Levine on Wall Street: Cuba Funds and Dark-Pool Plans

Also, Shindler's List, but for the loan market.


Yesterday's big news that the U.S. will move to normalize relations with Cuba was also big news for U.S. investment funds that invest in Cuba. Of which there are none. But there's the Hertzfeld Carribean Basin fund, a closed-end mutual fund profiled here in 2012, which invests sort of near Cuba, and which was set up years ago with the goal of one day actually investing in Cuba. It also has the convenient ticker CUBA, so it was up 29 percent yesterday, presumably partly on the new business opportunity and partly on the pea-brained algorithmic "good news for Cuba -> buy CUBA" calculation. Josh Brown and ETF.com are skeptical. Elsewhere in pea-brained algorithms, Cuba Beverage Co., which has nothing whatsoever to do with Cuba except the name, soared yesterday on heavy volume, but "soared" means "to 3.4 cents a share," and "heavy volume" means "around $86,000 worth of total trading," so don't make fun of the algorithms too much. The Cuban rapprochement seems connected to the financial troubles of Venezuela. Other Cuba-related investment theses include cruise lines and Cuban cigars, which you can now buy, and which really are better than other cigars.  And further afield, John Carney asks what the news means for Mark Cuban.

A stock market plan.

One widely disliked feature of U.S. equity markets is the cap on stock-exchange fees at 30 cents per 100 shares. Exchanges don't actually have 30 cents of cost to trade 100 shares, so you might think that the fees would be competed down to well below the regulatory cap. But the way the cap works is, exchanges tend to charge the full 30 cents to people who take liquidity, and then rebate most of it to people who provide liquidity, and this drives a significant portion of market kookiness, as banks look to avoid paying the fees by routing orders to their own dark pools, and as high-frequency traders take advantage of banks' fee-driven routing of customer orders. So here is a proposal from the New York Stock Exchange to cut the exchange-fee cap from 30 cents per 100 to 5 cents, and to introduce a trade-at rule that would require orders for fewer than 5,000 shares to trade on exchanges unless dark pools can offer significant price improvement. The idea is to get banks to move their trading from their dark pools back onto exchanges, in part by requiring them to do so, and in part by making it cheaper. Apparently Credit Suisse, the largest dark-pool operator, has signed on, and Nasdaq "also broadly supports the proposal," but this is not something that NYSE can do unilaterally, and there are those who oppose it. KCG Holdings, for instance, whose business involves a lot of internalization of retail orders, is not happy, since the proposal would more or less ban that practice. So it's hard to tell how real the NYSE plan is at this point, though if you asked me whether exchange fee caps will be more like 30 cents or 5 cents in five years I guess I'd take 5 cents. Elsewhere, the European Securities and Markets Authority is skeptical about dark pools.

Loan market blacklists.

What is a "bank loan"? Back in the olden days, a company would go to a bank and ask it for some money, and they'd negotiate a loan, and then the company would have money and the bank would have a loan, and a few years later the company would pay the bank back, and it was always just the two of them, tied together by that loan. Today, though, bank loans work more like bonds: One or more banks will serve as arrangers of the loan, but rather than holding it themselves will syndicate most of it to a bunch of other banks, investment funds, collateralized loan obligations, etc. And then those banks, funds, CLOs, etc. will trade the loans freely in the secondary market. But not perfectly freely. Here is a delightful Bloomberg News article about blacklists in the loan market, which are sometimes, amazingly, referred to as "Shindler's List." The idea is that some companies prohibit certain investors from buying pieces of their loans. Sometimes companies blacklist their competitors (sensible!), sometimes they blacklist investors who are "too demanding in debt restructurings," and sometimes they just blacklist people they don't like. (One company blacklists Bulldog Investors, a rambunctious hedge fund that doesn't actually invest in loans.) If you think of loans as being just like bonds -- which, for many practical purposes, is a good way to think of them -- then this seems a little odd; most companies don't get to decide who can buy their stocks or bonds in the secondary market. 1  Certainly the restrictions seem bad for liquidity. But if you think of loans as being just slightly more dispersed versions of the old-timey bank loans, then the blacklists make sense. After all, in the olden days, when a loan was a special relationship between a company and a single bank, the company could always choose what lender(s) it wanted to deal with.

