Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: It was a painful game. I don't know if I
Speaker 2: enjoyed watching it. It was really stressful.
Speaker 1: Had the experience the entire game of being like, well,
Speaker 1: obviously the Knicks are going to win this.
Speaker 2: Yeah. I felt that way too.
Speaker 1: I said jokingly, but not I was like, well, we
Speaker 1: haven't right where they want them. MIxS were down like
Speaker 1: fifteen or whatever.
Speaker 2: I knew that they were going to win in my
Speaker 2: long tenure of watching basketball for two weeks, because that's
Speaker 2: how they started every game. But I was watching with
Speaker 2: my dad who was having a heart attack like the
Speaker 2: entire time, so he was not as confident.
Speaker 1: But I was also so tired. Yeah, I'm not cut
Speaker 1: out for late night sports. Why I love the World Cup? Yeah,
Speaker 1: because actually I prefer the World Cup in other parts
Speaker 1: of the world, even not going to any games, And
Speaker 1: I'd rather it be in like Asia and have games
Speaker 1: out of like eight in the morning New York times,
Speaker 1: because like then I can watch the games.
Speaker 2: I think, you're you're a rare bird.
Speaker 1: Like there are games in this World Cup that are
Speaker 1: at like nine pm.
Speaker 2: It's it's too late.
Speaker 1: They start at midnight and like never.
Speaker 2: I just don't know if I have the emotional energy
Speaker 2: to like get invested in another sport that I so
Speaker 2: casually follow, you know, I feel like.
Speaker 1: The World Cup is extremely great for not getting very invested. Yeah,
Speaker 1: you can watch two countries you've never thought about play
Speaker 1: each other and it's just fun. It's just like there's
Speaker 1: no stakes. I mean there's stakes, are that that's true.
Speaker 2: I just think basketball is the perfect sport for someone
Speaker 2: who doesn't follow it to watch it because it's super fast,
Speaker 2: they score a ton, They're all like kind of concentrated together.
Speaker 2: You always know where the basketball is, whereas you know, soccer,
Speaker 2: it's bigger and they don't score as much.
Speaker 1: I hear you, But as a crotchity old man, I
Speaker 1: really appreciate the way that soccer works where they start
Speaker 1: the clock and then they play soccer, yeah, and then
Speaker 1: they finish the half for the game, whereas like in bascowball,
Speaker 1: when there's five minutes of eighteen seconds of game time left,
Speaker 1: you're like, yeah, another two hours.
Speaker 2: Yeah right, I gotta go to bed, go to the
Speaker 2: bathroom again.
Speaker 1: This is a real sports podcast. You're hosted by and
Speaker 1: for people who don't really go out attention to sports.
Speaker 1: We talked the other day about my very slight desire
Speaker 1: to coach little league. Yes, and I got an email
Speaker 1: from a reader being like, please coach little league. He's like,
Speaker 1: I do some administration for our league. And like the
Speaker 1: dads who are like, I must coach little league like
Speaker 1: need to be balanced.
Speaker 2: Yeah.
Speaker 1: Other dads are like, yeah, yes, sure you've got you need.
Speaker 1: You need some low commitment little league catches.
Speaker 2: That's good. Yeah. Remind everyone that they should be having fun.
Speaker 1: Right yeah, sportsmanship. Hello, and welcome to The Money Stuff Podcast,
Speaker 1: your weekly podcasts where youre talking about stuff related to money.
Speaker 1: I'm Matt Levian, r at the Money Stuff column.
Speaker 2: For Bloomberg Opinion, and I'm Katie Greifeld, a reporter for
Speaker 2: Bloomberg News and an anchor for Bloomberg Television.
Speaker 1: I think you're just not talking about.
Speaker 2: I'm spacexed out, even though I will say, as we're
Speaker 2: recording this on fed Day, by the way, we're going
Speaker 2: to miss the starting minutes of Kevin Worrish at the
Speaker 2: podium for the first time. Not that I don't think
Speaker 2: you care. I care a little bit. SpaceX is a
Speaker 2: little bit lower today on this Wednesday the line hasn't
Speaker 2: moved in that direction before, and its short life is
Speaker 2: a publicly listed equity. But we don't have to talk.
