Shareholder democracy is weird because you can just buy votes. In fact, that’s kind of the point: Each share of a public company usually has one vote,[1] so if you want to take control of the company, all you have to do is buy enough shares to win a shareholder vote. (Conservatively 50% plus one, but probably less, if you can get other shareholders to join you and/or they don’t vote.) The voting power is generally proportional to the economic ownership of the company; the more you own, the more say you have.

But it is reasonably easy to hedge stock. If you own a lot of stock of a company, and you want to (1) continue owning that stock but (2) not be fully economically exposed to the risk of the stock price, you can probably find a way to do that. Most simply, you could (1) buy 10 million shares of stock and (2) also borrow 10 million other shares of stock and sell them short. You’re long 10 million shares and short 10 million shares, so you have net zero exposure: If the stock goes up (or down), you will make (lose) money on the 10 million shares you own, and lose (make) an exactly offsetting amount of money on the 10 million shares that you are short. But you get to vote the 10 million shares that you’re long, while you don’t get negative votes for shares you are short.[2] So you have zero economic ownership but 10 million votes. […]

The fun question, which people email me about from time to time, is: What if you go long 10 million shares and short 20 million shares? Then (1) you get to vote 10 million shares and, as a big economic owner, you have a say in the running of the company, but (2) you actually profit if the company does badly, so your voting incentives will be bad.

{ Matt Levine / Bloomberg | Continue reading }

Christopher DeVocht, a carpenter from Vancouver Island, Canada, says he started out like a lot of day traders. After work, he’d read about trading on forums. His favorite things to trade were options on Tesla Inc. stock. […]

At the end of 2019, his account, with the brokerage division of Royal Bank of Canada, was worth C$88,000. Within two years, he’d turned that into C$415 million ($306 million), he says.

Some people would have cashed out. DeVocht didn’t. And when Tesla stock fell in 2022, he lost it all. […]

DeVocht now claims that the advice he received, geared mainly toward minimizing taxes, was negligent […] [Royal Bank of Canada] advised him to incorporate a company, roll all of his securities into it and conduct trades within the company “with a strategy of accumulating as many Tesla shares as possible and holding them for as long as possible,” DeVocht claims in the lawsuit. The idea was to convince Canadian tax authorities to view it as an investment holding company, not an active trading business, because he’d pay lower taxes that way.

{ Bloomberg | Continue reading }

This is just a cool insider trading case. There’s a guy, Robert Westbrook. He allegedly hacked into the email accounts of several executives at different US public companies. The SEC complaint lays out how he allegedly did that:

He would go to the executive’s Outlook email login page and click to reset the password. “Four of the five Hacked Companies used the same password reset portal software,” says the SEC, and he was apparently familiar with its workings.

He subscribed to “an online directory service provider and an online genealogy company,” which gave him “personal and family

information that could be used to guess the answers to the security questions that employees at the Hacked Companies may have used to reset their passwords.” You can do a lot of damage if you know a public-company executive’s mother’s maiden name and first pet’s name.

He’d reset their passwords and get access to their emails.

Then he’d read them and look for secret earnings information. […]

But even if you get earnings releases in advance, there’s no guarantee that you’ll make money. My Bloomberg Opinion colleague John Authers wrote last week about an Elm Partners study finding that most people can’t trade profitably even knowing tomorrow’s news. […]

Ten trades were winners, four were losers, the winners were bigger than the losers and his net profit was about $3.4 million. […]

This includes buying half a million dollars’ worth of one company’s[2] stock and call options before its March 2019 earnings report, and making a $236,492 profit when the earnings were good, and then buying $786,364 worth of that company’s put options before its March 2020 earnings report, and making a $1.04 million profit when those earnings were mixed.

{ Matt Levine / Bloomberg | Continue reading }

• You buy a stock, its value keeps going up, you don’t sell it and you don’t pay taxes.

• If you need cash, you go to your broker and take out a loan, secured by the value of the stock.

• If the stock keeps going up, you never pay back the loan, and you can borrow more money if you want.

• Eventually you die, your heirs get the stock, and they don’t pay taxes on your gains. (This is called the “basis step-up”: When you inherit stock, the IRS pretends that you paid market value for it, so you don’t have to pay taxes on the previous gains.)

