Jul

22

 The fixing scandal involving NBA referee Tim Donaghy raises many questions for markets. Who would have known that one of the key insights that he gave other gamblers was information on who was going to ref the game, which affected the outcomes of games because of how they were going to call offensive and defensive fouls?

Also, he was able to ply his trade without any of his fellow refs or even the players knowing he had an ax to grind. Particularly creative in this regard was his adding an extra 1.2 seconds on the clock following a missed Portland shot in the Dec 1, 2006, Orlando-Portland game, won by Orlando 91 to 89, with Orlando favored by 4 points. The game would have gone into overtime without it. It appears Donaghy also used technical fouls and mismatched fouls.

In racket sports, I always could tell when a player was fixing the game. Often my own partner in handball was fixing the game against me and I had to kick him off the court if I couldn't beat him up. In tennis you can always tell if the other side is trying to lose by their muscle moves and gait, and apparently a sister game was once found out this way.

If basketball games can be fixed this way, how much easier is it to disguise stock market fixes?

Vance Humbert replies:

A couple of examples I view as fixing the game-

1) In the hedge fund world, there are many managers labeled "talented" and "consistent performer" by external analysts, but who are in fact blessed with a few Street relationships that provide most of the generated alpha. I think back to certain convertible arb funds in the early 2000s with stellar returns which were a function of taking every new deal that came down the pipe as a matter of facilitating the issuance process. It was common knowledge that, within a matter of hours to days, they could flip the bad deals back to the underwriter for a .20-.50% loss but the good deals they would hold for 1-3% gain. Where is the portfolio management skill when you have to take every deal?

2) Referring back to perceived stellar high frequency managers, how about the one who takes down a bunch of stock and then strongly suggests the sell-side analyst change his rating for the better? Of course, this is all in the name of improving fundamentals. But it doesn't hurt that the fund does a lot of transaction volume with the firm. Once the rating change is announced, the hedge fund's minions make sure to call all the other research desks on the Street to ensure they are aware of a "good call" by another house. While the stock ramps, they unload their inventory.

Steve Ellison comments:

 One evening last summer while playing blackjack, I began to suspect the dealer was cheating. Four times, the dealer's face-up card was a five. The best playing strategy in this case is generally to stand on any hand of twelve or more. In no circumstance should the player risk busting because the dealer is at high risk of busting.

In all four cases on this evening, the dealer managed to draw a third card with a value less than ten that brought the dealer's total to 20 or 21. Of course, it could have occurred by chance, but Edward Thorp documented in Beat the Dealer various sleights of hand dealers can use to view cards still in the shoe and deal the second card rather than the top card.

Andrea Ravano adds:

The first and most important principle here is of human nature. What is it that motivates Americans, Chinese, Italians and everyone else? Greed, passion, hatred? There are many desires that make up the complexities of human nature, but the afore mentioned are among the strongest in determining our actions.

Thus, corruption in all its parts, belongs to our nature regardless of our culture. Weak people will always seek a short cut to obtain what has been built by endeavoring , trying, suffering and sweating. Racists will tell you that a certain culture, brings about corruption and weak thoughts, as if a political system or a social group could stand up and offer the perfect model for us to admire.

Einstein said "it is easier to break the atom than prejudice" and the same goes for the markets. Prejudice is your worst enemy. The lack of clarity when analyzing data, or your inability to understand the nature of the ever changing cycles, will lead you directly on to the wrong side of the trade.

My grandfather considered the stock exchange a place for depravates who didn't want to work and sweat, and he taught his children to keep investing their assets in "real" economy. His ideas were largely influenced by the fact that one of his brothers (out of a family of fourteen brothers and sisters!) had lost a considerable amount of his fortune in the 1929 Stock market crash. Thus he taught his children to stay away from the corruption of the faster moving parts of the financial world and to keep investing their money in a sound way.

When the time came, after his death, to sell assets and increase financial holdings, none of his sons thought of doing so as the great early 80's bear market in shipping wreaked havoc among ship owners (which they were) and brought to its final conclusion the danger of believing in an idea without testing it: prejudice had taken its toll. 

Steve Leslie extends:

Poker is a game that lends itself quite nicely to fixing because there can be up to 10 people at a table during the course of a game, and the players are constantly touching the cards. Poker can be manipulated in a variety of ways.

The obvious ways to cheat in poker:

1. Mark cards

2. Manipulate the deal

3. Bring extra cards in and out of a deck such as the occasional ace to fill out a hand

4. Post incorrect bets

5. Pull back a bet when it is obvious that you are beat

6. Deal from the bottom of the deck and "deal seconds"

7. Conspire with the dealer to steal an occasional pot

Less obvious ways to cheat include:

1. Play teams at the table, splitting the winnings with an accomplice

2. When handing out chips or changing out a player, giving an incorrect amount

3. In tournament play, having an accomplice dump his stack to you by going all-in with a vastly inferior hand in heads-up play

4. Having an accomplice consistently raise the pot while you hold the best hand, drawing attention away from you

5. "String betting"

More subtle ways include:

1. Having the more experienced players go after or attack the weak and unprepared "fishes" or "pigeons" at the table

2. Having the large stacks go after the small stacks

3. Having dealers rake more money than they should

As they always say, if after 20 minutes you can't figure out who the pigeon is at the table, it's you. Always ask yourself why you were invited to the game in the first place.

John Lamberg replies: 

Casinos do not have to cheat to be profitable. The only time I suspected a blackjack dealer of cheating was at a small casino where the dealer, who was hand-dealing, correctly announced the next two cards by suit — an ominous warning to run to the exit.

While basic strategy does call to stand on 12 or more against an up five, hitting a 12 against a five would be an appropriate play if the count supported it. In a situation where the dealer repeatedly makes a hand on a "weak five or six" (or repeatedly beats my hand by one), my strategy is to find another table or sit the rest of the shoe and evaluate the next one. Red flags, whistles, and bells now sound when a player announces in frustration or anger that the cards can't be that bad and have to turn soon.

On occasion, I will watch a player fight the cards and wait until he either blows out or gives up in frustration, take his spot, and enjoy the blackjack he just missed. Nice parlor trick when it works, but certainly nothing to bet the farm on.

Sam Marx comments: 

I think the term "fixing the game" as applied to the market should be made more clear. What is included in "fixing the game"? For example, I believe you would include "trading on inside information." 

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