Showing posts with label financial markets. Show all posts
Showing posts with label financial markets. Show all posts

Monday, September 11, 2023

Talent wars in private equity: continued unraveling

 The WSJ has the latest:

Hectic Private-Equity Recruitment Process Leaves Firms Looking for Alternatives. July talent-grab leaves some firms frustrated with process for hiring entry-level workers. by Chris Cumming, Aug. 30, 2023

"Private-equity firms are recruiting workers with less and less Wall Street experience every year, hoping to beat out their competitors to hire the most impressive recent college graduates. 

...

"Over about 48 hours every year, hundreds of first-year investment bankers file through private-equity offices for a battery of interviews and tests, hoping to land an offer in one of the world’s most highly paid industries.

...

"This year’s recruitment process kicked off July 21—the earliest date ever—for positions starting in 2025. Firms hired candidates who have mostly just graduated from college and are beginning two-year bank-analyst programs, making offers that kick in after their programs end.



HT: Isaac Sorkin

Monday, June 26, 2023

Harry Markowitz (1927-2023)

 Harry Markowitz, who invented modern portfolio theory, and did much beside, has died.

Here's his NYT obituary, which was apparently prepared long in advance.

Harry Markowitz, Nobel-Winning Pioneer of Modern Portfolio Theory, Dies at 95. He overturned the traditional approach to buying stocks by examining the relationship between risk and reward. By Robert D. Hershey Jr.

I’m not a one-shot Nobel laureate — only doing one thing,” Dr. Markowitz said in an interview for this obituary in 2014. Although he was 87 at the time, he was embarked on a monumental analysis of securities risk and return."

********

PORTFOLIO SELECTION, by Harry Markowitz, The Journal of Finance Volume 7, Issue 1 p. 77-91 First published: March 1952  https://doi.org/10.1111/j.1540-6261.1952.tb01525.x

*******

Here's the beginning of the 1990 Nobel Prize press release:

16 October 1990

THIS YEAR’S LAUREATES ARE PIONEERS IN THE THEORY OF FINANCIAL ECONOMICS AND CORPORATE FINANCE

The Royal Swedish Academy of Sciences has decided to award the 1990 Alfred Nobel Memorial Prize in Economic Sciences with one third each, to

Professor Harry Markowitz, City University of New York, USA,
Professor Merton Miller, University of Chicago, USA,
Professor William Sharpe, Stanford University, USA,

for their pioneering work in the theory of financial economics.

Harry Markowitz is awarded the Prize for having developed the theory of portfolio choice;
William Sharpe, for his contributions to the theory of price formation for financial assets, the so-called, Capital Asset Pricing Model (CAPM); and
Merton Miller, for his fundamental contributions to the theory of corporate finance.

********

Here's the citation for the 1989 von Neumann theory prize in operations research:

"1989 John von Neumann Theory Prize:  


"Harry M. Markowitz received the 1989 John von Neumann Theory Prize. Dr. Markowitz, presenter Ellis Johnson noted, contributed ground-breaking work in three areas: portfolio selection, mathematical programming, and simulation.


"Harry Markowitz is the Marvin Speiser Distinguished Professor of Finance and Economics at Baruch College, NYC. He developed the portfolio selection model in his Ph.D. thesis at the University of Chicago. First published in 1952, today his model is one of the most widely used quantitative tools for investment analysis.


"During the late 50s Markowitz worked on mathematical programming at the RAND Corp. and also did his ground-breaking work on factoring bases and maintaining sparsity in the course of solving linear programs, in effect introducing the triangularization or LU factorization in place of inversion of the basis. His selection criterion for reducing fill-in when forming basis factors is the well-known Markowitz criterion and is still used in state-of-the-art codes for both LU and Cholesky factorizations. Markowitz's third main area of activity involved codifying the underlying notions of simulation by defining a world view composed of entities having attributes and belonging to sets that have defined relationships with each other. The state of the world changes through events, which are triggered by time. Based on this, in the 60s he developed a high-level simulation language, SIMSCRIPT, and in the 80s has collaborated with IBM researchers to develop EAS-E, an integrated data base, modeling and applications development language.


Dr. Markowitz told OR/MS Today that the award was a great honor and a reflection of the influence of von Neumann on portfolio theory."


Saturday, February 4, 2023

Unraveling of the private equity labor market, continued (and continuing)

 Here's some news and history on the

Private Equity On-Cycle Recruiting Timeline

by Matt Ting (Peak Frameworks)

"The sheer absurdity of the private equity recruiting process is perhaps best illustrated by the recruiting timeline.

"In recent years, private equity recruiting has kicked off within months of people graduating. Private equity firms commonly interview and hire people that have fewer than 6 months of work experience. And the thing is, private equity firms are hiring people who won’t actually start their jobs for another 2 years.



