Pidgin’s past: a track record of profiteering at our expense

Photo credit: Murray Bush, Vancouver Media Coop

“There was no one in this building for as long as anyone can remember. Then we came along. We worked hard at fixing it up. People moved in upstairs. These guys criticize, but they don’t offer any solutions of their own.” -Brandon Grossutti, President of Pidgin Restaurant Ltd, quoted in the National Post, Feb 21st 2013

As is often the case in public debates on the Downtown East Side, media coverage of the new Pidgin restaurant has been characterized by historical amnesia. Uncritical repeating of the imperative and beneficial claims of gentrification has ignored longstanding issues, their context, and most of the relevant facts. Despite Brandon Grossutti’s proclamation that there was “no one in the building” when he “came along”, the DTES community remembers well that the 21 Doors development which houses Pidgin used to be affrodable housing for low-income families.  Until March 2008, that is, when its tenants were evicted for the renovation and conversion of the property into market condos to be flipped for quick profit.

While Grossutti has made himself the public face of the business, appearing in numerous media interviews, he is not a solitary small business owner beset by a “poverty industry” as The Province suggests, but rather one of several high-profile individuals with a financial stake in the project. The owner of the 21 Doors development which houses Pidgin, Robert Fung, is listed as one of many “partners” on the restaurant’s website, and is implicated in Grossutti’s “we.” While the media has chosen to depict Grossutti as a well-meaning restaurateur that has stumbled into a conflict not of his making, the extent of his personal financial involvement remains obscured, and the presence of significant real estate capital is undeniable.

As unusual as it may be for a restaurant to boast a “president,” Mr. Grossutti is no stranger to the title. The second key fact which has eluded media accounts is Grossutti’s venture capitalist career before his adventure into the restaurant business. Grossutti is the president of Integrated Algorithmics, a financial services firm he co-founded with Stefan Moser in 2005.  He created the company after working as the Software Development Manager at Vancouver-based Wolverton Securities, one of Canada’s oldest venture capital firms.  This brokerage has been operating on the Vancouver Stock Exchange for over 100 years, and remains privately owned and managed by the Wolverton family. Grossutti is also the Managing Director at Knowledge-Based Telephony Systems, an Alberta-based telecommunications company. His career at Wolverton lasted over a decade, apparently only coming to a close in 2012 to attend more closely to his passion for fine dining. Finally he is also registered as the owner of the website for a personal consulting company called Sildon Image Consulting, which provides wardrobe and personal shopping services. The contact for this last company (which declares, unironically, that “image is everything”) is Silvia Kim, another employee of Wolverton Securities.

Integrated Algorithmics is about as arcane as its name suggests, but further investigation sheds light on Grossutti’s current scuffle in the DTES. The company provides IT services specialized for private brokerages like Wolverton Securities that are engaged in a relatively new financial practice called “high-frequency trading” (HFT). This is a trading strategy which exploits ultra-high-speed computing and proprietary software to perform rapid analysis of stock market data and respond with trades in a tiny fraction of a second. Current market players, including Grossuti’s Integrated Algorithmics, boast reaction times faster than one millisecond.

This high-frequency trading technology outperforms humans with its near-instantaneous responses to market movement, allowing computers to profit by doing extremely frequent but small trades (on the order of thousands of trades per day).  It is a relatively new practice, exclusive to a few well-connected brokerages, though it has been growing rapidly: HFT volume in the USA increased 164% from 2005 to 2009. Despite its small profile, the nature of the practice makes it disproportionately influential. While high-frequency trading operations account for 2% of the firms operating in the equity order market, they constitute 73% of order volume.

From high-frequency trading to gentrification

The rise of high-frequency trading has much to tell us about how businesses operate, and why it is naive for the City of Vancouver to stake its housing strategy on market-based policies and their attendant gentrification.

High-frequency trading firms and real estate developers both “go where the spreads are widest,” in the words of James Overdahl, former US Security & Exchange Commission (SEC) economist –  that is, where the largest profits can be made. In the real estate world, speculators target neighbourhoods where the rent is lowest compared to the citywide average – a margin which urban geographers and gentrification scholars call the “rent gap.” In Vancouver, the “spreads are the widest” in the Downtown Eastside. The building that houses Pidgin was first targeted in 2008 by real-estate speculator Robert Wilson, who proceeded to evict its 40-odd low-income tenants. At the same time Wilson purchased a dozen other low-income hotels in the Downtown Eastside, and made-off with millions by “flipping” the buildings. Like a high-frequency trader, Wilson played the game to extract personal profit, regardless of its human or social impact. Grossutti’s recent entrance onto the restaurant scene with Pidgin was not so much a change in profession as a re-application of the principle of profiteering from the stock market to the low-income housing stock.