This is sometimes called the “buy, borrow, die” tax strategy.

{ Bloomberg/Matt Levine | Continue reading }

Nomura and Credit Suisse are facing billions of dollars in losses after a U.S. hedge fund, named by sources as Archegos Capital, defaulted on margin calls. […]

A margin call is when a bank asks a client to put up more collateral if a trade partly funded with borrowed money has fallen sharply in value. If the client cannot afford to do that, the lender will sell the securities to try to recoup what it is owed.

Margin calls on Archegos Capital prompted a massive unwinding of leveraged equity bets. Shares in ViacomCBS and Discovery each tumbled around 27% on Friday, while U.S.-listed shares of China-based Baidu and Tencent Music plunged during the week, dropping as much as 33.5% and 48.5%, respectively, from Tuesday’s closing levels. […]

Morgan Stanley sold $4 billion worth of shares early on Friday, followed by another $4 billion in the afternoon. […] Goldman liquidated more than $10 billion worth of stocks in the block trades [and] sold $6.6 billion worth of shares of Baidu Inc, Tencent Music Entertainment Group and Vipshop Holdings Ltd, before the U.S. market opened on Friday […] Following this, Goldman sold $3.9 billion worth of shares inViacomCBS Inc, Discovery Inc, Farfetch Ltd, iQIYI Inc and GSX Techedu Inc […]

Hwang, who founded Archegos and ran Tiger Asia from 2001 to 2012, renamed it Archegos Capital and made it a family office.

{ Reuters | Continue reading }

Archegos borrowed a mere five times its capital. Closely regulated Goldman Sachs is at nearly seven times on a risk-weighted basis. […]

Hwang himself was a walking risk factor. He admitted to wire fraud in 2012 and in 2014 was banned from trading in Hong Kong for four years.

{ Reuters | Continue reading }

Data analytics company Palantir Technologies and workplace software maker Asana Inc are set to debut on the U.S. stock market on Wednesday bypassing an initial public offering (IPO). […]

[S]ome investors and corporate executives have been pushing to shed investment banks as their middlemen. For years, they have criticized IPOs as chummy deals that allowed bankers to allocate the most shares to their top clients. […] “If Palantir and Asana are successful, which they should be, more and more companies will return to looking seriously at direct listings,” Narasin added. […]

In 2020, the price of a newly listed company’s shares has risen by an average of 38% on the first day of trading, according to IPOScoop data and Reuters calculations.
This has fueled renewed criticism among investors snubbed by the investment banks underwriting the IPOs, as well as suspicion among some companies that bankers are leaving money on the table in their IPO to help create a first-day trading “pop”. […]

In a direct listing, no shares are sold in advance, as is the case with IPOs. The company’s share price in its market debut is determined by orders coming into the stock exchange.

The downside is that the companies involved cannot raise money, though both NYSE and Nasdaq have requested U.S. regulators allow them to change their rules to allow companies to sell new stock in a direct listing.

{ Reuters | Continue reading }

“Financial machine learning creates a number of challenges for the 6.14 million people employed in the finance and insurance industry, many of whom will lose their jobs — not necessarily because they are replaced by machines, but because they are not trained to work alongside algorithms,” said Marcos Lopez de Prado, a Cornell University professor. […]

Nasdaq runs more than 40 different algorithms, using about 35,000 parameters, to look for market abuse and manipulation in real time.

{ Bloomberg | Continue reading }

related { 90% of high-tech job growth concentrated in just 5 cities: Boston, San Francisco, San Jose, Seattle and San Diego }

photo { Matthew Reamer }

Software from Amenity Analytics promises to automate this process by spotting when chief executive officers try to duck tough questions. The software, its makers say, can even pick up on the signs of potential deception that CIA and FBI interrogators look for—including stalling and the use of qualifiers—and can gauge the sentiment of what is said on calls and reported in public filings, issuing a positive or negative numeric score. The goal is to make it easier for investors to wade through information and quickly make trading decisions.

