Speaker 1: Bloomberg Audio Studios, podcasts, radio news. On my desk yesterday
Speaker 1: I arrived a tungsten cube on the tungsten cube is engraved.
Speaker 1: This is weird. It arrives in a box with no note.
Speaker 1: I was not expecting a tungsten cube.
Speaker 2: Was it checked for anthrax first? Was it dustin?
Speaker 1: I want to give any ideas, but I assume that
Speaker 1: Bloomberg mellroom is quite comprehensive and it's anthex tusting, I hope,
Speaker 1: so I didn't even think about it. I was just like, ah,
Speaker 1: it's come through the Bloomberg mellroom. It's fine. Anyway, I
Speaker 1: have this tungsten cube now. So have anyone sent me
Speaker 1: a tungsten cube that says this is weird? Be in touch?
Speaker 1: That's fun. I have to say that, first of all,
Speaker 1: a tungsten cube with this is weird and groat on
Speaker 1: it is very much my jam. And secondly, sending that
Speaker 1: with no note and thereby making it weird is kind
Speaker 1: of a good joke. So I have no complaints, but
Speaker 1: I wouldn't mind hearing from whoever was said that to me.
Speaker 2: I didn't realize that this weird was engraved on it
Speaker 2: when you posted it. On Instagram. I thought that you
Speaker 2: added the text on.
Speaker 1: The no no, no, yeah, I posted on my close
Speaker 1: Friends stories. But I'm also holding it up to the
Speaker 1: camera in our zoom another way that you can't see it.
Speaker 2: That is a pretty good gag.
Speaker 1: Yeah, yeah, yeah, this is my life.
Speaker 2: It's pretty good. You have a little bit of a collection.
Speaker 1: Now, I do have my I have my money Stuff
Speaker 1: ten year anniversary collection. I'm now holding both of them
Speaker 1: up to the camera and again no one can see it.
Speaker 1: Speaking of things that come in the mail.
Speaker 2: Oh good one.
Speaker 1: Mail if it's also transition I've ever done on this podcast,
Speaker 1: It's a mail bag episode that was smooth.
Speaker 2: I wasn't even expecting it.
Speaker 1: I know, right when you at least expected a transition,
Speaker 1: We've got some pretty good ones this week.
Speaker 2: Mail Bag mail Bag.
Speaker 1: Hello and welcome to the Money Stuff Podcast. You're a
Speaker 1: weekly podcast where we talk about stuff related to money.
Speaker 1: I'm Matt Levian and I write the Money Stuff column
Speaker 1: for Bloomberg Opinion.
Speaker 2: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 2: an anchor for Bloomberg Television.
Speaker 1: And today we're doing a mailbag sud Effect.
Speaker 2: Mail Bag mail Bag great questions. Thank you for everyone
Speaker 2: for setting them in. Let's just dive right in. We
Speaker 2: got a great one out of the gates from broad
Speaker 2: he asks, why not more frequent reporting. As a CFO
Speaker 2: of a small but private equity owned business, I close
Speaker 2: our books monthly and report out our financial results each month.
Speaker 2: Every public company in the world is doing the same.
Speaker 2: It's no additional cost to release those results publicly in
Speaker 2: some form, even if not a full ten Q. This
Speaker 2: was interesting.
Speaker 1: The ostensible purpose of financial reporting is to give investors
Speaker 1: the same financial data that management is using to manage
Speaker 1: its business, so that the investors can have sit in
Speaker 1: the shoes of management. Everyone knows that's not true, but like,
Speaker 1: that's sort of like the ostensible That's why there's a
Speaker 1: you know, in your ten K you have to have
Speaker 1: a management discussion and analysis where you sort of say what
Speaker 1: management is thinking about the financial results. Rod is surely
Speaker 1: right that every public company closes its books every month
Speaker 1: and has some sense of the financial results for that month.