"Over a decade ago, recruiting occurred only 1 year in advance. This gave analysts much more time to do actual deals, technically prepare, and thoughtfully decide if they wanted to recruit for private equity.

"Every single year, the recruiting timeline inches forward by a month or so. There was a brief stretch for the 2012 – 2016 associate classes where the start time held relatively constant at around 1.5 years in advance.

"Over the past five years, the recruiting timeline has consistently moved up a month or two at a time. Every single year, many firms get caught off-guard or unprepared because of how accelerated things have become. It’s at the point where it seems like there’s no further it can move forward.

"The only time over the last 15 years that recruiting has moved backwards in time was during the Great Recession (recruiting during July 2009). And even then, recruiting only moved back by a couple of months."

HT: Mike Ostrovsky

Monday, December 19, 2022

Leveling the stock market playing field: SEC proposals

 The WSJ has the story: 

SEC Proposes Rules That Would Squeeze Stock-Market Middlemen. Agency is formally considering biggest overhaul of stock-market structure since mid-2000s  By Paul Kiernan and Alexander Osipovich

"The Securities and Exchange Commission voted Wednesday to advance the biggest changes to U.S. stock-market rules since the mid-2000s, aiming to give small investors better prices on their trades and reduce some advantages enjoyed by high-speed trading firms.... Voting to advance the rules opens them to public comment until at least March 31 before the agency can decide whether to finalize them.

...

"The broad idea motivating the proposals is to use greater competition for investors’ orders to deliver better prices, while stepping up regulations of the firms that profit from handling retail stock trades.

...

"The centerpiece of the SEC’s plans is a proposal for brokers to send many small-investor stock orders into auctions. This would enable a mix of high-speed traders and institutional investors such as hedge funds or pension funds to compete to fill the orders, with the idea that investors would get better prices as a result—higher prices if they are selling shares, or lower prices if they are buying.

"The auctions would apply to so-called marketable orders—in which investors buy or sell stocks at the currently available price—less than $200,000 in size and placed by investors who average fewer than 40 trades a day. They would be required to last between one-tenth and three-tenths of a second, roughly the duration of a blink of an eye, and would likely be run by exchanges. 

Requiring such auctions would be a big change. The SEC says brokers send more than 90% of marketable orders to wholesalers. Unlike exchanges, which display price quotes publicly and allow a variety of market players to attempt to fill orders, wholesalers trade directly against the incoming retail flow, an arrangement that effectively prevents other market players such as institutional investors from interacting with individual investors’ orders."


HT: Eric Budish

Tuesday, August 2, 2022

American Finance Association guidelines to prevent unravelling of the job market

 Zoom is changing interview practices, and there's concern that academic markets for new Ph.D grads could unravel. The AFA is on the case for the finance market with these guidelines:

Guidelines for the AFA Rookie Recruiting Cycle

The AFA rookie job market cycle of 2021-2022 created uncertainty, confusion, and unneeded stress for job market candidates and for recruiters. In the interest of developing a more coordinated job market that benefits all involved, the AFA Board has the following suggested guidelines.

Timing of interviews:

Initial interviews can be virtual or in person, but the AFA recommends that the initial interviews should not begin before December 15, 2022, and that the timing of the “campus visit” should occur after the AFA meeting.

Timing of job offers:

In order to facilitate the best matching between candidates and positions, the AFA Board believes strongly that job offers should remain open until at least February 20. The AFA Board also encourages employers to abstain from giving exploding offers with too short of a time frame, since they are unfair to the candidates. Consequently, the AFA promotes the following professional norm: If a job candidate receives and accepts a coercive exploding offer (i.e., one that expires before February 20), the AFA does not consider such an acceptance to be binding.

These guidelines are designed for the AFA rookie recruiting cycle and do not pertain to recruiting cycles for other job markets such as the FMA or European job markets.


HT: Alex Chan

Sunday, July 18, 2021

Experiments touching on market design in the July AER

 The July AER has a number of experiments that speak to market design:

 Online,

How to Avoid Black Markets for Appointments with Online Booking Systems  By Rustamdjan Hakimov, C.-Philipp Heller, Dorothea Kübler, and Morimitsu Kurino*

Abstract: Allocating appointment slots is presented as a new application for market design. Online booking systems are commonly used by public authorities to allocate appointments for visa interviews, driver’s licenses, passport renewals, etc. We document that black markets for appointments have developed in many parts of the world. Scalpers book the appointments that are offered for free and sell the slots to appointment seekers. We model the existing first-come-first-served booking system and propose an alternative batch system. The batch system collects applications for slots over a certain time period and then randomly allocates slots to applicants. The theory predicts and lab experiments confirm that scalpers profitably book and sell slots under the current system with sufficiently high demand, but that they are not active in the proposed batch system. We discuss practical issues for the implementation of the batch system and its applicability to other markets with scalping.

