A Tower, a Shoebox and a Maserati

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Market structure.

Let's start with "High-Speed Trader DRW Proposes Thousand-Foot-Plus Tower in Rural England." The idea of the thousand-foot tower is that you can see Europe from up there, and if you put a guy on top of a big tower in Europe, and another guy on top of the big tower in England, they can wave semaphore flags at each other and instantly communicate what's going on in the markets. Only instead of guys it's computers, and instead of flags it's microwaves. (Not waving microwave ovens, I mean, but beaming microwaves across the channel.) Anyway DRW's telecomm subsidiary (yep) produced some handy but not-to-scale diagrams to explain why a thousand-plus-foot (320-meter) tower works:

And why a 45-meter tower doesn't:

Then there's one explaining why a 220-meter tower doesn't work either, and for a brief thrilling moment I thought they were going to diagram all of the tower heights that wouldn't work, but no, they quit after two. But there is a long series of impossibly wonderful before-and-after pictures of views in the neighboring areas, where the before pictures are photographs of mostly flat fields and the after pictures are the same photographs of the same flat fields but with a giant pole added off in the distance. Like, before:

And after:

Did you find the pole? There are really surprisingly many of these and they are incredibly soothing. I love that the skill set of high-frequency trading includes understanding, like, rural English zoning boards. Anyway you often read that high-frequency trading creates a socially wasteful arms race to build faster and faster computers and telecommunications infrastructures, and I have never understood the assumption that that race is socially wasteful. Faster computers and telecommunications seem, intuitively, like a good thing, no? The proposal lists the benefits the giant pole would provide to the local community, including a more powerful community radio station and low-cost wireless broadband access, and they are ... maybe a little underwhelming? But still better than nothing? I guess it depends on how much you like community radio, and how much you mind that view of the big pole from your field.

Elsewhere in market structure let's talk about IEX, whose application to be a public stock exchange remains controversial. Here is a very good pro-IEX comment letter from Rajiv Sethi of Barnard that focuses on the key controversial feature of the proposed exchange, the fact that it skips its "magic shoebox" speed bump when routing orders to other exchanges. Critics dislike this because it means that orders can partially execute on IEX and then be routed to other exchanges before other traders can update their orders to reflect the IEX execution. IEX proponents argue that that is exactly the point, and that traders who update their orders to reflect those executions are the sort of spoofy phantom liquidity providers that we should not protect. Sethi:

The design proposed by IEX, by preventing orders from trading out of sequence (measured with respect to first contact with the market) would bring the system closer to that envisaged by Congress. In a true national market system with multiple exchanges, each order would receive a timestamp marking its first contact with the market, and no order would begin to be executed until all orders with earlier timestamps had been fully processed. 

I might loosely paraphrase Sethi's point as being: If you pretend that there is just "a market," rather than an interlocking fragmented system of different exchanges and dark pools with different latencies and different matching engines, then anyone who arrives at "the market" with "an order" should be allowed to execute that order fully (including routing bits of the order between exchanges) before anyone else changes any orders. I don't know how practically workable that theory is in our context of market fragmentation, but it has an obvious appeal.

Elsewhere in IEX, Kipp Rogers has a fascinating post on "Pershing Square and Information Leakage on IEX." From December 24 through 31, Pershing Square sold a bunch of Valeant stock; it disclosed those sales after the market closed on December 31. Presumably it didn't want people to know that it was selling until it had finished. But the volume of Valeant stock traded on IEX was unusually high during those days, and since Pershing Square has been a vocal supporter (and shareholder) of IEX, Rogers guessed that Pershing Square was the seller before Pershing disclosed it. So by trading on IEX, Pershing might have leaked its intentions to the market. There is a (very speculative but) more general lesson here, which is that, to the extent that IEX succeeds in being an exchange for "real" investors, then trading on IEX might be more informative than trading elsewhere. If you are a high-frequency trading firm and you sell some stock on BATS, then you know there's a buyer for the stock, and you should maybe race to raise your quotes elsewhere. But if you sell some stock on IEX, then you know that there's a real buyer for the stock, and while you are delayed by 350 microseconds in raising your quotes elsewhere, maybe you should then race to raise them by even more?

Finally, since the start of the IEX controversy, the Securities and Exchange Commission comment letters have become a well-known venue for market-structure comedy, so you can read this satirical comment letter (on a proposed BATS rule change) from "Big Boy Pants Trading." It is mostly the usual sort of breathlessly sarcastic things-were-better-in-the-old-days criticism of high-frequency trading, but there's an emoji, maybe you'll find that funny.

Meanwhile in China.

Yesterday I mused a little about the idea of sort of meta-circuit-breakers where, if the market goes down too much, you close it not for 15 minutes, or for the rest of the day, but for the rest of the year. That was mostly a joke -- a year is a really long time -- but you could imagine that Chinese authorities, after yesterday's carnage, might want a real vacation from free markets. So:

Government funds purchased local stocks on Tuesday after a 7 percent tumble in the CSI 300 Index on Monday triggered a market-wide trading halt, said the people, who asked not to be identified because the buying wasn’t publicly disclosed. The China Securities Regulatory Commission asked bourses verbally to tell listed companies that the six-month sales ban on major stockholders will remain valid beyond Jan. 8, the people said.

