Money Stuff

Stock Lending and Regulatory Advice

Also orthodontists, boring CEOs, desk monitors and volatility.

Stock lending.

Financial products pretty much all start out trading the same way. There is a small group of dealers who are willing to buy and sell the product, and if you want to sell or buy it, you have to go to a dealer. If you want to buy and I want to sell, we could in theory just trade with each other directly and cut out the middleman -- but we have no way of finding each other, no reason to trust each other, no sense of what the market price is. The dealers are necessary to make the market work, and their essential product is information about who owns what and who wants to trade. The big banks tend to be natural dealers, because they have big balance sheets to buy and sell the product, and because they have relationships with lots of investors: It's easier for someone who is already a dealer of stocks and bonds and derivatives to add a new product to its lineup than it is for a startup to establish brand-new relationships with everyone in the market.

Eventually, the product gets big enough, and the dealers' markups get annoying enough, that someone says "hey let's have an electronic all-to-all exchange to cut out the middleman and allow people to trade with each other directly." This happened a long time ago with U.S. public stocks, and it worked great, and now you can pretty much instantaneously buy and sell stocks for free. (On the other hand it didn't exactly cut out the middleman: Much of the time, when you are buying and selling stock, you are doing it with some high-frequency trader who is acting like a dealer.) It is kind of happening now with corporate bonds, as dealers retreat from market-making and as a hundred all-to-all electronic trading platforms bloom. It is also happening now, a bit, with some derivatives, as regulation pushes things like interest-rate swaps into swap execution facilities that are meant to open up the markets beyond the usual group of dealers.

The dealers tend not to love these developments. In the old system, they charged high markups and got a piece of every trade. Their information was valuable and proprietary; their markups were not subject to much competition because the pool of dealers was small and entrenched. In an all-to-all electronic system, everyone tends to get the same information, and competition is open. You'd expect the dealers to fight back against that change.

And they have one crucial weapon in that fight: They still control the information. The point of the all-to-all electronic exchange is to wrest control of the information from the dealers, eventually, to provide price discovery and transparency on its own platform. But when any new exchange starts, with few members and few trades, the dealers will still control the knowledge of what is for sale and for what price. If they refuse to share that information -- which is proprietary and accumulated at great cost -- with the exchange, then it will be hard for the exchange to get anywhere.

Here is Owen Davis at Dealbreaker on a new antitrust lawsuit accusing a bunch of banks of colluding to control the stock lending market. This is a category of lawsuit that you see a lot of these days -- there was a big one a few years ago over the credit default swaps market -- and will probably see more of. The stock lending market, unlike the stock market, is a classic over-the-counter dealer-based market with high markups. From the complaint:

The cut taken by the Prime Broker Defendants is massive. In 2016, for example, the Prime Broker Defendants skimmed approximately 60% off a pot of some $9.15 billion in total industry revenue. These profits far exceed any benefit or service provided by the Prime Broker Defendants, who take virtually no risk in brokering these transactions. They are a drain on the American economy and result from market inefficiencies the Prime Broker Defendants have jointly cultivated and fought to maintain.

Stock lending is, of course, how short selling is facilitated, and I cannot resist a complaint that argues that making short selling more expensive is "a drain on the American economy." (Disclosure: I used to work at Goldman Sachs Group Inc., one of the prime broker defendants.) Anyway the basic allegation is that people came up with all-to-all electronic solutions that would have matched stock lenders and stock borrowers directly, cutting out the dealers, but that the dealers conspired to drive those all-to-all providers out of business by refusing to provide them with information. Also by trying to keep their hedge-fund customers off the all-to-all platforms:

For instance, Renaissance Capital Technologies — one of the world’s largest and most successful quantitative hedge funds — asked each of its multiple Prime Brokers for direct access to AQS. Every one of them not only refused, but told Renaissance Capital that if they were not happy with that, they could move their business to another firm. The same thing happened to dozens of large hedge funds, including D.E. Shaw and SAC Capital. 

The lawsuit claims that this was all an explicit conspiracy among the big prime brokers, though it is also perhaps possible to read it as a bunch of dealers each acting in their own obvious best interests. Anyway:

Absent their joint action as part of Project Gateway, the stock loan market would be much more like the modern, electronic, U.S. stock market, instead of a “$2 trillion dark pool.” Stock lenders and borrowers would be able to discover publicly-available prices. Lenders and borrowers would be able to meet on the trading platform of their choice and, if they chose AQS, would enjoy having their trades centrally cleared through the OCC. Spreads would be lower for lenders and borrowers alike. 

Is that true? Is it the case that every big financial market would operate seamlessly and electronically and transparently, were it not for the efforts of dealers to protect their turf? I don't know; the experience of the bond market suggests that it's not as simple as that. 

Elsewhere: "Some curious securities lending activity from Microsoft."

Carl Icahn.