Another Herbalife video.

I feel like there ought to be a lot of common ground on Herbalife. Like:

  • Herbalife really is pitched as a business opportunity to a lot of people.
  • Virtually none of those people actually make a lot of money from that business opportunity.
  • Probably many of them would not sign up for the business opportunity, and lay out their own money to buy diet shakes, if they knew that they would not be successful in the business.
  • But the very few people who do make a lot of money from Herbalife do so in large part because those other people sign up for the doomed business opportunity.

If you called that, colloquially, a "pyramid scheme," well, that's your business. But you don't have to characterize it that way. That list of bullet points reasonably accurately describes ... I don't know, the stock market? Kind of? Certainly the penny stock market. It also works reasonably well for lotteries. Lots of people do lots of things because they think they'll make money, even though they won't. Anyway Bill Ackman has released another attack on Herbalife that features video of a very high-level Herbalife distributor basically making those points, and the video is embarrassing because he says those things out loud, but they're not new things. And while they're bad things, they don't seem to be illegal pyramid scheme things. Elsewhere in multilevel marketing, Avon paid $135 million to settle Foreign Corrupt Practices Act charges over bribing Chinese officials, and Preet Bharara said "For years in China it was ‘Avon calling,’ as Avon bestowed millions of dollars in gifts and other things on Chinese government officials in return for business benefits," which is really not at all a good joke.

Business education.

I have a certain fondness for the Yale School of Management, which is more of a scrappy upstart than you'd generally expect to find at, you know, Yale. Traditionally the thing that you say about Yale's SOM is that it produces a lot of nonprofit managers, and here is a story about a prospective student saying exactly that to the SOM's dean, who is not happy about it:

What Dean Snyder had hoped to hear was that these potential applicants were keen on Yale because it is, in the dean’s own words, “the most distinctively global U.S. business school.” That is, after all, what Snyder has tirelessly worked to do in repositioning the school since his arrival as dean in mid-2011. There are only two other answers that he would have preferred to hear this morning: that they’re keen to look at SOM because it is among the most integrated business schools with its home university or because it is the best source of leaders for all sectors and regions.

Golly that is jargon-y; SOM, you have arrived. Anyway there's a lot more about SOM's global aspirations. 


Inside Lacrosse's men's and women's All-Name Teams are reliably the best news items of the year (via Deadspin), with a perhaps obvious relevance to the financial industry. Everyone will have their own favorites, though for myself I am partial to Griffin Woodfinlevine (no woodfinrelation).

Things happen.

"Economics 101 lectures from journalists are generally bad." The Swiss National Bank is going to negative interest rates. Vladimir Putin does some central banking. Russell Brand responds to the RBS guy whose lunch got cold (previously). Sage Kelly resigned from Jefferies to spend more time with his divorce. How's Marissa Mayer doing at Yahoo? The Petsmart buyout lets one shareholder roll over into the new private company. The Effect of Safe Assets on Financial Fragility in a Bank-Run Model. The guy who helped write the law letting the government take over Fannie Mae and Freddie Mac thinks that the government's permanent takeover is illegal. FIFA's corruption investigator quit because he thinks FIFA is too corrupt. Goldman's traders are fitter than its bankers. Scotch shoes. Bookmaker Coral closes book on Queen abdicating. Tonight is the last Colbert Report. Dr. Dreidel

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
  1. Though for myself I tend to think that there's nothing wrong with letting companies decide how to set up the trading restrictions of their securities, as long as it's all agreed at issuance. You want to issue stock that is not transferable to activist hedge funds? Why not let you? Investors ought to charge you some discount for that stock, but you might decide that trade-off is worth it. Anyway this is mostly not the rule for U.S. public securities markets, though there are plenty of private securities markets.

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

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

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