Fake Plates

Vol #190 - August 15th, 2024

On our way to a Brewers game. Cruising through the mean streets of Milwaukee. Standing room only on a school bus. Of course I’d seen the phenomenon, but assumed it was just neglect. We all know how most people drive. 

Did you know about scratching off or using fake plates?

Rubbing out a number is a homemade captcha. Toll booth readers can’t parse your digits, so you don’t pay. Even better for speed cameras. A broken middle finger to the surveillance state.

After my buddies spent another 24 hours razzing my naivete, we landed back in NYC to put the theory to the test. If it wasn’t a taxi or livery vehicle, plenty of cars on the Van Wyck had a suspiciously grazed plate. Begrudgingly more so than traffic incidents would suggest. 

It only took a few hours after I got home before the answer came to me on X.com. None other than the Manhattan borough president was going after this fake plate phenomenon. The replies quickly finger the police as starting and affirming this trend. Cops are pissed they can’t flash their badge off duty to a robot camera. 

Reviving the group chat, I shared the link. The response: “Siri is listening.” 

Notwithstanding the above blind spot, my knee jerk reaction to this is hogwash. There’s enough public data to retrace your every movement this month, Siri doesn’t need to listen. Coincidences do happen, and that’s called probability. 

Is it more likely that a device is scanning my every word, sharing that data in real time, and apps are curating a customized stream of content for me; or is a simple phenomenon (of the hundreds currently)  broadly making its way through the zeitgeist? My guess is that post shows up in the feed of 50% of New Yorkers that spend more than a couple minutes doom scrolling. 

I want Siri to be listening like I want there to be insider trading. It’s more appealing that something nefarious is happening than grappling with the truth of big data or big compliance. All the more so if you sold a $0.10 option that jumped 3000% in value. 

Simple and random is more likely than romantic and risky. Blaming privileged information is easier than recognizing this is the 1% chance that hit. The 99 other dimes are no consolidation at times like this. 

While $6.94 on the Whitestone and a couple of speeding tickets add up, it’s nothing compared to what a $0.10 of options bought at the right time can do. With cheating so valuable - it’s extremely important that it doesn’t happen. 

Options have value because of their potential distribution. And a distribution reflects ALL the possible worlds that could happen before expiration. If you know what the future holds - particularly if it's going to land in the tails, you can make a lot of money.  

Insider trading is illegal because it creates an unfair market. If the game is rigged, liquidity will go elsewhere and everybody pays more or earns less. The reason a dealer can sell you out of the money call options for nickels or dimes is because they’re tracking volatility distributions and relying on the law of large numbers - combined with a little bit of a fee (edge) for doing so. 

Traders get pissed when that call goes the other way. If someone buys a low delta option before a surprise, they obviously knew something. Particularly if they did so in size. 

Mergers are the most obvious place this happens. If there’s one thing that will cause price jumps, it’s an offer from one company to buy another for a price higher than where stock is trading. And since that doesn’t just happen ex-machina, there are dozens if not hundreds of people privy to privileged information that could move markets. 

This kind of information leaks. Just read Matt Levine. It’s the banker in the restaurant who talks a little too loudly and the roommate who catches a glimpse of your WFH screen. Maybe it's a bunch of guys passing napkins at Grand Central. 

When we see how easy crime is, we’re tempted to do some ourselves. Put a little nick on your plates. Let it slip that distribution has been a bear for the public company you work for. The line is as gray as you can handle. But you will get caught. Trading when someone says “we’re going to have bad earnings”  - that’s illegal. Buying puts because your CFO friend seems stressed even if he doesn’t say anything….. Eh?

In the days of Gordon Gecko, information was how he and Bud Fox made a living. There’s robust academic proof that insider trading was rampant. As far back as 1981, researchers found “The results confirm statistically what most traders already know. Impending merger announcements are poorly held secrets, and trading on this nonpublic information abounds.”

That has changed. Dramatically. Mostly thanks to increased regulation. While it’s the bane of every individual who even glimpses a trading terminal during their day, compliance works. It was only 25 years ago that in the eve before Regulation FD, analysts were still getting earnings winks while on privileged retreats. Go Mets!

Following the Great Financial Crisis, the UK put together the Financial Services Act. Prior to the legislation, share prices tended to foretell announcements. Following implementation - “insignificant abnormal returns are found in the run-up to the first announcement of mergers in the 2015-2019 period.”

I don’t envy the compliance officer that has to randomly scan e-mails, nor the trader who has to defend why he wrote an instant message about “pumping up” his yoga ball. The blunt edged trawler might snag some silly cases, but it catches enough of them that it works in preventing systemic and economically significant crime. 

Someone somewhere is getting away with cheating right now and laughing at this. I get it. But when I ran through the volume in the week prior to Capital One announcing they were going to buy Discover earlier this year, there wasn’t a single “shady” options trade. The most abnormal thing was a 2x225 lots in a 48 hour expiry. Catch was, they settled before the announcement. 

Market makers can file suspicious activity reports with their local exchange if they see activity that is likely to be illegal. The exchanges can work with various authorities to review brokerage records. Knowing how many eyes are on this makes options the last place I’d go with inside information. 

Decades of cheating in financial markets happened before successive rounds of Sarb-Ox, FD, and Dodd Frank. The exorcism is ongoing. Gatekeepers to financial markets have such a threat of penalty that they can’t afford to be anywhere close to illegal activity. Yesterday the SEC announced civil penalties of $393M from financial firms for poor recordkeeping. Four shops were over $50M each for the violation of not having proof of no violations.

There certainly are a lot of trades that feel like Siri was listening. But amongst 47M contracts a day, there are many dimensions of speculative orders. Maybe that 225 lot was part of a researched gamble that there would be banking consolidation. Or I’m not cynical enough and it was a cheater with bad information. 

When events happen infrequently they arouse suspicion. The most plausible reason for buying calls isn’t always the most probable, and it’s confusing. Now that I know fake and obscured plates are out there, I’m going to see them everywhere. 

There’s evidence that more cheating happens in less developed markets. And there’s also a lot less liquidity and more inefficient pricing on those exchanges. The best thing a market can say about itself is that 2% happens 2% of the time. If you have to account for cheaters, price deviates from fair value. 

The pervasiveness of fake plates was a paradigm shattering truth. Every toll will now feel like I sold takeover calls. But you don’t need to worry about Siri listening - they already have your data. And honest market participants don’t have to worry about cheating, they actually are listening.