Speaker 1: And if they had private equity investors, they would just
Speaker 1: send over the spreadsheet and the private equity investors be like,
Speaker 1: thanks this selfhul But they have public investors which means
Speaker 1: primarily that they have people that can sue them. Everything
Speaker 1: that happens in US financial regulation and especially US financial disclosure,
Speaker 1: is in the shadow of litigation. Right, So if you
Speaker 1: put out a ten Q and your numbers are wrong,
Speaker 1: you will get sued and you will be like, yep,
Speaker 1: our numbers are wrong. Here is some money plaintiffs layers,
Speaker 1: and I think that's a lot of what is going
Speaker 1: on here, Like when you put out a ten Q,
Speaker 1: Like a ten Q does not have audited financials, but
Speaker 1: you like spend three days with your auditor going through
Speaker 1: the ten and making sure that you have utited or
Speaker 1: comfort on every number in the financials because if they're wrong,
Speaker 1: you'll get very sued. And so that I think is
Speaker 1: why companies do not put out more frequent disclosure, because sure,
Speaker 1: you have those numbers, but the task of turning those
Speaker 1: numbers into something you could give to shareholders and not
Speaker 1: worry about getting sued over is monumental. People like understand
Speaker 1: that this is like not great, right, Like this is
Speaker 1: why periodically the SEC tries to have some reform that
Speaker 1: tries to make it harder for shareholders to sue public companies.
Speaker 1: But you know, I always say everything is security is
Speaker 1: for it. I think the arc of the universe spends
Speaker 1: towards it, making it easier to sue public companies.
Speaker 2: This question did make me think a little bit about
Speaker 2: how occasionally you will see companies pre announce their earnings,
Speaker 2: even though they're wedded to quarterly updates. They will go
Speaker 2: early sometimes, but usually it's for bad news. Also, that's
Speaker 2: not monthly.
Speaker 1: Yeah, people pronounced for operatings or for bad news. But
Speaker 1: right to have a monthly schedule of putting out financial
Speaker 1: information no matter what would be three times as stressful
Speaker 1: as doing it quarterly.
Speaker 2: Yeah. But in all these conversations, I feel like, you know,
Speaker 2: as we continue to bat around like quarterly versus semi annual,
Speaker 2: I just feel like when it comes to shareholder reaction
Speaker 2: in terms of how the stock actually performs, it just
Speaker 2: needs to be consistent, you know, whether you announced monthly
Speaker 2: or every three months or every six months. I feel
Speaker 2: like switching around between the different timeframes is what really
Speaker 2: matters for investors trying to make decisions.
Speaker 1: Yeah, I mean, I think Rod points out that like
Speaker 1: monthly reporting would smooth a lot of volatility and just
Speaker 1: you know, make things more predictable. And investors could have
Speaker 1: more information and not react as strongly to every three
Speaker 1: month announcements. But yeah, I think like the disconnect here
Speaker 1: is between the burden of actually doing the financials and
Speaker 1: the burden of like public company reporting, which is an
Speaker 1: entirely different beast. Kitty is wiping her screen.
Speaker 2: There's like a beam of like.
Speaker 1: She's trying wipe me off her screen. Is as you
Speaker 1: might know if you've been listening closely or listened last
Speaker 1: week closely. Katie is recording.
Speaker 2: This from Colorado, Colorado.
Speaker 1: I'm recording this from my house, so it's the somewhat
Speaker 1: unusual but not unheard of remote money stuff podcast recording.
Speaker 2: Yeah, it's always a little bit worse. So thanks for listening.
Speaker 2: All right, great question, Rod.
Speaker 3: Mail mail back.
Speaker 2: Let's see we have another one from Josh, and this
Speaker 2: one is about ETFs and Josh wants to know about them.
Speaker 2: He says, you've done a great job covering the flaws
Speaker 2: of levered equity ETFs, especially how daily resets make them
Speaker 2: diverge from long term leveraged exposure. Do you see potential
Speaker 2: for retail products that actually deliver true long term levered
Speaker 2: equity performance. Suppose you think Corporate America is too conservative
Speaker 2: with their use of leverage. But simply buying on margin
Speaker 2: is too costly for the ordinary retail investor. But an
Speaker 2: ETF sponsor could implement leverage far more efficiently. Is there
Speaker 2: a path for this to exist?
Speaker 1: Great question, so, Josh, I think that has been ETF
Speaker 1: builded by Katie. So we've talked about like levered ETF's
Speaker 1: ordinarily rebalance every day to give you two times or
Speaker 1: three times the daily returns of a stock, and that
Speaker 1: creates this weird volatility drag. And if you wanted to
Speaker 1: have like two times the returns of a company for
Speaker 1: like a year, there's not really a product that will
Speaker 1: give you that other than buying the stock on margin
Speaker 1: and waiting a year. But there's no rely ETF product.
