Basketball Tickets and Hyperloops

Also blue sheets, shadow banks, regular banks and IEX .

The bribery business.

Here is a federal criminal case against "five current and former employees" of Georgeson, a proxy solicitation firm, who were charged "with conspiring to bribe an employee of a prominent proxy advisory firm to obtain confidential information about how the advisory firm’s clients had voted on numerous shareholder proposals." The proxy advisory firm is Institutional Shareholder Services, which among other things helps institutional shareholders vote on contested corporate actions. Georgeson, which is in the business of advising the contestants in those corporate actions -- companies and activist shareholders -- on how to win votes, was interested in knowing how those shareholders were voting. ISS's contracts with its clients said that it wouldn't disclose their votes. But allegedly a Georgeson employee would bribe an ISS guy for inside information about how the shareholders were voting, which Georgeson could then use to help advise its clients on how to win more votes.

Now obviously you shouldn't do this: ISS promised to keep its votes confidential, but the ISS employee (who pleaded guilty last year) broke that promise for his own personal benefit. But the form of the alleged bribery is sort of interesting:

Last year, prosecutors alleged that a former employee of Georgeson as well as the firm bought more than $12,000 worth of tickets to games and concerts for ​the former ​ISS ​employee.

This happened "from September 2007 to March 2012," a period of about four and a half years, which works out to about two basketball games a year if this anecdote is representative:

Mr. Sedlak allegedly expensed tickets for various sporting events, including $1,400 for two tickets to a 2010 basketball game between the Miami Heat and the Boston Celtics. His colleagues then billed clients for the bribes, describing the costs as courier services or travel expenses, according to the complaint.

I talk a lot about my fascination with the bribery business, because it is so close to the sales business. There are many salespeople who would think nothing of dropping a couple of thousand dollars a year to take an important business prospect out to games and concerts. We talked just yesterday about data-room providers, a very boring business that apparently takes junior investment banking analysts to Beyoncé concerts and baseball games to try to win their business.

The Georgeson case is an easy one because the ISS employee just wasn't supposed to give the voting information to anyone. He had no legitimate business reason for giving out the information, so when he did, it must have been because he was bribed. Most of the time that's not the case: Those investment banking analysts really do have to pick a data-room provider for due diligence on the mergers they work on, and presumably the company that bought them Beyoncé tickets is also perfectly competent at building data rooms. So it would be hard to prove that they picked a data-room company fraudulently (because of the tickets) rather than legitimately (because of the competence).

But that's an evidentiary issue, not a conceptual one. The government's theory in the Georgeson case doesn't really rely on the fact that the ISS employee wasn't supposed to share the voting information with anyone. The theory is that it was "honest services wire fraud"; the ISS employee was supposed to act in ISS's best interests, but instead acted in his own interests because he was bribed. This theory would apply just as much if ISS did sometimes allow employees to share voting information with third parties for business reasons, but the employee shared the information not for those business reasons but for Heat tickets.

That's how business bribery is prosecuted, and it makes sense. If a corporate executive gives her company's business to a bad expensive vendor over a good cheap one because the bad expensive vendor gave her a bag stuffed with $100,000 in cash, that does seem like a fraud on her business, and a crime. But there are gray areas; every vendor probably takes the executive out to lunch, and it would be weird to prosecute her for giving the business to the vendor who took her to the nicest lunch. Taking someone to a couple of sporting events each year -- even, to be fair, pretty expensive sporting events -- seems to me to fall pretty solidly into the gray area, and it's a little weird to see the government explicitly push the theory that it's criminal bribery.

Elsewhere in criminal quid pro quos, the former Barclays employee accused of tipping a plumber about upcoming mergers in exchange for cash and a free bathroom renovation pleaded guilty yesterday

Blue sheets.

