Dark Pools, Apps and Moonshots

Also China, Greece, paper prospectuses and insider trading. But neither bond liquidity nor share buybacks!

More Alphabet. 

For Ben Thompson, Alphabet comes down to the question, "do you trust Larry Page?"

The problem for Page, though, is that he is not a strategy and business nerd. Page is, for lack of a better description, a change-the-world nerd, and it seems clear that he found the day-to-day business of managing a very profitable utility to be not only uninteresting but a distraction from what he truly wanted to do. 

Matt O'Brien says that, with their blather about capital allocation, Page and Sergey Brin are "trying to present themselves not as Silicon Valley nerds, but rather as Silicon Valley Warren Buffetts." But there just isn't that much evidence that Page and Brin want to be disciplined capital allocators. "Page may be abandoning day-to-day responsibilities at Google," says Thompson, "but he has no intention of abandoning Google’s profits." He's just going to be a bit clearer about how he directs those profits to the moonshot businesses.

But the stock was up over 4 percent. Stephen Gandel thinks the market got it wrong: "This is the same company it was yesterday, just $20 billion more expensive." Maybe the market got it right, though, along lines I suggested yesterday: More clarity around capital allocation will lead to more disciplined decisions and less wasteful spending on moonshots. And you know how investors like capital discipline.

Or maybe the market got it right, but the opposite way. Maybe investors are thrilled about the moonshots, and want Page and Brin to focus more on them? Maybe public-market investors aren't as short-term-obsessed as their critics make them out to be? A stock price is a mechanism for predicting the net present value of a company's future cash flows. Why would it be prima facie obvious that a project to extend the human lifespan would have a negative NPV? I mean, I'd pay for that. Or, being Google, they could probably sell ads against it. 

The core question, always, is whom you trust to allocate capital. Mark Zuckerberg gets time to monetize weird projects, because he has a history of turning weird projects into money gushers. Whoever's in charge of Twitter this week gets less time. For myself, I tend to trust Larry Page just fine, though I say that not as an investor but as a guy who spends his day searching for stuff on the Internet. Maybe some investors agree.

More dark pool trouble.

"Credit Suisse is in talks to pay a fine in the high tens of millions" to New York's attorney general and the Securities and Exchange Commission, and Barclays -- with is in rather public trouble with the New York AG -- is also in settlement talks. It's not entirely clear what Credit Suisse did wrong, but "The case against Credit Suisse includes allegations that it provided unfair advantages to some traders, violated rules against pricing of stocks and didn’t adequately disclose to investors how CrossFinder works." The generic meta-problem in most (though not all!) of the dark-pool enforcement cases seems to be that trading venue architecture is complicated, and some participants are more interested in that complexity than others. Some firms make a living off of arbitraging trading venue complexity. Other firms just, you know, want to buy some stock. The complexity arbitrageurs tend to spend more time with, and send more business to, the dark pool operators, so they tend to end up with informational advantages that, when you describe them clearly, kind of sound unfair. Also, just, trading venue architecture is complicated, so sometimes the dark pool gets its pricing or matching or reporting wrong by accident and gets in trouble for that.

Meanwhile, here is Kipp Rogers on "IEX, Ideology, and the Role of an Exchange," arguing, among other things, that IEX's built-in delay in orders, intended to limit high-frequency traders' advantages, also has some potentially harmful consequences.

Goldman Sachs, tech company.

Here is a story about how Goldman Sachs is marketing "applications, or apps" to clients to help them do trading stuff. The idea is that Goldman shares technology expertise with the clients, and the clients develop warm feelings of gratitude for Goldman, and the clients do more trades with Goldman. As the article points out, this is not an entirely revolutionary idea:

The concept of giving clients potentially valuable information in hopes of winning business isn't unprecedented: Goldman and other investment banks have for years given clients trading ideas and market research on the same presumption.

The whole business of financial services is about flinging free things at clients in the hopes that they will give you some extremely overpriced paying work. Honestly it is continually surprising that that's a business model. Anyway, Goldman (disclosure: where I used to work) tends to be pretty good at technology, for a bank, and so is hoping to use that to its marketing advantage:

One of the first apps, called Simon, provides tools that allow smaller brokers to create and analyze equity-linked derivatives for their retail clients. Goldman officials have said 20 firms signed up for a pilot program that began in early 2014. That program helped more than double the firm’s sales of U.S. equity-linked notes last year, people familiar with the matter said.

A second app, Strategy Studio, aims to help money managers devise quantitative investments based on their views on broad economic themes. 

Not to be too cynical, but I wonder about an app that convinces people to more than double their purchases of structured notes. But, generally, sure. The job of an investment bank is to advise clients on how to do finance stuff, and then get paid for executing that finance stuff. It is 2015; the way anyone advises anyone on anything is through an app. This seems like a reasonable development.

