Yogurt, Liquidity and Listings

Also index funds, smart contracts, Bitcoens, seating charts and global nuclear war.

Froyo Juicero!

One thing that puzzles me is how Blue Apron Holdings Inc. is a tech company. Blue Apron is a grocery company; its business is to put meat and vegetables into bags and deliver them to your door so you can cook them. And yet everyone seems to think it's a tech company. I express this puzzlement from time to time, and people try to explain it to me (it's "tech-enabled"?), but I have never really gotten it.

Here is my theory, though: Blue Apron is a tech company in the sense that its product is not meals, or ingredients, but simulacrum. What it delivers is the idea of creating a home-cooked meal from fresh ingredients, without the tedious shopping and chopping work that that would otherwise require. What Blue Apron delivers is not exactly convenience -- ordering takeout is a lot more convenient -- but the perception that you are doing something complicated and real and primal while you are actually, through the miracle of technology, doing something much easier. Blue Apron is a virtual-reality company. 

Virtual reality (and augmented reality) is a booming tech sector, and simulacrum is a central product of the modern technology industry: Facebook Inc.'s business, after all, is creating the perception that you are maintaining meaningful friendships with hundreds of people while you are actually, through the miracle of technology, clicking icons on a screen. 

Food Simulacrum is a part of this boom, and it gets much weirder -- and more tech-enabled -- than Blue Apron. We have talked, of course, about Juicero, a vegetable-squeezing startup that made me question the nature of physical reality. You could just ... buy ... juice? Or you could buy vegetables, and chop them, and put them in a blender, and have juice, and then have to clean the blender. 

But at Juicero, they will do almost every aspect of the juice-making for you: They'll buy the vegetables, and chop them, and clean the blender. But so will a juice shop. Juicero's innovation is to omit one step, to require you to put a bag of stuff into a machine, which will then transmute that stuff into juice. (Via a QR code, somehow.) Famously, Bloomberg's Ellen Huet and Olivia Zaleski discovered that you could replace the physical work of the machine by just squeezing the bags with your hands until juice comes out. But the machine, for all of its overengineering, is not really there to perform physical labor. It's there to perform conceptual magic: The bag of stuff is in the category "ingredients"; the juice that comes out is in the category "food," and by putting it in the machine and pushing a button, you have transformed the ingredients into food. You have Made Juice Fresh At Home. If you just squeeze the bag yourself, it might as well be Capri Sun.

Anyway here's a home frozen-yogurt maker called Wim. "Made in Front of You Frozen Yogurt," is the headline on the website. You buy a container of stuff. You put it in the machine. (You add your own milk.) Out comes frozen yogurt. (After 10 minutes.) You could have bought a container of frozen yogurt and saved the 10 minutes! But then you'd have bought frozen yogurt. This way, you have made it, fresh, in your house. (From "freeze-dried organic yogurt mix.") "We’re not saying that when you buy this appliance your home will become an effortlessly elegant frozen yogurt sanctuary," says the website coyly, "but we’re not not saying that either." They're saying that your home will become a virtual-reality theater in which you can watch yourself make fresh frozen yogurt. The machine costs $299.

People are worried about bond market liquidity.

Yesterday the Securities and Exchange Commission's Division of Economic and Risk Analysis published a 315-page report about bond market liquidity, which Congress had asked for back in 2015. Specifically, the report's purposes are "describing trends in primary securities issuance and secondary market liquidity, and assessing how those trends relate to post-crisis regulatory reforms." In layman's terms, these days, that means trying to find some evidence to justify repealing, or keeping, the Volcker Rule.

The report is long and full of data, but it comes to many of the same conclusions and non-conclusions as other regulatory inquiries into bond market liquidity. Specifically, (1) bond market liquidity is more or less fine:

In corporate bond markets, trading activity and average transaction costs have generally improved or remained flat. More corporate bond issues traded after regulatory changes than in any prior sample period. In the post-regulatory period, we estimate that transaction costs have decreased (by 31 basis points (bps), to 55.4 bps round-trip) for smaller trade sizes ($20,000) and remain low for larger trade sizes relative to the precrisis period (estimated at 5.7 bps round-trip for trades of $5,000,000, compared to 5.8 bps pre-crisis).

and (2) if there are problems, you can't confidently attribute them to post-crisis regulation:

Dealers in the corporate bond markets have, in aggregate, reduced their capital commitment since the 2007 peak. This is consistent with the Volcker Rule and other reforms potentially reducing the liquidity provision in corporate bonds. It is also consistent with alternative explanations, such as an enhanced ability of dealers to manage corporate bond inventory, shorter dealer intermediation chains associated with electronification of bond markets, crisis-induced changes in dealer assessment of risks and returns of traditional market making, and the effects of a low interest rate environment. These alternative explanations are not mutually exclusive or necessarily fully independent of regulatory reforms, so distinguishing between these potential explanations from the market trends data is not possible.