Speaker 1: About I feel like I have a lot of like
Speaker 1: ill formed thoughts about it's not gying up. Who cares?
Speaker 2: I tweeted something about SpaceX today.
Speaker 1: It's funny that tweeting is now business.
Speaker 2: Yeah, that's true, that's true. I tweeted on X or
Speaker 2: post it on X owned by the parent company SpaceX.
Speaker 2: Would the discovery of aliens be bullish or bearish for
Speaker 2: SpaceX's valuation.
Speaker 1: That's a great question.
Speaker 2: It's kind of fun to think about.
Speaker 1: I've joked that, like their medium term plan is like
Speaker 1: data centers in space to run like Enterprise ai yah,
Speaker 1: but their long term plan is to like colonize the
Speaker 1: universe and sell spice to alien civilizations. So I'm gonna
Speaker 1: be with bullish. But you know, obviously, if like the
Speaker 1: aliens have better spacefaring technology and also like robustly developed
Speaker 1: capital markets, then like you don't need to don one
Speaker 1: SpaceX when you can know and you know that's intergalactic
Speaker 1: space conglomerate.
Speaker 2: I do think it would introduce some shortly volatility as
Speaker 2: we sort through those questions.
Speaker 1: But possibly long with volatility.
Speaker 2: Yeah, that's true anyways, SpaceX So, I mean it's like,
Speaker 2: which hedge fund ish do you want to talk about?
Speaker 1: I don't know what do you want to talking about?
Speaker 2: I mean we could talk about Ken Griffin.
Speaker 1: First in The New Yorker by Carrie Cernowitz, who's the
Speaker 1: guy I know in his book I've blurped, and he
Speaker 1: was photographed for that story. But oh yeah, Jeff Brown,
Speaker 1: who photographed me for my no kidding, I very cool
Speaker 1: publicity stills like me slept in a chair the past
Speaker 1: time during the start issue. Ye, Jeff Fron's a genius
Speaker 1: and photographed and it's a profile of what makes Ken
Speaker 1: Griffin tick.
Speaker 2: I really enjoyed it. I have to say my attention
Speaker 2: span is so shot.
Speaker 1: This was the most I've never read article.
Speaker 2: Yeah, exactly. I couldn't quite get there. I do make
Speaker 2: it through money stuff, but I made it probably three
Speaker 2: fourths the way through. That's why I asked to push
Speaker 2: to two TE. I was wondering at what point Ken
Speaker 2: Griffin's eyes would come up, and they came up pretty quickly.
Speaker 2: Here's the sentence in particular, Griffin's blue eyes are unsettlingly bright.
Speaker 2: Colleagues debate half in jest about whether he lacks the
Speaker 2: normal need to blink.
Speaker 1: I love that I just made a joke today about
Speaker 1: hedgehund managers not having time to blink. Now this market moves,
Speaker 1: maybe he's evolved to keep his eyes up in all
Speaker 1: the time.
Speaker 2: I feel like he might like that joke, right. But yeah, No,
Speaker 2: it was a great profile. There were a lot of
Speaker 2: interesting things. I like when I'm reading a thing that
Speaker 2: I know that we're going to talk about, and then
Speaker 2: I find the angle while i'm reading it, then I
Speaker 2: know that you're going to want to.
Speaker 1: Talk about behind the scenes, Yeah, is making presses? What
Speaker 1: am I going to want to talk about?
Speaker 2: You want to talk You do my part for me,
Speaker 2: the quality of earning?
Speaker 1: Yes, exactly, you did right about that too, right. My
Speaker 1: stick for a while has been that I think people
Speaker 1: have this view of what a hedgehund manager is, or
Speaker 1: what a hedgehund is, that it's like an investing firm,
Speaker 1: And my view is that these multistat funds are much
Speaker 1: more more like what investment banks were twenty years ago,
Speaker 1: and they're they're not the best thought of as like
Speaker 1: making investment decisions, but rather as like running businesses that
Speaker 1: provide services to the market. Some of those services are
Speaker 1: like making prices more efficient, they're like long short equity trading.
