It's fascinating that the financial system has evolved this kind of layered abstraction (humans owning stocks is a fiction maintained by brokers owning stocks, which is a fiction maintained by DTC owning stocks, which is a fiction maintained...) reminiscent of hallowed engineering kludges like TCP/IP. Its especially interesting since, unlike data packets, stocks are purely an abstraction to begin with, but the systems around them have become sufficiently complicated that it can't function without this kind of structure.
A blockchain likely wouldn't help this issue either- high-speed traders would inevitably be dissatisfied with blockchain latencies and re-invent brokers that abstracted over blockchain transactions at a faster pace. These brokers would wind up causing bureaucratic meltdowns and become managed by some overarching structure similar to the DTC. Etc. If anything, a blockchain-based system would become more complicated, because it reduces the task of adding another financial sub-mechanism to an engineering problem.
Something about large distributed systems of non- or imperfectly-cooperative agents breed complexity. (There's probably already formalized versions of that principle, but none are presently coming to mind.)
It reminds me of the last wave of distributed P2P filesharing, c. 2000-2005. First we got Napster, which realized that by taking advantage of the bidirectional nature of TCP/IP, we could distribute copyright infringement so widely that it would become impossible to enforce. Then some techies at NullSoft realized that you don't actually need a central server for discovery at all, you can broadcast the existence of and metadata about files throughout the network for discovery, and put out Gnutella. Lots of excitement followed, with many people of that era believing P2P would be the Next Big Thing (among people working on this were such folks as Travis Kalanick of Red Swoosh -> Uber, Mark Zuckerburg of WireHog -> Facebook, Friis & Zenstrom of Kazaa -> Skype -> Rdio, and Robert Tappan Morris of Chord -> YCombinator).
And then folks realized that Gnutella was slow. Really slow, because folks on transient dialup connections in Estonia were critical nodes in file discovery. So they created the idea of super-peers, where the protocol was adapted to realize that some nodes are more equal than others and route requests through nodes with known-good connections. Then the next-generation P2P network (BitTorrent) decided that it was easier just to rely on HTTP for metadata exchange and went to centralized trackers, and the ecosystem that grew up around BitTorrent realized branding & centralized search engines were important for non-technical users and we got big torrent search engines like ThePirateBay and Mininova.
Eventually, the market seemed to settle on convenience & performance over distribution, and the real winners in the mass market were DropBox, Google, and Apple. There's probably a lesson in there, but as someone who's been fascinated by P2P technologies since high school and wasted a lot of time thinking about the problem in college, the lesson is pretty depressing. If hierarchy, market concentration, and single points of failure don't already exist, they will be reinvented.
> Then the next-generation P2P network (BitTorrent) decided that it was easier just to rely on HTTP for metadata exchange and went to centralized trackers, and the ecosystem that grew up around BitTorrent realized branding & centralized search engines were important for non-technical users and we got big torrent search engines like ThePirateBay and Mininova.
Followed by those trackers getting taken down, we went from distributing .torrent files over HTTP, to distributing magnet links and getting the torrent metadata over DHT.
Yeah, Bittorrent has actually gotten more decentralized in recent years, both on the tracker front and on an increasing number of Torrent search engines being small operations.
I just find it sad that apparently the only reason that things tend to get more distributed is to evade some powerful authority. I wanted distributed systems to become mainstream, because of their freedom, equality, & competition benefits, but it appears that when given the choice, the mainstream would rather play kingmaker and live under centralized overlords.
> Yeah, Bittorrent has actually gotten more decentralized in recent years
Only due to sustained pressure to keep it decentralized. If TPB was acquired by Google and rebranded to 'Google Bay', bittorrent would be just another Google fiefdom, and be as entrenched as Docs or YouTube.
>I wanted distributed systems to become mainstream, because of their freedom, equality, & competition benefits
Unfortunately you're in the vast minority of people who understand what distributed systems are, and how to connect them to anything as abstract as freedom, equality, etc. Most people just want an easy-to-remember, easier-to-use, not sketchy looking way to consume content. Profit-seeking companies are simply better equipped and more motivated to provide that service than the open-source community is, because they don't have to worry about freedom, equality, and certainly competition.
You forget that the mainstream had no choice. The old centralized authorities fought and fought hard.
As an older user I'm surprised you conceded this point so quickly by calling it copyright infringement. These are the same guys who made CDs cost magically more than cassettes, stood at every juncture against moving society forwards and have constantly pushed American copy right life higher because they can afford the lawyers normal people can't.
People didn't give up anything - they lost something they didn't know they had because media firms beat them.
But once these kinds of distributed schemes are developed they're available for other things.
The real problem is any time you develop a system a government doesn't control they can always shut it down by convincing the average joe that it's just being used for child porn.
Yup. Same with Git. Nobody uses Git in a truly p2p fashion.
Distributed systems are useful for a variety of reasons, but so is authority. Most successful systems seem to use a distributed p2p system because it adds useful functionality to a system that will still ultimately have a master server.
Interesting that you wrote Spotify out of that narrative. They were a really interesting early take on P2P there for awhile too, keeping legality and centralization but leveraging the technology for increased quality of service. It's a large part of why they're the market leader now. It's not like the idea of a subscription music service was novel, their execution was unusually good as a result.
> If hierarchy, market concentration, and single points of failure don't already exist, they will be reinvented.