Speaking of weird investigations, can anyone explain the blue sheets thing? Every so often a bank is fined a relatively small amount of money for messing up the electronic "blue sheets" that it sends to the Securities and Exchange Commission to report its stock transactions. The latest, and biggest, is Citigroup, which "agreed to pay a $7 million penalty and admit wrongdoing to settle charges that a computer coding error caused the firm to provide the agency with incomplete 'blue sheet' information about trades it executed." The error is dumb and boring -- basically the computer confused some branch codes with test-transaction codes, and so thought some real transactions were fake and not to be reported -- and affected 26,810 transactions over 15 years.

The SEC is very upset about this, as you can probably tell from the fact that it keeps fining banks for these mistakes:

Records requested through the EBS system are vital to the Commission’s enforcement and regulatory functions. They assist Commission staff in the investigation of possible securities law violations and in conducting market reconstructions, primarily following significant market volatility. A broker-dealer’s failure to furnish promptly true and complete records through the EBS system can undermine the integrity of Commission investigations and examinations, impede the Commission’s ability to discharge its statutory obligations, and ultimately interfere with the Commission’s ability to protect investors.

We have talked before about the blockchain as a sociological solution to the problem of coordinating databases among banks, and you can see why that's a big deal. The blue sheets project seems like a mess; the SEC gets its transaction data from banks' submissions, but the quality control on those submissions is, you know, bad enough that transactions are mis-coded for 15 years. But this is a key tool for the SEC to find out what stock trades there are. (The SEC is working on a new "consolidated audit trail" that would do a better job of telling it what stock trades there are, but getting that done is a non-trivial endeavor.) This is just basic, core stuff, done in such a half-hearted and disorganized way. Coordinating data projects among banks and regulators is not easy. Perhaps the fines, or the consolidated audit trail project, will improve things.

Shadow banking.

Here's a speech by Federal Reserve Board Governor Daniel K. Tarullo about "shadow banking," arguing "that the post-crisis work to create a solid regime to protect financial stability cannot be deemed complete without a well-considered approach to regulating runnable funding outside, as well as inside, the regulatory perimeter" of the banking system. He raises some questions about how to do that; I liked this one:

Fourth, as a factual matter, to what extent is the supply of short-term funding a response to a persistent demand for more safe assets? If the answer is "considerable," then further constraints on the creation of currently used safe assets might result in further financial engineering in search of assets that approximate the attributes of truly safe assets even less well, but are the best the demanders of these assets can do.

That strikes me as a question that is often missed or minimized in debates about, say, bank capital. Banks -- and some forms of "shadow banks" -- are in the business of issuing "risk-free" ("money-like," etc.) liabilities and using them to purchase risky assets. This is a fragile and paradoxical business model that gives a lot of people the heebie-jeebies, and one common response to those heebie-jeebies is to demand that the banks fund their business with a lot fewer "risk-free" claims (short-term funding, repo, etc.) and a lot more "risky" claims (especially equity, but also long-term unsecured debt or contingent capital instruments or whatever). 

As a way to think about the risk models of banks (or shadow banks), this makes sense; more equity would obviously make them safer. But as a way to think about a financial system, it leaves something to be desired. Banks don't try to build and issue risk-free claims just because they enjoy being risky and tricky; they issue risk-free claims because there is tremendous demand for those claims. An approach to bank -- or shadow-bank -- regulation that would drastically cut down the supply of those claims needs to figure out some other way to meet, or at least assuage, that demand.

Market structure.

One problem that its opponents have with IEX is that it pitches itself as a fair and safe and transparent stock exchange (or stock-exchange-to-be, anyway), but that many of its key features seem more like brokerage functions. So for instance IEX's famous "speed bump" doesn't help anyone who does normal stock-exchange stuff on IEX: If you post a displayed order, or try to trade with a displayed order, both sides of the trade are slowed down just as much by the speed bump, and the end result is that it's a regular stock exchange offset by 350 microseconds. On the other hand, the speed bump does help IEX in its business of routing client orders to other exchanges before the executions on IEX become public. (Or it would have, except that IEX eventually had to modify its router to sit outside the speed bump; the delay probably still helps, though.) 