Speaker 1: But some of those services are liquidity services, and like
Speaker 1: you know, like the dispersion trade in the index ARB
Speaker 1: trades are really like just real liquidity provision services that
Speaker 1: used to be done by bank center now being done
Speaker 1: by these hedge ones. And what is pleasing in this
Speaker 1: article is like that thesis has sort of been enshrined.
Speaker 1: In The New Yorker, carry Sernovis writes about ken Griffin
Speaker 1: being in college at Cabot House, which is also where
Speaker 1: I lived in college. He and I are among the
Speaker 1: illustrious cabin house Alonia. Ken Griffin was like doing options trades,
Speaker 1: and he was like, well, I've made money on these
Speaker 1: options trades, but like the market maker on the other
Speaker 1: side explaining all of the options trades, I should do that.
Speaker 1: So I eventually started a market maker. But also he
Speaker 1: had like the more holistic view of like I want
Speaker 1: to hire earnings quality even in my regular trading. So
Speaker 1: he got into like a convert our business that used
Speaker 1: to be done by banks and is now like convert harvest,
Speaker 1: just the standard hedge fund trade. So he got into
Speaker 1: these businesses that are repeatable liquidity provision, almost like fee
Speaker 1: for service businesses, where like you do stuff that gets
Speaker 1: a steady return because you're providing a service to the market,
Speaker 1: rather than like picking the stock that'll go up.
Speaker 2: Yeah. I thought that was an interesting anecdote in sort
Speaker 2: of explaining the starting point of his thinking, because I
Speaker 2: can connect that story easily into why he started a
Speaker 2: market maker eventually, Yes, but.
Speaker 1: He even started a marketmaker, initially started a hedge fund
Speaker 1: that did trades that sort of had that shape of
Speaker 1: like being repeatable businesses rather than being like stock picking.
Speaker 2: Yeah. I did think it's interesting that when Starner Woods
Speaker 2: sort of asked him, like, who are your heroes, Ken
Speaker 2: Griffin didn't really have anyone to name.
Speaker 1: Yeah, because like there are a lot of hegemon managers,
Speaker 1: Bill Ackman being perhaps the most prominent among them.
Speaker 2: Who also has piercing blue eyes or.
Speaker 1: Hazel a matter of some controversy. He would be the
Speaker 1: first to tell you that he wants to be Warren Buffett, right,
Speaker 1: And there's like a lot of hedgemo matters like that,
Speaker 1: and like that is the opposite of what Ken Griffin's approaches, right,
Speaker 1: Like he is not like I'm going to pick good
Speaker 1: businesses and on their stocks forever. He is like, I'm
Speaker 1: going to have a high quality earnings. I'm gonna have
Speaker 1: recurring earnings every quarter, you know. And so that model
Speaker 1: like the sort of like big swing headshow manager the
Speaker 1: you know, Gary mentioned George Soros as a as a
Speaker 1: name of you know who other hedge matters have admired. Like,
Speaker 1: that's not what he's trying to do, right, He's trying
Speaker 1: to build high quality of earnings and repeatable business.
Speaker 2: Yeah, there was a great one here from Lloyd Blankfine,
Speaker 2: the former CEO of Goldman, who told Cernawitz that he
Speaker 2: still can't figure out who mentored him to who he
Speaker 2: has a debt because I mean Griffin also, I mean
Speaker 2: he started Todel so early, like.
Speaker 1: In like the cable House, Yeah more or less, I
Speaker 1: mean not literally, but like he started the stuff he
Speaker 1: was doing at cabin House grew very quickly into being
Speaker 1: said at all.
Speaker 2: Yeah, no real time to like find a mentor if
Speaker 2: you just start out the gate. Also, it's also a
Speaker 2: very different model from like a Bridgewater for example. Oh yeah,
Speaker 2: oh yeah.
