Tickets, Boutiques and Reactions
The other day I half-jokingly said that "a good trick is, find an industry where the words 'Monte Carlo model' make you sound brilliant and mysterious, then go to town." I was mostly making fun of the film industry, which seems to have considered those words the height of salesmanship. But it's more generally applicable; a former investment bank quant writes:
This is exactly what I set out to do in 2011, and have continued to do since then. And you’d be amazed to find the number of industries where “Monte Carlo model” makes you sound brilliant and mysterious.
The techniques and technologies of financial markets have taken over much of the world, and if you are a creative and ambitious financier, finding new territories in which to apply them can be a good business.
There is a weird corollary, which is that if you are a creative and ambitious regulator, finding new territories for financial-style regulation can also be a good business. New York Attorney General Eric Schneiderman decided that high-frequency trading was "Insider Trading 2.0," and went after it with fairly mixed results. Then he investigated daily fantasy sports sites DraftKings and FanDuel, "looking at specific allegations that employees of both firms may have made money using company data not available to the public." I called that inquiry "Insider Trading 3.0," and it went roughly nowhere, but in the course of the investigation Schneiderman noticed that daily fantasy sports is just obviously gambling, and sued to shut the sites down anyway.
The New York Attorney General’s office outlines all the ways the ticket market is stacked against the average consumer in a 44-page report to be released Thursday. Public inventory is limited, some ticket brokers get favored treatment, and still others used bots to buy up large swaths of seats (yes, that’s illegal) before your slow computer even enters the line.
"Ticketing, to put it bluntly, is a fixed game," Schneiderman wrote in the report, and the fix starts long before tickets officially go on sale to the public.
Obviously one part of the reason to move your high-frequency-trading bots from the stock market to the ticket market is that the stock market is highly regulated, and the ticket market is not. In the beginning, you get to apply the techniques and technologies of finance in a space with less regulation and less competition, and it's great. Then the competition comes. Eventually, Eric Schneiderman comes too. It's fun while it lasts though.
Elsewhere in market structure, apparently Nav Sarao didn't cause the flash crash:
Sarao may not have had a material, or even any, impact on the bout of equity market volatility in May 2010 that later became known as the flash crash, according to a draft research report by University of California, Santa Cruz and Stanford University professors dated Jan. 25.
Instead, the report finds "that the explanation offered by the joint CFTC-SEC Staff Report, which relies on prevailing market conditions combined with the introduction of a large equity sell order implemented in a particularly dislocating manner, is consistent with the data," and "documents the emergence of heretofore unobserved anomalies in market data feeds that correlate very closely with the initiation of and recovery from the Flash Crash." Specifically:
This anomaly suggests that increasingly stale prices for the SPY ETF were disseminated to the market and that the inception of this reporting delay correlates strongly with the start of the Flash Crash. When the delay reached 90 seconds, these late reported trades began to be labeled as delayed (in accordance with regulations then in force). Recovery from the Crash began immediately thereafter. Our analysis of these data feed anomalies is ongoing
Frank Quattrone is stepping down as chief executive officer of Qatalyst Group, his 53-person investment banking advisory boutique. Boutiques have been hot in recent years: "There’s been a backlash against conflicts of interest at big banks that has worked in our favor," says Quattrone, and "boutiques took 16% of the M&A advisory market share" in 2015. For employees, working at a lightly regulated boutique that takes no balance sheet risk and is paid in cash for completing deals can be a lot more fun than working at a big regulated universal bank. But there is an obvious succession concern: If you go work for a firm named for and run by a star investment banker, what happens when that founder retires? Do the clients leave when he does, or has he built an institution that can survive his departure? For Qatalyst, it helps that the new CEO, George Boutros, "has worked with Mr. Quattrone since 1992" and "is one of the most experienced and accomplished M.&A. advisers on the planet," and that "Quattrone and Boutros also named a next generation of leadership for Qatalyst," naming two co-presidents in their early 40s. I guess it also helps that Qatalyst's name refers to Quattrone's, without actually being, you know, "Quattrone & Co."
It announced earnings. They were ridiculously good. Facebook is ridiculously good at making money on social media. "That growth engine has given Facebook lots of room to play in different areas — like virtual reality, messaging and even building drones capable of delivering Internet service to far-flung places around the world — that seem to have little to do with Facebook’s core business of advertising." Presumably some of those will also turn out to be ridiculously profitable. No one is particularly agitating for share buybacks at Facebook.
In other news, Facebook is working on Reactions, which is like the like button, but if you hold it down a bit longer, you get the choice of saying "angry, sad, wow, haha, yay, and love" instead of just "like." The man leading the team working on this is "not a billionaire, just a centi-millionaire," though it is billionaire CEO Mark Zuckerberg who came up with the idea of holding the button down a bit longer to get the menu. Modern capitalism is very strange.
Five and a half of the six brokers charged in the U.K. with rigging Libor were acquitted yesterday, and the sixth was acquitted today. The accusation was that they conspired with Tom Hayes, formerly of UBS and Citigroup, to manipulate Libor; Hayes went on trial first, was convicted, and was sentenced to 14 (later reduced to 11) years in prison. It's an odd split result:
A statement released on Mr. Hayes’s behalf said he was “thrilled that the brokers can tonight return to their families and their lives” while also “bewildered that he is now in a situation where he has been convicted of conspiring with nobody.”
