Trump Trades and Algorithm Power

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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What will Trump mean for _______? ¯\_(ツ)_/¯

One theme at Money Stuff recently has been that banking has gotten boring. This is of course by design: The general sense, after the financial crisis of 2008 and the subsequent Libor, etc., scandals, has been that the big banks were having a bit too much fun. Proprietary trading was banned, capital requirements were increased, funding was termed out, and you had the strange spectacle of Goldman Sachs Group Inc. announcing with great fanfare its entry into online retail banking. The hip new idea at the cutting edge of banking was to take deposits from customers and use those deposits to fund loans to other customers.

The regulators' goal was to make the financial system safer, and while there are of course skeptics, there's a pretty broad consensus that they made good progress. Banks are better capitalized than they used to be, have more stable funding, and probably have fewer sources of concentrated systemic risk. On the other hand, it is a bit ... boring. This is arguably a problem for the financial industry: Arguably financial innovation is valuable, and arguably banks are important centers for that innovation, and arguably boring banks will have a hard time attracting clever creative people to come up with the next big financial idea. Arguably! That was a tradeoff that I think a lot of people were fine with, honestly. There's that famous Paul Volcker line about financial innovation and the ATM.

But it's certainly a problem for a financial newsletter! Boring banks are boring to read about. Nobody has any idea what a Donald Trump presidency will do about anything, really. But my general assumption is that Trump's motley crew of financial advisers lent their names to Trump's racially charged populist campaign in exchange for the hope of tax cuts and financial deregulation, and that Trump doesn't particularly care about financial regulation one way or the other, so they'll probably get their reward. Somehow or other. Speaking strictly in my role as someone whose joy and paycheck come from writing about weird finance stuff, I am expecting a whole lot more weird finance stuff in the next four years.

But who knows what? Here at Bloomberg Gadfly, Gillian Tan isn't sure what Trump will mean for banks. (Sure he says he wants to repeal Dodd-Frank, but he also says he wants a new Glass-Steagall. But he also says he doesn't want to break up the banks. So ... ?) And neither Tara Lachapelle at Gadfly nor Michael de la Merced or Cecilia Kang at the New York Times know what Trump will mean for mergers-and-acquisitions activity. (Sure he has said he opposes mergers of media companies that report about him, but usually Republicans are pretty chill about antitrust.) Here is more speculation from the Times about regulation generally. (A full Dodd-Frank repeal may be too much, but the Volcker Rule may be on the table.) Also at the Times, Peter Henning has a few guesses about what Trump will mean for the Securities and Exchange Commission and Department of Justice. (Fewer resources for white-collar prosecutions and SEC enforcement, maybe.) And Trump's transition team includes Paul Atkins, a generally deregulatory former SEC commissioner, which might signify something. 

In monetary policy, a Trump adviser said that he won't seek Janet Yellen's resignation, but probably won't re-nominate her when her term as Federal Reserve Chairwoman expires in February 2018. "He’s saying he’d want someone whose thinking is more in keeping with his own," meaning ... what? But "The Market Is Betting Trump Will Bring Higher Inflation and Interest Rates," with the 10-year Treasury yield up 22 basis points to 2.07 percent yesterday. "If as president Mr. Trump pressures the Fed — or even just appoints members who are not worried about maintaining the central bank’s inflation-fighting credibility — inflation and longer-term interest rates would tend to rise." So a Trump presidency might end up including massive Keynesian infrastructure spending and a Federal Reserve that is finally willing to exceed its 2 percent inflation target. 

Meanwhile, here are some hedge fund investors who have no idea about what Trump will mean for markets. Well, some of them have some guesses. Here's how Carl Icahn spent Tuesday night:

Icahn, 80, left President-elect Trump’s victory party in the early hours of the morning to bet about $1 billion on U.S. equities, he said Wednesday in a telephone interview on Bloomberg TV.