***********

In rural Malawi,

Pay Me Later: Savings Constraints and the Demand for Deferred Payments  By Lasse Brune, Eric Chyn, and Jason Kerwin*

Abrstract: We study a simple savings scheme that allows workers to defer receipt of part of their wages for three months at zero interest. The scheme significantly increases savings during the deferral period, leading to higher postdisbursement spending on lumpy goods. Two years later, after two additional rounds of the savings scheme, we find that treated workers have made permanent improvements to their homes. The popularity of the scheme implies a lack of good alternative savings options. The results of a follow-up experiment suggest that demand for the scheme is partly due to its ability to address self-control issues.

************

In Rwanda,

Recruitment, Effort, and Retention Effects of Performance Contracts for Civil Servants: Experimental Evidence from Rwandan Primary Schools  by Clare Leaver, Owen Ozier, Pieter Serneels and Andrew Zeitlin

Abstract: This paper reports on a two-tiered experiment designed to separately identify the selection and effort margins of pay for performance (P4P). At the recruitment stage, teacher labor markets were randomly assigned to a "pay-for-percentile" or fixed-wage contract. Once recruits were placed, an unexpected, incentive-compatible, school-level re-randomization was performed so that some teachers who applied for a fixed-wage contract ended up being paid by P4P, and vice versa. By the second year of the study, the within-year effort effect of P4P was 0.16 standard deviations of pupil learning, with the total effect rising to 0.20 standard deviations after allowing for selection. 

*************

and in India,

On Her Own Account: How Strengthening Women's Financial Control Impacts Labor Supply and Gender Norms  By Erica Field, Rohini Pande, Natalia Rigol, Simone Schaner and Charity Troyer Moore

Abstract: Can increasing control over earnings incentivize a woman to work, and thereby influence norms around gender roles? We randomly varied whether rural Indian women received bank accounts, training in account use, and direct deposit of public sector wages into their own (versus husbands') accounts. Relative to the accounts only group, women who also received direct deposit and training worked more in public and private sector jobs. The private sector result suggests gender norms initially constrained female employment. Three years later, direct deposit and training broadly liberalized women's own work-related norms, and shifted perceptions of community norms. 

Saturday, July 3, 2021

The art of money laundering through the art market

 What looks like privacy to some looks like secrecy to others.

The NY Times has the story:

As Money Launderers Buy Dalís, U.S. Looks at Lifting the Veil on Art Sales. Secrecy has long been part of the art market’s mystique, but now lawmakers say they fear it fosters abuses and should be addressed.  By Graham Bowley

"Billions of dollars of art changes hands every year with little or no public scrutiny. Buyers typically have no idea where the work they are purchasing is coming from. Sellers are similarly in the dark about where a work is going. And none of the purchasing requires the filing of paperwork that would allow regulators to easily track art sales or profits, a distinct difference from the way the government can review the transfer of other substantial assets, like stocks or real estate.

...

"In January, Congress extended federal anti-money laundering regulations, designed to govern the banking industry, to antiquities dealers. The legislation required the Department of the Treasury to join with other agencies to study whether the stricter regulations should be imposed on the wider art market as well. The U.S. effort follows laws recently adopted in Europe, where dealers and auction houses must now determine the identity of their clients and check the source of their wealth.

“Secrecy, anonymity and a lack of regulation create an environment ripe for laundering money and evading sanctions,” the U.S. Senate’s Permanent Subcommittee on Investigations said in a report last July in support of increased scrutiny.

"To art world veterans, who associate anonymity with discretion, tradition and class, not duplicity, this siege on secrecy is an overreaction that will damage the market. They worry about alienating customers with probing questions when they say there is scant evidence of abuse.

...

"What is the origin of such secrecy? Experts say it likely dates to the earliest days of the art market in the 15th and 16th centuries when the Guilds of St. Luke, professional trade organizations, began to regulate the production and sale of art in Europe. Until then, art was not so much sold as commissioned by aristocratic or clerical patrons. But as a merchant class expanded, so did an art market, operating from workshops and public stalls in cities like Antwerp. To thwart competitors, it made sense to conceal the identity of one’s clients so they could not be stolen, or to keep secret what they charged one customer so they could charge another client a different price, incentives to guard information that persist today.

...

"Auction catalogs say works are from “a private collection,” often nothing more. Paintings are at times brought to market by representatives of owners whose identities are unknown, even to the galleries arranging the sale, experts and officials say. Purchasers use surrogates, too. 