From another point of view, if at least one point of responsibility does not exist, it will have to be reinvented. There have been plenty of times when I can't download something because, while I can find the torrent on a tracker, nobody is actually seeding it anymore. Sometimes nobody has been seeding some obscure file for years.
Nobody in the distributed protocol is responsible for keeping up old torrents, so nobody actually does. Then it becomes easier to go as Netflix or iTunes for an unpopular old movie than to torrent it.
I'm pretty sure this happened with Iron Sky when I wanted to watch it.
There's a book called "The Social Construction of Reality." Some of it is a little difficult to grasp as it gets into a lot of social science elements, but the basic gist is that everything in our societies are abstractions we have to believe in collectively.
School systems, justice departments, police departments, et. al. don't really exist. They exist because we believe they do. Enough people believe money system works that we can trade money in exchange for labor, potentially adding value to something and building capitol. You can chose to believe such things don't exist and murder 10 people, but enough people believe those structures exist that you'd quickly be put in a prison, or at least a mental institution.
Money and markets are one of the most interesting abstractions of our time. I highly recommend Debt The First 5,000 Years, in which Graeber argues that the earliest forms of money in human history were credit based (not barter like you learn in high school). Wealth was always an abstract belief, and hard money (like coins) came about directly through war (conquerors had to tax areas they took, paid their soliders with coins and where thereby supported by the regions they held as the people were forced to give goods to solders in order to pay taxes) and markets cannot exist without states.
Money is useful because it allows for delayed reciprocity. Delayed reciprocity can help overcome environmental uncertainty for the individual human that next to zero other animals can benefit from. From there you get the productivity of networks.
I sometimes wonder what the future of money will be if AI takes off - will non-human autonomous intelligence have a use for money, for trade and store of value?
AI requires energy in order to function. I've seen a handful of sci-fi scenarios where money is replaced with energy, and units of energy are traded and stored just like money. The second law of thermodynamics even ensures a certain amount of inflation.
The irony is that if you were to build a securities markets from scratch as an electronic system, blockchain architecture for the ledger is one way you could absolutely guarantee that the authoritative record would only be eventually consistent with microsecond trades people actually place, and brokers' own independent records would still be absolutely essential to determining who owned what when a particular acquisition was allowed to go through.
There's no benefit to trustlessness in settling a transaction when you're still reliant on a counterparty to actually make it for you, especially not in a situation like the one in the article which begins with legislation that means the regulator can determine if and when a takeover is allowed to go through. Even if it could settle transactions at market speed, there's not really much point in aiming for a distributed ledger if one party's legal status means they must be given sufficient control to hard fork it anyway.
Ethereum's raiden network can achieve market speed while maintaining the property that an exchange happens or it doesn't (a single transaction can contain the transfer of both assets being exchanged) the way it works is that transactions are made but not immediately submitted to the blockchain. If a new transaction happens it is designed so that the later transaction if submitted prevents or even undoes all previous transactions on the same channel. Combine that with funds held in escrow (on chain) and a challenge period and you have a way to transfer funds back and forth at communication speed rather than blockchain speed and if there is a dispute or the trading parties wish to go their separate ways everything becomes finalized to the chain.
In this model there would be the equivalent of brokers. These are parties who are willing to act as nodes in a network of buyers and sellers. These brokers do not take ownership of user funds though. They do have the ability to refuse to act as a relay for whoever they want to refuse but they don't have the ability to confiscate funds, do fractional accounting or prevent users from using another note to rout their transactions through.
These entities could also be anonymous because there is no need to trust them but they could also be identified and only relay transactions for KYC compliant users.
> blockchain architecture for the ledger is one way you could absolutely guarantee that the authoritative record would only be eventually consistent with microsecond trades people actually place
There are architectures that can reach consistency in seconds rather than minutes. And transactions requiring seconds rather than microseconds could potentially represent a feature, not a bug.
As for things like dividends, with a distributed ledger, the company owning the stock could issue a dividend to everyone who owns the stock at time T, and meanwhile anyone who owns fictitious borrowed shares can take their claims up with whoever claimed to buy/sell a share without entering it into the official record.
Legal restrictions against certain transactions (such as mergers or acquisitions) wouldn't necessarily prevent the ledger from serving as a purely financial record. They'd just make it more difficult to use that record for shareholder voting and other questions of control.
Bitsquare, BitShares are good examples of a decentralized exchange.
> There's no benefit to trustlessness in settling a transaction when you're still reliant on a counterparty to actually make it for you
The whole point of a blockchain is that you don't rely on the counter-party to actually make the trade for you. The exchange happens at the exact same time on a blockchain.
> if one party's legal status means they must be given sufficient control to hard fork it anyway.
I don't think hard fork is the right concept here. Hard fork implies an entire network change; I think what you are talking about is the ability for a company to issue more shares, etc... They could be given this control through smart contracts.
As my banking law professor said on day one of his class, money started when someone traded a seashell for a coconut. It's all abstractions, until you get to the coconuts.
That is so over simplified that it is basically nonsense. There are properties of ideal money which explains why gold, fiat, and currencies all have value.
The fact that so few people seem to know this is a big reason why money continues to baffle people. Most haven't been able to figure out the real underlying principles that give a dollar bill value, they just know that it does.
Gold is heavy, corrosion-resistant, shiny, pliant, and scarce. For those reasons, it makes a good coin. But you can't eat or drink a coin. Its value is still based on being able to exchange it for a coconut.
Why don't you take a break from patting yourself on the back and explain to us simpletons the inherent value of a currency?