Speaker 1: Since we started talking about this, trader did like a
Speaker 1: weekly and monthly rebel ETF which gives you a month
Speaker 1: of two times the returns I think for like the
Speaker 1: S and P. But it is very hard to do
Speaker 1: an ETF that is like, we'll give you leverage return
Speaker 1: on a stock for five years. Because the whole point
Speaker 1: of an ETF is it has daily liquidity and so
Speaker 1: people can buy into the ETF each day, and you're
Speaker 1: giving them a different proposition each day. If you're giving them,
Speaker 1: you know, five years return starting on September twenty fifth,
Speaker 1: instead of saying we'll giving you daily leverage returns. But
Speaker 1: there's no reason that if the thing that you want
Speaker 1: is long term levered exposure to a company or an
Speaker 1: index or whatever, there's no reason that you should get
Speaker 1: that in the forum of a daily liquidity ETF that
Speaker 1: you can get out of at any time, right, Like,
Speaker 1: there are other ways to build that product. Now, the
Speaker 1: classic way to build that product is something like a
Speaker 1: private equity firm which buys companies, levers them up, and
Speaker 1: takes investors. And as we talk about a lot around here,
Speaker 1: it is getting easier and easier to put private equity
Speaker 1: into your retail brokerage account and so one day in
Speaker 1: the not too distant future, you'll just like, you know,
Speaker 1: get a KKR fund and your brokerage account and that'll
Speaker 1: be that. But otherwise, yeah, I mean, like it is
Speaker 1: hard because the sort of classic retail products are mutual funds,
Speaker 1: whether or not they're ETFs, and mutual funds have leverage limits,
Speaker 1: and so it is a little hard to invest in
Speaker 1: a retail product that gives you two x the exposure
Speaker 1: to Corporate America other than that retail product being your
Speaker 1: own margin account. But you know, watch this space. In
Speaker 1: like a year, it's just going to be private equity
Speaker 1: funds in your prohne.
Speaker 2: Okay, I'm glad you brought up the trader ETFs. I
Speaker 2: have some sad news. A bunch of them actually shut down.
Speaker 1: I'm not surprised. It's a super niche product, right to
Speaker 1: Like I want two times the monthly return on the
Speaker 1: SMB why yeah, Like two times the daily returns is
Speaker 1: a fun gambling product, right, and two times the long
Speaker 1: term returns is maybe for like a month? Like why
Speaker 1: a month?
Speaker 2: Yeah? I think at least one of them still exists.
Speaker 2: They did on the Queues spy and also the Philadelphia's
Speaker 2: Semiconductor Index. Sure, and the Monthly Cues reset ETF still exists.
Speaker 2: But I mean it's small. It just seems like the
Speaker 2: demand isn't there. It's sixty one million, but.
Speaker 1: Still there's two trades here. There's like what Jo asked
Speaker 1: about is like if you think that Corporate America is
Speaker 1: too conservative with their use of leverage, right, so like
Speaker 1: you can think that the capital structure of the S
Speaker 1: and P is under levered, and you want to back
Speaker 1: lever at yourself, and you can't do that through a
Speaker 1: margin account because like you can't get good margin terms,
Speaker 1: but you wish some investment advisor would do it for you.
Speaker 1: That's a sort of set of corporate financedcs that are reasonable.
Speaker 1: The other one is like, if you enjoy gambling, you'll
Speaker 1: enjoy a double gamble twice as much. And that I think,
Speaker 1: I think is a levered bet on a semiconductor index.
Speaker 1: Like I don't know, I don't know, but I think
Speaker 1: you're coming to that being like from the perspective of like, ah,
Speaker 1: the semi industry is too under levered. I need to
Speaker 1: synthetically lever up that industry. I think you're like, ooh,
Speaker 1: these talks will go up a lot. Why don't make
Speaker 1: them go up twice as much?
Speaker 2: Yeah, Josh, great question.
Speaker 3: Mail bag, mail bag.
Speaker 2: Another j name Justin asks. According to a recent op
Speaker 2: ed in The New York Times, the number of publicly
Speaker 2: traded companies has decreased by fifty percent over the last
Speaker 2: thirty years. Companies are choosing to remain private to avoid
Speaker 2: the additional regulatory requirements but also because of the evolution
Speaker 2: in the funding models for promising tech startups, how will
Speaker 2: this impact the investment options available to individual investors. Well,
Speaker 2: four oh one K investors in the future have to
Speaker 2: allocate some portion of their investment portfolio to private capital
Speaker 2: funds with management fees that are much higher than standard
Speaker 2: equity index funds.
