A dealer's conflict of interest...

[jtryka]

In reading Mark Feld's recent thread on a particular coin at auction and the dillemma of whether/how much to bid on it as a dealer. So that got me to thinking on the impact of dealer trades and the market as a whole.

 

And no, I am not trying to bash dealers, but I am curious as to how they perceive the impact of their actions on the marketplace, and what efforts they make to limit the negative aspects of their trading.

 

For example, suppose a large dealer has a significant stock of blast white coins, but vibrantly toned coins are popular right now. Should that dealer so desire, he could start buying up white coins at auction, bidding them to a premium comparable to toned coins. As these auction prices become known in the market, other participants might react, buying white coins in anticipation of the "next market move" and thus increasing overall interest and demand. Then once the market demand increases the overall price levels, the dealer can sell his inventory at a larger than normal profit.

 

Now certainly when a dealer has a client who instructs him or her to buy the coin at any price, then the dealer acting as agent bears no responsibilty for this impact on the market. But when buying for their own account so to speak, they must exercise more caution to prevent undue influence on the market, or outright market manipulation. This is the care that Mark Feld showed in his thread when he struggled with what exactly he should bid on a particular coin.

 

For the dealers out there, how do you deal with this conundrum, and for those of us who are buyers/collectors, how can we be more confident that recent auction archives most accurately represent the true state of the market?

[MarkFeld]

For example, suppose a large dealer has a significant stock of blast white coins, but vibrantly toned coins are popular right now. Should that dealer so desire, he could start buying up white coins at auction, bidding them to a premium comparable to toned coins

Jtryka , unless others were bidding against the dealer (at his request or otherwise), his buying the white coins would not necessarily cause the prices to rise above where they would be, anyway. And, others might or might not react to those prices in the future, meaning, it would not be a given that the dealer could profit by those means.

 

In other words, if intentional market manipulation is the goal, it could be achieved much more easily in the case of an especially esoteric and/or small group of coins.For larger groups of coins, the buyer is potentially taking on more risk and his odds of success are reduced

 

But when buying for their own account so to speak, they must exercise more caution to prevent undue influence on the market, or outright market manipulation.

I feel that as long as a dealer (or non-dealer) is willing to honor his bids and is not guilty of any intentional price manipulation, he does not have any obligation to the "market" and its prices.

 

This is the care that Mark Feld showed in his thread when he struggled with what exactly he should bid on a particular coin

I think you gave me too much credit. I was not worried about undue influence (particularly with respect to the effect I could/would have bidding on one coin). I was, however, pointing out the frustration of seeing a coin that I really wanted, but "knowing" that I probably wouldn't be able to buy it at what I thought to be a realistic price level. If I were a collector who did not care about re-sale considerations, I wouldn't be faced with the dilemma that I am as a dealer, who must consider re-sale possibilities.

 

Interesting topic - I look forward to reading more replies.

[jtryka]

Dave, unless others were bidding against the dealer (at his request or otherwise), his buying the white coins would not necessarily cause the prices to rise above where they would be, anyway. And, others might or might not react to those prices in the future, meaning, it would not be a given that the dealer could profit by those means.

 

In other words, if intentional market manipulation is the goal, it could be achieved much more easily in the case of an especially esoteric and/or small group of coins.For larger groups of coins, the buyer is potentially taking on more risk and his odds of success are reduced

 

Well, first off my name's not Dave, but that's ok. You're point is well put, and perhaps my example was not well thought out, so to make it more sensible, take a more esoteric series. Maybe bust halves or early dollars, or 3-cent silvers, there this type of situation may be plausible as for manipulation, but even moreso susceptible to simple undue influence of on major dealer on the market.

 

I think you gave me too much credit. I was not worried about undue influence (particularly with respect to the effect I could/would have bidding on one coin). I was, however, pointing out the frustration of seeing a coin that I really wanted, but "knowing" that I probably wouldn't be able to buy it at what I thought to be a realistic price level. If I were a collector who did not care about re-sale considerations, I wouldn't be faced with the dilemma that I am as a dealer, who must consider re-sale possibilities.

 

Maybe I do, but you seem like a fairly descent guy, so I am more than happy to give you the benefit of the doubt. I guess this just raises the question again, of how we determine the market price for coin. In some cases CDN is good, other times we should expect prices x% back of bid, other times it's just completely irrelevant, and coins go for multiples of bid or ask. But each transaction aids in overall price discovery so every purchase or sale, but collector or dealer has some impact on the market. How do we view and or measure that impact?

[MarkFeld]

Sorry for the incorrect name reference - I have edited my other post.

 

Thanks for giving me the benefit of the doubt, especially considering that.

[sinin1-migration]

whenever someone tries to manipulate a market, they eventually get burned

 

 

no one has deep enough pockets to manipulate a freely trading market for extended periods of time

[TomB]

I've thought about this issue in the past and think that the downside is so great that it is something that is seldom attmepted, let alone succeeded at. In my thinking, one would need very deep pockets, a well laid out plan, patience, access to the required number of pieces in order to form a critical mass and one heck of a set of stones. Even your second set of examples seems to common to me for this type of manipulation. I would think issues such as Gobrecht dollars, chain cents and matte proof gold might be amenable to this manipulation if someone really wanted to try it. However, I don't think they would succeed in the long term.

[CarlWohlforth]

I think dealers put a floor on prices. They usually don't invest. That is they would only bid if they think they can sell the coin for a profit (even if slim) in the near term. Trying to infer prices for white coins based on color coin prices would be something only a mid to long term investor/speculator would do. IMHO.

[jtryka]

Well, I think everyone is putting a little too much emphasis on the hypothetical in my initial post, so I am going to try another thread with a refined emphasis. Meanwhile, to pursue the market manipulation idea, would it be that difficult to launch the initial spark of a rally by overbidding for a few pieces of a specific type (I leave that to your imagination) in some high profile sales, whether auctions, etc.?

[TomB]

I think you could spark a rally in the way that you suggest in your last post. In fact, I think it's possible with more common, generic coins where the bump might be very small yet the percentage gain considerable. Mail order advertisements could be used in such a manipulation. I don't know if it's been done, but it sounds like it might work.

[EVillageProwler]

I've considered hoarding 1836 RE bust halves in AU+. Very easy to do, but I'd be afraid of getting stuck like that guy who hoarded all those Little Orphan Annie dimes.

 

At one point, I was buying up as many nice EF+ 1799 8x5 ED's that I could find.

 

EVP

 

[EZ_E]

re: If I were a collector who did not care about re-sale considerations, I wouldn't be faced with the dilemma that I am as a dealer, who must consider re-sale possibilities.

 

Whew, Mark, I certainly have a new appreciation for the dealer's side of the market based upon my excusion on your side of the fence. I recently rented a table at a coin show and and was amazed at the lack of retail sales. I had a wide selection of coins being offered but settled on more wholesale business than retail. Pretty tough market out there.

 

The experience, however, was invaluable to me as a collector. I have read and now firmly believe that to be a well-rounded collector, one should dabble in sells somewhat. It will certainly put one's spending in check on subsequent purchases.

 

p.s. No, I did not sell my 1885 proof 64 cameo quarter that I got from Pinnacle. I just liquidated some coins that I was no longer interested in.