The inherent value of ideal money should be obvious. It allows the universal exchange of time-shifted value. It is so fundamental that from cigarettes to cell phone minutes, groups of people tend to gravitate towards some combination of currencies, if if they lack in some properties of ideal money.
A shared ledger of value does not help someone on the edge of biological survival. Once the most basic needs are met, money happens one way or another.
"Distributed processing is not only more complex to implement but also turns out to be less efficient in most if not all cases" -- not sure where I got that one. Google tells me it's not literal, or NotOnTheInternet(tm).
>A blockchain likely wouldn't help this issue either- high-speed traders would inevitably be dissatisfied with blockchain latencies and re-invent brokers that abstracted over blockchain transactions at a faster pace.
It's funny you mention that, because that's exactly what's already happened. Major bitcoin exchanges are internally handling matching and settlement for trading BTC<=>fiat, and part of it is because people do high-frequency and algo trading and need the lower latencies and fast execution, and certainly can't wait for confirmations to know if they really bought/sold the BTC.
I don't know if exchanges end up posting the moves of BTC to the blockchain, or if it's all just a big balance sheet internally and BTC only really moves on the blockchain when you withdraw/deposit. Probably varies between exchanges.
stocks, or shares as they are called in the article aren't that abstract. If you own a business you have ownership of the assets and if you own 50% of the shares you own half of them and some others own half. Unless you are arguing owning anything is an abstraction?
Blockchains wouldn't help? You would actually own the stock in minutes. Anyone wanting to buy stock would have it settled in less time than it takes to order stock through e-trade. How long does it take to actually own stock through DCT?
Instead of having chain of trust through all these different entities trust would be instilled in a blockchain. I would prefer one source of truth rather than truth that is built up through a chain of private intermediaries.
As for the high speed traders they would depend on layers built on top of a blockchain that allow them to transfer ownership quickly while still using a blockchain as an eventually consistent record.
The solution to the problem he ends up with seems pretty easy to me - this is just counterparty risk:
When you lend your shares (or let them be lent on on your behalf) there are counterparty risks. You charge interest and accept collateral as compensation for these risks. Usually these risks are gone after the shares are returned or the position closed and settled out - but not always. Tracking down the short and making him cough up the extra $2.74 is the broker's job. If the broker can't find him, then if it was a case of a normal margin account the broker is on the hook. If it was a case of the client directly accessing the stock lending market then the broker is probably (fine print time!) not liable for the counterparty failure.
No, a "blockchain" wouldn't help. It wouldn't help finding the holders of three years ago. Also, putting all stock transactions for the entire market into one blockchain would have huge traffic and synchronization issues. All the players have to agree on transaction order. You'd have one giant file that was petabytes long. If you used one of those schemes that "summarizes" the blockchain, you wouldn't have an authoritative record of who owned something years ago.
Bitcoin only works because transactions are few and slow transaction commit is acceptable. Most schemes for scaling Bitcoin involve "off-chain transactions".
DTIC predates high-speed trading. It was designed when it was assume that if you bought a stock, you'd probably hold it for weeks or months, not seconds or minutes.
Also, with DTC there is a continuous net settlement system that basically nets a brokers transactions together for the day and basically lets them know which securities are credited or debited from their account and how much they need to pay or receive for the day. It helps solve the issue of high speed trading and nets each brokers obligations out at the end of each day. In its simplest form if a broker had two customers and Customer A sold a share of AAPL and Customer B bought 2 shares of AAPL. The CNS system would basically net those two transactions together and calculates that the broker is going to receive 1 share and that they will pay x amount of dollars.
There is definitely room for improvement because sales don't settle till T+3 (however the settlement cycle is shortening to T+2 as of Sept 5th)
You're assuming the blockchain would work similar to Bitcoin, where every 'trade' (transfer) is a settlement, written into the blockchain. While this is the holy grail, you've rightly pointed out issues with high-frequency trading, synchronization across nodes, etc. The current system does T+3 due to this. A 'blockchain' could conceivably do better - even if it doesn't record every single trade like Bitcoin, it might record transfers at better granularity and better frequency.
What's wrong with off-chain transactions? Off-chain transactions have the same value/worth/weight of on-chain transactions. Both transactions are worthless before "settlement" (which is 1, 3 or 6 confirmations depending on how careful you are) but after settlement they are practically the same.
Actually, Mr. B borrows from a broker. If they are shares held by the broker in inventory, then the broker is Mr. A and obviously your description is wrong.
But even in other cases it's wrong: the shares may be from Mr. A's margin account with the same broker, in which case the margin account contract included the right for the broker to lend the shares; so Mr. A has already been asked about loaning shares and accepted.
Similar analysis can be extended to the case where Mr. A is either another broker lending inventory shares to the broker lending to Mr. B or where Mr. A has a margin account with such a broker.
No one is lending shares unless they own them or have a contract with the owner where the owner has agreed to allow such lending.
Securities in a cash account can't be lent out by the broker without the written agreement of the customer. The necessary language could theoretically be put into the standard account agreement, so if you care you should read it. However, it is not common business practice to include that in retail customer account agreements. Also, the broker is required to notify you whenever your shares are borrowed, and this requirement cannot be waived by the agreement. So if you haven't been notified about lending activity, your broker is not lending your shares. The same requirements hold for fully paid securities held in a margin account, so even if you have a margin account, if you're not actually borrowing money from them, they're not lending your shares without your knowledge.