Speaker 3: Yeah.
Speaker 1: I just feel like the answer is yes, right, Like
Speaker 1: it's not a first best state of affairs, right, Like
Speaker 1: the first best state of affairs I think. I think
Speaker 1: in the abstract is like somehow it gets easier to
Speaker 1: go public, and companies like feel some sense of like
Speaker 1: patriotic obligation to go public, and they're like, you know,
Speaker 1: we're a good company. We want mom and pop investors
Speaker 1: to be able to participate in our growth. And so
Speaker 1: all the little companies go public, and we make it
Speaker 1: really cheap and easy, and you know, we don't get
Speaker 1: sued when you go public. And so all the companies
Speaker 1: go public, and like the big, fun, fast growing companies
Speaker 1: are available to mom and pop investors they're available, and
Speaker 1: index funds they're available, and like standard low fee equity
Speaker 1: mutual funds, and life is great. Right, the second best
Speaker 1: outcome is like all the companies stay private and big
Speaker 1: institutional investors have access to their private shares, and those
Speaker 1: big institutional investors get bigger and bigger and bigger, and
Speaker 1: they tap out all of the available institutional capital and
Speaker 1: they're like, hey, there's a lot of money in four
Speaker 1: oh and ks, and then they lobby the president to
Speaker 1: let them take four roh and K money, and everyone's like, oh, yeah,
Speaker 1: it'd be great to put individual retail investors into private
Speaker 1: investments because those are the ones that go up a lot.
Speaker 1: And then the alternative asset managers are like, great, so
Speaker 1: we'll just charge like two and twenty for that, and
Speaker 1: then that's the equilibrium you end up in. I think
Speaker 1: that's like clearly happening, and it's not how anyone would
Speaker 1: design a financial system from like first principles, right, because
Speaker 1: like the you know you have is like historically what
Speaker 1: you have is like a lot of companies that want
Speaker 1: a lot of money are public and they're available to everyone,
Speaker 1: including retail investors, and then like a smaller number of
Speaker 1: companies that don't need as much money are private and
Speaker 1: they don't have access to retail investors. But like it's
Speaker 1: fine because it's like they're the smaller companies, the weirder companies,
Speaker 1: or the companies that don't need capital. And now we've
Speaker 1: moved to a model where like the big companies that
Speaker 1: do need a lot of capital can get it in
Speaker 1: private markets, but the private market capital providers are like, hey,
Speaker 1: we could really use some retail money. And so you
Speaker 1: have this like second layer of intermediation where you can
Speaker 1: just charge people a lot higher fees for investing in
Speaker 1: companies that would have been public twenty years ago.
Speaker 2: So the answer is yes, yes.
Speaker 1: Yeah, right, I got it.
Speaker 2: Prove me wrong.
Speaker 1: I'd love to be wrong. It just it's right.
Speaker 2: This is really interesting to just me. But we have
Speaker 2: another question from another j name. This one comes from Jordan.
Speaker 2: It'd be funny, okay, Jordan. Jordan asks one of the
Speaker 2: recurring trends across both betting markets and crypto is that
Speaker 2: things that were previously illegal are now legal if you
Speaker 2: go through these venues not legal advice. Does there exist
Speaker 2: a way to get around the Onion Futures Act of
Speaker 2: nineteen fifty eight by creating a betting market on poly
Speaker 2: market on the price of onions. Gosh, this question was
Speaker 2: written just for you.
Speaker 1: I feel like the answer is no. Okay. So we've
Speaker 1: talked about the Onion Futures Act of nineteen fifty eight
Speaker 1: in the past. Basically in the United States there are
Speaker 1: regulated commodity futures trading markets except for onions, because onions
Speaker 1: are specifically it's specifically illegal to trade onion futures. And
Speaker 1: the reason for that is, like someone cornered the onion
Speaker 1: market in the fifties and they were like so mad
Speaker 1: that they said, nowhere onion futures also motion picture receipts.
Speaker 1: Don't actually know why that is, but like the Onion
Speaker 1: Features Act also says it's illegal to trade futures on
Speaker 1: motion picture receipts, but otherwise you can trade futures on
Speaker 1: any commodity, which like people used to understand to mean
Speaker 1: like wheat and corn and metals and whatnot. And then
Speaker 1: in like the seventies they started to understand it to
Speaker 1: mean like treasury rates and stock indexes and stuff like that.
