John Gapper has a long evaluation of the art auction business in today’s Financial Times. It comes out as the stock market is reacting to Dan Loeb’s victory:

A first test for Sotheby’s, with Mr Loeb now on its board, is whether it will stick to its principles or venture further into opaque deals and private guarantees.

Gapper’s concern is that in trying generate margins, auction houses are becoming more opaque and like the dealers they would seem to be a counter-part or alternative to. One can see why auction houses are viewed as the art world’s analog to an open exchange like the stock market. But that assumption is based upon two shibboleths.

First, with all of the furor surrounding Michael Lewis’s Flash Boys, only the latest in numerous illustrations that equity markets are far from fair and transparent, it is surprising that we still imagine there’s a free and unfettered market somewhere lacking any attempt at an advantage to one side or another.

Second, Gapper goes through the litany of complaints about third-party guarantees and reduced commissions. All of which is true. But he thinks the auction houses are a separate space from an art dealing world dominated by private galleries. No one knows how much of the world’s art is sold through galleries. But we do know that dealers play a prominent role both buying and selling through auction houses.

New buyers from around the globe may feel more welcome at an auction house but that doesn’t leave out the dealers who are often selling to each other or establishing a public price.

In one sense, shenanigans in the upper echelons of the art market – especially in the contemporary art world, where intrinsic value and price bear very little relationship to each other – do not matter terribly. As in the VIP baccarat room at a Macau casino, if you cannot afford to lose millions by gambling, you should not be playing alongside the high-rollers who can.

But Christie’s and Sotheby’s have more than their own reputations to consider. Art auction houses bring together buyers and sellers in what is at least an approximation of a public market (allowing for tricks of the trade such as “chandelier bids” made up by auctioneers to meet the reserve). Without some transparency at such auctions, the entire market is vulnerable to fraud.

Modern art auctions are as baffling as the paintings (FT.com)