************

Here's a related State Department report on how art sales have been used to circumvent U.S. sanctions on Russian oligarchs:

THE ART INDUSTRY AND U.S. POLICIES THAT UNDERMINE SANCTIONS.  STAFF REPORT, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, UNITED STATES SENATE

Wednesday, June 30, 2021

Evolutionary Models of Financial Markets in the PNAS

 Here's the relevant part (with links) of the PNAS Table of Contents for June 29, 2021; Vol. 118, No. 26 

Evolutionary Models of Financial Markets Special Feature

Introduction

Introduction to PNAS special issue on evolutionary models of financial markets

Simon A. Levin and Andrew W. Lo

Social Sciences — Economic Sciences

How market ecology explains market malfunction

Maarten P. Scholl, Anisoara Calinescu, and J. Doyne Farmer

Moonshots, investment booms, and selection bias in the transmission of cultural traits

David Hirshleifer and Joshua B. Plotkin

Social Sciences — Economic Sciences - Biological Sciences — Evolution

Evolution in pecunia

Rabah Amir, Igor V. Evstigneev, Thorsten Hens, Valeriya Potapova, and Klaus R. Schenk-Hoppé

The origin of cooperation

Nihal Koduri and Andrew W. Lo

Evolved attitudes to risk and the demand for equity

Arthur J. Robson and H. Allen Orr

Social Sciences — Economic Sciences - Physical Sciences — Statistics

High-frequency trading and networked markets

Federico Musciotto, Jyrki Piilo, and Rosario N. Mantegna

Perspectives

Social finance as cultural evolution, transmission bias, and market dynamics

Erol Akçay and David Hirshleifer

The landscape of innovation in bacteria, battleships, and beyond

Terence C. Burnham and Michael Travisano

Sunsetting as an adaptive strategy

Roberta Romano and Simon A. Levin

Sunday, March 14, 2021

The market for chicken parts

 Can the wholesale food market come to resemble the modern retail financial market?  The WSJ has the story.

Trading Chicken Feet Is Going Digital. For giants like Tyson, moving millions of pounds of meat from farmers to vendors still requires phone calls, spreadsheets and middlemen  By Julia-Ambra Verlaine

"For agricultural giants like Tyson Foods Inc., moving millions of pounds daily of meat and poultry products from farmers to vendors world-wide still requires phone calls, spreadsheets and personal relationships with middlemen who take a cut. Brokers fees can add up, and it is hard to get reliable up-to-the-minute pricing information. Unlike other markets, inventory and supply aren’t available on a centralized database.

...

"Scott Spradley, chief technology officer at Tyson, the second-largest processor of chicken, beef and pork in the U.S., said large transactions with some external partners still require a fax machine. To fill a supermarket order for chicken, salespeople need to call warehouses peppered across the country. Improving the technology could ultimately bring down the cost of processing and distributing food across the country.

...

"The more middlemen involved, the higher the cost. Before a steak ends up on an American dinner table, it goes through slaughterhouses that process and package the meat. While large retailers like Costco Wholesale Corp. or food chains like McDonald’s Corp. have direct contracts with producers at fixed rates, small restaurants and local suppliers have to go through protein brokers including Louis Dreyfus Co., or redistributors such as NebraskaLand.

“It’s an archaic industry that relies on an old-boy network, a bit like foreign exchange in the 1980s,” said Mr. Honey. “We are trying to cut the fat out that brings the price up.”

...

"Companies like Nui, populated with former traders, are seeking to build streaming platforms that centralize supply and give access to smaller players at better prices. Industry publisher Urner Barry is like a Bloomberg in the meat, fish poultry industry—providing data, news and market pricing on lamb, pork, turkey, eggs and more.

"Urner Barry, founded in 1858, upgraded its electronic platform called COMTELL over a year ago. It supplies brokers, restaurateurs and supermarkets with prices on over 15,000 products ranging from chuck roll to West Coast chicken drumsticks.

“Unlike the past, people are coming into this industry that have a finance background,” said Russell Barton, a COMTELL director at Urner Barry. “They are treating the meat and poultry markets like analysts treat the stock market. They aren’t content with a static price sheet.”

***********

One of the companies mentioned in the WSJ story is the New Zealand based Nui (https://www.nuimarkets.com/our-platform/)

Friday, March 5, 2021

The costs of applying for financial aid for college

 The Chronicle of Higher Education has a surprisingly moving long story about the fact that applying for financial aid is not only time consuming, difficult and even expensive for the people who need it most, but can also be emotionally costly, especially for students from broken families, since the form requires input from both parents.