Speaker 1: And from there we have very recently expanded into a
Speaker 1: brave new world for commodities include who will win the
Speaker 1: football game tonight and who will win the election, And
Speaker 1: so now we have this brave new world where like
Speaker 1: almost everything is by default with many objections, with many complaints,
Speaker 1: with like many people believing this is wrong. But almost
Speaker 1: everything is currently legal to trade as a commodity futures
Speaker 1: contract on Calshie, Like if you can think of a proposition,
Speaker 1: you can make it into a commodity's future contract on Calshi.
Speaker 1: But there are a few exceptions, and one of them
Speaker 1: is onions, because onions are actually the statute. They say
Speaker 1: you can trade commodity features on everything but onions. So
Speaker 1: everything includes sports, includes elections, that doesn't include onions.
Speaker 3: Mail bag, mail back.
Speaker 1: I'm going to read the next question because it's segueyed
Speaker 1: directly from that. It's from Jamas, I mean Thomas Thomas right,
Speaker 1: say syllogism. One, gambling is legal if it is a
Speaker 1: commodities trade. True. Two, stock movement can be gambled on
Speaker 1: well true. Three company can insider trade on a commodity
Speaker 1: which it directly deals with, except onions of course, nice callback.
Speaker 1: So is insider trading of a company's own stock legal
Speaker 1: if it happens on a prediction market aka a commodities exchange.
Speaker 1: So I think the other exception to like everything is
Speaker 1: a commodity that can be traded on commodity exchange. The
Speaker 1: other exception is stock, because stock is a security and
Speaker 1: there are details complicated I do not pretend to fully understand,
Speaker 1: but there are rules about securities based swaps, so like
Speaker 1: there are commodities features which are regulated by the Commodity
Speaker 1: Futures Trading Commission, and are you know, traded on commodities exchanges.
Speaker 1: And then there are stock derivatives which are regulated by
Speaker 1: the SEC and have a more or less completely separate
Speaker 1: set of rules that apply to them. So if you
Speaker 1: were to try to list stocks on a prediction market
Speaker 1: just like stocks, or I think like binary options on stocks,
Speaker 1: I think questions like will Tesla be up or down today?
Speaker 1: Is I think a securities based swap, and I think
Speaker 1: you could not list that on a commodities exchange like calcio.
Speaker 1: This is not legal advice, and people are pushing the
Speaker 1: boundaries of this every day, so I don't feel confident
Speaker 1: that this will always be true, But for right now,
Speaker 1: I think it is the case that you can't just
Speaker 1: have straight up stock bets on prediction markets. Now, I
Speaker 1: went and looked at polymarket and calshiy, and there's some stuff.
Speaker 1: There's some like what will be the biggest AI company
Speaker 1: at the end of the year. There's stuff where you're like,
Speaker 1: that's a little bit like a securities based swap, but
Speaker 1: it's like far enough away that people don't think of
Speaker 1: it as betting on stocks. I know the answer to
Speaker 1: the question. I mean, I think if you think that
Speaker 1: like pretty straightforward bets on stocks will end up existing
Speaker 1: on these prediction markets. I don't know the answer to
Speaker 1: the question. Would it be legal for the company to
Speaker 1: gamble on its own stock. I feel like the intuitively
Speaker 1: correct answer is no, but the like the tracing through
Speaker 1: the commodities rules might be yes. But in any case,
Speaker 1: I wouldn't worry about it because like, these contracts are
Speaker 1: never going to be that liquid, and like, no one,
Speaker 1: you know, Tesla's not going to go around and be
Speaker 1: like I can make forty dollars betting my stock will
Speaker 1: be up today.
Speaker 2: I feel like a company just has to do it
Speaker 2: so we can find out the answer.
Speaker 1: Once there's a series of things you have to do,
Speaker 1: which include getting some sort of bet on your stock
Speaker 1: listed on a prediction market, which is you know, that's
Speaker 1: your first problem right there by the way. I do
Speaker 1: think that more of that happens in Europe, like, you
Speaker 1: can have bets on stocks on prediction markets, but instort
Speaker 1: of treating rules and commodities rules are different.
Speaker 2: There. That was a good one to two punch of questions.
Speaker 1: Onions and stocks, the two things that are not legal
Speaker 1: to trade, and commodities features.
Speaker 3: We mail back.
