This is so simple it is wrong. The truth is, that the short term investor cares how PUBLIC KNOWLEDGE changes during that minute. For example, if Kobe steel holds off on making a fraud scandal public during that minute, that's a good thing, even if keeping the fraud skandal secret will hurt in the long term. The short term investor wants the IPhone X to be announced NOW, even if holding off on the announcment could give apple a leg up against the competitors. The short term investor wants toshiba to announce they've got a good deal selling off their memory business NOW, even if that makes it harder for toshiba to improve the price they get even further with a bidding war.
tl;dr - PR is everything, often shadowing actual hw or sw "stuff" people make, and HFT capitalizes on this.
Also, external happennings in other companies such as competitors, purchasers, suppliers have an impact on your company. So those should technically feed a model some factors (and in fact they do at hedge funds.)
> The value of a share of a company is equal to the market's expectation of the present value of its future free cash flows.
Emphasis on "expectation". It may change wildly in the short term; reasons include hype, speculation, and news that has only short term relevance.
* Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? If so, can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time?
* Many (most?) consumer-facing brokerages make a significant portion of their revenue by lending out their customers' securities. Voting rights transfer to the borrower of the security. Would this be the same in a long-term exchange? If yes, then this will break the existing revenue model. Online brokerages will need to make the money elsewhere (likely by charging higher trading fees), and this will push consumers back into existing exchanges with low cost trades.
* How long until there is a secondary market for buying and selling voting rights?
The fact that a company is listed on multiple exchanges doesn't mean it has different sorts of stock for each exchange. This real subject of this article is tenure voting, which is an aspect of the stock (not the exchange). The reason exchanges are mentioned is that exchanges have rules about the sorts of stock they will list. But to have tenure voting, you only need one exchange to allow out (like the proposed long-term exchange). And most stocks aren't cross-listed to multiple exchanges anyways.
> How long until there is a secondary market for buying and selling voting rights?
Yes, this strikes me as the obvious problem. The equilibrium is for third party to buy and hold all the tenure-voting stock and then sell stakes in the dividends of the company plus allowing voting by proxy. Basically, the third party becomes an exchange, and all stock effectively has maximal tenure.
This problem is so obvious that it must have been addressed by the people proposing this.
You've essentially just described the current system. Most shares on NASDAQ and NYSE etc. are technically held by Depository Trust Company via its nominee, Cede & Co. [1]. Through a complicated set of regulatory and contractual arrangements, public companies, the beneficial owners of their stock (i.e. the investor at the end of the chain) and each intermediary (banks and brokers, etc.) all maintain a sort of legal fiction that the shares are "owned" by Joe Schmoe, even though all he really has is an attenuated set of contractual rights that flow through the various intermediaries between him and "his" shares held by Cede.
Joe Schmoe does not technically or legally own those shares. Cede does. Believe it or not, you were spot on in predicting that the third party would allow "voting by proxy." That's exactly how Joe Schmoe (i.e. all of us) must vote our shares if we want to participate in a stockholder vote. We can't just show up at the meeting (or fill out the company's proxy card). You send a "voting instruction form" telling your broker how you'd like to vote, and your broker then tells Cede & Co. how to vote your shares at the stockholder meeting.[2]
To address your specific point, tenure voting would surely be based on the tenure of the beneficial owner (i.e. the person at the end of the chain who gets to vote) not the nominee holding the shares in "street name" on the beneficial owner's behalf. This might take some reworking of the arrangements between the brokers, DTC, clearinghouses, etc. (likely needing to be be built into the financial systems that log transfers and ownership, if not already provided for) but would not really pose a significant barrier.
[1] https://www.bloomberg.com/view/articles/2015-07-14/banks-for... [2] https://www.sec.gov/spotlight/proxymatters/proxy_materials.s...
I think this is just optimism, it would be nice to have an actual reason to think this is the case.
I feel like this sentence could be found on the graves of many a failed startup.
Strictly speaking, nobody needs an exchange to implement a corporate voting regime where one's vote per share increases as a function of holding time. You just amend your certificate of incorporation and/or bylaws and, assuming the state in which you're incorporate allows it, it happens.
The trouble is most stock exchanges have rules about voting rights. If you aren't compliant, you can't list with them. A big-ticket IPO, e.g. Uber, Airbnb or Saudi Aramco, might be able to convince an exchange to change its rules. This is an exchange pre-empting that negotiation.