> If they are shares held by the broker in inventory, then the broker is Mr. A
except then Mr A does not own the shares, there is in fact a Mr Ax who lent Mr A's shares to Mr B.
> No one is lending shares unless they own them or have a contract with the owner where the owner has agreed to allow such lending.
as others point out, this is going to be in the small print of the brokers account
However, I think Mr B is still fraudulent as Mr C bought some shares that were not for sale. I guess shares are supposed to be fungible but in some way they are not exactly - if the company has a share register, and shares are numbered then what number does Mr C get? If Mr C is offering to buy future-shares then he knows that he doesn't have a share today but that isn't what happened, he understood that he has bought something not an option to buy.
> I guess shares are supposed to be fungible but in some way they are not exactly - if the company has a share register, and shares are numbered then what number does Mr C get?
Currency is also numbered. If I lend you $20, it's not fraud to give me a $20 back with a different serial number on it. It's not even fraud to give me back two $10s. Adding those kinds of restrictions would defeat much of the point of lending you $20 in the first place. It's also not fraud to spend it at Mr C's eatery for lunch, and hope you can replace it later - in fact, that's the whole point of borrowing money.
> However, I think Mr B is still fraudulent as Mr C bought some shares that were not for sale. I guess shares are supposed to be fungible
The entire idea of margin accounts, stock exchanges, etc., is that shares of the same class in the same firm are, in fact, absolutely and perfectly fungible; thats the agreement you make when you participate in those systems. If that wasn't the case, you'd have specific bid/ask prices for individual shares.
> if the company has a share register, and shares are numbered then what number does Mr C get?
The one that was borrowed, which must be replaced by the borrower with an equivalent one at the end of the specified term, per the terms of the contract under which it was borrowed (this is true for all the borrowers in the chain, however deep it may be.)
Most broker agreements allow them to lend out your shares without your consent or knowledge. It actually works against the long stock holders, but it does help brokers to lower their customers' transaction fees.
Even worse is Naked Short Selling, a practise where short sellers don't borrow the shares in the first place. This artificially creates shares and dilutes the value of the stock being shorted. Although illegal since Reg SHO was introduced, it still goes on due to lack of enforcement and comically low fines - google "Reg SHO Violations".
Some public pension funds forbid the lending of the shares they own for shorting. The minimal interest gained by lending shares is not worth the downward pressure to the stock price created by the short which undermines the asset value.
> Most broker agreements allow them to lend out your shares without your consent or knowledge.
This is straddling the line between completely untrue and highly misleading. For cash accounts, brokers cannot lend your shares without a written agreement allowing it. Although the standard agreement could include agreeing to a securities lending program, this is not common in retail brokerage contracts. Additionally, even if that clause was in your contract, they have to notify you whenever they lend your shares. That right to notification CANNOT be waived in the agreement. So if you have a cash account, no one is lending your shares without your knowledge, period.
Even for margin accounts, the same requirements hold for fully paid securities. So if you have a margin account, but you're not actually borrowing any money, no one is lending your shares without your knowledge.
The only case where your broker might lend your securities without your knowledge is when you have a margin account and you are actually borrowing money.
You didn't mention whether it was a cash account or a margin account, or if there's an exception for fully paid securities. If it's a margin account, that is indeed how it works for non-fully paid securities. If it's a cash account, or there's no exception for fully paid securities, regulators will probably not view that agreement favorably. You can file a complaint at https://www.sec.gov/complaint/tipscomplaint.shtml. In my experience, they actually read and act on complaints. (Well, at least small easy to investigate ones... ones requiring a lot of investigatory work like the Madoff case are a different story.) The relevant regulation is 17 CFR §240.15c3-3, paragraphs b(1), b(3), and b(3)ii. (http://www.ecfr.gov/cgi-bin/text-idx?SID=f07570958d348a3f75d...)
> even if that clause was in your contract, they have to notify you whenever they lend your shares. That right to notification CANNOT be waived in the agreement.
>> The minimal interest gained by lending shares is not worth the downward pressure to the stock price created by the short which undermines the asset value.
yes - if someone wants to borrow, shouldn't the lender demand a fee? At many brokers there is a program to route a portion of that interest back to the client.
also - the interest rate is often negative : ie the lender PAYS THE BORROWER to take the shares. The borrower posts cash collateral that the lender gets to earn interest on...
The pension fund thing is interesting, because interest on shares is linear with respect to number lent, while downward pressure on asset price is quadratic (number of shares * per-lending downward pressure).
I believe the logical conclusion to this scenario is that Mr. B suspects the stock price will drop. He has borrowed from Mr. A, and promised to give it back later. When the stock price drops, Mr. B re-purchases a share at a price lower than what he sold it for to Mr. C.
Mr. B returns the share to Mr. A, and pockets the difference. This isn't fraud, it's relatively common.
Naked shorting is practically legal, and basically unenforced. The seller only has to claim that there was "good faith reason to believe" that shares could be reasonably acquired within the settlement period (3 days). See Goldman Sach's infamous "Easy to Borrow List"[0].
Coordinated naked shorting attacks are real and legal. Flood the market with false shares and tiny lots of low-asks. Rapidly drop the price down to capture the easy stop-losses that retail investors might set. It is fool-proof because you know those shares can be obtained at a certain price (hedge-funds and market-makers can see the stop-losses). As soon as you acquire the stop-loss shares, pull off the selling pressure and use the shares just obtained to fulfill the short-contract. There is no borrowing.