Similarly, IEX's "discretionary peg" order type looks a little like an effort to put a brokerage function -- deciding when the market is moving against a customer's order, and repricing the order to avoid being picked off -- into a stock-exchange order type. This isn't that unusual; most weird order types on stock exchanges are basically efforts to automate what were previously discretionary decisions by traders and brokers. But IEX's DPEG is fairly fancy, and math-y, and there's a patent application, and the New York Stock Exchange somewhat hilariously copied it. Here is Matt Hurd on the thinking behind DPEG, and its potential implications for further exchange complexity:

An exchange that copies IEX's DPEG could tune things differently if they try by simply adjusting the parameters, targets, and time frames a little. Secondly, you could have different parameter sets for different stocks or stock types, or even have different parameterisations for each stock. This sounds complex, but investors are already facing a black box so does it really matter if that transparent black box is more complicated, right? In that vein, it also opens the door to simply using much better predictors, or even machine learnt black boxes, such as support vector machines, random forests, or, deep neural nets, as an alternative to the simple logistic regression. You could even just use a simple heuristic formula. Unsurprisingly, this is covering the same territory a broker's algo or an HFT would consider to avoid adverse selection.

If you can have an order type that uses regression coefficients to decide when to re-price, why not have an order type that uses deep neural nets to decide when to re-price? 

Elsewhere, waiting times to trade would be a lot longer without high-frequency trading.


Here is Cardiff Garcia on JPMorgan's plan to raise pay for its lower-paid staff, pointing out that JPMorgan has 12,000 fewer tellers than it had in 2012 as banking has become more automated:

But it’s also likely that many of the retail, lower-paid workers still employed at JPMorgan will be earning that higher wage by implementing a more sophisticated, interpersonal skillset than was traditionally needed for the earlier teller jobs, dealing directly with bank customers more often and more intensively. These roles complement the newly-automated routine tasks handled by ATMs.

If the remaining bank tellers are (fewer and) more productive, then it makes sense for them to get a raise, not as a way to address income inequality but as a matter of supply and demand.

Elsewhere, here is a story about how SoFi, which was founded to "kill banks," is now working more closely with banks. Disruption!

People are worried about unicorns.

I don't know if Hyperloop One, formerly Hyperloop Technologies, the company formed to build Elon Musk's proposed super-fast ... transportation ... tube? ... between San Francisco and Los Angeles, is actually a unicorn (a loopicorn?), though it has raised about $100 million in funding. But according to a lawsuit filed by a group of former employees, including gloriously named co-founder Brogan BamBrogan, it has gone astray:

Those in control of the company continually used the work of the team to augment their personal brands, enhance their romantic lives, and line their pockets (and those of their family members). Those with the expertise to bring the hyperloop concept to fruition -- the team that has done an incredible job building out hardware with their heads down and hands in the dirt -- have been systematically marginalized, while the “money men” who do not understand the technology spent little time seeking to understand its potential, focusing instead on puffery --- turning the company into a marketing-driven exercise, instead of the engineering-driven enterprise it should be.

It goes on like that. "Hyperloop is not a party trick," complain the plaintiffs, but the "money men" allegedly treated it like one:

But, according to the lawsuit, Hyperloop One was run as the personal fief of Shervin Pishevar and Mr. Lonsdale, who together control 78 percent of the company’s voting rights. The two men rarely spent time at the start-up except, the court filing claims, to give tours of the place to friends, celebrities and even a nightclub doorman.

There are claims that Pishevar, BamBrogan's co-founder, overpaid his brother and girlfriend with company money. And after BamBrogan complained about the perceived mismanagement, he claims, "Pishevar’s brother, Hyperloop’s general counsel, left a hangman’s noose on his chair, a photograph of which is included in the complaint." (A hypernoose?) "Today’s lawsuit brought by former employees of Hyperloop One is unfortunate and delusional," says a Hyperloop One spokesman. 