It is strange that for all of the research that is done on the topic, bond market liquidity is still so vague and anecdotal. People are worried about bond market liquidity, and the data doesn't really look worrying, but you can't exactly say that they're wrong. The worrying aspects of bond market liquidity -- the trades that people want to do but don't, the perceived reduced resilience in a crash -- don't show up in the data.

IEX listings.

IEX Group Inc., the "Flash Boys" stock exchange, has "passed a major hurdle to becoming a listing venue to challenge the New York Stock Exchange and Nasdaq after winning regulatory approval for a process to open and close the market." (You need to be able to open and close a stock if you are going to be the primary listing venue for that stock.) Obviously it makes a ton of sense for IEX to capitalize on its "Flash Boys"-driven goodwill, and public companies' vague sense that it will protect them from evil high-frequency traders, by going after listing business.

Stock exchanges, through a series of historical quirks, are now key regulators of corporate governance standards in the U.S., and one thing that I have long thought is that if IEX is going to have listings, it should try to distinguish itself as a governance regulator. Ignoring the technicalities of speed bumps and routers and discretionary peg orders, IEX's central marketing proposition has been that it limits the predatory behavior of high-frequency traders to create a welcoming exchange for long-term real-money investors. Similarly, in listings, IEX could stake out valuable marketing territory with listing standards that favor good governance or long-term thoughtful investors or whatever.

That's especially true now, after several big index providers have decided to ban dual-class stocks from their indexes. Banning dual-class stock is so hot right now, and if I were IEX, I would do it: I'd forbid companies with dual-class stock from listing on IEX. My bet is that not too many big companies will want to go public with dual-class shares anymore anyway -- getting into the S&P 500 is pretty important for the share price -- so IEX wouldn't miss out on many new listings with that rule. But it would get to say to investors, "we are the only U.S. stock exchange that protects shareholders' voting rights," and to companies, "we are the exchange for the long-term real-money investors that you want, and listing with us will signal to investors that you are good and nice, like us."

Are Index Funds Evil?

That is the headline of this Frank Partnoy article about my favorite financial controversy, whether index funds (and other broadly diversified mutual funds that hold shares of multiple companies in the same industry) should be illegal because they reduce competition. One thing that I did not realize is that this debate is 30 years old and has a Larry Summers pedigree:

Concerns about the potential dangers of shareholder diversification first surfaced back in 1984, not long after index funds themselves did. Julio Rotemberg, then a newly minted economist from Princeton, posited that “firms, acting in the interest of their shareholders,” might “tend to act collusively when their shareholders have diversified portfolios.” The idea, which Rotemberg explored in a working paper, was that if investors own a slice of every firm, they will make more money if firms compete less and collectively raise prices, at the expense of consumers. Knowing this, the firms’ managers will de-emphasize competition and behave more cooperatively with one another. Rotemberg was advised by Larry Summers, then a Harvard economist, and bolstered his argument with 30 pages of mathematical theory. But the argument was counterintuitive and lacked empirical support; his paper sank into obscurity.

But then it was rescued from obscurity in 2014 by the famous Azar-Schmalz-Tecu paper finding that increased common ownership by mutual fund families has reduced competition in the airline industry, and the rest is history, or at least, occasional half-joking discussions in Money Stuff. "Azar, Schmalz and Tecu's paper went viral among academics," writes Partnoy, but I have not noticed too much interest from politicians or regulators in banning index funds. The index funds are worried enough to respond to the controversy, but they don't seem to be losing business. "Sometimes academic fights are so ​​vicious because the stakes are so low," writes Partnoy. "But this battle really matters." Sort of: If the index-funds-as-antitrust-problem is real, then it could be a profound problem in the economy, whose solution would upend the entire investment industry. But for now, it remains mostly an academic battle.

Blockchain blockchain blockchain: legacy financial services division.

A smart contract is a contract that is executed automatically by computers, but lots of contracts are executed mostly by computers. For instance, I used to build and sell derivatives at a bank, and after we negotiated the ISDA agreement with the terms of a derivative, those terms would be plugged into a computer, which would then keep track of how to hedge and when to deliver what cash flows. The derivative just went burbling off on autopilot. Many discussions of smart contracts use options and derivatives as examples, because they are the quintessential computerizable contracts: In a financial derivative, I deliver you a series of electronic book entries (representing money, stock, whatever), and you deliver me a series of electronic book entries, and neither of us ever gives or gets or does anything in the real physical world. It is all stuff that a computer can handle. (Commodity futures, of course, are different, in the unlikely event that you end up taking delivery of 20 tons of live cattle. Your computer might need help with those.)