The Most Onerous Form in College Admissions. The Fafsa is tough, but the CSS Profile is grueling. There’s a human cost.   By Eric Hoover

"The most onerous form in admissions bores into the bones of your existence. Each year it sows confusion and multiplies misery among those seeking financial aid from many of the nation’s wealthiest colleges. It’s called the College Scholarship Service Profile, or CSS Profile, for short. Some students call it burdensome, invasive, evil.
...
"The CSS Profile is more detailed than the Free Application for Federal Student Aid, or Fafsa. The latter form, which families use to get government grants and loans, has long been seen as a barrier to college access. But if the Fafsa is a 100 yards of difficulty, the CSS Profile is a mile.

"And unlike the federal form, it’s not free for everyone. The College Board provides fee waivers for some low-income students; otherwise families pay $25 to submit the form to one college, then $16 a pop for each additional one.
...
"Just so we’re clear, the application — used by more than 400,000 students annually — isn’t evil or ill-intentioned. It helps colleges and scholarship organizations allot more than $9 billion a year to students, often unlocking doors to a new life.
...
"This is perhaps the most important thing to know about the CSS Profile: Teenagers, especially in lower-income families, are often the ones who fill out the form. They’re the ones digging up tax forms and asking reluctant parents for their Social Security number. They’re the ones being asked to list “Social Security benefits received for all family members, except any who will be enrolled in college in 2021-22, that were not reported on a tax return,” and “Alimony Received (including, but not limited to, amounts reported on a tax return),” and to answer this: “Is any person in your family the beneficiary of a trust?”
...
"The heaviest weight falls on students who don’t live in a nuclear family. Students from single-parent homes. Students whose parents had ugly separations. Students with a parent who’s abusive or imprisoned or nowhere to be found. Whose parents are dead. Who live with siblings or grandparents or legal guardians or foster parents — or with no one.

"There are many reasons you might need to request a waiver for the CSS Profile’s noncustodial-parent requirement. One college counselor calls the process “the worst and most demeaning thing I’ve ever seen.”
...
"Though a majority of institutions that use the CSS Profile require noncustodial parents to complete their own form, students who have no contact with that parent can ask colleges to waive the requirement. They do so by completing the College Board’s official waiver-request form, which says that institutions typically consider the requests in cases of “documented abuse,” legal orders limiting the parent’s contact with the child, or “no contact or support ever received from the noncustodial parent.” Colleges might ask for documentation, such as court documents or legal orders.
...
"Each year, 22 percent of first-time domestic students using the CSS Profile get fee waivers, according to the College Board. Orphans and wards of the court under 24 get them, as do students receiving SAT fee waivers. Others qualify based on their parental income and family size (a family of four would qualify with an income of $45,000 or less). An applicant’s eligibility is determined automatically by his or her responses on the CSS Profile — meaning they don’t know if they will get a waiver until they complete the form.

"Let’s do some quick math. If 22 percent of CSS Profile users get fee waivers, that means 78 percent don’t. That’s approximately 312,000 students who pay the College Board about $7.8 million a year just by completing the $25 form and sending it to one college."

Sunday, February 7, 2021

Financing drug discovery

 Bloomberg has a nice story about financial innovation in funding drug discovery startups:

Out of Grief, MIT’s Andrew Lo Invented a Better Way to Finance Biomedical Innovation.  A company he inspired, BridgeBio Pharma, is worth $9 billion and is creating cures for orphan diseases   by Peter Coy

"The main factor in the dearth of financing, Lo realized, was the lack of diversification. Let’s say a drug costs $200 million to develop and has only a 5% chance of success. If it does succeed after 10 years of development, it could earn $2 billion a year annually for 10 years. Intriguing, but too much of a lottery ticket for most investors. 

"But what if you could raise $30 billion to fund 150 startups at once? If the success of each was independent—that is, uncorrelated with the success of any other drug in the portfolio—then the chance of at least three becoming blockbusters was 98% and the chance of at least five becoming blockbusters was 87%. Those odds were so attractive, Lo realized, that even conservative fixed-income investors who like single-A-rated bonds would be willing to finance such a fund.

"Lo had been lecturing and publishing papers along these lines for several years when a former student, Neil Kumar, told him he wanted to put Lo’s ideas into practice in a company that would focus on treatments for orphan diseases caused by single-gene defects and cancers with clear genetic drivers. It was a perfect test of the concept because each rare disease was unique; their causes were uncorrelated, as in Lo’s thought experiment.

"Lo made a small investment and was listed as a co-founder of what became BridgeBio Pharma Inc. in Palo Alto, Calif. According to Bloomberg data, the company had a market value of $9.3 billion as of Feb. 4, making Kumar’s 5.6% stake worth more than $500 million. In the webinar, Lo said, “I’m most proud of the fact that they have 20 projects of which four are in Phase 3 trials.” The company anticipates approval of one by the end of 2021 and another by the end of 2022, he said, adding, “These are therapies that would not have been developed” if not for BridgeBio."