Speaker 2: I'm really pleased to say that. The next question comes
Speaker 2: from another Josh, so we're back to the Jay names,
Speaker 2: which is interesting anyway. This Josh asks sports betting apps
Speaker 2: regularly ban or limit so called sharp betters, gamblers that
Speaker 2: have a history of winning a high percent of the time.
Speaker 2: This has always seemed weird or kind of unfair to me,
Speaker 2: But whatever, If these apps and other prediction type markets
Speaker 2: begin allowing bets on equities, can they legally do the
Speaker 2: same thing. If I'm consistently winning bets on if the
Speaker 2: SMP will go up or down on a specific day,
Speaker 2: can they ban me from making that bet? I love
Speaker 2: this question. I have no idea, but boys, it fun
Speaker 2: to think about.
Speaker 1: So a couple wins one is As we just said,
Speaker 1: I think it's going to be hard for these prediction
Speaker 1: markets to list stock trades because I think that's the
Speaker 1: securities based on now there isn't. The exception is indexes
Speaker 1: for some reason trade on commodities exchanges like stock indexas,
Speaker 1: So you can probably probably have a better on the SMP,
Speaker 1: whereas you can't on like Tesla or en video. So
Speaker 1: like it is plausible that like consistently winning bets on
Speaker 1: the s and P on your prediction market app is
Speaker 1: the thing that could happen, and then the question is
Speaker 1: can they ban you. So in traditional sports betting, you
Speaker 1: like have an account with a sports book that takes
Speaker 1: the other side of your bets, and the sports book
Speaker 1: doesn't want to lose, and so it will think about
Speaker 1: are you going to be a winning better? And it
Speaker 1: has various data to you know, evaluate that, including your
Speaker 1: track record and you know at the time of day
Speaker 1: that you make bets and things like that, and if
Speaker 1: it concludes you're going to be a winning better, it
Speaker 1: will probably limit how much you can bet, or even
Speaker 1: cut you off entirely because it doesn't want to lose
Speaker 1: big bets to you because it's taking the other side
Speaker 1: of your traits. A commodities exchange can't really do that.
Speaker 1: A commodity exchange has to have some sort of like
Speaker 1: fair open access and so if you are betting on
Speaker 1: a commodities exchange, it can't limit your cut you off. Now,
Speaker 1: the other thing that's true about a commodities exchange is
Speaker 1: it isn't taking the other side of your bets. It's
Speaker 1: just an exchange. Like in a classic sports book, the
Speaker 1: person facing you is like both like the people providing
Speaker 1: the interface and the people taking the other side of
Speaker 1: the bets are the same, or the book maker. In
Speaker 1: a commodities exchange, there's the exchange that provides the venue
Speaker 1: for the bets, and then the person taking the other
Speaker 1: side of your bet is just another better it's probably
Speaker 1: a market maker in like these prediction markets, that's probably
Speaker 1: a professional or semi professional market maker who is like
Speaker 1: in the business of taking the other side of bets.
Speaker 1: If you like look at actual US equity market structure,
Speaker 1: it's not quite the case that like, if you're good
Speaker 1: at you know, trading stocks, they will cut you off
Speaker 1: or limit you because you know, equities markets have a
Speaker 1: higher standard of fairness and openness than like sports books.
Speaker 1: But it's not entirely not the case either. Like one
Speaker 1: thing that happens is that like the stock exchanges have
Speaker 1: programs separate venues to segregate retail and institutional orders, because
Speaker 1: you know, in this world, the institutions are the sharps,
Speaker 1: and the retail orders are the you know, like noise gamblers,
Speaker 1: and so market makers, who are the equivalent of bookmakers,
Speaker 1: want to trade on the other side of retail, and
Speaker 1: they don't want to trade on the other side of sharps.
Speaker 1: And so you have ways to segregate the order flow.
Speaker 1: So like the exchanges do some of it where they
Speaker 1: have like retail execution facilities, where like you can trade
Speaker 1: with only retail on the exchange. But the main way
Speaker 1: this happens in the US equity market is payment for orderflow,
Speaker 1: where you know, Robinhood will route stock orders to market
Speaker 1: makers because those market makers want to interact only with
Speaker 1: retail orders. So most retail is noise traders, and it's
Speaker 1: fun for a market maker and to interact with them.
