Quants, Currencies and Merger Pranks
Here's a nice explanation of how quant firms like Two Sigma work, using computers to sift market data and analyst reports and financial statements and Twitter and so forth for statistical signals that predict stock prices, and then feeding those signals into a decision engine that buys and sells stocks based on the strength and accuracy of the combined signals. For balance there are some dire warnings that these firms might be making bets based on spurious correlations, but have you met people? We're all making bets based on spurious correlations; some of us just have 100 teraflops of computing power to test those correlations. There's also a bunch of stuff about Two Sigma, which like all trading firms cultivates an image of "A walk through its offices shows how far it is from traditional Wall Street." Apparently at career fairs, "Prospective recruits don virtual-reality headsets that bring them through a frenetic Times Square and fly them over buildings in Dubai," which, sure, is pretty weird. I wonder if they can integrate that with StockCity. (Disclosure: I interviewed once for a job at Two Sigma, though this was years ago and there were no virtual-reality headsets involved.)
Wall Street and Silicon Valley.
There's a DealBook special section on the above topic and it's pretty fun. Here is a good map to the houses of the unicorns, showing not just valuations but also how much money companies like Uber and Airbnb and Snapchat and SpaceX have raised. Who needs to go public when you can raise $6.3 billion (in Uber's case) in the private markets? Also what on earth does Uber need $6.3 billion for? You could buy a new car for every taxi driver in America with $6.3 billion. Here is Andrew Ross Sorkin on how tech companies and venture capitalists pretend to dislike bankers because that is part of Silicon Valley's rigorously enforced code of pseudo-chill conformity, though that perhaps describes my interpretation more than Sorkin's. Here are stories about the PayPal Mafia, Silicon Valley Bank and the lack of office space in California.
Everyone likes FX volatility.
For banks that managed to avoid getting run over by the un-pegging of the Swiss franc -- either by being short the franc, or by financing clients who were short the franc and not good for their losses -- 2015 is a golden age of foreign-exchange trading:
"The foreign-exchange quarter was a blowout," said Nancy Bush, an analyst at NAB Research LLC. "You’ve got two ingredients there, volume and volatility, and you had both of them in the first quarter."
People complain about banks being involved in volatile trading businesses, but broadly speaking (very broadly speaking) (probably falsely speaking) trading businesses are structurally long volatility, so having a trading business is something of a hedge to your boring banking business that profits from collecting interest payments when things are calm. Elsewhere, here is a claim that illiquidity in bond markets is driving bond investors to switch to trading FX.
Would you pay me 11 Swedish kronor on Tuesday if I'll pay you 1.05 kronor on Thursday?
No? What if I told you that you'll get paid 1.05 kronor on Thursday, but you'll get paid by Jay Z? Does that change things? It seems to have; here is a very silly story about Aspiro, a Swedish company that Jay Z-controlled "Project Panther Bidco" is buying to launch the artist-owned-or-whatever Tidal music streaming service. Project Panther Bidco bought most of Aspiro's shares for 1.05 kronor and said that "it would start a compulsory purchase of the remaining shares," also at 1.05. Today is the last day of trading. On Tuesday though, "In what appeared to reflect investors clamouring too late for a piece of Aspiro's music streaming service Tidal, the shares were up 938 percent at 11 Swedish crowns just before trading was halted." The lesson is either that people and/or algorithms saw "Jay Z acquiring Aspiro" headlines and assumed its price would spike so they bought it too late, or that markets are efficient but that the hedonic value of being able to say "I once sold some stock to Jay Z in a squeeze-out merger" is worth 9.95 kronor a share.
Elsewhere in bizarre merger news, I don't really understand the story of Quindell at all. Quindell is a U.K. company that has a Professional Services Division (basically a law firm) and a Digital Solutions division. Professional Services had run into some accounting troubles, and on Monday Quindell announced that it was selling it to Australian law group Slater and Gordon. But then yesterday Quindell "noted that there was a failure to fully transcribe profits related to entities forming part of the Disposal as disclosed in the Circular (predominantly in respect of iSaaS Technology Limited and Intelligent Claims Management Limited, entities previously included within the Company's 'Digital Solutions' division in historic financial information)." That is a bland way of saying: It sold more of itself to Slater and Gordon than it initially let on, not just the Professional Services Division but also two-thirds of Digital Solutions. April Fools! I feel like you are not supposed to do that in M&A? Like you can't really tell shareholders that you're selling half your company and then say, no, just kidding, we're actually selling all of it. It's utterly baffling.
