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Matt Levine

People Will Pay for Illiquidity

Also Libor prosecutions, blue-check pricing negotiations, meme-stock bank runs and the laws of tax.

One sort of financial innovation is about adding liquidity. There is some class of thing that does not trade very much for some reason, and you find a way to make it trade a lot. Perhaps the thing is very big and not many people can afford to buy it, so you split it into small pieces so people can trade the pieces. This basically describes the stock market: If you like Tesla Inc. as a company, you probably can’t go buy all of it, for a bunch of reasons of which the most important is that it costs $725 billion. But Tesla is split up into billions of shares, and you can go buy a share of Tesla for about $230. 

Or perhaps the things are very different and non-fungible, making them hard to trade, so you smush lots of them into a big standardized package that is easier to trade. This is roughly the idea behind mortgage bonds, or bond exchange-traded funds, or we talked the other day about a guy who wants to do it for diamonds. There is no visible trading market price for a 1.53-carat VVS1 diamond, because there aren’t that many diamonds with exactly those characteristics, but if you can build some sort of standardized diamond basket then maybe you can create a market price for that diamond, and thus a market.