“I would have tried to put a lot more to work, but I couldn’t put more than about $1 billion to work, and then the market got away. But I’m still happy about it,’’ Icahn said. “The S&P was so liquid -- it was unbelievably liquid -- the world was going nuts. Last night it was amazing, the world was going into a panic with no reason.”

Let's hope! Let's also pause here and note that if you are leaving a party in the wee hours of the morning to bet a billion dollars on the stock market, you are living your best life. Certainly when I am 80 years old that's how I hope to end my evenings. 

Meanwhile, JPMorgan Chase & Co. is doing some stuff to comply with the Department of Labor's fiduciary rule. It's joining Bank of America Merrill Lynch in getting rid of commission-based retirement accounts, while Morgan Stanley has decided to retain them under the "best-interest contract" exemption. Clearly a lot of lawyers have spent a lot of time thinking about how to comply with the rule, and the answers are still shaking out. But ... why? "The long-term viability of the regulations is at least once again in play" with Trump's election, says a lawyer. Trump adviser Anthony Scaramucci has promised to repeal the fiduciary rule. That doesn't mean it will happen, but certainly it might happen. Really just about anything might happen. If you are the law firm associate drafting the extensive flowchart showing how to comply with a recent controversial Obama financial regulation, you must feel a bit like you're wasting your time. 

Of course there are more important things than financial regulation. "For perhaps millions of immigrants, Muslims, and people of color in this country," fear is a very reasonable reaction to this week's election. "Reach out a hand to someone who is scared today and say that you will stand with them," advises Hamilton Nolan. And Trump's presidency seems like an unequivocal positive for private prison companies.

Facebook and Twitter.

I have said before that the most disturbing thing I've read about this election is this April book review by Scott Alexander, but I may have to revise that. Here is just a terrifying article by Sarah Frier about how maybe Facebook now decides the government of the United States. I mean, not Mark Zuckerberg, but Facebook Inc.'s algorithm, and the people who figure out how to game it, and the people who write the algorithm and are like "meh, it's an algorithm, whaddaya want?" 

In a statement, a Facebook spokeswoman said: “While Facebook played a part in this election, it was just one of many ways people received their information – and was one of the many ways people connected with their leaders, engaged in the political process and shared their views.”

Online (on Facebook, of course), current and former employees debated the company's role as an influencer. Bobby Goodlatte, a Facebook product designer from 2008 to 2012, according to his LinkedIn, today said the company's news feed was responsible for fueling “highly partisan, fact-light media outlets” that propelled Donald Trump's ascension to the presidency. “News feed optimizes for engagement,” Goodlatte wrote. “As we’ve learned in this election, bullshit is highly engaging.” 

Accusations that media companies optimize their content for popularity and profit rather than truth are as old as for-profit media, but in general media companies start with an ethic of truth-seeking and fairness that then may or may not be compromised by the quest for clicks and shares. But Facebook is just a clicks-and-shares company. Its mission, its ethos, is that people should tell their friends and family what they're up to. If what they are up to is making videos of cats doing funny things, Facebook doesn't care if the videos were staged. And if what they're up to is sharing anti-Semitic memes and fake news, then ... I mean ... what? Facebook's DNA is in the sharing business, not the truth business, and its thinking about how to deal with the truth and harm of what it shares seems inchoate and muddled. But staggeringly important. "Behind the scenes, Facebook has been studying and analyzing its effect on news consumption."

Twitter has also been really important in sharing news in this election cycle, and has sort of opposite issues. Twitter sharing is mostly not algorithmic; you mostly choose who to follow and read what they say. That makes its corporate/algorithmic decisions about what to emphasize less important, which is in some ways simplifying. But it means that if Twitter is harmful -- if it provides an echo chamber that confirms and intensifies dangerous false views -- then there's not as much it can do about it. Tweaks to the algorithm won't help. 

