Money Stuff

Disappearing Deals and Locked Cars

Also latency arbitrage, Jay Clayton, binary options, books, Snap and Uber.


As the writer of a daily newsletter, I always appreciate it when news happens and then un-happens in the course of the weekend. Let us never speak of Kraft Heinz Co.'s bid for Unilever. It has gone away, like it never happened.

It kind of didn't? The story here basically seems to be that Kraft Heinz approached Unilever and asked if it fancied a merger, and Unilever said no, and Kraft Heinz said all right then, never mind, have a nice day. ("Unilever and Kraft Heinz hold each other in high regard," the companies said in their joint never-mind press release.) That is a thing that happens from time to time, whenever giant companies brush up against each other, and it's mostly a non-issue. But Kraft Heinz had to disclose the approach under British takeover rules after FT Alphaville reported on the talks. The disclosure created, in round numbers, $27 billion of stock-market value on Friday, though some of it has gone away since the deal vanished.

And of course it vanished: While Kraft Heinz's backers at 3G Capital have some history of hostility, its biggest shareholder, Warren Buffett's Berkshire Hathaway Inc., famously doesn't, so when Unilever pushed back, Kraft Heinz quickly folded. "The most unusual thing about Kraft Heinz’s abortive bid for Unilever is that it became public. Most of the time, no one hears about the takeovers that Buffett opts not to pursue." For obvious reasons: If you are a discreet dealmaker who makes decisions quickly and never goes hostile, there is pretty much never any reason to disclose a transaction before it's been agreed. 

Was the forced disclosure here ... good? The basic idea of merger-disclosure rules is to keep shareholders informed, giving them some clarity and certainty about what is going on at their companies rather than leaving them in the dark until a merger is formally announced. Here, if you bought Unilever stock at the highs on Friday, you might feel a bit annoyed by the forced disclosure of a deal that never really stood a chance. On the other hand:

In a sign that investors still expect some dealmaking, Unilever shares on Monday lost only about half their gains from Friday, when the U.S. company disclosed its approach.

And "both consumer-goods giants now find themselves under heightened pressure to make bold moves to accelerate growth." I suppose "accelerating growth" is a perfectly fine reason to do a deal, but it's a little odd that the disclosure of a non-deal would greatly increase the pressure on both companies to go find a real deal. Kraft Heinz and Warren Buffett probably didn't want to put Unilever in play via a hostile bid, but they may have done that anyway.

Smart contracts.

Auto finance companies "are using technologies to track the location of borrowers’ vehicles in case they need to repossess them," as well as "devices that enable them to remotely disable a car’s ignition after a borrower misses a payment," and "federal regulators are investigating whether these devices unfairly violate a borrower’s’ privacy." They do seem ... rude? ("They don’t need to know what we are doing — when we go out to eat, when we go on vacation," says one driver.) That doesn't mean they're illegal. "So far, there is no widespread evidence that lenders are misusing information they track from a vehicle’s whereabouts."

Still it seems to be a live question. I like to think about it in the context of the enthusiasm for the blockchain and smart contracts. If you like smart contracts, you should like these technologies, no? A smart contract is a piece of computer code that makes the terms of a contract operate automatically. People often talk about them in terms of stock options -- I buy a smart option from you, and if the stock ends up above the strike price, the option automatically transfers money from me to you and the shares from you to me, all over some comprehensive blockchain -- but who buys stock options? If smart contracts are going to be a live thing in the real world, they're going to look like this: self-executing auto loans that automatically turn off your car if you miss a payment. And people are going to find them a little gross.

Does that matter? I mean, people are going to find a lot of things about our robot future pretty gross. People find Facebook's approach to privacy pretty gross, and that has not stopped Facebook from taking over the world. Perhaps blockchains and smart contracts will offer irresistible efficiency gains. Certainly they are neat; there is something clean and elegant about programming a contract to just work automatically rather than having to go to court to argue over whether the missed payment was really the borrower's fault. And neatness, elegance, certainty and efficiency are very important considerations in a lot of financial transactions. But, especially in consumer transactions, they're not the only considerations.

Some market structure.

I read this story about Aquis Exchange Ltd., a London-based stock exchange, and thought: "Why didn't someone else think of this?"

The idea is to reduce latency arbitrage, where a trader uses faster data connections to take advantage of traders posting out-of-date prices. The exchange discourages such practices like this: Proprietary traders are only allowed to place passive bids and offers. That means they have to wait for a trade to occur -- they can’t act on anyone else’s orders.

Brokers acting on behalf of clients like pension funds or asset managers don’t face those restrictions.

This is plausibly good for end-user investors, who can buy stock without competing with aggressive high-frequency traders. It's plausibly good for proprietary traders running market-making strategies, who don't have to worry about being picked off by aggressive high-frequency traders. ("We are comfortable providing more liquidity there," says the head of one algorithmic trading firm.) It's probably not a good way to run a financial system: Even the most boring liquidity-providing market maker might occasionally want to cross the spread to manage its risk, and aggressive high-frequency traders probably help make prices more efficient. But for one exchange among many, just banning aggressive high-frequency trading entirely seems fine. It also seems like a pretty good marketing differentiator, in a world where everyone is afraid of high-frequency trading.