If a quality company listed with these voting rights, there would be nowhere you could buy its shares where voting rights would be different because they'd all trace to the same corporate charter. There might just, at least for some time, fewer places where one could buy them.
(Stock lending would have to be dealt with. It doesn't strike me as a particularly challenging issue to solve, and not everyone has to solve it the same way. The bigger issue is where to sever legal and beneficial ownership. If I have a bunch of LLCs who have held a company's stock since IPO, it might make more sense to sell the LLCs with their voting rights intact than sell out of them. This torpedoes most of the benefits of public over private markets.)
Buying voting power on the long-term exchange isn't free, your capital is allocated. You have finite capital. Your cost for each unit of voting power declines perpetually so long as you hold it, it never goes to zero (free).
You can view the shorting as paying for your purchase in the long-term position, however you could view it that way for shorting any other company just as well. It's meaningless as a premise or issue.
Voting rights are powerful. That's the point of the long-term exchange.
In existing exchanges, going long and short in equal amounts on the same stock simply cancel each other out.
But in a "long-term exchange", taking this same position (or lack thereof) gives me a valuable asset: voting power that grows over time.
- one quote per day - transactions of the day are processed in a random order (using a provable random deterministic algorithm) - shares have to be kept for at least 3 months (Warren Buffet recommends 6 months) before being sold.
When Steve Jobs died, which was obviously an event that would have an impact on Apple's shares, the quotation was suspended for a day, so that people could take their time to evaluate the significance of the event. This was a confession that they knew that the high frequency changes is just noise and that the signal has a lower time resolution of about a day.
The prospects of future profits do not change every nanosecond.
In the hypothetical "one quote a day" market, the quotes will be insanely wide to account for the risk that the natural price of product moves through the quote (with no way to provide pricing/quoting updates).
That said, I like the idea of a slower market, but, much like the debate over Maker/Taker, it will take an entire industry shift and can't be done on a single venue.
Steve Jobs's death was announced after the closure of New York markets on October 5, 2011.
Apple stock shares traded in Frankfurt the next day: https://www.theguardian.com/technology/2011/oct/06/apple-sto...
Apple stock also traded on its primary exchange, Nasdaq, the following day with no suspensions: http://abcnews.go.com/Business/steve-jobs-death-apple-stock-...
It appears that the stock continued trading without incident in all markets following Steve Job's death, until the BATS IPO went haywire in March 2012.
That's what people get wrong all of the time. Most of HFT is not about seeing a trend and acting on it. Most of that is front-running on data obtained from deals with brokerage firms and the likes.
A timestep of a day seems to have all the benefits of regular stock exchanges without any drawbacks.
Maybe the vote strength should instead go with the period of lockup instead? That is, I agree to hold my shares for ten years, so I get ten votes.
Perhaps it could even be slightly nonlinear with respect to the length of time? (years * 1+log(years)) or similar?
Edit: LTSE reminds me of LTCM. Not a great connotation?
I love a lot of the comments here. I think many of the assumptions both in this piece and in the comments are reasonable guesses about what we are doing - but in a lot of cases wrong.
Part of the reason it has taken me more than five years to figure out how to build this company is that we have to be able to:
1. Offer companies full liquidity and full protection from short-termism even if their stock trades on another exchange or they dual-list
2. Build support among many financial system stakeholders and regulators to get approval to do this
3. Build a multi-disciplinary team that is literate in the arcane ways of SF NY and DC all at once
We aren’t quite ready to take the hood off and reveal how we solved all of these problems quite yet. This is stil a sensitive regulatory process and I’m limited in what I can say publicly. But to the extend I can, I’ll try and answer questions in this thread. Please keep them coming.
Thanks for taking a look at what we are building!
*edit: Ah, I found something myself. You're the lean startup guy right? https://en.wikipedia.org/wiki/Lean_startup
"Skeptics wonder whether the LTSE is just another way for tech founders and elite Silicon Valley investors to maintain control at the expense of other shareholders."
I'm sure some economist smarter than me could formalize the issue, but unless the cliff issue is solved, this sort of ownership scheme will not result in shareholders maximizing long term value.
A dominant founder-CEO could mitigate or overpower the incentives described above, but my guess is that any company that successfully gets of the ground using this scheme will replace their tenured shares with ordinary common shares at some point.