As we've discussed, the Securities and Exchange Commission charged Lynn Tilton and Patriarch Partners with fraud earlier this week. Yesterday Tilton sued the SEC right back, claiming that it violated her constitutional rights by bringing the fraud case in an SEC administrative proceeding rather than in a real court with a real judge. Tilton is not the first to object to SEC administrative proceedings, which have been expanded recently. In the old days, only brokers, investment advisers, and other SEC-registered people could be forced into SEC administrative proceedings; if the SEC wanted to punish anyone else it had to take them to court. (The theory was that the brokers, etc., voluntarily consented to the administrative proceedings by registering with the SEC.) Since Dodd-Frank the SEC has expanded, but controversial, powers. One thing I learned from Tilton's lawsuit is that she "is not registered with the Commission as an investment advisor," and neither was Patriarch until 2012, when it was required to register by Dodd-Frank. It does seem a bit odd to run a CLO fund for years and not be subject to SEC jurisdiction, but I guess the framers of the Constitution didn't really think about collateralized loan obligations.
Elsewhere in SEC enforcement.
Andrew Miller is the former chief executive officer of Polycom. His 2012 total compensation was over $7 million, but only about $820,000 of that was in cash salary. So, the SEC alleges, he did what he had to to make ends meet:
The SEC alleges that Andrew Miller created hundreds of false expense reports with bogus business descriptions for his personal use of company dollars to pay for meals, entertainment, and gifts. Furthermore, he used Polycom funds to travel with his friends and girlfriend to luxurious international resorts while falsely claiming the trips were business-related site inspections in advance of company sales retreats. Miller hid the costs by directing a travel agent to bury them in fake budget line items. In 2012 alone, Miller charged Polycom for more than $115,000 in personal expenses despite publicly reporting that he received less than $35,000 in perks that year.
The SEC complaint is amazingly detailed. There are two paragraphs (18-19) about the time that Miller allegedly bought himself some shirts at Heathrow Airport and billed them to the company, "claiming that the purchase was for a Polycom partner," and why would the CEO be buying a client shirts? My favorite story might be the one about how Polycom ran an "annual incentive trip that Polycom offered to its top performing sales people." In 2012 and 2013, those trips were held in Bali and South Africa. In 2011 and 2012, Miller allegedly took long personal vacations to Bali and South Africa, and billed them to the company as "site inspections." I mean you gotta inspect the sites. Don't want the top performing sales people to be disappointed on their incentive trips. That's just good business.
Some market structure.
I'm not sure there's new news here, but this is a very sensible paper about modern market structure that is worth reading if you are confused about whether and how the U.S. equity markets are rigged. It's by Merritt Fox and Gabe Rauterberg of Columbia Law School and Lawrence Glosten of Columbia Business School. Sometimes people ask me for recommendations for what they should read to learn about high-frequency trading, and this will now be among my go-to recommendations. Elsewhere in academia: a study of insider trading ahead of spin-offs, and Where to Find Cool Academic Finance Research.
There were a lot of hoaxes and pranks and things yesterday, not even counting the Quindell and Aspiro stuff that we've already talked about. Here's one list. Here's a theory that history is a hoax. Here is a press release from Hedgeye, which knows from pranks, announcing that its founder Keith McCullough will be "Director of the newly formed Division of Transparency" at the Fed. Here is a Planet Money episode in which they go to a comedy club and tell economist jokes; connoisseurs of quiet will appreciate the intensity of the silence with which the audience greets each joke.
"Tax -- like government debt issuance -- is really just a means by which a government sterilises the monetary expansion that would otherwise occur when it spends." James Gorman is getting paid. More on the Herbalife market manipulation probe. More on the shocking corruption of the Silk Road investigation and trial. More on the Sergey Aleynikov trial, which is also kind of shocking. The SEC worries about shadow banking. Should Kraft have bought Heinz? Soccer and globalization. You should worry more. "Couldn’t we say that a tie is really a symbolic displacement of the penis, only an intellectualized penis, dangling not from one’s crotch but from one’s head, chosen from among an almost infinite variety of other ties by an act of mental will?" People are drinking less Scotch.
(Correction: This article originally stated that Two Sigma recruits wear virtual-reality headsets in job interviews. A spokesman for Two Sigma assures me that the recruits wear the headsets at career fairs, but not in their actual interviews.)
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