Speaker 1: But some retail is sharps. And I have heard anecdotally
Speaker 1: that market makers do limit the sharps, and that if
Speaker 1: you are really really really good at trading stocks in
Speaker 1: a particular way, like if you're picking off quotes, or
Speaker 1: if you're like if you have like really good like
Speaker 1: short term alpha, possibly because you have like some weird algorithm,
Speaker 1: possibly because you're spoofing, which some retail traders do, or
Speaker 1: possibly because you're incredibly smart and you're doing that on
Speaker 1: your Robinhoo account, and Robinhood is routing your orders to
Speaker 1: some market maker. That market maker might notice and it
Speaker 1: might call Robinhood up and say, hey, we don't want
Speaker 1: these orders anymore. Right, there's some possibility of, like if
Speaker 1: you're too sharp, you will get limited in some way
Speaker 1: in the equity market, although I think it's much more
Speaker 1: like unclear and uncertain than it is in the sports
Speaker 1: betting world. I don't think that any of that is
Speaker 1: in the near future for like Calshi, but in the
Speaker 1: far future, when you know, sports betting on commodities exchanges
Speaker 1: is a huge business. Will bookmakers pay like app providers
Speaker 1: to route orders directly to the bookmakers? And will the
Speaker 1: bookmakers say I don't want these orders because they're too sharp, Like, yeah,
Speaker 1: maybe I don't know.
Speaker 2: So maybe we revisited this question and like ten years,
Speaker 2: I would.
Speaker 1: Just say there's a continuum of how much a market
Speaker 1: maker can limit sharps, and like bookmakers do it like
Speaker 1: most clearly and explicitly, but like in the rest of
Speaker 1: the financial world, there's a little bit of it. I
Speaker 1: think in professional institutional bond trading you see a certain
Speaker 1: amount of this, where like if you continue to like
Speaker 1: pick off your brokers, your brokers will stop answering their calls, right,
Speaker 1: I mean, like there's a lot of If you're too sharp,
Speaker 1: people will notice and you'll get less ability to trade.
Speaker 2: Mike asks During earning season, a company missus beats or
Speaker 2: hits expectations, but the reality is that earnings are what
Speaker 2: they are. It's the analysts who hit or miss or
Speaker 2: come close in their predictions. When a Category five hurricane
Speaker 2: drops to a Category fourlogists don't say the hurricane underperformed. Instead,
Speaker 2: they say it took a different path, et cetera. Shouldn't
Speaker 2: the hit or miss burden be on the analysts rather
Speaker 2: than the company? So I think this is interesting, But
Speaker 2: I also feel like it is on the company because
Speaker 2: they're in pretty regular communication with the cell side and
Speaker 2: are in the business of managing expectations.
Speaker 1: Yeah, like, no one wants to hear that, but that's
Speaker 1: the answer, right, I mean, like, yeah, earnings expectations are
Speaker 1: not like analysts like putting their finger in the wind
Speaker 1: and say, ah, I think those guys will go up.
Speaker 1: You know, earnings expectations are analysts talking to the companies,
Speaker 1: and it's sort of seeping out through the analysts. So, right,
Speaker 1: if you miss expectations, like you have done a poor
Speaker 1: job of managing your analysts.
Speaker 2: Yeah, this is.
Speaker 1: A common complaint. And it's like, no, the analysts were wrong,
Speaker 1: not the company. And it's like that's fine, Like you
Speaker 1: can say that, but like the point is that when you, Katie,
Speaker 1: go on television and you say the company missed expectations,
Speaker 1: what you're doing is explaining why the stock has gone down, right, Yeah,
Speaker 1: And like the stock went down because people did have expectations, right,
Speaker 1: and when the company underperformed those expectations or the expectations
Speaker 1: overperformed the company in any case, like what happens next
Speaker 1: the stock goes that, And so it is natural for
Speaker 1: the investors to feel disappointed, right, Yeah, this company disappointed us,
Speaker 1: Like I don't know, like it does feel like the
Speaker 1: company is the one that is the immediate cause of
Speaker 1: the disappointment. And so I think it's completely fair to
Speaker 1: say they missed expectations.
Speaker 2: It's in some way similar to the lead up to
Speaker 2: big FED decisions, Like the FED doesn't like to surprise
Speaker 2: the market. The FED is almost certainly going to tell
Speaker 2: you without telling you what exactly it's going to do.
Speaker 2: At their policy decision, they do have a blackout period,
Speaker 2: so you see like a real parade of FED speakers
Speaker 2: get in what they're going to say before the blackout period. Like,
Speaker 2: no big FED decision should be that big of a surprise.
Speaker 2: You have like a range of possibilities, and I feel
Speaker 2: like it's the same at the micro level with all
Speaker 2: these companies as well.