Wednesday, July 8, 2020

Will curtailing early hiring/unraveling help diversity?

If you run a company that hires very early, you likely hire from familiar places.  If talented recruits from more diverse backgrounds are harder to identify very early, you might want to slow things down a bit.  Here's a WSJ story, about what might signal a change in the famously unraveled market for young analysts in private equity:


Blackstone to Bypass Scramble for Investment-Bank Talent in Bid to Diversify Hiring
On-campus recruiting will be expanded to 44 schools from nine in 2015
By Miriam Gottfried, June 24, 2020

"Blackstone Group Inc., ...one of the most coveted employers on Wall Street, is throwing out a key section of its recruiting playbook in a bid to improve its hiring process and increase diversity.

"The investing giant and its private-equity peers have long engaged in a yearly race to pluck junior investment bankers already trained in spreadsheet and PowerPoint wizardry from firms such as Goldman Sachs Group Inc. and Morgan Stanley. The prize for those lucky enough to make the jump: entry-level jobs that can pay as much as $300,000 a year at some firms.

"Now Blackstone officials say the firm plans to sit out that contest in favor of on-campus recruiting, already its main source of talent and one that it is expanding to bring in more candidates directly from schools, including historically black colleges and universities and women’s colleges. Blackstone, which has been working for years to extend its campus reach, says it will directly recruit from 44 schools this academic year. That is up from just nine in 2015.
...
"Blackstone, the largest buyout firm with $538 billion of assets, received nearly 15,000 applications for just 90 full-time analyst roles that started last year. It has two main sources of new junior talent: campuses and investment banks, which have their own hotly competitive entry-level hiring operations.

In the case of the latter, recruitment used to happen during the summer after applicants’ first year on the job, but it has steadily crept forward as private-equity firms jump the starting gun in hopes of securing the best candidates. In 2019, recruiting took place in September, just a couple months after candidates began working at banks—for roles that wouldn’t start until summer 2021."

***********
Here's an earlier related post (from long ago, before Covid-19 and George Floyd...):

Monday, December 9, 2019

Saturday, June 20, 2020

Supermarkets

There's a nice article about supermarkets in the Atlantic, and how they are organized and supplied,  motivated by nostalgia for one NYC chain, Fairway, that is now going through bankruptcy.

The Pandemic Shows Us the Genius of Supermarkets
A short history of the stores that—even now—keep us supplied with an abundance of choices
by Bianca Bosker

"Most stores open with a colorful bounty of flowers and produce (a breath of freshness to whet our appetites), followed by the flyover expanse of the center store (cans, jars, boxes, bags), followed, in the way back, by milk, eggs, and other staples (pushed to Siberia so you’ll travel through as much of the store as possible, and be tempted along the way). Store designers can choose from a variety of floor plans—forced-path, free-flow, island, wagon-wheel—but by far the most popular is the combination grid/racetrack, with nonperishable items in rectilinear aisles, and the deli, cheese, meat, seafood, and produce departments circling them on the exhilaratingly named racetrack, so called because we scoot faster on the store’s perimeter.
************

Here's an earlier story on how and why established retail chains (low debt, own their own real estate) attract the interest of private equity firms:

How Private Equity Ruined a Beloved Grocery Chain
An investment firm was supposed to help Fairway survive. So why is the company now filing for bankruptcy?
by Eileen Appelbaum and Andrew W. Park

Wednesday, March 25, 2020

Litigation financing revisited

It looks like litigation financing--i.e. the financing of legal suits for a share of the proceeds--is here to stay, and the New York City Bar Association is trying to come to terms with it.   Here is their

REPORT TO THE PRESIDENT
BY THE NEW YORK CITY BAR ASSOCIATION
WORKING GROUP ON LITIGATION FUNDING

"Maintenance is defined as “helping another prosecute a suit,”18 and champerty is defined as “maintaining a suit in return for a financial interest in the outcome.”19 Prohibitions against maintenance and champerty arose in medieval England.20
...
"Many U.S. states are beginning to relax prohibitions on maintenance and champerty.  Twenty-eight jurisdictions permit maintenance with varying limitations,31 and sixteen explicitly allow champerty.32 However, other states have refused to “abandon the champerty doctrine ...