Maybe, but it is also such a wonderful confirmation of every Silicon Valley stereotype. Like, really, why start a company if not to impress nightclub doormen? Why leave a startup if not in a bitter public dispute over power and credit? The guy's name is Brogan BamBrogan. I hope he calls his next company Unicorn BamUnicorn. "This Hyperloop Lawsuit Is Insane," is the Wired headline

Seriously though, a nightclub doorman. Can you imagine?

Scene: On line outside the club.
Doorman: Not you.
Startup founder: Why not?
Doorman: Please don't make me answer that, it will embarrass both of us.
Founder: But I am very important!
Doorman: Oh sure.
Founder: I founded a startup! We make hyperloops!
Doorman: I don't even know what that is.
Founder: Would you like a tour?

It is so endearing, in its absolute faith in the commensurability of technological and social capital. The thesis of the movie "The Social Network" seems to be that Mark Zuckerberg started Facebook because he was insecure about getting into final club parties at Harvard. There are dissertations to be written about party exclusion as a factor in the creation of tech startups. 

Elsewhere in news that is vaguely related to Elon Musk, here is a paper about "algorithm aversion":

We show that people are especially averse to algorithmic forecasters after seeing them perform, even when they see them outperform a human forecaster. This is because people more quickly lose confidence in algorithmic than human forecasters after seeing them make the same mistake. In five studies, participants either saw an algorithm make forecasts, a human make forecasts, both, or neither. They then decided whether to tie their incentives to the future predictions of the algorithm or the human. Participants who saw the algorithm perform were less confident in it, and less likely to choose it over an inferior human forecaster. This was true even among those who saw the algorithm outperform the human.

Tesla is now under a lot of fire because one of its self-driving cars crashed, even though Tesla's autopilot feature apparently (apparently!) has a better safety record than human drivers. But humans don't trust algorithms that make mistakes, even if they make them less frequently than humans do.

People are worried about stock buybacks.

But you have them to thank for all the stock-market records:

Among the most prominent drivers of the 2016 stock rally has been companies’ willingness to buy back shares. The strategy has been embraced by firms and outside investors alike, because it drives up share prices and improves per-share earnings by reducing the number of shares outstanding. Some investors decry buybacks as financial engineering.

I guess there is something a little weird about a stock-market rally built on companies buying their own stocks, especially paired with a bond-market rally built on central bank purchases. The calls are all coming from inside the house. I tend to think that, you know, supply is supply and demand is demand, but I can see why some people find it all a little fake.

People are worried about bond market liquidity.

It is quiet on the bond market liquidity front today but here, have this tweet:



According to GQ, Mashable, Fusion,, the Daily Mail and Reddit, Pokémon Go is an effective dating app, so I see no reason why it shouldn't also be an effective bond-trading platform. The trick is to bring buyers and sellers together in one place, and Pokémon Go seems to be as good as anything else at bringing people to places. 

Elsewhere, we are getting arbitrarily close to corporate issuers selling bonds at negative yields.

Things happen.

Monster Bet on ‘Pokémon Go’ to Pay Off for Hong Kong Fund Manager. ‘Pokémon Go’ Craze Raises Safety Issues. Senator Al Franken issues letter asking Niantic to clarify privacy concerns on Pokémon Go. Pokémon Go Has Created a New Kind of Flâneur. Dronémon is the best Pokémon Go cheat we’ve seen yet. People Are Already Using Pokémon Go as a Real Estate Selling Point. The poor get poorer, the rich get Pokémon. Pokémon Go is everything that is wrong with late capitalism. Holocaust Museum to visitors: Please stop catching Pokemon here. US government plans to use drones to fire vaccine-laced M&Ms near endangered ferrets.

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