"Flash Boys" & Arts Transparency For Profit
Although I’m often pathologically resistant to popular thinking, I make exceptions when it comes to Michael Lewis’s work. So I recently joined seemingly the entire rest of the country in reading his new book, Flash Boys. If you’ve just been resurrected from a cryogenic slumber, Flash Boys is primarily a story about a motley crew of bankers, programmers, and technicians led by a man named Brad Katsuyama, all endeavoring to build an upstart, completely “fair” stock exchange to combat what they view as the predatory tactics of high frequency traders.
Those scare quotes appear because the concept of fairness in the financial markets is, in my opinion and those of a lot of much smarter people, a dubious concept in itself. (I especially dug Josh Brown’s historical retort to Lewis’s widely publicized battle cry that the stock market is now “rigged.”) But I don’t want to get bogged down in that discussion. What I’d like to focus on instead is what Katsuyama’s example suggests about the possible long-term business upside to any gallery willing to go rogue and adopt a stance of radical openness in an otherwise opaque art market.
Katsuyama’s baby, called the Investors Exchange (IEX), is a unicorn in the financial world for two intertwined reasons. The first is that its interface and technological guts were built to foil the many types of breakneck speed, algorithm-based tactics that high frequency traders used to get an advantage on traditional investors. (I say “used,” past tense, because Flash Boys covers HFT’s apex, from about 2006-2009; the data shows that the practice has been on a death march ever since.)
The second reason is that IEX published all of the rules steering its operation - a sharp contrast to the closed-book policy of HFT-friendly “dark pools,” or private stock exchanges run by the big banks. You can probably guess from the moniker, but operational directives don’t escape dark pools. Investors and money managers are never told things like how the pricing of assets is determined and what options are available for fulfilling a client’s order elsewhere on the market. As Katsuyama says at one point:
“The fact that it it such an opaque industry should be alarming… The fact that the people who make the most money want the least clarity possible - that should be alarming, too.”
Sound like any other industries you know?
This relationship between profits and secrecy begs an obvious question: If it’s true, what’s the incentive for any business in a veiled market - whether finance or contemporary art - to opt for transparency? IEX’s response can be summed up in the following two quotes:
“‘Why would any broker behave well?’'The long-term benefit is that when the shit hits the fan, it will quickly become clear who made good decisions and who made bad decisions,’ said [Katsuyama].”
“Vincent Daniel, the head strategist at Seawolf, put it [to Katsuyama] another way… 'Your biggest competitive advantage is that you don’t want to fuck me.’”
In other words, catastrophe is a sorting mechanism. When it strikes any business, radioactive info leaks through the damaged parts like uranium seeping out of a cracked nuclear reactor. Clients suddenly get an unshuttered view of which actors used the cover to exploit them and which operated in good faith, despite having the opportunity not to.
There may not be any technology-induced flash crashes in the art market, but it’s still a perpetually combustible business. The latest example is Perry Rubenstein Gallery, which filed for bankruptcy here in LA in March. Signs of contamination first began to appear when mega-collector Michael Ovitz sued Rubenstein for fraud and breach of contract late last year. At issue were the sales of two Richard Prince pieces he consigned to Rubenstein - and more importantly, the nearly $1M in proceeds that never found their way to Ovitz’s account.
Then more lurid details about Rubenstein’s operations emerged this past week thanks to court filings surrounding the bankruptcy case. These mostly consisted of an assortment of six figure debts owed to artists like Shepard Fairey and collectors like (surprise!) Ovitz.
Having been involved in a bankruptcy case in the art world before, I can guarantee that more and more of Rubenstein’s business will be thrust out into the sunlight as the court process proceeds. It’s a nightmare scenario for any gallerist. Legal action is one of the few tools capable of stripping away the exoskeleton protecting how business is done in the art world. And to analogize with Prince’s own infamous appropriation work Spiritual America, certain types of exposure have the power to incite violent outrage.
The wrath can also spread frightfully easily: a single collector sues, and suddenly every other collector can read the details of the case and ask themselves, “Wait, am I getting screwed, too?”
In the aftermath of a situation like Rubenstein’s, a transparent gallery would have a serious advantage in crashing the boards for business. I can think of no more effective sales pitch to a collector base traumatized by scandal than an open book policy. To paraphrase Vincent Daniel in a Disney way, there is a competitive advantage when clients feel they can trust you. All good business is based on trust, after all: trust that you will be punctual and responsive to your clients’ needs; trust that you will deliver them a quality product or service; trust that you will act as an honest broker on their behalf.
This is not about being utopian - or at least, not entirely. Though Michael Lewis portrays Katsuyama as having the noblest intentions, he and his allies only start to get traction with money managers in the lead up to IEX’s debut when they stop presenting their motivation as fairness and instead portray it as “long-term greed.”
The idea is that, over a long enough timeline, enough investors will have enough bad experiences in the opaque system to divert their cash flow into the transparent one. At that point, Katsuyama’s exchange would slaughter its shrouded competitors. This was a narrative the barons of finance on the other side of the table could connect with; ironically, creating IEX because it was “the right thing to do” seemed suspect to them. Since many of the same wealthy characters are pumping cash into the art market, a transparent gallery would be wise to use the same rationale.
The question for the art world, though, is one of timing. It’s a gargantuan risk to choose long-term greed in a short-term greedy industry. The sea change needed to justify such a radical policy won’t sweep in overnight, and any gallerist who emerged from the deep water early would be gambling that she could survive on the scraps washed ashore for long enough to make the future worthwhile.
Yet Katsuyama and IEX faced the same uncertainty, and it appears that their decision is beginning to pay off. There are no guarantees that transparency would lead an innovative gallerist to similar prosperity in the art market. But in combination with the potential to gain privileged access to at least one lucrative untapped demographic, IEX suggests that there is a big picture, bottom line argument for doing the unthinkable.