The brokers' defense was more or less that Hayes asked them to manipulate Libor, and they agreed, but then they didn't do it: They "instead were simply telling the gullible trader what he wanted to hear," and "their only vice was conning Hayes about their actions." First of all, in other contexts a broker's vice of conning his customers is a pretty serious vice, a crime even, though I guess conning a con man about a con just about cancels itself out. But second, Hayes is right, right? Prosecutors made him out to be a Libor-manipulating mastermind who could move global interest rates, but it turns out he (sometimes? mostly?) couldn't. So the 11 years is a bit rough.
Meanwhile in Italy, here is the story of a banker who presided over a series of disasters at Banco Popolare di Vicenza, and whose punishments include being "banned from a half-dozen restaurants and heckled at his church."
Vice's Allie Conti went to Martin Shkreli's apartment, saw his Picasso, watched him drink $15,000 Bordeaux on a hoverboard, listened to him say ridiculous things and wrote them down. You can see why he's in the market for new lawyers. Conti also listened to Shkreli's Wu-Tang album with him; last I checked he hadn't listened to it, but I suppose life's pleasures have a bit more urgency for him now.
People are worried about corporate capital structures.
How much money should a company borrow? On the one hand, borrowing money boosts shareholder return, imposes managerial discipline, and saves money on taxes. On the one hand, if you borrow too much money, it may be hard to pay back, and you may find yourself in bankruptcy. There is an optimization problem, and bankers are generally happy to solve it for you; "the answer has universally been 'more leverage' with a focused sweet spot on BBB/BB." So says "Jeff Bahl, former head of U.S. high-yield credit trading at Goldman Sachs and now a portfolio manager at Bahl & Gaynor," in an investor letter. There is, however, no particular reason to think that the optimum leverage level is the same at all times, and Bahl argues that "the 'efficient capital structure thesis' is currently in the process of unwinding." Elsewhere: "The $29 Trillion Corporate Debt Hangover That Could Spark a Recession."
People are worried about swap spreads.
Swap spreads are kind of a niche worry, and this header hasn't gotten too much use recently, but swap spreads have remained negative (the 10-year has been negative since September) and, I suppose, worrying. Here Harley Bassman at Pimco argues that interest-rate swaps should replace U.S. Treasuries as the benchmark for long-term U.S. dollar interest rates:
But just because a UST is a perceived nearly “risk-free” asset does not automatically make it the superior benchmark. USTs are issued in a fixed quantity with a single CUSIP; a derivative IRS has no such limitations. USTs demand a place to be stored (balance sheet), while IRSs do not. USTs have a huge terminal principal that must be safeguarded in case of financing counterparty default; IRSs have only a rate differential at risk. This concept also affects investors in currencies other than the U.S. dollar since currency movements can have a greater impact on principal than mark-to-market value movements.
While one may debate which is more liquid, there is no questioning the efficiency of the swap market. Buying and selling large notional IRSs requires little preparation – they can be bought or sold in any size, at any time. In contrast, selling short a single CUSIP UST security can have both a large and uncertain cost, and their availability can vary widely. As such, the analysis of the interest rate term structure is almost solely the purview of the IRS market since UST long-term funding (the cost to borrow a single CUSIP) is relatively rare.
People are worried about unicorns.
The Blood Unicorn is in trouble again:
Federal inspectors found “deficient practices” at a Theranos Inc. laboratory that “pose immediate jeopardy to patient health and safety,” according a letter released Wednesday.
Nor is this defense entirely reassuring:
Theranos said the inspection, conducted in November, doesn’t reflect the current condition of its lab. The company already has fixed some of the problems identified by regulators and plans to submit a plan to address the rest “within days,” according to spokeswoman Brooke Buchanan.
I feel like if you run a company in the medical field, you don't want to find yourself explaining that you haven't posed immediate jeopardy to patient health and safety for weeks now.
Elsewhere, here is "Uber for welfare," which is exactly as dreadful as you'd expect.
People are worried about bond market liquidity.
If you are looking to find people who are worried about bond market liquidity, there is a TABB Group conference today about fixed-income market structure, and that's probably where they'll all be. I count two panels with "liquidity" in the title, but you can probably find liquidity worriers on the other ones too. Elsewhere at TABB Group: "Single-Name CDS Market Needs a Reboot," "to address the increasing concern around flagging liquidity in both cash bonds and derivatives."
Meanwhile in Treasury market liquidity, "the overnight session has become increasingly important in recent years," which sounds exhausting.
In Paul Singer Versus the New Argentina, the Bad Blood Remains. Italy Claims Google Evaded Over $300 Million in Taxes. British Government to Delay Retail Sale of Lloyds Stake. New EU Brokering Rules May Boost U.S. Ownership of Companies. Ronald Barusch is not that optimistic about the pushback against disclosure-only merger settlements. Barry Diller Says IAC Won't Buy Yahoo, But It Could Stand Alone. IMF and World Bank move to forestall oil-led defaults. Two-Person Board Committees Exist at Some Big Firms. India Invents the 10-Second Loan. The inventor of the "Biggins Craps System" was indicted. Voxsplaining the bitcoin fork. "Oracle plans to deprecate the Java browser plugin." "Chat fatigue is already setting in." AI wins at Go. Don't quit Twitter. "If the veins of America are its Interstates, Cracker Barrel is a series of fat deposits, gently stanching their flow." Mushroom Death Suit.
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