I've had my stop losses trigger at the daily low for a share multiple times. It basically touched my stop loss then bounced back up. I think using conditional orders, which some brokers support makes this less of an issue.
- Mr. A intentionally lent out the stock (not fraud - there's no reason to lend out the stock other than to enable this kind of scheme AFAIK, Mr. A will generally not be an ignorant and deceived party here)
- Mr. A signed some fine print allowing his stock to be lent out for such schemes (not fraud)
- Mr. A signed some fine print saying some proxy (his broker?) technically owns the stock and they can lend it out for such schemes (not fraud)
- Mr. A owns his stock outright, and signed nothing allowing it to be lent out (step #2 isn't called "borrowing" in this case, it's called "theft")
clort, Thanks for raising this issue - there is an informative discussion in the responses. You might not want to be so fired up about fraud being the explanation for a thing you don't understand very well. Ignorance is perfectly fine - but assuming malice as the explanation is not going to serve you or this forum very well.
Usually this is part of the fine print when you sign up for a margin account. By the margin agreement, your shares can be lent out at any time. Don't like it, use a cash account.
Presumably, this is the premise behind T0 [1] in that it would allow beneficial owners, instead of brokers, to be able to lend their securities to short-sellers. In that case, there is no problem of tracking ownership - if you lend your shares to the short-seller, you're no longer the beneficial owner, and any agreement, like paying of dividend, has to be worked out between the two parties without involving a broker.
I agree that the problem here is the basic concept of loaning shares of stock. It's a practice that just doesn't make sense except for people playing games. You could say the ability to bet against a company isn't a game, it's a strategy. But the whole concept of stocks is primarily shared ownership, not a casino. Short selling could be banned but don't hold your breath.
My understanding is that short selling is still a useful tool for signaling that a company is overvalued. Without short selling we would see even more asset bubbles and then eventual crashes. Plus short selling allows for hedging strategies which allows investors to, well, invest more, which is generally a good thing.
Short selling can't really be banned without mangling the right to enter contracts. There's too easy of an effective substitute - start writing contracts that have the payments to the same parties as shorting a stock.
You make a contract that's functionally equivalent.
You think the judge is going to say "oh, well it's not _exactly_ short selling... YOU GOT ME!"? Intent is everything, those sorts of tricks don't work. You're up against judges and other humans on this sort of thing, not some AI you're trying to trick.
That contract is called a CFD and I'm not sure it's legal in the USA, but there are other synthetic forms of shorts that are. They do not have to follow the same rules as short sales such as respecting the uptick rule when it is in effect.
I understand that synthetic shorts exist, I was speaking in the hypothetical that the SEC decides "no more short selling, period."
If there was a rule against short selling, I imagine that synthetic shorts would also have those rules applied to them unless there are enough differences to qualify them as "not short selling".
Though I guess the uptick rule already doesn't apply, so they're already seen as different in some sense?
practically speaking - short selling helps the market find the right price for the security. this is a vitally important feature of markets.
philosophically, shorting is an emergent feature from basic property rights. I have a thing, you want to borrow it, we're both consenting adults and negotiate an arrangement.
A naked short seller doesn't need to deliver the share(s) at the time of the sale, but must deliver according to the terms of the contract, whatever those may be.
Kind of like selling things online. You take the cash, then you ship the product. Or like the extreme form of "Lean Startup Method" -- sell the product, then build it.
The problem with naked short selling is the ability for rampant, cheap, and extremely profitable manipulation to cause "artificial" price-drops. There is basically no penalty for failure-to-delivers and companies share price can be gutted while no real shares have been traded.
If you own an equity ETF in a retail brokerage, you actually own a claim on a claim on a claim on a fund that owns a claim on a claim on a claim on corporate stock which is itself a secondary or tertiary claim (behind debt and/or preferred stock) on tangible and intangible assets.
It is a common & legal practice for the fund to lend its claim on a claim on a claim on corporate stock to other parties, for a small amount of interest, to help reduce its fees. See https://personal.vanguard.com/pdf/ISGSL.pdf
If the potential for fraud and error in this system doesn't give you a bit of a pause, it probably should.
Why not both.. based on Chinese/Indian/Russian/German central bank action I do find the argument that gold is now a "worthless, obsolete shiny rock" unconvincing & I think a good case has been made for a modest allocation to physical PMs as insurance against tail risks. The goal is not to "outperform everything else" during normal market conditions but rather to limit worst-case draw down in the unlikely event of a major and sustained equity collapse, currency collapse, etc.
I read an article recently on "Patterns for dealing with uncertainty". It never ceases to amaze me how often these concurrency patterns apply to more antiquated business models.
Taking a company private is when a company buys back all the publicly traded shares, so that one can no longer purchase shares in the company on a publicly traded market. Usually a company doesn't have enough cash to accomplish this, so they take on additional debt or outside investment to afford buying all of the publicly available shares.
You set a price high enough and make an offer to all the shareholders, who might or might not want to sell to you at that price. And then there are complex rules about how many of them have to accept and what happens to those who didn't want to sell.
There are usually shareholder agreements in place that not every single shareholder has to agree to a acquisition. Otherwise, you'd never be able to acquire a company if just one shareholder, holding one unit of stock said "no".
I think in most jurisdictions there is a law that enables a supermajority shareholder to take possession by a forced buy-out of remaining stock, at a "fair price". Thus a separate shareholder agreement is not necessarily required.