Speaker 1: Yeah, two important things about Ken Griffin. One is that
Speaker 1: he owns all the houses. Also, all the constitutions, yes,
Speaker 1: all the dinosaurs, Yeah, all the art. If you're in
Speaker 1: the business of like generating billions of dollars of profits
Speaker 1: from doing financial trades, like, I appreciate people who are
Speaker 1: like I mean to like turn that as rapidly as
Speaker 1: possible into tangible wealth. Yeah, Like all this stuff feels
Speaker 1: somewhat imaginary, but a stegosaurus that's real.
Speaker 2: Well, the the profile does go into you know, he
Speaker 2: had a really rough time during the financial crisis and
Speaker 2: made the decision at that point that he wanted to
Speaker 2: have non financial assets. Yeah, from that point on.
Speaker 1: You out of market making businesses into stegosaurus constitutions.
Speaker 2: Yeah, that cartis and a lot of pieces he does
Speaker 2: have on loan to actual museums, which is cool versus
Speaker 2: just sitting in the various basements of his billion and
Speaker 2: a half dollar real estate portfolio.
Speaker 1: Right. I don't know if he has a dinosaur at
Speaker 1: any of his houses. If I had a billion dollar
Speaker 1: collection of stuff, I would probably want a stegosaurus in
Speaker 1: my living room because that is very cool. Like I
Speaker 1: get that having it at a museum is also also cool.
Speaker 2: It might just because I'm sick, but I did get
Speaker 2: the shivers thinking about that. Like here's a dinosaurs. This
Speaker 2: is something that was a live once a long time ago,
Speaker 2: and now I own it. I have a lot of
Speaker 2: a live horses. Yeah, right, alive being.
Speaker 1: Right, key right, totally different collecting impulse. The other thing
Speaker 1: about cityl yeah kindo, friends saidst is no one is
Speaker 1: a tough place to work. Yeah, And the story gets
Speaker 1: into things like someone someone calls it a highway wreck
Speaker 1: of human bodies, not meaning that the bodies have been wrecked,
Speaker 1: but rather that the people get fired a lot when
Speaker 1: they like transition, turnover, a lot of turnover. Someone kept
Speaker 1: a book of souls about all their friends who go
Speaker 1: and again it's like it's like there's something about like
Speaker 1: quality of earnings, right, It's like it's like if you
Speaker 1: think about hedgehns generating alpha, there are alphas that are
Speaker 1: just repeatable forever because you're providing a service. But there's
Speaker 1: a lot of stuff that's like yeah, like people didn't
Speaker 1: notice it, and then you notice it. You made a
Speaker 1: little money, and then like people notice it and it
Speaker 1: stops making money, and so there's a real like you know,
Speaker 1: constant churn as signals the kay when the cigneal partner
Speaker 1: says in the story, it's not about a portfolio, it's
Speaker 1: about a business that can recreate great portfolios again and again,
Speaker 1: which is like you think about like what a person does,
Speaker 1: like often a person is good at finding your particular portfolio,
Speaker 1: and like if you need to totally recreate the portfolios,
Speaker 1: then that means getting only people. So another hedge fund
Speaker 1: is yeah, Bridge Wader.
Speaker 2: Yeah, capacity constraints, tensions between GPS and LPs.
Speaker 1: I don't want to say this, but you shouldn't. The
Speaker 1: Bridge Order had this reputation for a while, okay, forgetting
Speaker 1: you know, like a load of mid single digit returns,
Speaker 1: being very stable, leading with its reputations being the biggest
Speaker 1: hedge fund in the world and being you know sort
Speaker 1: of like not a like taking big swings, making lots
Speaker 1: of money kind of place, right, And that reputation was
Speaker 1: not entirely a positive thing.
Speaker 2: They were going to talk about their other reputation, Oh sure, sure.
Speaker 1: Sure, they had a reputation for being very interpersonally weird.
Speaker 2: Yeah, they're actually got a name drop in the New
Speaker 2: Yorker profile about Ray Dalio being a pregnant woman cry.
Speaker 1: Yeah, yeah, like it being just so ostentatiously weird personally,
Speaker 1: but like they were doing all of that and like
Speaker 1: doing all that ruthless self examination and like struggle sessions
Speaker 1: or they all got in a room and berated each other. Well,
Speaker 1: their performance is like kind of mediocre. Yes, it, take
Speaker 1: a step back and do a struggle session about that.
