Levine on Wall Street: Cronut Economics
High frequency traders discover faster than light travel
The Federal Reserve released its decision not to begin tapering quantitative easing at 2:00 p.m. last Wednesday in Washington. By 2:00:00.001, volumes in certain economic instruments that are traded in Chicago and sensitive to that decision (S&P e-mini futures, gold futures and ETFs) jumped. Because information takes about 0.007 seconds to travel from Washington to Chicago, this is suspicious. The Fed, etc., seem to be looking into this, since it is unfair, but remember it's mostly unfair to people who were sellers of those instruments at 2:00:00.001. Why would you have a sell order in at that time? Probably because you were planning to change it in reaction to the news at 2:00:00.007 or whenever it reached you. The high frequency traders with inside information and/or time machines picked off the high frequency traders without. Meh. More here and here.
Everybody wants to come to America for our corporate governance flexibility
Here is a story by Steven Davidoff about how Alibaba, the Chinese internet company, may list in the U.S. because it can't have a dual-class share structure in Hong Kong. You can have two theories about shareholder voting rights. One is that shareholders own the company and should control it in proportion to the amount of their investment. The other is that shareholders supply cash in exchange for whatever rights they can negotiate for. Many global stock exchanges seem to subscribe to the former theory and so require each share of stock to get one vote. The U.S. stock exchanges have long, though somewhat begrudgingly, allowed dual-class share structures in which founders and insiders get control and outside shareholders more or less supply cash and get whatever the insiders give them. Davidoff cites statistics about whether dual-class companies over or under-perform but that's a matter that can be settled via price; the question is: Should companies be allowed to go public with whatever governance they can get shareholders to accept? The U.S. answer is mostly yes, which seems right to me.
Herbalife: good pyramid scheme or bad pyramid scheme?
Diet-shake marketing firm Herbalife is a crucible for hedge fund managers' egos but it is also a multilevel marketing company that has been accused (by one of those hedge fund managers, Bill Ackman) of being a pyramid scheme. Dan McCrum at FT Alphaville takes a look at those accusations, starting with the Federal Trade Commission's precedents on what makes a multilevel marketer a pyramid scheme. There is a colloquial sense in which every multilevel marketing company is a pyramid scheme: Herbalife's own Statement of Average Gross Compensation shows that 88 percent of the people who sign up to be Herbalife distributors and pay for the startup packages make zero dollars in income from Herbalife, and Ackman would probably say the number is higher. Meanwhile 0.04 percent of distributors make more than $250,000 a year. But the colloquial sense is not the legal standard, which turns on retail sales figures, and if you're interested in the Herbalife story it's worth checking out what the legal standard actually is.
If this sort of thing is your bag you can read a debate about the opportunity cost of buying a cronut, the deep-fried croissant-pastry thing sold by Dominique Ansel Bakery in Soho. It's a popular thing as things go, which means that the opportunity cost is standing on line for three hours at 5 a.m. in Soho. You can translate that into a dollar figure if you want but my own view is that you couldn't pay me enough to stand on line for three hours at 5 a.m. anywhere, or in Soho any time. If you buy a cronut you're paying $5 to Dominique Ansel, which benefits him $5 worth, and wasting three hours of your life, which benefits no one. If Dominique Ansel was an economist rather than a baker he would charge $20 for a cronut and have a shorter line, but of course you wouldn't want to eat a pastry made by an economist would you? This is an exceptionally silly thing to think about but one reason New York is a global financial capital -- also one result of New York being a global financial capital -- is that it generally offers very efficient mechanisms for converting money into time. It's a convenient place to be rich. In this context the cronut feels like a violation of the city's social contract. Though of course you can just pay someone to stand on line for you.
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Matthew S Levine at firstname.lastname@example.org