Elsewhere, here's a story about how Trump was much better than Hillary Clinton at social media use. That's the sort of thing that one decides in hindsight by the election results, and then finds data to justify. My general sense was that Clinton's Twitter account was mostly carefully curated cool memes and arguments, while Trump's was more about posting and deleting anti-Semitic memes and telling followers at 5:30 a.m. to "check out sex tape." I think a week ago a lot of people would have said that Clinton's use of social media was Good, and Trump's was Bad. But Trump's Twitter -- full of ranting tweetstorms and things he regretted -- looks in broad outline like the account of a human who likes Twitter. Clinton's looks like a brand. Apparently the Trump approach worked better. 

And despite Twitter being perhaps the second-most-important company in the world this week, in terms of global political impact, it is still an absolute mess in corporate terms. The latest news is that "Adam Bain, the operating chief and longtime head of advertising sales -- the only part of Twitter that was functional (for a while) -- is stepping down after six years to 'explore opportunities outside the company.'" Chief Financial Officer Anthony Noto will take over his role until they find someone else to do it, because apparently he left without a succession plan? Great, great.

Bookies.

I said on Twitter once that I don't understand the business model of British bookmakers, whose election betting system seems to involve taking bets on the favorite, paying out those bets early even when the outcome is still in doubt, taking bets on the underdog, and then paying out those bets too. They lose on both sides, but make it up in volume? Actually, yes, that seems to be the answer; the consensus response was that election betting is a drop in the bucket for these bookies, and that their dumb much-publicized losses on politics just serve as advertising for their giant real business of sports gambling. Anyway here's some more performative moaning from the bookies about Trump's win:

Three weeks ago, Paddy Power paid out more than £800,000 early to some customers who backed Hillary Clinton, hoping to prevent higher losses as Mr. Trump’s numbers plummeted following the release of a recording in which he made lewd comments.

“We’re in the business of making predictions and decided to put our neck on the line by paying out early on Hillary Clinton, but boy did we get it wrong,” said Lewis Davey, a spokesman for Paddy Power. We have “very, very expensive egg on our faces.”

Overall, the result was Paddy Power’s biggest-ever political payout, with the bookie now having to pay more than £4 million to customers who backed Trump.

Total wagering on the U.S. election in the U.K. was about 200 million pounds, of which only about 20 million was in "the traditional bookmaking industry—which excludes spread betting or exchanges." Paddy Power's 2015 sportsbook handle was 8.6 billion pounds. 

Poor Nav Sarao.

Navinder Singh Sarao, who was arrested for spoofing in connection with the 2010 flash crash in U.S. stocks, had a pretty good case that he shouldn't be extradited from the U.K. to the U.S. to face trial. After all, he did his alleged spoofing in the U.K., where it probably wasn't a crime. But he lost that argument, after spending four months in jail in the U.K., and was sent to the U.S. He also has a pretty good case that he wasn't responsible for the flash crash, which seems to have had several causes, of which he was perhaps a minor one.

He did ... not have a great case that he didn't commit spoofing, though. Like, you know, he asked a programmer in writing to build him a spoofing function. It would not be a fun case to take to trial. So yesterday he pleaded guilty to spoofing and wire fraud and agreed to pay $12.9 million in forfeiture and $25.7 million in civil penalties. He faces a maximum prison term of 30 years, and likely much less, which is considerably better than the 380 years he was originally said to be facing. His guilty plea also means that he gets to leave a U.S. jail and go home to London while awaiting sentencing. You can see why most U.S. criminal defendants plead guilty: Going to trial, for Sarao, would have meant tremendous risk and suffering. On the other hand, he did seem pretty guilty.

Movies.

Here's a Securities and Exchange Commission action charging "a former movie producer and self-proclaimed private equity executive with defrauding investors in hedge funds and using the money he stole to support his extravagant lifestyle":

According to the SEC’s complaint, David R. Bergstein of Hidden Hills, California, stole millions from investors in 2011 and 2012 and used the money for purchases with a firearms dealer, an antique watch and jewelry retailer, and a bonsai tree nursery.