Businesses have been moving further and further into short-termism; with the next quarter being the most important metric. This is partly due to investors also being short-term, and voting on the board who will bring the most value in the shortest period.
I'd be interested in taking part in a Long-Term stock exchange, even if it is an experiment at this point.
That's the conventional wisdom, I've heard it my whole life, and I see no evidence of it. AMZN, MSFT, etc.
I've known CEOs who believed it, and manipulated the books to make the short term look better at the expense of the long term. Investors weren't fooled and the stocks would tank.
Suppose you have $1B worth of stock, and 10% of the value is in the vested voting rights that you'd lose by selling it. Instead of selling part of it on the open market, you sell shares in a shell corporation that holds that stock. Surely the discount in ShellCorp's stock price compared to UnderlyingCorp is less than 10%? And the cost of setting up ShellCorp is going to be far less than losing 10% of the value of your holding.
Though it might have the interesting side effect of fund managers who exercise their voting rights being better compensated and staying in their jobs longer...
[1]possible to devise some kind of unusual contractual arrangement where the "beneficial owner" retained formal title to the shares but accepted an obligation to both hand over stock yields and vote in the interests of the other party. But this is something you could effectively ban.
A major reason for that is trying to prevent "gaming" of votes, along the lines of your footnote [1]. Just like right now, I don't think the LTSE proposal would require an outright ban on these arrangements--it just requires the issuer/exchange to make sure the disclosure requirements for "beneficial owners" are sufficient for them to "reset" the voting clock if/when voting power is transferred.
Just because someone has held a stock for 20 years does not necessarily mean they are currently interested in the long term. But, it probably points in that direction.
I especially like logistic growth for having slow growth at the start and end, only growing quickly in the middle.
[1] https://www.khanacademy.org/science/biology/ecology/populati...
Reducing the complexity of the real world -> If only shares held for a long term have full rights, you will obfuscate how you pay for those rights. either the stock will have a depreciated market price to what it 'should' trade at or the voting rights will be acquired through rent seeking by long-term holders.
This has been discussed already on HN, and I believe it's a bad idea.
All that would do would be to create two kinds of shares : the normal ones and those with high voting power. The market would then want to price them differently, and if you want to prevent long-term owners to sell their shares (for instance if they want to enjoy the increased value), then you are doing some kind of capital control.
It's just a bad idea. In a free country capital can be bought and sold : if you give voting rights to someone, he should be able to sell them, which would probably defeat whatever purpose you had when you gave those rights in the first place.
As is said in the 1981 movie "rollover", capitalism is like a force of nature : you can try to fight it, but in the end it always win[1]
And even if somehow you succeed, you would have created capital that can not be bought nor sold, or can only be bought and sold from and to a particular category of investors. You would have introduced a bit of communism in the system (in the sense that in communism, buying or selling capital is forbidden). I guess some people will be happy about that, but I won't.
Now, how well that mission is fulfilled is another thing. The reason I note vanguard specifically is because of the current activist spat between P&G and Nelson Peltz/Trian Partners. Of the top 3 holders (vanguard, black rock, state street), only vanguard voted against the activist shakeup.
I guess I'm just having trouble seeing the difference between giving a bunch of small investors more power, vs a large amount of krill with similar goals making up a whale the company can't ignore. It seems the tenure setup complicates a lot without immediately perceptible benefit, at least to me.
You should check out John Bogle's "Clash of Cultures" (founder of Vanguard), he discusses this problem at length.
In general I'm inclined to agree with you though. This thing has a lot of hype around it because it's backed by Eric Ries, the "Lean Startup" author, but I don't really see a problem with the NYSE/Nasdaq in their current form. People overlook the liquidity, depth, and other benefits of such well-run exchanges; it's not at all clear to me that an average investor would be better off on this "long-term" exchange, where I'm sure volumes will be a lot lower, and bid/ask spreads will be wider than on a "bad" exchange with many "short-term" players, who, as a side-effect of their actions, create tons of liquidity for small-potatoes investors.
Frankly, I don't understand the point of this at all. There's nothing stopping a long-term oriented investor from holding shares a long period of time in today's markets. And there are real risks of corporations being too long-term focused. The existence of Amazon, at a minimum, should show that companies with 10-20 year investment horizons are tenable under the current system.