More China.

I like Matt Klein's description of Tuesday's yuan devaluation:

Buyers and sellers of currency — people who transact in goods, services, and assets across borders — pushed down the yuan by a little less than 2 per cent on August 10. Rather than fight the move, the Chinese government uncharacteristically accepted this outcome, and opened morning trading on August 11 at a price that partly reflected the previous day’s decline. In other words, the People’s Bank of China decided that market forces should affect the exchange rate between the dollar and the yuan a little bit more than in the past. (At least for now.)

A little bit more. The Wall Street Journal today:

China intervened on Wednesday to prop up the yuan in the last minutes of trading, according to people familiar with the matter, in an apparent attempt to prevent an excessive fall in the currency as the authorities seek to give the market more say in setting the exchange rate.

It's a band, not a free float; among other things Chinese dollar-denominated borrowing makes it hard for China to devalue the yuan too much. Here is Bloomberg on the effects of the yuan's fall, and Tracy Alloway on the collapse of the China carry trade.

More Greece.

Yesterday I was flummoxed that Greece had reached a bailout deal nine days ahead of its absolute deadline, but never fear, "there are serious concerns that this putative deal still faces big hurdles." We still have plenty of opportunities for brinksmanship and catastrophe. Bloomberg has "Five Things You Need to Know" about the deal, ending with an economist saying that "Greece is far from being out of the woods." And Jordan Weissmann says that "Europe still expects Greece to run unrealistically large primary budget surpluses," and that the new deal "sounds like it's destined to fail." Super.


Like the SEC, I tend to think that mutual funds should distribute information in some convenient electronic form, rather than by mailing bulky paper prospectuses for me to throw away. Some people disagree:

“I am 72 and do not use a computer for much else other than email and solitaire [sic],” said Ann Neubauer, a retiree from Connecticut. “I will not read any prospectus or annual reports on my computer, and rely upon my paper copies.”

I feel like most retail investors don't read prospectuses or annual reports on their computers, on paper, or anywhere else, but I suppose that is not a reality that the SEC is allowed to countenance.

Comparative insider trading.

Here's an Italian law professor writing about insider trading law in the U.S. and the EU, though confusingly he calls it "outsider trading":

The US more nuanced and selective approach in addressing informed trading by outsiders is effective in avoiding unintended adverse effects on markets and firms’ governance, but it comes at the price of high doctrinal complexity and, in some cases, inconsistency. On the whole, EU law appears more straightforward and perhaps doctrinally more coherent. Further, there are specific advantages in the broad EU outsider trading prohibition: prosecutors’ evidential burden is substantially lightened, making it easier for them to pursue tippees and secondary insiders more generally. These benefits, however, may not be worth the costs associated with the excessive breadth of the prohibition.

This of course aligns with my view, which is that when people propose to simplify U.S. insider trading law by getting rid of the "personal benefit" requirement, they usually haven't fully thought things through.

Me yesterday.

I wrote about the enchanting accused insider-trading hackers. One thing that puzzled me was that it seems to have been relatively easy, with brute-force and SQL injection attacks, to hack into the systems of the major newswires. I hypothesized that maybe people just weren't paying enough attention to this risk, asking:"How important could it be to keep press releases secure?" I got some pushback on this: Apparently lots of people knew it was really important! And there have been previous cases of insider trading based on documents stolen from financial printers and newswires, so this was kind of a known danger. I don't know what to tell you. One reader suggests that the simple fix would be for companies not to send news releases to newswires during market hours: Since the releases don't go out until after the close anyway, why not wait until the close to send to the wire? Here is xkcd on SQL injection attacksElsewhere: Everything Is Not a "Hack."

Things happen.

Jessica Pressler on Net-a-Porter. Puerto Rico Agency Sets $750 Million Bond Sale After Default. Sovereign debt repayments: Evidence on seniority. Argentine Investors Bet Scioli Will Distance From ‘Kirchnerism.’ Pearson’s Stake in Economist Group to Be Sold to Existing Shareholders. Berkshire Risks S&P Rating Cut on Leverage From Buffett Deal. John Paulson is selling land. Activist hedge funds are having a good year. Germany’s Financial Watchdog Worried Over Scale of Forex Manipulation. 40-Times-Leveraged Short Volatility Trade Goes Horrifically Wrong For Everyone Involved. What fighter pilots can teach investment managers. From running with ‘The Wolf of Wall Street’ to homeless. Is SoulCycle a brothel? Is the Pope Catholic? Commentarii de Inepto Puero. Shade ballsFrankenborough. 40 Interns Are Suing The Olsen Twins' Company Over Tears, Dehydration, No Pay

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

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    Zara Kessler at zkessler@bloomberg.net

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