{ Bloomberg Businessweek | Continue reading }

previously { Former CIA Officer Will Teach You How to Spot a Lie }

photo { Laurie Simmons, Blonde/Pink Dress/Standing Corner, 2014 }

{ while ordinary people are struggling, those at the top are doing just fine. Income and wealth inequality have shot up. The top 1% of Americans command nearly twice the amount of income as the bottom 50%. The situation is more equitable in Europe, though the top 1% have had a good few decades. | The Economist | full story }

{ Netflix performance burns hedge fund short sellers }

Twelve years ago, my now-Bloomberg colleague Joe Weisenthal proposed that startups that planned to disrupt an established industry should short the stock of the incumbents in that industry. That way, if they were right — if they were able to undercut big established public companies — then they’d get rich as those public companies declined. […] Their profits would come from the incumbents’ shrinking.

Weisenthal’s proposal was for disruptors offering a free product; the idea was that the entire business model would consist of (1) offering a free service that public companies offer for money and (2) paying for the service by shorting the public companies. But there’s a more boring and more widely generalizable — yet still vanishingly rare — version of this approach in which it just augments the disruptors’ business model: You sell better widgets cheaper and make a profit that way, while doubling down by also shorting your competitors. It’s a more leveraged way to do the business you were going to do anyway, an extra vote of confidence in yourself.

{ Bloomberg | Continue reading }

You know, someone invented the XIV ETN. And someone invented the VIX, and VIX futures. And when you read the technical specifications for all of those things, it is clear that they are not trivial feats of engineering. Teams of marketers and traders and quants and technologists and lawyers put many hours into getting them just right, so that they would work as intended. They are technologies, highly engineered tools designed to help customers do things that they couldn’t have done before. They are financial technologies, built not out of screens and circuit boards but out of formulas and hedging strategies and legal documents, but that is what you’d expect: Financial firms ought to innovate in financial technology.

Yesterday Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein presented at the Credit Suisse Financial Services Conference, and his presentation is kind of a weird read. The running theme is that Goldman is doing technology stuff to win business. “Engineering underpins our growth initiatives,” says a summary page, and it doesn’t mean financial engineering. In fixed income, currencies and commodities, engineers are 25 percent of headcount, and the presentation touts growth in Marquee (its client-facing software platform) and “systematic market making.” In equities, Goldman touts its quant relationships. In consumer banking (now a thing!), the centerpiece is Marcus, Goldman’s online savings and lending platform. And in investment banking, “Engineering enhances client engagement through apps, machine learning and big data analytics.” […]

Instead of developing new financial technologies, Goldman is developing new computer technologies for its financial clients.

{ Bloomberg | Continue reading }

related { Hedge-fund mediocrity is the best magic trick. Never have so many investors paid so much for such uninspiring returns. }

lithograph { Ellsworth Kelly, Camellia III, 1964–65 }

There are 1,036 virtual currencies out there, from Bitcoin to — no joke — BigBoobsCoin. The price of almost every single one was down Friday morning.

{ Bloomberg | Continue reading }

Stock trading strategies: competition is so stiff that there are only two ways to succeed: (1) insider trading, e.g. you try to obtain job interviews with small publicly traded companies, then based on information glanned during the interview, perform trades and (2) use trading strategies that professional traders will never use, e.g. stay “all cash” for several years on your trading account, and when the right event occurs, massively trade major indexes for a couple of days, then go dormant for another few years. You need sophisticated statistical models to succeed in this, with good back testing, walk-forward and robustness based on state-of-the-art cross-validation.

{ analyticbridge | Continue reading }

art { Rochelle Goldberg, The Cannibal Actif, 2015 }

Two hedge fund “quants” have come up with an algorithm that diagnoses heart disease from MRI images, beating nearly 1,000 other teams in one of the most ambitious competitions in artificial intelligence.

{ Financial Times | Continue reading }

Qi Liu and Tencia Lee, hedge fund analysts and self-described “quants,” didn’t know each other before they won the competition, beating out more than 1,390 algorithms. They met each other in a forum on the Kaggle site, where the competition was hosted over a three-month period.

{ WSJ | Continue reading }

The mantra of Wall St hedge funds was once “only the strongest will survive.” It may now have to change to “the geeks will inherit the earth.”

