options in the wild, ebay edition

ebay would do well to better understand the trading card market

I am no financial expert, and this is not financial advice. But as I understand it, options work like this:

• A call option is where you pay money to have the right to buy an item at a specific price for a specific period of time. So I pay $1 to have the right to buy something at $100 for 1 week. If the price goes up to, say, $102, I exercise the option, buy the thing for $100, sell it for $102, and make $1. If the thing does not go up in price the seller of the option pockets $1. You do this when you think the price will go up.

• A put option is where you have the right to sell something at a specific price for a specific period of time. For instance, I pay $1 to have the right to sell something at $100. Then, if the thing goes down in price to, say, $98, I exercise the option, buy the item for $98 and sell it for $100, netting $1. If the thing does not go down in price, the option expires and the seller of the option nets $1. You do this when you think the price will go down.

How does this relate to eBay and trading cards? Well, on eBay when you win an auction or get an item via the Best Offer feature, you have 4 days to pay for the item. As I have discussed before, eBay is terrible at running auctions because it is incredibly easy for both buyers and sellers to flake. The penalties are somewhat higher for sellers but still low—you can flake on 2% of your transactions without incurring a penalty. For buyers, I don’t think there are penalties at all, or at least I have never seen them enforced. When a buyer flakes on payment, eBay doesn’t even give you the option as a seller to report them. You can just re-list your item for free.

buyer side

So let’s start with the case of an unscrupulous buyer. eBay is offering them free call options. You win an auction or make a successful offer on an item, and you have four days to find a buyer at a higher price. If not, just don’t pay! Easy money.

To give you an idea of how frequent this is, we’ve sold about 1000 items over the last year on our eBay store and have had to block about 50 people for nonpayment, so that’s about 5% which is a staggeringly high number. Even if the true number is 1% of buyers: that many people on eBay using the site for free call options is terrible for the ecosystem. You see the economic incentive from the buyer side: it’s literally free money if you can swing it. The main complication is you need your buyers to wait for shipping, but if you have some relationships where people are happy to wait, it’s literally free money.

We’ve had about 5% non-payment even though we block after 1 instance of non-payment, so there are no repeat accounts in there. Non-payment happens on items of all values as far as I can tell, we’ve had non-payment on 99 cent items and on $1200 ones.

I have bugged eBay many times over the last year on Twitter to no avail: their company line is that this is good policy. It is not! We run many fewer auctions than we would otherwise via eBay because non-payment is so rampant, and we turn offers off on most items for the same reason. The overall effect is less stuff moves, markets are slower, and eBay makes less money.

It’s one of the true puzzles to me why a major company that wants to dominate the trading card market and faces substantial competition doesn’t want to clean up its ecosystem. It’s also a puzzle considering eBay could just auto-charge credit cards for auction wins (Goldin does this), so the only cases of non-payment would be credit card declines. eBay could then take action by placing spending limits or other restrictions on those whose cards are declined.

seller side

On the seller side, scammers have it a little tougher but eBay is still looking out for them. Let’s say you have a trading card of a quarterback and a big game is coming up. If the game goes well for the QB, obviously the card will spike in price, but you want to cover your downside. So you run an auction ending *before* the game to lock in the pre-market-moving price. If the QB has a good game, you just cancel the order and re-list. If the QB has a bad game, you ship it. Bam—free put options!

It is not quite free, though—your buyer only has a 95% chance to pay, which complicates things a bit. Perhaps you will attract disproportionally unscrupulous buyers with your QB card auction ending at 11AM on a Sunday before gametime, so perhaps that number is higher. But still, eBay has mostly got your back.

And the other “tax” on this strategy is that if you flake on more than 2% of shipments overall eBay will actually start to penalize your account. So you can only use your free put option coupons on 1 in 5 items. But if you allocate those free puts to your higher value stuff, being a scammer could really pay off for you! The tax is you’d have to ship 49 items on time, which I guess is something but if you’re a mixture of a scammer and a legitimate trading card seller (many such cases!) it could work for you.

In my experience as a buyer on eBay, non-shipment is rarer but still happens. It’s maybe in the 1 in 100 range, if I had to guess.

why doesn’t ebay fix this?

At least a non-negligiable fraction of buyers are using eBay for free call options. A few sellers, but probably just a few, are using it for free put options. I’d imagine shill bidding is the much more common seller scam—it’s obviously rampant—but that’s a story for another post.

eBay—if you’re reading—fix your shit!