6 ms·

Enron tried to trade memory chip futures; why didn't it work?

80 points by Dagulf795 2y ago

black_13 2y ago
[dead]
moomin 2y ago
Pretty good article. For the record, this centralised counterparty model is exactly how other derivatives exchanges such as the CME work. This requires careful risk management but is generally regarded as best practice by regulators. It fails horribly if the CCP is financially unstable, of course. My impression is that Enron Online was a real, successful, innovative business. And then the parent company went bust and ICE grabbed all the liquidity almost overnight.
- dmurray 2y ago
  The CCP stuff is well understood. The reason this market didn't work is not because Enron was financially shady - per TFA, respectable exchanges have tried something similar with the same lack of success. The reason that it doesn't work is exactly what TFA says: it was hard to commoditize the product. Imagine trading pork belly futures but the typical pig doubled in size every six months.
  - twic 2y ago
    > Imagine trading pork belly futures but the typical pig doubled in size every six months. My gut feeling is that a lot of traders would relish the excitement of that.
    - dmurray 2y ago
      Right, and Enron would probably have enjoyed it, and that's why they dreamt it up. But a market can't survive on traders. It needs real buyers and sellers who aren't looking to capture inefficiencies in the market but to smooth out uncertainties in their cashflow. Dell, Apple, Samsung, TI, etc. They would find it didn't offer them a good hedge.
- SOVIETIC-BOSS88 2y ago
  John Arnold commented in an interview a couple years ago that Enron Online was a massive success. Even equity holders in ICE preferred trading there due lack of liq.
test334232 2y ago
[flagged]
tedajax 2y ago
[flagged]
lenerdenator 2y ago
Enron's a perfect example of what happens when you have some pretty good ideas being executed by absolute sociopaths.
- 79a6ed87 2y ago
  This comment plus the one about Enron's water investments reminded me of Bill Burr's take on Lance Armstrong: "Look, the guy was a sociopath on a bicycle, all right? As far as I'm concerned, we got off easy. If that guy was working for a corporation, he probably would have been pourin' stuff in the water supply, doing God knows what. Just keep him on the bike, just let him go up and down the hills, he's not hurting anybody."
michaelgiba 2y ago
I actually went down nearly this exact same rabbit hole recently. Specifically I was curious why, given all of the demand for GPUs, compute not been commoditized and resold through public markets. This also led me to the Enron's ideas before their collapse :) One thing I found surprising is how hard it is to discover prices of this compute time in today's world as compared to traditional commodities like oil. A factor could be a difference in regulation, for example in the US I believe there are requirements for reporting energy trades between producers and consumers. side note: I made this minimal website for tracking these prices which shows some of the disparity: https://computeindex.michaelgiba.com/ https://computeindex.michaelgiba.com/
- soulofmischief 2y ago
  Do you mean something like TensorDock? https://www.tensordock.com/host https://www.tensordock.com/host
  - michaelgiba 2y ago
    Sort of, gpulist.ai as well
- jazzyjackson 2y ago
  I suppose one complication is that not all flops are equal, computation is not only "how many kW/h did this math take" but "how much memory and at what bandwidth"
  - jakeinspace 2y ago
    kWh, not per hour
    - jazzyjackson 2y ago
      thanks :)
- michaelgiba 2y ago
  There are definitely thresholds you reach that make it difficult to generalize. large cluster setups can differ significantly and actual usability of the clusters makes a big difference too. However I guess there are some differences like these even in real commodities like oil based on the blend/refinement/producer/geography.
photochemsyn 2y ago
Enron tried to trade natural gas futures; it only caused massive price swing and economic disaster for anyone buying those contracts. They tried to privatize water systems, and that was another disaster: https://www.citizen.org/news/enrons-failure-in-water-ventures-highlights-dangers-of-privatization-to-consumers-taxpayers/ https://www.citizen.org/news/enrons-failure-in-water-venture... Overall, Enron is a good example for why critical infrastructure like water and energy should be nationalized and stabilized - the opposite of investment capitalism's casino approach - not because it would form the basis of a communist utopia, but because every other competitive market industry relies on those basic services to thrive and grow.
- AlexandrB 2y ago
  This is also why industries like Bitcoin mining can be so corrosive. You can't stabilize the price of a commodity like energy if there's an entity that can generate nearly infinite demand.
  - bequanna 2y ago
    Well, the rewards for Bitcoin mining are zero-sum so the demand will never really be infinite as the miners need some amount of profitability.
    - AlexandrB 2y ago
      Fair enough. Though as long as the price of bitcoin continues to increase demand for compute can continue increasing as well.
      - bequanna 2y ago
        Right, but I believe halving of rewards also keeps the compute growth in check somewhat. I suppose it just depends on how BTC price increases vs the halving timeline.
jmount 2y ago
Futures are tricky. If not designed right they degenerate bucket shops (side bets that have nothing to do with the underlying- literally just betting on what numbers will appear on a tape) or depend only on interest rate (instead of capturing price trends of the underlying).
mud_dauber 2y ago
It seems to me that liquidity in a semi futures marketplace would be much better if you traded on a lowest common denominator - cents per square millimeter of a finished wafer. Same units of value regardless of underlying technology. Am I wrong?
fuzzfactor 2y ago
Sheesh, it takes a lot of smoke & mirrors to divert people's attention away from the essential need for price per megabyte to always trend net downward. But you can trust Enron to have it all figured out and be able to play different rates of decline as if it was actual ups & downs. >It's the perfect market. And Enron has the credibility. They wouldn't have said it if it wasn't false. More like un-credibility.

