May

20

sotheby'sA daughter webmasterist asked me how pools signal to each other to stand aside on auctions and not get into bidding wars so as to lower the average net price that you get with high quality goods from auctions with the majors to about 50% of the current market value. I didn't have a good answer except to say that it's the invisible hand. The big dealers partner on deals, and they decide in advance who's going to buy it. With that one big dealer the only presence the competitive elements is withdrawn. Also, if a non dealer customer comes in the dealers know what's good and what's bad. And how much to bid. And they often tell the customer that he'd do better buying from them without the hurly burly of having to wait a few hours while the blue bloods in their monotonous voice try to eke things above the reserve.

She then asked me how this is done in the markets. And again I didn't have a good answer. Some of them have dinners together, others go on the media to tout, and others ride in a car together or tergiversate who's weak and where the vulnerabilities are. Often it's a pilot fish in a peripheral market that's not so obvious like the fixed income vis a vis the equities.

But I didn't have a good answer like Dickson does in his baseball work, i.e. the hidden signals, and the changing nature during the game, as to the code, and who's giving it? What would you have said so as not to disappoint a daughter with one's naivete?

Henry Gifford writes:

I know of at least two ways cartels do this.

My mother used to be a licensed auctioneer, having done a few charity bits and wanting to be legit, which ended her up on the list for doing auctions for the city government. At the Dept of Sanitation auctions where she auctioned off contents of apartments that had been stored by the landlord for the required time period before auctioning, the boxes were sealed, but the Dept of Sanitation employees tipped off the cartel to which lots were good. The cartel bid a minimum and then held their own auction on the hood of a car outside. Each member put the cash on the hood as he won a bid, then at the end of their auction the money on the hood was split evenly between the cartel members, about 5 or 6 of them. One time one guy was in the hospital, sent a messenger with a low bid for one lot, which he didn't win, but he was eligible for his cut of the auction profits, delivered to him in his hospital bed. If an outsider showed up at an auction, everyone bid against him at a cost shared by the whole cartel if they won the bid, and encouraged him to win the bids on the crummy lots. If someone showed up saying it was their personal goods for sale, they did a "courtesy bid" and let them buy the stuff for $10. At the police auctions, the jewelry was not in transparent plastic bags, but in translucent bags which bidders were prohibited from opening to examine the goods. Insiders, of course, knew which were the diamonds and which were not.For public bidding on contracting work, it works a little differently. One scheme is a cartel takes turns assigning jobs to members, who are told how much to bid, and which jobs they will win. They are asked to bid high enough to lose on some, etc. This requires cooperation from the agency putting the work out to bid, to discourage participation by outsiders. This can take many forms, including "confusion" about the time and place of the bid opening, or simply waiting until two weeks after the bid opening and mailing the bid back with a note that it was late. As money paid to purchase plans and money spent to put together a bid is not trivial, a few experiences like this can discourage someone from bidding - my personal experience.

Another trick is to put out work worth about $100K and mention a $50K contingency fund for unforseen site conditions, unknown soil conditions found only after digging, etc., confusingly written, so if an outsider wins they are told their bid is to be reduced by $50K, while insiders get $50K added to their bid.

Or, heavy duty mechanical work is mixed with painting work, which contractors who lack housebroken workers are hesitant to bid on, thus only one or two friendly contractors bid, and maybe bid high to cover unforseen adventures with painting. Another variation is asking for a very expensive, special piece of equipment, which insiders know they can skip installing, while outsiders are held to the terms of the contract.

This puts the systems into two broad categories, as far as I can see:

1 Better information for insiders 2 Rules are different for insiders.

Number two was perhaps covered on the list when some firms on Wall Street were bailed out, leaving us mostly with what was described below as rides in cars together, etc.

When I can't avoid being near a radio which is playing, I am reminded of this when I hear "company such-and-such announced some problem, the stock fell x points today", of course telling me what is told on the news is not news any more, and there was someone getting the news ahead of time.

I used to own a newsstand, and get the Sunday NY Times Real Estate section on Thursday night, which led to some good real estate deals for me. But, otherwise, I don't know of any legitimate way to get any such advantages.

Alston Mabry writes:

At auto auctions, if the guy running the car has an in with the auctioneer, then you gotta watch out and make sure you're not "bidding against the wall", as they say. Crowded conditions make accurate observation difficult. 


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4 Comments so far

  1. Russell Sears on May 19, 2010 10:27 am

    One of the most memorable Saturday I spent with my daughter was at a Lafayette IN County Police Auction. The county auctioned off stolen goods that never got claimed, plus some county equipment.
    There were hundreds of bikes, and random goods like a used Wood Chipper Truck from the county Parks Department.
    It was an education for both of us. There were several things that prevented bidding wars, but here were some;

    1. It was a “fire sale” those with lots of cash made out well. Liquidity was important to the seller, and therefore the buyer needed cash

    2. It was clear who in the audience was a “bike dealer” but they were buying for hopeful business. They already had an inventory, and only would continue to bid on bike with large margin on resale. No dealer would bid below 50% of my estimated resale value. There were plenty of opportunities, none of the dealers left without many bikes.

    3. There was the “lemon” effect. The bikes not in clear working order went for much less.

    4. There was limit of expertise and specialization even amoungst the dealers. Most of the dealers were obviously dealing with kids and teen bikes, buying mountain bikes and such. Ten speed racing bikes were not catching a bid and I went with a bike racer. He picked up several bikes for less than $20 each and sold the frames for over $500 on e-bay. He knew the high end brands. I picked up a 10 speed for $10. Other odd lot items like the wood chipping truck sold for about $2,500 and generally was worth 10 to 20 times this.The dealers were simply looking to stock-up on inventory, and as such did not want too many items and were choosy about what they knew they could sell.

    5. While the auction was advertised and an annual event.
    The dealers dominated. There were many more individuals, but they were looking for one particular purchase. The individuals were not perpared with the extra cash to catch the great bargins and stuck with what they came for. When there were bidding wars, it was for a particular item which 2 individuals wanted. The dealers quickly withdrew as they had plenty of opportunities. If not here at the next auction.

    6. The dealers were patient and cordial to all. My daughter then 9 years old kept bidding on all the small kids bikes, with her $10 she generally was out bid, since these were the bikes the dealers also wanted. And the smaller bikes generally are not stolen as often. But near the end all the dealers seeing her persistance, let her have one for $5. It clearly was signal to not bid by the crowd response to her prior lost bid.

  2. vic on May 19, 2010 1:06 pm

    a beautiful story especially the gallant behavior of the dealers to your daughter. vic

  3. korareddy on May 19, 2010 1:28 pm

    it is almost a fortnight.., wannabe from India is waiting for that letter to Aubrey ( if only it is not a private affair ) … & curious to know how the Aubrey’s Lemonade Empire (ALE) is turning out …

  4. Bob Ryan on May 21, 2010 6:28 am

    In the UK auction pools are known as “rings”. My first job was as an auctioneer’s clerk for a firm that had the government contract to sell surplus office furniture and other items.

    It was easy from the rostrum to spot rings. The way we used to break them was to speed the bidding rate and buy in several lots to offer in the next sale. This caused suspicion to break out in the ring, and as the bidding rate was now higher there was no time for the ring members to confer and then it was every man for himself. The ring was broken.

    With the variety of bidding options available to most prospective bidders, remote or otherwise, it is very easy for an experienced auctioneer to overcome any arranged limitation on bidding.

    So the answer to pool member communication methods is don’t bother because you can’t be sure that yours is the only pool in existence.

    By the way, I am enjoying reading the Education of a Speculator.

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