"New York’s prohibition of champerty remains in force, although its breadth is uncertain.
**************
Earlier:
Sunday, November 8, 2015

Saturday, February 8, 2020

Market designs to reduce the costs of high frequency trading, by Baldauf and Mollner

A forthcoming paper by Markus Baldauf and Joshua Mollner considers two designs to reduce the costs of (and incentives for) very high frequency trading. One is frequent batch auctions (on also which see Budish et al.), and the other is allowing market  participants to cancel bids or asks while imposing a delay on acceptances of those bids or asks, so that spreads will not have to be widened to defend against faster traders.

High-Frequency Trading and Market Performance
Journal of Finance, Forthcoming
Last revised: 25 Jan 2020
Markus Baldauf
University of British Columbia (UBC) - Division of Finance
and
Joshua Mollner
Northwestern University - Kellogg School of Management



Abstract
We study the consequences of high-frequency trading (HFT) — and potential policy responses — via the tradeoff between liquidity and information production. Faster speeds facilitate HFT with consequences for this tradeoff: information production diminishes because informed traders have less time to trade before HFTs react, but liquidity (measured by the bid-ask spread) improves because informational asymmetries decline. HFT also pushes outcomes inside the frontier of this tradeoff. However, outcomes can be restored to the frontier by replacing the limit order book (LOB) with either of two alternative mechanisms: delaying all orders except cancellations or frequent batch auctions.

Friday, February 7, 2020

What is the cost of high frequency trading? by Aquilina, Budish, and O'Neill

A recent WSJ article highlights a paper by Aquilina, Budish, and O'Neill:

Ultrafast Trading Costs Stock Investors Nearly $5 Billion a Year, Study Says
U.K. regulator’s study says ‘latency arbitrage’ imposes a small but significant tax on investors
"High-frequency traders earn nearly $5 billion on global stock markets a year by taking advantage of slightly out-of-date prices, imposing a small but significant tax on investors, a new study says."
********

And here's the original paper from Britain's Financial Conduct Authority:

Quantifying the High-Frequency Trading 'Arms Race': A new methodology and estimates
Occasional papers 27/01/2020
by Matteo Aquilina, Financial Conduct Authority,
Eric Budish, University of Chicago Booth School of Business and NBER and Peter O’Neill, Financial Conduct Authority


"The authors use stock exchange message data to quantify the negative aspect of high-frequency trading, known as 'latency arbitrage.' The key difference between message data and widely-familiar limit order book data is that message data contain attempts to trade or cancel that fail."

 Summary:
"The authors use stock exchange message data to quantify the negative aspect of high-frequency trading, known as “latency arbitrage.” The main results show:

  • races are frequent, fast and worth only small amounts per race
  • a large proportion of daily trading volume is in races
  • race participation is concentrated
  • in aggregate, these small races make up a meaningful proportion of price impact
  • in aggregate, these small races add up to meaningful harm to liquidity
  • in aggregate, these small races add up to a meaningful total ‘size of the prize’
  • The paper finds that while there is only a small detriment per transaction as a result, it adds up to a 17% reduction in the cost of liquidity and $5bn a year in tax on trading volume."

Thursday, January 9, 2020

Reforming stock exchange governance, from the SEC

It's good to know that sometimes the SEC reads papers by market designers (in this case Budish et al.):

Statement on Reforming Stock Exchange Governance by Commissioner Robert J. Jackson Jr., Jan. 8