Why isn't there more of it, particularly in the U.S.? I suppose U.S. rules around "fair and non-discriminatory access" to exchanges make it difficult. Also, of course, aggressive HFTs are good for exchanges: They create a lot of volume and pay a lot for data. If you want a lot of market share, turning your back on a huge active chunk of the market is a bad idea, so you have to instead come up with other ways (speed bumps, "Liquidity Profiling") to convince people that you are limiting aggressive HFTs while also encouraging those aggressive HFTs to keep sending you orders. 

Private markets are the new etc.

Here is a profile of Jay Clayton, Donald Trump's nominee to run the Securities and Exchange Commission:

Through his memo and subsequent meetings, the person said, Mr. Clayton assured the Trump team he shared their fear that public markets have become much less attractive than private fundraising channels, including mutual funds that pour millions into startups that are far from going public.

He “gets big corporations and the need for raising capital,” said Robert Evans III, a partner at Shearman & Sterling LLP who has known Mr. Clayton through legal circles.

There are some cause and effect questions there. Big corporations, as a rule, don't have much need to raise capital. Companies in the S&P 500 Index buy back more stock than they issue. (They do issue a lot of debt, though.) It strikes me as more or less a misconception to think that U.S. public equity markets are primarily about raising capital for companies, a misconception that could have deregulatory ("let's make it easier to raise capital by legalizing fraud!") or pro-regulatory ("let's make stock buybacks illegal!") consequences. But of course I could be wrong. Perhaps the natural purpose of 21st-century public capital markets is to allow companies like Uber to raise money to finance their operations, and the actual state of the world -- in which Uber raises its billions of dollars in private markets and public markets are mostly used for stock buybacks -- is an anomaly that can be cured with better regulation. On the other hand: Who is suffering because Uber remains private? 

Elsewhere: "Signs of a Step Back in Financial Regulatory Enforcement."

Binary options.

Here is an exposé from a guy who spent a day cold-calling people to get them to trade binary options at an Israeli firm with the charming name "St Binary." I appreciated St Binary's efforts to create an atmosphere of businessiness:

Three big television screens were booming Bloomberg TV. When I asked a sales agent named Patrick whether it was possible to lower the volume, he growled: “No, the volume must be high.”

I was given to understand that the background TV noise helps persuade customers on the other end of the phone that they are talking with international experts who work in a big, buzzing trading room in a financial hot spot — not a small room in a nondescript building in Ramat Gan, Israel.

That is sweet, but literally anyone can turn on a TV? I feel like the real mark of professionalism, or fake professionalism, is having the TV on mute. But that is harder to convey over the phone.


"A 31-year-old millionaire who's read 360 personal finance books shares his favorite," it says here, and can you imagine reading 360 personal finance books? All of the important personal finance advice fits on an index card, though alas the writers of that index card somehow turned it into a book too. Once you have read 359 personal finance books, how likely are you to learn something new from the 360th? It would be funny if the first 359 were all like "save as much as you can, max out your 401(k), and use low-cost index funds" and then the 360th was like "hey but have you considered binary options?" Even worse, his favorite personal finance book "happens to be the first one he picked up," making the remaining 359 a particularly embarrassing waste of time. Anyway my personal financial advice to you is read some novels sometime. "It is difficult to get [asset allocation advice] from poems," William Carlos Williams almost wrote, "yet men die miserably every day for lack of what is found there."

Elsewhere: "Two-Thirds of Americans Aren’t Putting Money in Their 401(k)." If only they had read a few hundred books on the topic!


Snap Inc. put the roadshow presentation materials for its initial public offering online on Friday, and I continue not to understand Snap as either a product or a business. The only reasonable conclusion here is that I am old and it will be a trillion-dollar company. This is not investing advice. Here is Aswath Damodaran with a valuation; he gets a median valuation of $13.3 billion and a mean of $14.9 billion, well below the IPO offering range. Also I was disappointed that the roadshow video was not shot vertically? 

Elsewhere: "With Snap’s I.P.O., Los Angeles Prepares to Embrace New Tech Millionaires." "Snap Finds Its IPO Is a Tough Sell in London." "Snapchat races Instagram to capture selfie ad sales." "For Generation Z, ‘Live Chilling’ Replaces Hanging Out in Person." (I don't think that's actually a story about Snapchat, but honestly I don't want to know.) And WhatsApp will now be Snapchat, making it at least the second Facebook product (after Instagram) to become Snapchat. Obviously that says something good about Snapchat, although not necessarily about Snap's financial prospects. ("WhatsApp's audience is far larger than Snapchat's," as is Instagram's.) "Honestly whatever you think of Evan Spiegel," tweeted Casey Newton, "it’s impressive that he’s taking Snap public while serving as Facebook’s chief product officer."

People are worried about covered interest parity.

Oh yeah they are:

We find that deviations from the covered interest rate parity condition (CIP) imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on the banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. 

That's from a new version of a paper on "Deviations from Covered Interest Rate Parity" by Wenxin Du, Alexander Tepper and Adrien Verdelhan. 