An indefinite ban on sales by major stockholders is not quite a circuit breaker, but it does trade away some price discovery in exchange for stability:

The sales ban on major holders, introduced in July near the height of a $5 trillion rout, will stay in effect until the introduction of a new rule restricting sales, the people said. Listed companies were encouraged to issue statements saying they’re willing to halt such sales, they said.

Meanwhile, "The money that came in at the bottom today definitely isn’t normal money," says an analyst, meaning presumably that it is government and "national team" money. It worked, and the CSI 300 closed up 0.3 percent on the day. 

The idea guy.

Here is a profile of Ari Bergmann, a consultant who sells trading ideas to hedge funds. One enjoyable trope of financial profiles is that people associated with the hedge-fund industry are generally portrayed as salt-of-the-earth guys who are not at all like stereotypical hedge-funders. But ... many of them ... are. So you get things like the profile of the hedge-fund manager who only sometimes takes a private plane to Nantucket. Or, now, this:

An Orthodox Jew who wears thick, black-rimmed glasses, Mr. Bergmann and his wife, Iona, live in Lawrence in western Long Island, removed from hedge-fund enclaves in Manhattan and Greenwich, Conn. He earned a doctorate in comparative religion at Columbia University in 2014. His most obvious indulgence is a Maserati Ghibli.

Jalopnik calls the Ghibli "a nice $40,000 car with a $30,000 badge on the front." I suspect I would enjoy a list of his less obvious indulgences. Anyway there is some worrying about whether some hedge funds rely too much on ideas rented from consultants, but in this age of high correlations between hedge funds and the S&P that seems like sort of a niche worry. Surely it's no worse to get ideas from consultants than it is to get ideas from Wall Street salespeople, or to quasi-index?

Clinton vs. Sanders.

Bernie Sanders is giving a speech on financial regulation today, in which he will presumably lay out some differences between his avowed socialism and Hillary Clinton's perceived closeness to Wall Street. And this is how the Clinton campaign responded, or presponded I guess, yesterday:

“Unfortunately, Senator Sanders has so far taken a hands-off approach to some of the riskiest institutions and activities in our economy, which were among the biggest culprits during the 2008 crisis,” Gary Gensler, Clinton’s chief financial officer and the former chair of the Commodity Futures Trading Commission, said in a statement, referring to the activities of hedge funds and high-frequency traders. In his speech tomorrow, Senator Sanders should go beyond his existing plans for reforming Wall Street and endorse Hillary Clinton’s tough, comprehensive proposals to rein in risky behavior within the shadow banking sector.”

So ... the way to show that you're not too close to Wall Street is to have the former Goldman Sachs partner on your campaign criticize Sanders's plan? Don't they have anyone else whose name could have been attached to this statement? Like a spokesperson? Or Clinton herself could have put her name on it? I get that Gensler has a reputation as a very tough and reform-minded former regulator, but he just unavoidably was a Goldman partner; maybe you wait until the general election to trot him out as your financial-regulation spokesman. (Disclosure: I am a former Goldman Sachs vice president and would be happy to criticize any presidential candidate's financial regulation plan, to the extent any of them has one.)

People are worried about unicorns.

"Don't Hold Your Breath for a 2016 Tech IPO Boom," says Dan Primack, who argues that private capital is still abundant ("albeit often at less ambitious valuations") and that public markets don't look that promising either from a valuation perspective or from the point of view of "negatives like Sarbanes-Oxley compliance and pressures from short-term investors." Elsewhere, General Motors invested $500 million in Lyft, and they'll work together on self-driving cars. 

People are worried about bond market liquidity.

Here's the New York Fed's Liberty Street Economics blog on "Characterizing the Rising Settlement Fails in Seasoned Treasury Securities." And here is an explainer from the Financial Times about how "Pricing mismatch worries hit ETFs" that I found somehow puzzling; I feel like the key line is "This death spiral did not happen during December’s volatility." I'm more or less in the BlackRock camp of, whatever you think about bond-market-liquidity and mutual-fund-liquidity-mismatch worries generally, exchange-traded funds should be less worrying than regular old mutual funds, because they offer the opportunity for liquidity without trading the underlying bonds. Elsewhere: "BlackRock Warns on Bonds as Fed Officials Shrug Off Stock Rout."

Things happen.

Puerto Rico Defaults on Debt Payments. Puerto Rico's General-Obligation Bonds Rally as Default Averted. Puerto Rico to Skip Some Payments, Likely Prompting Turmoil. "MPs are planning to push for an inquiry into the UK financial watchdog’s decision to drop a review of banking culture only months after its launch." In Cohen and I.B.M. Insider Trading Cases, Challenges for the S.E.C. Supermines Add to Supply Glut of Metals. The Best-Paid U.S. Executives Don't Work on Wall Street. Regulatory Consultancies Now Come In Democrat and Republican Flavors. Elliott Hedge-Fund Group Loses German Court Porsche Ruling. Golf courses as conservation areas. Doggie bunk beds. Rat rat

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net