Recently, the Salander-O’Reilly Galleries has made major news by mismanaging just about everything it could. Whether it was exorbitant rent for its townhouse gallery ($156,000/mo.) or losing millions of dollars worth of art, Salander screwed up. Big time. My impression, noted on my art blog, is that Salander was an entrepreneur who attempted a daring expansion and got in way over his head.
But now, some are having a knee-jerk reaction. They have identified a problem (Salander messing things up) and turned to government to fix it, as if government could have or would have. This is actually just a post on Artworld Salon reasonably discussing the issue, but as you know, I have strong opinions on the matter. Since they won’t let outsiders comment, I am forced to do so here.
At various times on this site we have discussed the relative lack of transparency of the Art market and talked about some of the mechanisms that exist in other markets.
There certainly is a relative lack of transparency, and the secondary markets (think auctions) like it that way. But I think it’s a good thing. It encourages trade and the development of art, because it keeps the flow of it moving. The public interest in knowing details that some would rather keep private is far less than the value the market has in maintaining its freedom, which will keep the market more competitive and liquid. Mechanisms for increasing “transparency” are not always a good thing, especially when taken to draconian ends.
In quoted markets for publicly traded assets, whether company shares, pork bellies or barrels of oil, every transaction must appear on a public register and be open to all bidders. No transactions are allowed to take place that do not appear on the register/exchange. [...] None of this, of course, happens in the Art world. But all of it could.
None of this is strictly true. It is true that the law says they must, but that’s like saying that people must not smoke marijuana. They do. All the time. Just so, transactions occur well outside the public domain in dark pools.
One of the fastest moving trends on Wall Street has flown under the radar of individual investors and, seemingly, the Securities and Exchange Commission: the rapid rise of “dark pools” stock trading arenas.
As the name suggests, dark pools lack transparency: They are used by institutional investors seeking to trade large blocks of stocks without creating the price wobbles that routinely accompany such moves. The trading is done away from the traditional exchanges, offering unprecedented anonymity.
Recently, more than 20% of all trades in New York Stock Exchange-listed stocks have been funneled through these dark pools, up from just 3% to 5% two years ago, according to NYSE figures.
Asked about the SEC’s view of dark pools, a spokesman cited a recent speech by the head of the Division of Market Regulation, Erik Sirri, who said that “while the increasing use of hidden orders may be troubling,” the SEC believes the new venues are available to all market participants. He suggested that the SEC is not in the position of favoring one market model over another. It would appear that until the trend toward dark pools has a measurable impact on investors, the SEC is willing to be simply an observer.
The article goes on to criticize the lack of transparency given the recent “subprime mortgage debacle.” The reality is that this has gone on for years, but mostly in whispers over mimosas at the large brokerage firms. Why? This is a very simple concept that holds true in all situations: water takes the path of least resistance. So do economic actors! Of all the people who have discussed this concept, the one who still does it best in my mind is Sun Tzu:
The army’s formation is like water. The water’s formation avoids the high and ruses to the low. So an army’s formation avoids the strong and rushes to the weak. Water’s formation adapts to the ground when flowing. So then an army’s formation adapts to the enemy to achieve victory. Therefore, an army does not have constant force, or have constant formation. Those who are able to adapt and change in accord with the enemy and achieve victory are called divine. Therefore, of the five elements, none a constant victory, of the four seasons, none has constant position.
This applies to war, football, love, and especially to economics. Make no mistake: the enemy is government regulation, stymiing the efforts of the people. The people will find a way around these preference-distorting mechanisms just as water flows over the rocks. Would the government be so arrogant as to develop yet another bureaucracy to regulate the art world? Although perhaps somewhat insulated from most Americans, it might attempt to block too much water and just bring the damn crashing down.
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