"As today’s release explains, America’s stock markets are riven by a fundamental conflict of interest: exchanges both operate public data feeds and profit from selling superior private ones.[1] Because exchanges have no economic reason to produce robust public data on stock prices, investors have long demanded a vote on how the public feeds are run.[2] Rather than give investors a real say over the data that drives our markets, today’s release merely invites for-profit exchanges to draft their own rules on these questions. Because that approach has failed investors before, and there’s no reason to expect it to succeed now, I respectfully dissent.
*          *          *          *
In 1934, American investors struck a fundamental bargain with our stock exchanges. The Commission was created to oversee the markets, and nonprofit exchanges were given the special legal status they needed to play a role in protecting ordinary investors.[3] But over a decade ago the deal changed: Exchanges became for-profit entities with powerful incentives to maximize profits, not protect investors.
That’s how we ended up with the two-tiered system for market data we have today. Congress mandated the creation of a public feed when exchanges were still nonprofits, but today’s for-profit exchanges also sell their own private feeds. So it’s unsurprising that exchanges underinvest in the public feed—it’s a product they directly compete with. The only question is what the Commission should do about it. Rather than recognize the reality of the exchanges’ incentives, the Commission today chooses hope over experience, asking exchanges to act contrary to their own economic interests.[4] For two reasons, we should not expect that approach to produce the robust public data that American investors deserve.
First, by proposing an order under a national market system (NMS) plan, we’re asking the exchanges to tell us how best to address the conflicts of interests that currently allow them to profit by controlling the public feed while selling superior private data.[5] No one should be surprised when the exchanges respond that, rather than give investors votes on the operation of the public feed, they’d rather continue controlling it themselves.[6] Instead of a clear solution to an obvious problem, today’s proposal will produce little more than a long process that will benefit lobbyists and lawyers—but not the ordinary investors living with the tax of rising data costs in our markets.[7]
Second, our history governing markets through NMS plans is hardly encouraging. One need look no further than the consolidated audit trail to see what happens when the Commission replaces real regulation with mere hope that stock exchanges will act against their own interests. The CAT was launched in the wake of a terrifying market event nearly a decade ago. Both Chairman Clayton and Director Redfearn have done tremendous work to move it forward. But our predecessors left the construction of the CAT to the NMS process. And the CAT will protect investors, not produce profits. So it’s no surprise that the CAT is still not complete.[8] I hope our successors won’t someday say the same about today’s attempt to reform exchange governance.
*          *          *          *
Those who, like me, are frustrated by today’s failure to require real reform may be tempted to direct their ire towards our stock exchanges. But it’s a mistake to blame private enterprises for maximizing the profit opportunities the law gives them.[9] Instead, we should change the law to address the incentives produced by giving exchanges both control over our public feeds and the opportunity to profit by selling private ones.[10] Without changing those incentives, we cannot and should not expect the market to fix the market.[11]
That’s why I hope commenters will come forward and urge the Commission to do more than merely hope that stock exchanges will act contrary to their private interests. Until we do, our stock markets will continue to fall short of the level playing field that ordinary American investors deserve."
....
"[11] Important recent research shows that, even when the market for trading is perfectly competitive, exchanges can extract supra-competitive rents from selling speed technology in the form of proprietary data feeds. See Eric Budish, Robin S. Lee & John J. Shim, Will the Market Fix the Market? A Theory of Stock Exchange Competition and Innovation, National Bureau of Economic Research Paper No. w25855 (2019)."

Monday, December 9, 2019

Unraveling has made investment banks the farm teams of private equity...

...at least that's the argument made in this article (full of nitty gritty detail) at Vanity Fair:

“IT’S, LIKE, LAWLESS”: HOW PRIVATE-EQUITY HEADHUNTERS ARE BLEEDING WALL STREET
In the battle for young talent, investment banks have been reduced to prep schools for private equity. Inside the cutthroat recruiting process launching the next generation of the superrich—and what it reveals about the status realignment rocking Wall Street.
BY WILLIAM D. COHAN

"The recruitment calendar keeps accelerating. Two years before he started at Morgan Stanley, the former analyst said, the private-equity vultures began circling the investment banks in March. The following year, recruiting began in April. Today, analysts who begin at Morgan Stanley in August are being courted by private-equity firms in mid-September—just weeks after they arrive.

"This super-charged dynamic can make for very odd interviews. “It’s so accelerated. Basically what you’re doing at the private-equity firm is you are saying, First of all, can this person hold a conversation?” the former analyst says. After that, the private equity people want to know what members of the new class are specializing in, and at which Wall Street bank. “Kids that are working in the mergers and acquisitions group at Morgan Stanley are probably going to get a great experience 8 times out of 10,” he explains. “Nine times out of 10. So I will want to interview those people that I consider to be in good groups at strong banks, where I hope and I assume that they are going to get the experience that they need that, by two years from now, when they come in the door, they are educated and their analytical skills and financial skills are up to snuff.”
...
"Somewhat surprisingly, most firms don’t seem to object. Rather, they have come to grips with the reality of the situation, even if they don’t like it, and recognize that they risk not getting the analysts at all if they put up too much of a stink. Some firms even encourage the analysts to go to private-equity firms—because that gives them a better chance of getting the very best college graduates. A partner at one firm even went to bat for one of the analysts who made it through the second round of recruiting at a big private-equity firm, but did not make it to the final round. The partner called up someone he knew at the private-equity firm and got the analyst back into the process. He got the job. “It’s like, I’m going to get you whatever job you want, but you’re going to bust your balls for me for the next two years,” the partner tells me.

"One young banker who got an offer from Blackstone recalled the supportive response when he walked into a partner’s office to share the good news. “He said, ‘That’s great. I’ve got to do a good job training you so that Jon Gray’”—Blackstone’s new president and chief operating officer—“‘thinks that I did a good job with you.’” (There is one exception to this good humor: Goldman Sachs, which has a three-year analyst program. “If they find out you are recruiting, they’re going to fire you,” says one analyst. “It’s official policy.” A Goldman spokesman says while that is true, some of their analysts still get recruited away from the firm.)".
************

Earlier post:

Monday, September 23, 2019