Billionaire investor Carl Icahn was, for a while, a special adviser to President Trump on regulatory issues, but he is not any more. Now he is in that quintessentially Trumpian state of superposition in which he was simultaneously fired, resigned, still employed, and never had a job in the first place. Here is Icahn's letter from Friday announcing his resignation. But the White House had previously told New Yorker writer Patrick Radden Keefe that Icahn was not a special adviser, leading him to conclude that Icahn had been fired -- though the White House then added that he had never been a special adviser in the first place. ("I never had a formal position with your administration nor a policymaking role," said Icahn's letter resigning from his non-position.) But being a "special adviser" just meant occasionally chatting with his buddy the president about regulations that affected his business -- "He is simply a private citizen whose opinion the president respects and whom the president speaks with from time to time," said a White House spokeswoman, back when he did have the title -- and there is no particular reason those chats can't continue. So Icahn has resigned from the job he never had, but he can keep doing whatever it is he wasn't doing when he had that job.

This was all apparently spurred by Keefe's profile of Icahn and his role as regulatory adviser to Trump, which seems to have been limited entirely to lobbying Trump to change regulations around renewable-fuel blending. (Icahn's own resignation-or-whatever letter says that "the only issues I ever discussed with you were broad matters of policy affecting the refining industry," which must have been a disappointment for everyone, given that in the initial announcement of his role, Trump said that Icahn's "help on the strangling regulations that our country is faced with will be invaluable," and Icahn said that "regulatory reform will be a critical component of making America work again.")

Those rules currently require refiners to do the blending, or to pay for renewable-fuel credits if they don't; Icahn wanted to change the "point of obligation" so that fuel retailers would have to pay for those credits. The fact that Icahn owns most of CVR Energy Inc., a refiner that has to pay for a lot of renewable-fuel credits under the current rules, and that wouldn't have to pay for the credits under Icahn's proposed rules, was ... possibly relevant to this one regulatory reform issue that Icahn actually worked on. CVR was also betting that the price of those credits would decline, while Icahn was advocating for the change in the point of obligation. "Carl confuses the personal good and the social good in a very profound way," one investor told Keefe. 

But Icahn's lobbying didn't work, and the point of obligation wasn't changed. It almost worked, though. There was a brief window during which Trump apparently would sign whatever anyone put in front of him, so Icahn sensibly put something in front of him, but it was snatched away at the last minute:

The point-of-obligation rule was a relatively obscure agenda item, a top priority for almost nobody but Icahn. “This was a middle-of-the-night quick strike,” Coleman said. “In the middle of the night, Icahn said, ‘Sign this.’ But it didn’t work. He got caught.” Those were heady times for executive orders, with the President seeming to sign a new one each day.

Like much early-Trump policymaking, it seems not to have been heavily lawyered:

I spoke to someone who has seen the draft executive order, and he told me that it looked conspicuously like something that had been prepared by someone with no experience in Washington: “It was like ‘I, the President, instruct Scott Pruitt to move the point of obligation.’ It was almost amateurish. Any policy person or lawyer would understand that this thing was never going to fly.”

Several sources in Washington who have discussed the matter with Mike Catanzaro, the Trump Administration official who dealt with Icahn, told me that, once he and Gary Cohn had concluded that Icahn was attempting to hijack the policy process, they put a stop to it. One of the sources said, “I think Icahn thought if he told his pal Don, ‘This is a bad thing,’ and explained why it was stupid, Don would say, ‘God damn it, Carl, you’re right!’—and then the law would change. That’s not how it works down here. We have this thing called the Administrative Procedure Act.” Another source said, “Mike had to make clear that the government is not a vending machine—that it’s not here to profit the President’s friends.” He added, “Not everybody in this Administration necessarily sees it that way.”

I have never paid much attention to the policy substance of the renewable-fuel point-of-obligation debate, and as far as I can tell neither has anyone else. For all I know Icahn is right that CVR shouldn't have to pay for renewable credits, and that the point of obligation should shift. But what you'd hope for from your special adviser on regulation is not just pointing out the isolated fact that one particular regulation (and in Icahn's case it was literally one regulation!) is bad and should be changed. What you'd want is a holistic picture of the regulatory state, a strategy for reducing regulations overall, a sense of the interplay between political and policy considerations, a nuanced understanding of the workings of the Administrative Procedure Act. That is, you might not want a corporate raider as your regulatory adviser.

Jeffrey Gundlach.

Jeffrey Gundlach of DoubleLine Capital spent some of last week teasing a Wall Street Journal article about his fund, and now the article is out, reporting that assets under management at Gundlach's flagship Total Return Bond Fund have dropped by 13 percent since last September, and that "some within the firm are bracing for what could be a more challenging environment." Gundlach continues to do publicity for the article, tweeting out some of the best lines, like this one: 

Barney Rothstein, a retired orthodontist in Tucson, Ariz., withdrew $250,000 from the fund over the past 18 months and shifted the money to individual bonds that carry similar yields but can be held to maturity, unlike a bond fund, potentially giving an investor more cushion if the market turns down.