We've talked before about the sadistic glee that the SEC takes in listing the personal expenses in misappropriation cases like this. I would never want the SEC to go through my credit card receipts and itemize what I spend my money on, even though it's basically just food, books, and dog treats. I would, however, like to hear more about the bonsai trees. The (alleged) securities-fraudster-slash-bonsai-tree enthusiast sounds like a promising character.

Congrats Goldman partners!

I mentioned yesterday that Goldman Sachs Group Inc., where I used to work, was about to name its new partner class, and that I was worried that I wouldn't know any of them. That worry was incorrect. Here is the list of new partners. Congratulations to all of them, but particularly the ones that I know, I guess. Here is a little video about how Goldman chooses partners, which is basically that the partners get together and talk about who the new partners should be, but it's Goldman so they're all very bought into the idea that that's a super mystical process. Anyway it's the biggest partner class since 2010, but it is also "one whose promises of wealth and prestige appear less certain than in years past." A record 23 percent are women.

People are worried about non-GAAP accounting.

Here's Francine McKenna on the effect of non-GAAP accounting on journalists trying to quickly decipher earnings releases:

The proliferation of non-GAAP metrics and the thousands of versions of each has made their life a nightmare. It’s like standing behind the person in the Starbucks line who orders their coffee with seven different variations. They don’t want milk or even 2%. They want soy or maybe now coconut milk. They want half caf/half decaf. They want extra espresso shots but skinny syrup. Maybe they want wet or extra dry foam, whatever the heck that means. And the final ridiculousness is some people actually dictate the temperature of the drink!

It would be fun if non-GAAP accounting was called "extra-foam accounting."

People are worried about unicorns.

The Enchanted Forest is a special place, shielded from the rough-and-tumble of American politics by a wall of flowers and a moat of money and its own smug sense of superiority. So there is this:

Silicon Valley’s elite want to fix our broken country—by seceding from it.

On Tuesday night, as it became increasingly clear that a Donald Trump presidency was not only possible, but likely, Uber investor and Hyperloop One co-founder Shervin Pishevar tweeted out a secession plan for California in a state of panic.

"If Trump wins I am announcing and funding a legitimate campaign for California to become its own nation," said Pishevar's first tweet. Tyler Cowen has a fun post about English words that most reliably mean their opposite. ("Humbled," "literally," "spry," etc.) What do you think separates a "legitimate" campaign for California secession from just a regular campaign for California secession?

Oh elsewhere, Trump may be bad for the IPO market. But who knows!

People are worried about bond market liquidity.

I mean, why not, right? Yesterday morning Eric Scott Hunsader tweeted "Treasury Futures liquidity dangerously low - harder to buy/sell w/o price impact," because whatever else a Donald Trump presidency means, it definitely provides a reason to worry about bond market liquidity. Meanwhile in China: "Liquidity in China’s secondary bond market and free flow of capital across borders are the two biggest concerns of global investors considering investing in the country’s onshore bond market, according to a new study."

Movie Stuff.

Fine, yes, "The Producers" is also arguably a movie about short selling. About naked short selling, really. There are a lot of movies about short selling.

Things happen.

Top high-frequency trader Teza to quit proprietary trading. Marijuana Company Prepares to Cross State Lines, as Legally as Possible. Blackstone, KKR Said to Ready Bid Financing for Valeant’s iNova. Macy’s Makes Real-Estate Pact With Brookfield; Profit Falls. Ex-Rabobank trader gets three months in U.S. prison for Libor scheme. Deloitte LLP and John Clennett fined for Misconduct in relation to Aero Inventory Plc. LME copper jumps 4% to 16-month high on US infrastructure hopes. Obama’s oil and gas regulations face fire from Trump. Russia Says It Was in Contact With Trump’s Team During Campaign. Trump Tower to face major security challenges that limit NYC tourism and traffic flow. Quit your job. Cat who resembles dog baffles the Internet. 

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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