80 points by Dagulf795 2y ago

[dead]

Pretty good article. For the record, this centralised counterparty model is exactly how other derivatives exchanges such as the CME work. This requires careful risk management but is generally regarded as best practice by regulators. It fails horribly if the CCP is financially unstable, of course. My impression is that Enron Online was a real, successful, innovative business. And then the parent company went bust and ICE grabbed all the liquidity almost overnight.

dmurray 2y ago
The CCP stuff is well understood. The reason this market didn't work is not because Enron was financially shady - per TFA, respectable exchanges have tried something similar with the same lack of success. The reason that it doesn't work is exactly what TFA says: it was hard to commoditize the product. Imagine trading pork belly futures but the typical pig doubled in size every six months.
- twic 2y ago
  > Imagine trading pork belly futures but the typical pig doubled in size every six months. My gut feeling is that a lot of traders would relish the excitement of that.
  - dmurray 2y ago
    Right, and Enron would probably have enjoyed it, and that's why they dreamt it up. But a market can't survive on traders. It needs real buyers and sellers who aren't looking to capture inefficiencies in the market but to smooth out uncertainties in their cashflow. Dell, Apple, Samsung, TI, etc. They would find it didn't offer them a good hedge.
SOVIETIC-BOSS88 2y ago
John Arnold commented in an interview a couple years ago that Enron Online was a massive success. Even equity holders in ICE preferred trading there due lack of liq.

test334232 2y ago

[flagged]

tedajax 2y ago

[flagged]

lenerdenator 2y ago

Enron's a perfect example of what happens when you have some pretty good ideas being executed by absolute sociopaths.

79a6ed87 2y ago
This comment plus the one about Enron's water investments reminded me of Bill Burr's take on Lance Armstrong: "Look, the guy was a sociopath on a bicycle, all right? As far as I'm concerned, we got off easy. If that guy was working for a corporation, he probably would have been pourin' stuff in the water supply, doing God knows what. Just keep him on the bike, just let him go up and down the hills, he's not hurting anybody."

michaelgiba 2y ago

I actually went down nearly this exact same rabbit hole recently. Specifically I was curious why, given all of the demand for GPUs, compute not been commoditized and resold through public markets. This also led me to the Enron's ideas before their collapse :) One thing I found surprising is how hard it is to discover prices of this compute time in today's world as compared to traditional commodities like oil. A factor could be a difference in regulation, for example in the US I believe there are requirements for reporting energy trades between producers and consumers. side note: I made this minimal website for tracking these prices which shows some of the disparity: https://computeindex.michaelgiba.com/ https://computeindex.michaelgiba.com/

soulofmischief 2y ago
Do you mean something like TensorDock? https://www.tensordock.com/host https://www.tensordock.com/host
- michaelgiba 2y ago
  Sort of, gpulist.ai as well
jazzyjackson 2y ago
I suppose one complication is that not all flops are equal, computation is not only "how many kW/h did this math take" but "how much memory and at what bandwidth"
- jakeinspace 2y ago
  kWh, not per hour
  - jazzyjackson 2y ago
    thanks :)
michaelgiba 2y ago
There are definitely thresholds you reach that make it difficult to generalize. large cluster setups can differ significantly and actual usability of the clusters makes a big difference too. However I guess there are some differences like these even in real commodities like oil based on the blend/refinement/producer/geography.

photochemsyn 2y ago

Enron tried to trade natural gas futures; it only caused massive price swing and economic disaster for anyone buying those contracts. They tried to privatize water systems, and that was another disaster: https://www.citizen.org/news/enrons-failure-in-water-ventures-highlights-dangers-of-privatization-to-consumers-taxpayers/ https://www.citizen.org/news/enrons-failure-in-water-venture... Overall, Enron is a good example for why critical infrastructure like water and energy should be nationalized and stabilized - the opposite of investment capitalism's casino approach - not because it would form the basis of a communist utopia, but because every other competitive market industry relies on those basic services to thrive and grow.

AlexandrB 2y ago
This is also why industries like Bitcoin mining can be so corrosive. You can't stabilize the price of a commodity like energy if there's an entity that can generate nearly infinite demand.
- bequanna 2y ago
  Well, the rewards for Bitcoin mining are zero-sum so the demand will never really be infinite as the miners need some amount of profitability.
  - AlexandrB 2y ago
    Fair enough. Though as long as the price of bitcoin continues to increase demand for compute can continue increasing as well.
    - bequanna 2y ago
      Right, but I believe halving of rewards also keeps the compute growth in check somewhat. I suppose it just depends on how BTC price increases vs the halving timeline.

jmount 2y ago

Futures are tricky. If not designed right they degenerate bucket shops (side bets that have nothing to do with the underlying- literally just betting on what numbers will appear on a tape) or depend only on interest rate (instead of capturing price trends of the underlying).

mud_dauber 2y ago

It seems to me that liquidity in a semi futures marketplace would be much better if you traded on a lowest common denominator - cents per square millimeter of a finished wafer. Same units of value regardless of underlying technology. Am I wrong?

fuzzfactor 2y ago

Sheesh, it takes a lot of smoke & mirrors to divert people's attention away from the essential need for price per megabyte to always trend net downward. But you can trust Enron to have it all figured out and be able to play different rates of decline as if it was actual ups & downs. >It's the perfect market. And Enron has the credibility. They wouldn't have said it if it wasn't false. More like un-credibility.