On the other hand, when I negotiated ISDA agreements, the first two pages of economic terms got plugged into the computer and executed automatically, but the remaining 15 pages of dense legalese did not. We spent a lot of time negotiating those! All the hard stuff, about who bears what risks in the case of weird unlikely events, was in there. And if the weird unlikely events happened, as they of course often did, the computer would throw up its little computer hands and turn to the human bankers and structurers and lawyers to tell it what to do.

Anyway here is a blog post from the International Swaps and Derivatives Association about its efforts to turn ISDA agreements into smart contracts:

ISDA is now taking a critical step in the process by reviewing and updating the ISDA documents and definitions, with the aim of standardizing and formalizing certain clauses to enable them to be more easily represented and executed by smart contract code. This work to future-proof our legal documents will start with the 2006 Definitions for interest rate and currency derivatives.

In some ways, ISDA's mission for decades has been "standardizing and formalizing certain clauses": The financial industry uses ISDA agreements because they allow standardization of derivatives contracts, so that everyone can trade derivatives quickly without renegotiating every piece of legal boilerplate from scratch each time. But now the trick is not to standardize the writing of those clauses, but their execution, to make ISDA contracts not just quick and automatic to negotiate, but also to carry out. Even when the weird stuff happens.

Blockchain blockchain blockchain: ICO division.

"'Bitcoen' to Become First Electronic Currency Specifically for Jews," says this apparently real headline, and what could possibly go wrong? Of course there will be a small international council of prominent Jews who control the currency, because ... I mean ... what?

While anyone can purchase tokens, the company will be managed by a 'Council of Six' made up solely of Jewish representatives. The representatives will likely be prominent leaders in both public and private sectors, though there is no word yet as to the planned demography of the leaders. 

People are worried that people aren't worried enough.

Ahahahahahahahahahahahahaha no, no, no, that was yesterday morning. Today people are worried about the threat of global nuclear war! I miss worrying about complacency and the VIX. But yesterday President Donald Trump threatened North Korea with "fire and fury like the world has never seen," and complacency now seems less worrying. "Fire and fury" was good for about 1.5 points on the CBOE Volatility Index yesterday, and this morning it broke above 12 for the first time in a month. The consensus has been that markets have been quiet despite recent political turmoil because they have concluded that the political stuff doesn't really matter: Electoral meddling or congressional gridlock or political incompetence might be bad for the world, but they don't seem to be affecting corporate profit margins. Nuclear war might change that calculation.

Elsewhere: "What Could Possibly Ruin Traders’ Summer Vacations?" I don't know, are you vacationing in Guam?

Work Stuff.

Everything, as I like to point out, is seating charts:

Proximity to high achievers can lift people’s performance in various jobs, via inspiration, peer pressure or new learning, a growing body of research shows. The findings offer a silver lining to anyone annoyed at the current fad of flexible office-seating arrangements; employees can use them to their advantage.

Simply sitting next to a high achiever can improve someone’s performance by 3% to 16%, according to a two-year Northwestern University study of 2,452 help-desk and other client-service workers at a technology company.

Elsewhere: "Having Work Friends Can Be Tricky, but It’s Worth It." And here is Jamie Dimon on work-life balance:

"I've always said family first, country second, JPMorgan literally last," Dimon said. "JPMorgan is the best I can do for my country. And my family — I spend a lot of time with them."

Opposite jobs.

Here is a fun toy from the Upshot that tells you what the opposite job of your job is, based on the Labor Department's "detailed and at times delightfully odd records on the skills and tasks required for each job." Sadly "investment banker" and "hedge fund manager" aren't on the list, but "financial analyst" is. "The opposite job of a financial analyst is a model," the Upshot tells me, plausibly, though there are counterexamples. Financial analysts use skills like "getting information," "evaluating information to determine compliance with standards" and "analyzing data or information." Models use skills like "ability to maintain balance," "gross body coordination," "trunk strength" and "ability to reach with arms, hands and legs."

Things happen.

Vantiv Agrees to Purchase Worldpay Group for $10.4 Billion. Venezuela’s neighbours try to put financial pressure on Maduro. China Is Taking On the ‘Original Sin’ of Its Mountain of Debt. It Was a Great Year for America’s Pensions, but Many Are Still in Crisis. Tools for Cleaning Up Europe’s Bad Debt: 18-Wheeler and a ‘Strong Stomach.’ Banking watchdog warns of risks from cliff-edge Brexit. In the Age of Trump, the Dollar No Longer Seems a Sure Thing. Uber Plans to Wind Down U.S. Car-Leasing Business. Securities Fraud Case Against Financier Benjamin Wey Is Dismissed. "Sugar, dollar for dollar, is the most influential commodity in the U.S." Investment banking compensation survey. The Dark Side of Implementing Basel Capital Requirements. Plaza butlers. Pet caftans. Cheetos restaurant.

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