Thoughts on the Berliner charges

Berliner's rumor was rather cleverly crafted. It contained enough specificity of imaginative detail to make it appear that someone 'in the know' was talking.

Here is the i-m he was sending out:

ADS getting pounded - hearing the board is now meeting on a revised proposal from Blackstone to acquire the company at $70/share, down from $81.50. Blackstone is negotiating a lower price due to weakness in World Financial Network - part of ADS’ Credit Services Unit, as evidence by awful master trust data this month from the WFN Holdings off-balance sheet credit vehicle.

The whole incident does tend to reflect poorly on "efficient markets" theory, at least in any very strong form.

On the other hand ... if the EMH is understood on a day-to-day basis (rather than minute to minute) the incident may be educed in the theory's support. ADC did 'get pounded' by the rumopr that it was getting pounded -- yes. But the pounding only lasted for minutes, and at the end of the day the price was back about where it had started. Even before the company had had a chance to issue a denial that the meeting had ever occurred.

Furthermore, the first MSM news coverage that the rumor ever got was coverage of its falsehood under the heading "Anatomy of a Bum Rumor".

Congrats to the folks over at the WSJ blog for getting this story both quickly and accurately.

Third, let me ask a very naive sounding question. Why does exchange self-regulation seem so toothless? Is it really toothless, or is that a false impression? What happened to Mr. Berliner or his employers in terms of their ability to trade on the NYSE hereafter? The SEC's complaint makes no reference to any action by the NYSE itself on that point.

Why not? Hmmmm. The obvious answer is that it is easier to do nothing than to do something, just as in an industrial context it is easier to pollute than to install smokestack scrubbers.

But that obvious answer isn't, by itself a very good one. The problem with pollution is that it's an "external costs," -- the manufacturers with the smokestacks are naturally tempted to pass those costs on to the public at large. But the costs imposed by such disinformation campaigns as Berliner's AREN'T EXTERNAL. They are costs imposed upon some members of the exchange itself by other members thereof.

This should, logically, be the ideal case for self-regulation. Why didn't it happen? I have a theory (I always do) but I'll hold it for now. We'll be back to covering proxy contests in this space tomorrow. Its the height of that season.