Speaker 1: It is, and like I think that like there are
Speaker 1: some you know, regulatory concerns about like the mechanism that
Speaker 1: you and I have just positive of, Like companies managed
Speaker 1: their analysts pretty closely. No one would quite say that,
Speaker 1: like it's a little awkward. You're not supposed to disclose
Speaker 1: material non public information to the analysts without disclosing it
Speaker 1: to everyone.
Speaker 2: But like yeah, you know, thanks, but we're on a podcast,
Speaker 2: so we can say it.
Speaker 1: We can say it. It's like the truth is somewhere
Speaker 1: to be trained. But right, if you're in a company
Speaker 1: and it's like two weeks before earnings and analysts expect
Speaker 1: you to make two dollars a share, and you're gonna
Speaker 1: make one dollar a share, like, it's too late to
Speaker 1: make the extra dollar a share.
Speaker 2: Like.
Speaker 1: What you're trying to do is figure out a way
Speaker 1: to communicate to the market that the market is going
Speaker 1: to be disappointed. Yeah, and if you fail to do that,
Speaker 1: then you missed expectations.
Speaker 2: Man, or you could pre announce it. Good question, though, Mike,
Speaker 2: we appreciate it.
Speaker 3: Mail Bag, mail Bag Charlie.
Speaker 2: I really like this question from Charlie. Charlie asks you
Speaker 2: both seem to hold primarily orthodox spin to it views parentheses.
Speaker 2: It is good to buy low cost index funds. Elon
Speaker 2: is wild but makes the number go up. M two
Speaker 2: graphs are not a useful way to consider price, et cetera.
Speaker 2: Do either of you hold any heterodox opinions in this area.
Speaker 2: I'll let you go first.
Speaker 1: I hold no heterox opinion. I probably hold some heterot
Speaker 1: ex opinions. I have like tried to start fights on
Speaker 1: fin Twitter because I think that comparing stocks and flows
Speaker 1: is completely normal and happens every day and the word
Speaker 1: for it is valuation. And like for a long time
Speaker 1: on finance Twitter there is like a stocks and flows
Speaker 1: police where people would see that like Apple is worth
Speaker 1: more than the GDP of Kazakhstan, and they'd be like,
Speaker 1: that's a stock and flow. You can never compare stocks
Speaker 1: and flow, And that's right. This is a very minor
Speaker 1: heterox opinion. And for the most part, I hold only
Speaker 1: orthodox opinions, and I think often that my job is
Speaker 1: just to explain recent financial events in terms of like
Speaker 1: corporate finance one oh one, and the most orthodox and
Speaker 1: normal corporate finance theories remain counterintuitor to a lot of people,
Speaker 1: and so it's fun to just explain them.
Speaker 2: Again, I would say, the heterodox opinion that I hold
Speaker 2: about investing, and this is not investing advice, et cetera.
Speaker 2: I don't know, fixed income and bond seem kind of
Speaker 2: stupid to me, Like I don't. It just seems dumb.
Speaker 1: Like that's really I love that, you know, I like
Speaker 1: come from an equities background, right, I was a convertible
Speaker 1: bomb guy, and so like, I do have a bit
Speaker 1: of like grievance that, like everyone thinks that equities are dumb,
Speaker 1: but I appreciate that you're that you think fixed and
Speaker 1: given is umb.
Speaker 2: Money market funds, sure that, but that's basically cash. But
Speaker 2: why on earth would anyone buy like even the belly
Speaker 2: of the treasury curve and especially out from there, They're
Speaker 2: unreliable as a hedge. And also I don't get that
Speaker 2: excited about the yield. But that's not investing advice. That
Speaker 2: is just a heterodox opinion that perhaps.
Speaker 1: I hold answered. No, can't believe you, so then I know.
Speaker 2: I'm sorry.
Speaker 1: All right, that was a mail bag.
Speaker 2: That was a meal bag. Thanks for the great questions.
Speaker 1: Thanks for joining us from your vacation.
Speaker 2: Yeah, I'm really eager to sign off, so I'm going
Speaker 2: to do it.
Speaker 1: All right, goodbye, And that was the Money Stuff Podcast.
Speaker 2: I'm Matt Levine and I'm Katie Greifeld.
Speaker 1: You can find my work by subscribing to the Money
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Speaker 1: The Money Stuff Podcast is produced by Anamazerakis and Moses Ona.
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