This comment makes no sense at all. Dole didn't offered anything! In case someone may be getting confused about the process: Murdock (who happened to be Dole's chairman and CEO) offered $12 in June (when the stock was trading at $10.20) for the shares he didn't control already. He raised his offer to $13.50 in August.
The part that is usually not explained is that there are state-by-state, and company-by-company, mechanisms to compel the left-over minority of shareholders who do not exchange their shares to be "squeezed-out" and paid the same cash value everyone else got. After this all of the shares are held by the private owner and the security is delisted/unregistered from the public markets
Going public means public offering, that anyone can buy its stock at the stock exchange. Taking a company private is the inverse of that: the company is no longer traded at the stock exchange.
Typical, but not the only scenarios are a management buy-out and a private entity offering to buy all stock. To make this work, it is usually necessary to offer a premium price.
"Arbitrage Discovered" about the best/worse life insurance contract ever (whether you're the beneficiary or the insurer), and includes possibly the best financial punchline in an opening paragraph ever: https://www.bloomberg.com/view/articles/2015-02-27/arbitrage...
There were others, but I can't remember them offhand. The Vomitoxin article is the one that put him (well, Bloomberg View really) in my feed :)
> A regular human retail trader could have read the S&P news release on Monday afternoon, had dinner with friends, seen a movie, gotten a good night's sleep, spent Tuesday morning doing research to confirm that American was in fact going to join the S&P 500 and that a lot of index fund money tracks the S&P 500, gone out for a two-martini lunch, had 40 martinis, gotten blackout drunk, woken up in the hospital, spent 48 hours recovering and still had time to buy the stock before it joined the S&P on Friday afternoon.
Was just about to say this. His writing is pure gold. As a techie and not a public finance person, he does an incredible job explaining seemingly very complex topics, and adds some very healthy snark to his analysis.
That's just a feed for his newsletter, Money Stuff. Here's[0] a more complete feed that also includes his standalone articles for Bloomberg View (like the current Dole article).
I'm just glad that the first 10 paragraphs weren't an intimate description of the clothing and mannerisms of the key people, as in most long-form journalism.
Levine is easily the best Wall Street / finance columnist out there, glad to see he's made his way to HN. Which makes me wonder, is there anyone similar writing about the SV / tech world?
Yeah, the market really cocked up here. We should replace it with a scheme where all the stock is actually owned by one central entity and when stocks are traded it directly tracks ownership.
Looking at this as a "free market" vs. "regulation" problem is looking at the entirely wrong dimension. This is "just" a complicated system doing complicated things in a complicated situation. Neither regulations nor freedom, be they the real sorts or the fake rhetorical sorts that are entirely good or bad of either, will prevent that from occurring.
Unless I'm grossly misunderstanding the article, that's pretty much what we already have here. This situation came about because that central entity decided it didn't want to hear about the sheer mass of trades happening with this stock for for a few days.
Market efficiency would pay out a certain amount of money per share and then be done with it. The trouble was caused by government interference in the form of a lawsuit that required paying an additional amount years after the transaction had supposedly been completed.
(This is not intended to be an argument for or against said government interference. I have no opinion either way and it may well be totally great. But this particular problem obviously wouldn't have happened without it.)
> Market efficiency would pay out a certain amount of money per share and then be done with it.
Yes, if real markets were perfectly efficient, legal process that addresses the causes of market inefficiency would be unnecessary.
Of course, markets are only perfectly efficient when a number of criteria are met which rarely all exist in real markets (such as perfect information in the hands of all market participants.)
The problem is that the courts can amend a buyout, which goes against the principles of free market capitalism ..a buyout represents a significant gain above the market price even if the offer is low relative to what it 'should' be. Matt is blaming the wrong target.
There's nothing particularly "free" about being compelled by majority vote to sell your shares at a price you don't agree to either. But, like executives' fidicuary duty not to act against the interests of their shareholders before mounting a takeover bid, it's baked into the rules of the market that shareholders and executives have freely chosen to participate in.
If you don't accept that in the interests of better functioning markets the law allows for both compulsory purchase of outstanding shares in the event of a successful takeover bid and litigation against those accused of ripping shareholders off by running down the value of the company before bidding on it, the principles of free market capitalism allow you to not even think of buying or managing a publicly owned company.
I don't think that Matt is really blaming anyone. He's just saying "Look at this situation that has happened and the oddball problems it has caused. It's kind of weird and no one quite knows how to deal with it."
It also doesn't seem that crazy to me that shareholders can sue management if they feel that management defrauded them.
Voting rights aren't even accurately tracked. People who buy non-existent shares from naked shorters get voting rights. Not too many people can naked short anymore, but I think voting rights also come along when you buy from people who shorted with borrowed shares, yet the people who lended the shares still get voting rights too.
voting rights are certainly tracked - there absolutely are a known number of shares and owners of them. Now, because of trading activity, settlement, lending, failing-to-deliver those shares might not yet be recorded as belonging to the people who think they own them!
shorting does not create new shares in the accounts at the DTC - it does create hypothetical entries in the accounts of the broker's clients. The lender does not get a vote while their share is lent out! The last person in the chain of re-hypothecated shares will eventually (usually after 3 days) be the one true owner of the one true share and has the vote.
there are some special cases that ordinary investors will not encounter where you can actually split the voting rights from the other aspects of the share and lend the share out but keep the vote - but in this case, of course, the borrower can't vote. This sort of thing is administrated by the brokers - and is kind of like what happened in the article where the brokers sort it out among themselves how to reconcile the official record to the client's account states.