What we also learn from high-frequency trading is that profit extraction can be highly destabilizing. The disproportionate and chaotic influence of high-frequency trading burst onto the public stage in the 2010 “Flash Crash”, where the Dow Jones industrial average lost 9% of its total value for no discernible reason, only to “recover those losses within minutes.” The event was the biggest one-day point decline in the Dow Jones’ history, and triggered an SEC inquiry into how and why it occurred (*see footnote). It concluded that high-frequency trading magnified the impacts of market actions, creating a market “so fragmented and fragile that a single large trade could send stocks into a sudden spiral.”

While high-frequency trading is certainly profitable, the question of whether or not it provides any value to the market as a whole remains a point of contention. In October 2012, American gas traders, former HFT executives, and Canadian brokers collectively spoke out against HFT firms, insisting they were destabilizing markets and distorting prices. In November, the U.S grain industry took the unusual step of chiming in to say the same was being done by HFT firms to grain futures, arguing that the practice was making markets increasingly erratic and irrational.  These criticisms were especially remarkable in that they alleged that HFT firms were exploiting the practice’s “market making” influence to manipulate markets, create volatility, and exploit resting orders by less sophisticated market players, a practice colorfully known as “banging the beehive.” When you bang the beehive, a lot of people get stung, and one person ends up with all the honey.

Similarly, real-estate investment in Vancouver has become a game for a group of well-connected profiteers, an end-in-itself, producing an unstable housing market teetering on the brink. Head city planner Brent Toderian, before being fired by Vision Vancouver, warned that in the Downtown Eastside there was “so much speculation, so much land was changing hands,” that prices were spiraling out-of-control. The immediate economic result was inflation of land-values and rents, while the human result was that poor people were evicted – including from 334 Carrall itself. This speculation was enabled by signals from city council that laissez-faire deregulation of the property market was the new order of the day in this most vulnerable of neighbourhoods.

Deregulation is the problem, not the solution

Despite these substantial criticisms of high-frequency trading and subsequent government promises for regulation targeting the industry, the practice remains out of the purview of the SEC. In Canada, the Investment Industry Regulatory Organization of Canada is considering imposing self-regulation due to the number of abusive practices associated with HFT, and regulators are contemplating significant action soon.  But instead of taking responsibility for their actions, traders and speculators have claimed to be the solution for the problems they created. After the Flash Crash of 2010, high-frequency trading firms continued to insist in the face of plentiful evidence that their practices were not a cause, and that if anything high-frequency trading “substantially improves market liquidity, narrows bid-offer spread, lowers volatility and makes trading cheaper for other market participants.” (Here is a summary of comments made to the SEC.) Meanwhile, here in Vancouver our real-estate industry calls for abolition of the property transfer tax and the cutting of “red tape” at city hall as “solutions” to the housing crisis.

But it falls to government to ensure that the activities of businesses, all the way from a gentrifying restaurant to a high-frequency trading firm to the largest of energy companies, are not adversely affecting its citizens. Without proper regulation and oversight, business can and will remain oblivious to the social harms their private operations create. While it is helpful when DTES business operators willingly embrace “a little humanity,” as gentrifying restaurateur Sean Heather prescribes, it is more helpful still when our government requires them to do so.

Pidgin has stated that in opening their restaurant they wanted to “[start] a conversation, one that is overdue.” Though much still needs to be discussed, this conversation has already been happening for a long time: it does not begin or end with this one block of Carrall Street, though Pidgin’s appearance has certainly raised the volume. And for the conversation about Pidgin in particular to have any benefit at all, I’ll suggest it should begin with an acknowledgement of shared principle: that if our politicians abdicate their social responsibility to businesses, the majority will suffer, while an elite group of well-connected “market makers” profit at our expense.

Footnote: A further investigation of high-frequency trading practices by Nanex LLC, a software company not unlike Grossutti’s, determined that high-frequency trading was responsible for an exponential rise in quote traffic in the last decade that resulted in a 10-fold increase in cost per transaction.  This increased data per transaction imposed additional costs on stock quote processors, requiring increasingly expensive communications and processing equipment to handle the exponential increases in quote traffic, pricing smaller, conventional players out of the market analysis business.  And this technological gulf compounds the challenge of imposing regulation on HFT, as “the technology that regulators have to monitor market abuse is far, far behind the technology used by traders,”  according to Stephen Piron, director of BrightSun Group, a UK financial technology company.