Hedge fund “quants” who use computer systems to trade financial markets earned more money than some of the industry’s most famous stockpickers, who posted large losses in 2015.

The most prominent among the quants was string theory expert and former code breaker James Simons of Renaissance Technologies, who earned $1.7bn, putting him in joint first place.

He was joined in the top 10 earners by former Columbia University computer science professor David Shaw of DE Shaw who made $750m and John Overdeck and David Siegel of Two Sigma who made $500m each.

Their success came in stark contrast to some of the biggest names on Wall Street who rely on human investment judgment rather than lines of computer code.

{ FT | Continue reading }

quote { Cabinet magazine | full story }

It was an invitation-only party (crabs, cocktails and a D.J. on a moonlit dock) thrown by Jane Street, a secretive E.T.F. trading firm that, after years of minting money in the shadows of Wall Street, is now pitching itself to some of the largest institutional investors in the world.

And the message was clear: Jane Street, which barely existed 15 years ago and now trades more than $1 trillion a year, was ready to take on the big boys.

Much of what Jane Street, which occupies two floors of an office building at the southern tip of Manhattan, does is not known. That is by design, as the firm deploys specialized trading strategies to capture arbitrage profits by buying and selling (using its own capital) large amounts of E.T.F. shares.

It’s a risky business.

As the popularity of E.T.F.s has soared — exchange-traded funds now account for a third of all publicly traded equities — the spreads, or margins, have narrowed substantially, making it harder to profit from the difference.
And in many cases, some of the most popular E.T.F.s track hard-to-trade securities like junk bonds, emerging-market stocks and a variety of derivative products, adding an extra layer of risk. […]

While traders at large investment banks watched their screens in horror, at Jane Street, a bunch of Harvard Ph.D.s wearing flip-flops, shorts and hoodies, swung into action with a wave of buy orders. By the end of the day, the E.T.F. shares had retraced their sharp falls.

It is not only Jane Street, of course. Cantor Fitzgerald, the Knight Capital Group and the Susquehanna International Group have all capitalized on the E.T.F. explosion.

And as these firms have grown, so has the demand for a new breed of Wall Street trader — one who can build financial models and write computer code but who also has the guts to spot a market anomaly and bet big with the firm’s capital. […]

Here is a small sample of Jane Street’s main traders: Tao Wang (doctorate in philosophy and finance from the National University of Singapore), Min Zhu (master’s in chemistry, Columbia), Brett Harrison (master’s in computer science with a focus in artificial intelligence, Harvard) and Srihari Seshadri (bachelor’s in computer science, Carnegie Mellon).

{ NY Times | Continue reading }

oil on Masonite { Grant Wood, Birthplace of Herbert Hoover, 1931 }

A recent Wall Street Journal/NBC News poll found that 49% of Americans still believe the U.S. economy is in recession, even though we are now in the sixth year of the recovery. […] If investing when others are skeptical has historically been a successful strategy, why don’t more investors do so? […] Taking advantage of the findings discussed earlier requires investing when the economy and market seem to be at their worst, and rebalancing when conditions appear to be the best. This is counterintuitive for many investors, who tend to wait for confirming evidence before acting. This is related to herd behavior, the tendency to follow the crowd with portfolio decisions. Investing when others are skeptical is emotionally difficult but, as we’ve shown, tends to be when rewards are the greatest.

{ JP Morgan Funds | PDF }

related { It is not possible for a human to know whether Bank of America made money or lost money last quarter. }

art { Jim Campbell, Ambiguous Icon #1 Running Falling, 2000 }

Since The Fed’s extension of Operation Twist (and subsequent unveiling of QE3) in 2012, the stocks of “weak balance sheet” companies are up over 100%. In that same period, the stock prices of “strong balance sheet” companies are up a mere 43%.

{ ZeroHedge | Continue reading }

The last 5 days saw “strong” companies outperform “weak” companies by the most in 3 years - something appears to be changing.

{ ZeroHedge | Continue reading }

A quarter of all public company deals may involve some kind of insider trading. […] The study [PDF], perhaps the most detailed and exhaustive of its kind, examined hundreds of transactions from 1996 through the end of 2012.

{ NY Times | Continue reading }