That article is really hard to find - no luck! It was written by Bob Drummond for Bloomberg Feb 27, 2006. He is still active and was writing a lot of articles on naked shorting at the time. fwiw
This is what bothers me. What stops someone from shorting and then buying the shares (likely through an intermediary) in order to gain votes. Seems like it would be enough to tip the vote in a close shareholder vote. I don't think there is anything like a negative vote to balance it out as with negative shares and dividends.
It is very likely that the people who know they are casting a negative vote will vote strategically for the opposite of the thing they actually want to happen, thus turning their negative vote into an anti-negative vote.
I don't think that is resolvable unless each vote has an intrinsic auction process wherein each vote is accompanied by a dollar-valued bid, which is what it would cost for you to not vote your shares on that issue.
The costs are ordered, and the cost of the lowest N votes are sold to the N anti-shares of open short positions, and so each short pays 1/N of the total cost. Any vote not cast or cast-by-proxy or explicitly cast as "abstain" is intrinsically a $0 bid for not-voting that share.
So if there are 10000 real shares in circulation, and 4000 shadow shares, and 4000 shadow anti-shares, then 14000 shares are eligible to vote, but the shadow anti-share holders are also on the hook for collectively buying off the proxy for the 4000 least-interested shareholders, and not-voting those shares. If 2000 people don't vote or fail to assign their proxy, and the next-lowest 2000 bids amount to $80, then each short pays $0.02 per shorted share, and the brokers distribute that to all the low bidders, including those who didn't vote or assign proxy.
> What stops someone from shorting and then buying the shares (likely through an intermediary) in order to gain votes.
i don't think anything stops you, but you're going to eat the whole bid/ask spread when you're acquiring these extra shares, then again when you exit the position, plus margin maintenance costs. your plan also assumes that your broker will let you get out the entire proceeds of a unclosed short sale fast enough to get them over to another broker to buy more shares before the market can really move on you.
if your broker will even let you short whatever number of shares you want to do this with, they'll probably just lend you the cash to go long that many shares. which would be a lot easier.
I should start by saying that I agree with your response to the above statement, but would add that while Simple/similar services may not have crushed the banking institutions, they definitely did bring forward a lot of technologies over the past few years that have now become absolutely expected from a bank, which was not the case before services like them came around. Now this could just as much be contributed to natural development of the banks that happened alongside these new banks, but it could be a similar case that where these newer stock solutions may not crush the existing players, they may force the hand of a lot of technological innovation that we may not see otherwise.
> There are little cracks that give us brief glimpses of the abyss below. Why not cover them up with a fresh, cool coat of blockchain?
This is a great example of Wall Street's continued but lessening snark towards blockchain and vicariously Bitcoin. That much of the complex system you know and revere and spent so long learning can be replaced by new fangled technology is still a hard pill to swallow. The snark is a coping mechanism.
I think you are misattributing his snark. In his regular column he has a recurring section called "Blockchain blockchain blockchain" such as in [1] in which he covers how the finance industry itself is trying to apply blockchains to everything. It's the new fad, they are in the Peak of Inflated Expectations [2]. So while it might be true that some bankers are afraid that Bitcoin is going to replace them (I have no opinion on that) the author is highlighting yet another case where blockchain is supposed to easily solve any difficult distributed ledger problem.
As currently implemented, blockchain technology cannot scale to the requirements of Wall St. It simply lacks the transaction volume. That's leaving aside other computation and synchronization difficulties inherent to distributing resources rather than centralizing them.
Furthermore, finance is not a homogenous group of luddites. Blockchains are being actively explored in the industry. There's even a consortium of large banks developing one - they're just doing it without all the decentralized sugar that bitcoin has.
Finally, as others have mentioned in this thread, a blockchain wouldn't have obviated this problem. The primary difficulty isn't identifying the owners of shares from three years ago, it's in correctly finding them and arranging for rightful reimbursement.
I think your characterization of the industry is misinformed and unfair.
Bitcoin's maximum throughput is about 7 transactions per second. Superior blockchain implementations can generally achieve ~30 transactions per second for long term, effective operation.
Nasdaq's daily trades would require over 430 transactions per second. There are tradeoffs to be made (such as block size or integrity), but it's fundamentally not feasible to port our existing centralized ledger to a decentralized blockchain ledger.
This is just Nasdaq. Imagine trying to scale a decentralized blockchain to multiple markets, or to Visa's requirements, which are over 2000 transactions per second.
Your numbers are nonsense. A blockchain can be made to handle any number of transactions per second. It's simply a matter of increasing the number of transactions per block, the frequency of the blocks or both. The trade off is in the increasing storage requirements. The Bitcoin blockchain currently sits at just over 100GiB. This is an insignificant amount of data for a bank. Furthermore, you can reduce the blockchain storage requirements through checkpointing. Every so many blocks the participants in the blockchain can agree to and cryptographically sign the latest balance sheet. All previous transactions can then be archived. IMO, the Bitcoin Core developers shouldn't be focusing on anything but checkpointing right now.
Do you have any evidence to support what you're saying? The research I cited directly contradicts your claim.
You cannot scale up blockchains arbitrarily without making fundamental tradeoffs to increase their performance (for example, increasingly centralizing it).
Increasing the block size may indeed make a coin more centralised but we are talking about using cryptocurrency to replace outdated systems among banks, government agencies and brokers. In this case, it's not unreasonable to assume that the participants could afford to dedicate sufficient storage space to handle high transaction rates. There is no fixed limit on the transaction rate.