People are worried about unicorns.

The big worry in the Enchanted Forest this weekend was Susan Fowler's story of sexual harassment at Uber Technologies Inc. There is a lot of (alleged) bad stuff in her story, but this seems like the core of the problem:

Uber was a pretty good-sized company at that time, and I had pretty standard expectations of how they would handle situations like this. I expected that I would report him to HR, they would handle the situation appropriately, and then life would go on - unfortunately, things played out quite a bit differently. When I reported the situation, I was told by both HR and upper management that even though this was clearly sexual harassment and he was propositioning me, it was this man's first offense, and that they wouldn't feel comfortable giving him anything other than a warning and a stern talking-to. Upper management told me that he "was a high performer" (i.e. had stellar performance reviews from his superiors) and they wouldn't feel comfortable punishing him for what was probably just an innocent mistake on his part.

It seems to me you can have one of roughly three kinds of company culture:

  1. A highly bureaucratized big-company culture in which human-resources managers handle situations according to a rigid and standardized rulebook.
  2. A freewheeling hacker culture in which stellar engineers are enabled to do their best work, even if they are also Neanderthals.
  3. A sensible human culture in which managers encourage engineers to do good work but are also conscious of the fact that people need to work together and treat each other well. 

Obviously 3 is good! Obviously everyone wants that. But it's the hard one to just dictate. It takes work and sensitivity. You can get 1 or 2 fairly easily: Either you build a big standard rule-bound bureaucracy, or you just don't. And given that choice, the Silicon Valley ethos seems to prefer 2 over 1.

Anyway, Uber's response has been to name a bunch of people to look into the situation, including Arianna Huffington and Eric Holder. Many companies have successfully found a middle ground between doing nothing about sexual-harassment complaints and having them investigated by the former attorney general of the United States, but Uber seems to embrace the extremes.

Elsewhere: Unicorn Startup Simulator.

People are worried about bond market liquidity.

Here is "Liquidity Transformation and Open-end Funds," by Stephen Cecchetti and Kermit Schoenholtz, who propose "to enhance the resilience of the financial system by encouraging open-end funds holding relatively illiquid assets to convert to ETFs." People sometimes worry about exchange-traded funds somehow causing liquidity problems, but I'm with Cecchetti and Schoenholtz: If you are worried about liquidity transformation, ETFs seem more like a solution than a problem. Elsewhere: "Selling Treasuries is still not a valid political threat."

Me Friday.

I wrote about some lawyers who ran into trouble counting how many shares Dole Food Co. had. It's a mess. The lesson that a Delaware vice chancellor drew from this story is that we should have more blockchains. That might be right! But one thing that it illustrates is the difference between having a blockchain here and there, and having the entire financial world on one integrated blockchain. Using a blockchain to keep track of U.S. public-company shares (and short positions) would make the record-keeping in the Dole case easier, but even if you know who was short Dole stock three years ago, that doesn't necessarily mean that you can go find them and demand some extra money from them. But if all financial transactions were integrated into one blockchain, you could go trace their money and take it pretty easily. That is the utopian blockchain dream, and it has some advantages, but it is much, much further away than just putting one or two share registries on a blockchain.

Also, in Friday's Money Stuff, I said that "a basic rule of volatility trading is that if you bet against volatility, you will increase volatility." A couple of readers pointed out that there's more to it than that: After all, if you are selling volatility, someone else is buying, and his trading will tend to decrease volatility. The net effect depends mostly on who is hedging and who isn't. In many cases, if you (an investor) bet against volatility, and you don't dynamically hedge your bet, the effect will in fact be to decrease volatility, because the dealer who sold you the bet is hedging. If, on the other hand, you later decide to hedge, because your bet has gotten too big or too risky or moved too far away from you, then that change would increase volatility -- and more rapidly than just hedging in the first place.

Things happen.

Saudi Arabia Favors New York for Aramco IPO. Shell Shakes Up Oil Trading World With Brash Buying Sprees. Fight to keep oil’s Brent benchmark fit for purpose. HSBC Shares Fall After Missing Profit Estimates on Revenue Drop. Credit Suisse Returns to Its Roots in Europe. "Our own research confirms that financial markets already price climate risk into oil and gas company stocks based on company reports and other data available from public and proprietary sources." Trump Team Fosters Fears He'll Adopt Alternative Economic Facts. Greeks Turn to the Black Market as Another Bailout Showdown Looms. Apple claims Brussels breached its fundamental rights in tax case. Samsung Heir, Seeking to Modernize Opaque Culture, Instead Faces Scandal. The long rise in profits is mostly just the flip side of falling interest rates. Citigroup Agrees $5.4 Million Fine to Settle Rand Collusion. World’s Largest Mutual-Fund Firm Wants Some Europe Action. Buy Warren Buffett's beach house. "I quit the City for Wall Street and I’ve never looked back." Bitmojis. US court confirms Snuggies are blankets, not clothes. Parents' Manhattan Kindergarten Application Essay. "Joey's owner, Adam Pearl, says no one can believe he has a squirrel that guards his house."

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    Matt Levine at

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