- Suppose an 18 year old and a 80 year old each buy a share of company XYZ's stock. Whatever their goals might otherwise be, the 80 year old might quite plausibly have a different time horizon expectation for returns than the 18 year old. If both choose to buy the same stock, they must both believe the stock is a good investment for their respective time horizon goals. Maybe it will be, maybe it won't be. In both cases, someone else sold each of the shares they both bought. The person who sold the shares had deemed the stock a not-so-good investment compared to other options and wished to liquidate.
- Now, suppose that we add a day trader to the mix, who also buys a share because she thinks that company XYZ offers a good investment based on her specific time-horizon goals. The demand she induced on the available stock helped to support the validity of whatever the current price appears to be. By being willing to buy, she helped create a market for the 18 year old and 70 year old to sell, should one of them change their mind about the stock.
- Now imagine we have 1000 day traders, 1000 18-25 year olds, and 1000 70-80 year olds participating in the market for this stock, with some buying and some selling every day. Due to all the transactions, we have high levels of liquidity for the stock and low "inventory risk" associated with holding the stock in inventory as a market maker, and thus lower spreads. Market maker spreads are a function of risk, which is correlated with supply and demand. The more supply and demand, the less risk there is to holding inventory.
- Now suppose we decide we don't like anyone who wishes to invest on a less-than-10-year time horizon. We determine that they are acting to incentivize the company to focus only on short-term profits. So we pull some strings and simply kick out those investors and limit investment only to those promising a long-term view. Now, there is less demand for shares, making them cheaper and limiting XYZ company's ability to fundraise. With less capital, XYZ must rein in its growth projections.
- What good were those projections anyway if they were based on short-term investors' dollars being available? Wasn't the capital invested by short-term investors likely to disappear at the first sign that short-term results might be floundering? How can a business adequately plan for the long term if it is distracted by the need to fundraise from such a fickle lot?
- The answer is simple: If a company's business activity is focused on long-term goals and long-term thinking, then it will attract like-minded investors. Like the random walk of day to day stock price, day to day information and speculation will result in short-term transactions occurring, but those transactions benefit the firm significantly as they provide an excellent price discovery mechanism. The day-to-day price will also reflect both short-term and long-term industry-wide shifts, and this will be true both in a long-term constrained exchange and an unconstrained exchange. If the firm is doing wind farms and has a 30-50 year view, and then suddenly a company doing solar comes up with a 100x efficiency improvement, that is going to impact the long-term viability of wind tech, as it should.
While I agree that firms embodying short-term thinking is a problem, the market mechanism offered by the exchange is not the problem, the problem is that executives and employees are generally given predominantly short-term incentives to care about. Imagine the following:
- Instead of ISOs issue employees a basket of different time-deferred options, so that each employee gets his/her comp incentive spread over time.
- Instead of giving the CEO shares of stock, give the CEO both present and future shares, and leverage the future ones to the point where any bias the CEO might have had toward short-term thinking is washed out by the appeal of the longer-term incentive. Any hypothetical business results can be used to preview what the CEO would earn in each scenario. If the owners of the company want long-term results, let that be the way the CEO will make the most (time and risk-adjusted) money.
Just as $100 now is worth more than $100 next year to any rational person, the comp incentives for future-looking payouts would need to be more generous in order to impact behavior in a comparable way. They would also need to be invulnerable to termination, since being worried about getting terminated and losing some or all of one's stock is a big disincentive for long-term thinking. The employee should be incentivized to act as if the role is a great fit and he/she will be there for the rest of his/her career, even though we all know that is highly unlikely if not absurd.
I think the ideal scenario for employees including the CEO would be a daily payout of cash salary, plus a daily payout of some basket of immediately vesting, future-weighted non-salary compensation.
In startups, this would look bad to the accountants who had to account for the future-weighted stuff in terms of some mythical hockey stick graph, but without it there really is very little incentive to care about the future in any non-unicorn startup. Big companies manage to create longer-term focus on retaining employment and benefits, and thus end up with a lot of 9-to-5'ers but do a terrible job of preventing organizations from doing repeated short-term-oriented fire drills. Unicorn startups create strong future incentives, but those immediately disappear once the company stops being a unicorn (or the handwriting on the wall suggests it might).