The "cloud" is someone else's computer. What are you actually suggesting that would have preempted this issue? The DTC's issue was one of volume, which is certainly a technological issue, but what precisely would "cloud" computing do about it?
By design it is supposed to be centralized, and it would likely be out of the question for the DTC to utilize the computing resources of a private company (especially one for which it owns all or nearly all the extant shares).
The problem is the chain of responsibility:
company -> DTC -> brokers -> investors
With "IPO as a service", the chain of responsibility is instead:
cloud-IPO -> company -> investors
Because of centralization, the DTC isn't as accountable to the company as a cloud service would be.
The other part was about how short selling tossed a huge monkeywrench in the court settlement, one that can't be solved by improved recordkeeping.
Ultimately the solution is to have everyone who had a short position 3 years ago come back and pay a bit more to their partner. But obviously this is problematic for many reasons, first and foremost being that they probably have not been depositing money into a collateral account for a position they closed three years ago. Some may be dead or gone. It's a huge mess.
Why can't they just make Dole responsible for covering payments from missing short sellers? I mean, there is a judgment that Dole is responsible, overall.
In before someone mentions blockchain as a solution (IBSMBAAS).
There already exists a database that works and has been well tested over the past 30+ years of securities settlement.
The issues was the database wasn't updated properly. So if a blockchain was used ti would stand to reason that that also wouldn't have been updated properly
You should read the article, it also mentions and plays down blockchains:
> Would a blockchain fix this? I don't know. A blockchain would make it easy to identify the short sellers, three years later. (That's what blockchain immutability is good for.) But then what? They could still have died, or closed their accounts, or yell.
The issues weren't that the database wasn't updated properly, but that transactions that were closed years ago need to be re-opened. Because of short sellers that means tracking down people who may no longer exist and get them to pay you money that they never planned on owning anyone.
> Because of short sellers that means tracking down people who may no longer exist and get them to pay you money that they never planned on owning anyone.
IMO, the death and disappearance problem is amusing, but the more interesting question to me as a layman is how the agreements are worded between brokers, shortsellers and stockholders.
I may have to review my own paperwork, because I don't recall giving permission to lend out my stock, or yielding my interest in related lawsuits. I've never short sold, so I don't know how the agreement is intended to work. But if they're not on the hook legally, (which seems like they ought to be?) then it seems like it's up to the broker to make me whole.
> I may have to review my own paperwork, because I don't recall giving permission to lend out my stock, or yielding my interest in related lawsuits. I've never short sold, so I don't know how the agreement is intended to work. But if they're not on the hook legally, (which seems like they ought to be?) then it seems like it's up to the broker to make me whole.
The problem here is for the broker, not the person who owns the share. If they loaned it out that's their issue, you'll get your money. That's why the broker is the one making the money on loaning out short shares, they also assume the responsibility.
> The main reason why the brokerage, and not the individual holding the shares, receives the benefits of loaning shares in a short sale transaction can be found in the terms of the margin account agreement. When a client opens a margin account, there is usually a clause in the contract that states that the broker is authorized to lend - either to itself or to others - any securities held by the client. By signing this agreement, the client forgoes any future benefit of having his or her shares lent out to other parties.
"Typical margin account agreements give brokerage firms the right to borrow customer shares without notifying the customer. In general, brokerage accounts are only allowed to lend shares from accounts for which customers have debit balances, meaning they have borrowed from the account. SEC Rule 15c3-3 imposes such severe restrictions on the lending of shares from cash accounts or excess margin (fully paid for) shares from margin accounts that most brokerage firms do not bother except in rare circumstances. (These restrictions include that the broker must have the express permission of the customer and provide collateral or a letter of credit.)" [1]
Neither of the two problems were that the existing databases weren't updated properly.
OTOH, neither of the two seems to be uniquely well corrected by blockchain: the first problem (the "chill" problem) seems to to be correctable by not having the central database ignore updates in certain periods to rely only on peripheral DBs. A blockchain providing a single source of truth in place of multiple different DBs solves this, but so does any single source of truth, or even something in outline like the current heirarchical system of DBs without the central one taking time outs.
The "shorts open at the time were closed long before the decision, and the entities that held them may not even exist anymore" problem is obviously not addressed by blockchain at all.
The difference is with a blockchain system every individual actor pushes in the transactions that update the data, whereas with the existing system you have to trust an arbitrary central party to perform the updates.
The problem with existing systems is that the incentives of the entity owning the asset and the entity responsible for updating the database are not aligned.
If you don't trust the company you're investing in and the securities regulator to record things faithfully on a non-distributed ledger and uphold the law, update privileges to and mutability of the transaction record is the least of your problems when it comes to investing.
The problem with existing systems is that the incentives of the entity owning the asset and the entity responsible for updating the database are not aligned.
Sure they are. An exchange is a combination of some physical systems and credibility. People won't trade on an exchange they don't trust.
A blockchain likely wouldn't help this issue either- high-speed traders would inevitably be dissatisfied with blockchain latencies and re-invent brokers that abstracted over blockchain transactions at a faster pace. These brokers would wind up causing bureaucratic meltdowns and become managed by some overarching structure similar to the DTC. Etc. If anything, a blockchain-based system would become more complicated, because it reduces the task of adding another financial sub-mechanism to an engineering problem.
Something about large distributed systems of non- or imperfectly-cooperative agents breed complexity. (There's probably already formalized versions of that principle, but none are presently coming to mind.)