Once you've lost Barney the retired orthodontist in Tucson, what do you have left? Well, $53.6 billion, in Gundlach's case, and he made fun of the Journal for citing this $250,000 withdrawal as evidence of investor unrest. On the other hand, if I had to imagine the paradigmatic American investor, it would pretty much be a retired orthodontist in Tucson. He'd probably even be named Barney. So in that sense it is a telling anecdote. Anyway though my favorite bit of the story might be this, about Gundlach's relationship with TCW Group Inc., his former employer:

Mr. Gundlach sometimes emails TCW executives, taunting them, boasting of his performance and accusing his rival of not playing fair, people familiar with the matter said.

I hope they taunt him back. "Hey I heard you lost Barney the retired orthodontist in Tucson, tough blow there big guy."


The latest news out of Uber Technologies Inc. is that its next chief executive officer will probably be Jeff Immelt of General Electric Co. This news is boring. That is the idea. Uber could use some boredom. "We all know Immelt’s not the dynamic entrepreneur that Travis is," one source told Kara Swisher, "but he can certainly settle things down." Swisher's story is full of shrugs like that:

“We know it is never going to be a perfect choice, but everyone is becoming exhausted,” said one person close to the situation. “We need someone with the skills to move us along.”

I ... um ... what happened to Uber's unicorn exceptionalism? This is a company that was meant to change the world, that was the living embodiment of ruthless Randian capitalism, and it's choosing its next CEO on the basis of "ehh, we're tired, this guy is probably good enough, let's move on"?


Oh man:

Managers were peppered with queries when investment bank staff in London discovered black boxes stuck to the underside of their desks in recent months, according to several Barclays employees who asked not to be identified speaking about their workplace. They turned out to be tracking devices called OccupEye, which use heat and motion sensors to record how long employees are spending at their posts.

There was a “phased roll-out” of the devices, and Barclays staff and the Unite union were notified before they were installed, although the bank did not send out a specific memo about them, according to spokesman Tom Hoskin. The Barclays employees said they don’t remember being informed about the boxes, but spokespeople for the bank said there have been no official human-resources complaints.

Nothing to see here, just a black box hiding under your desk, tracking your heat and movement. "The sensors aren’t monitoring people or their productivity; they are assessing office space usage," says Barclays Plc. But even that official explanation -- that Barclays wants to get rid of unproductive desks, not unproductive bankers -- isn't that comforting. It's nice to have a desk! You should put like a Roomba and a candle under your desk, so that Barclays thinks it's always in use. (Not legal, or fire-safety, advice.)

People are worried that people aren't worried enough.

Don't worry, very soon it will be time to retire this category, since this worry is going away:

The historic calm that enveloped U.S. stocks for much of this year has been upended twice in the past two weeks. The Dow Jones Industrial Average posted its biggest decline in three months on Thursday, one week after a selloff of similar scale sent stock indexes tumbling around the world. It is too soon to call the end of the eight-year bull market, investors, traders and analysts say, but many agree the indiscriminate optimism that characterized the postelection rally is evaporating.

Meanwhile here is kind of an impressive statistic:

A frenzy of trading in the five largest exchange-traded products that profit either when volatility spikes or declines accounted for 7.2% of total composite stock market volume Thursday, an unprecedented feat for these hot-potato products, according to WSJ Market Data Group.

Eventually the stock market will consist solely of (1) index funds, (2) corporate stock buybacks, and (3) people betting on the volatility of the stock market. What else do you need?

Things happen.

Sempra Bests Berkshire With $9.45 Billion Offer for Oncor. Total Chases Growth With $5 Billion Purchase of Maersk Oil. Rosneft, Trafigura Seal $12.9 Billion Deal for India's Essar Oil. Insider trading schemes using encrypted apps alarm FBI. Yellen, Draghi Head to Jackson Hole Amid Inflation Unease. ECB’s bond shortage dilemma sharpens as inflation slows. Cohn Solidifies Lead in Race to Replace Yellen, Economists Say. Trump and the CEOs: Behind the Collapse of an Uneasy Alliance. How a New Audit Rule Could Bring Sunshine to U.S. Markets. Your Credit Score Could Make or Break Your Love Life. Elon Musk joins more than 100 tech bosses calling for ban on killer robots. Why Is Westeros Still Poor? "We think a lot about what’s in the museum and out of the museum, and the idea that the exit to the Museum of Capitalism is the entrance into the real Museum of Capitalism."

If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Thanks! 

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

    To contact the editor responsible for this story:
    James Greiff at

    Before it's here, it's on the Bloomberg Terminal.