It should also be noted that startups are almost by definition not long-term in nature. The seed investors need a buyer so there needs to be a series A, and the series A investors need a buyer so there needs to be a series B, etc. It's a sales process that (when it works as intended) results in an IPO where each phase of investors get a nice leveraged payout when an IPO occurs, but the whole ecosystem is meant to create that IPO payout, which is fundamentally short-term thinking. The sales pitch at each phase boils down to "wow check out this long term win available to you at a discount because the market doesn't yet realize this is a long term win".
I mean, they're certainly not going to raise bigger IPOs on a brand new marginal exchange with no track record and a lack of liquidity, but I'm not sure that's the real aim here. (You might need a new exchange to introduce rules like making key executives immune to termination too)
That said, I'm not sure how real a problem it is: AMZN has a very long term strategy and unusual approach towards margins and its stock is doing just fine. And cynics might suggest that other tech stocks returning unimpressive quarterly figures might actually not have thirty year plans...
[1]or want to be considered that way to justify still not turning any profits as their growth metrics start to plateau
We need more activist shareholders, not a plan to kill off the few remaining.
> The person who sold the shares had deemed the stock a not-so-good investment compared to other options and wished to liquidate.
That's one possible explanation for the decision to sell. The person could also be motivated to sell (a portion) because the current price would lead to a modest return on the initial investment; or perhaps the person suddenly needs cash and decided that a stock (from among several positions) would yield a certain amount of liquidity, ROI considerations will generally not factor into distress sale decisions.
Only to the extent that all stocks, bonds, and investments (in a sense) compete against each other. Thus, selling means that the owner decided that one of the competitors was a better fit. Of course, as you point out, it could just be due to some unrelated cash flow issue.
That's why longer term investments are preferable. It puts the focus on building sustainable value for its owners rather than balance sheet gymnastics.
Most of your argument here is in favor of liquidity, but that's not the issue in question.
You're also mistaking the role of stock exchanges, which are secondary markets. It's rare for companies to issue new shares to raise money. Not only does it send a bad signal and piss off existing shareholders, but its also one of the least efficient ways of getting capital. They'd prefer long-term debt.
I don't think that's the primary point, because the CEO should have an incentive to profit from multiplying the future value of that cash, not simply "wring it out" and get a short-term bonus. I meant to lump in "wringing" with all other perverse-incentives for management that a short-term incentive structure creates.
> That's why longer term investments are preferable.
In the same sense that it's better for an employee to receive a single paycheck for the entire year on day 1 of employment. That is not necessarily realistic. If investments were not reversible there would be a lot less of them, just as there would be fewer hires if the entire salary had to be paid on day 1.
> It puts the focus on building sustainable value for its owners rather than balance sheet gymnastics.
Building sustainable value? There are a lot of assumptions baked into that idea. One person's sustainable is another person's "safe" course of action and another person's definition of greed. Suppose someone is starting a restaurant and expects it to be profitable starting in year 10. Most people would consider that foolhardy. Is it? Not necessarily, it depends on how profitable it will be. Notably firms like McDonalds were profitable fairly rapidly but grew in scale significantly over time. Where did the tradeoff between sustainability and short-term greed occur? Arguably early investors were not greedy enough, since the firm had to resort to franchising to fundraise.
> You're also mistaking the role of stock exchanges, which are secondary markets.
I am not sure how the Long-Term Stock Exchange will work, but my point is that simply restricting the behavior of firms that join the exchange will not necessarily change the behavior of that firm's employees, except to the extent that investors/owners are able to create long-term incentives.
What prevents me from selling my vote, without technically selling my share?
There would probably be unintended consequences galore but it would interesting to see if it helped preserve culture and avoid the "it was better in the early days" syndrome.
This is the exact kind of experimental BS that lead to the derivative bubble.
As in: Do not worry about quarterly profits but longterm success
We should open gambling shops for those who want to day trade or deal in Stock options because that is all that they are doing.
The only stock market that promotes long term growth and profitability of businesses is one that awards long term investment.
If you think options (your example, not mine) are somehow inherently nothing more than gambling, it’s because you don’t understand how options work. Options are one of the least exotic and most straightforwardly useful securities.
And I'd say actually stock trading is the high stake gambling. If you increase the gambling sizes too high with card games etc, the public will believe it's unserious. But if you put it in a context of business, suits, and skyscrapers then it seems serious enough. That's why you cannot just make Casinos with bigger stakes and instead need to rely on that farce.