Speaker 2: Yeah. It wasn't in service of like improving their returns, right,
Speaker 2: it was just like it was just its own thing. Yeah,
Speaker 2: like a weird social experience exactly.
Speaker 1: If you talk about that to a like an investor,
Speaker 1: an alligator, like that sounds bad, right. It's like, no,
Speaker 1: I want a good return rather than a bad return.
Speaker 1: But I'd rather be in a good fund that generates
Speaker 1: high returns than in like a giant fund that doesn't.
Speaker 1: But as a business matter, it's nice to run a
Speaker 1: giant fund that has very sticky capital for a variety
Speaker 1: of reasons and that generates steady, you know, mediocre returns
Speaker 1: because it's a business matter. You're charging management fees, and
Speaker 1: it is nice to have a very predictable recurring management
Speaker 1: fee revenue. And so arguably it was a good business
Speaker 1: for Bridgewater to be running as much money as possible
Speaker 1: and like, yeah, I have an okay returns. Yeah, but
Speaker 1: they moved on from that, and so Bloomberg's Emma Parmer
Speaker 1: are pretty singing and Lionoda I have a story about
Speaker 1: how basically near Bardea, who's like the I was gonna
Speaker 1: say new CEO. He's not that new, but he's a
Speaker 1: guy who took over when Ray Dalio kind of retired
Speaker 1: from from Bridgewater. He has been trying to make it
Speaker 1: a smaller, more focused, higher performance fund.
Speaker 2: Yeah, I think I think it's.
Speaker 1: Operating a little bit more like a hedge fund than it.
Speaker 2: Used to, which makes sense.
Speaker 1: Which makes sense because like when it was Ray Dalio's baby,
Speaker 1: it was just like a strange, giant institution. But now
Speaker 1: it's like the guy, you got a round a hedge fund,
Speaker 1: you know.
Speaker 2: Yeah.
Speaker 1: And so one thing that means is the performance is better.
Speaker 1: Another thing it means is that they've returned capital to
Speaker 1: investors because they don't think they have the capacity to
Speaker 1: run as much money as they used to run. And
Speaker 1: the third thing it means they sold stakes to in
Speaker 1: their general partner. They sold stakes in the management company
Speaker 1: to a bunch of investors, including like some people who
Speaker 1: like swapped out hedge fund steaks into management company steaks,
Speaker 1: which is a very strange signal. But anyway, those people
Speaker 1: are now disappointed because they were like I was signing
Speaker 1: up for a steady stream of management fees on this
Speaker 1: giant pool of capital, and now I'm getting good but
Speaker 1: variable performance fees on a smaller pool of capital. And
Speaker 1: that's not what I wanted. I wanted like a high
Speaker 1: quality of earnings, you know.
Speaker 2: Yeah, No, it's great reporting Bloomberg saying that two of
Speaker 2: the firms seven institutional owners have sold their shares back
Speaker 2: to Bridgewater at a discount to their purchase price.
Speaker 1: Right, because like when you buy the thing and it's like,
Speaker 1: you know, the stream of management fees on a giant
Speaker 1: pool of money, like then it goes down when it
Speaker 1: has a smaller pool of money.
Speaker 2: Yeah, but they're not alone. There's a third the Teacher
Speaker 2: Retirement System of Texas. It's also looking to sell. It's
Speaker 2: already slashed its value of its holding by nine percent
Speaker 2: last year. So that's the rub, right, Like you would
Speaker 2: think before you think of like really think about it.
Speaker 2: That Okay, it makes sense the new CEO would come
Speaker 2: in and be like, we need to improve returns. We
Speaker 2: are way too big. We're constrained by how big we are.
Speaker 2: Let's improve this. But even though I mean, twenty twenty
Speaker 2: five was a great year for their pure Alpha fund,
Speaker 2: which had been sort of having a middling decade or so.
Speaker 2: But I guess the anxiety there is that, in addition
Speaker 2: to your earning less on the big pool of money,
Speaker 2: that there's no guarantee that they're going to be able
Speaker 2: to replicate their twenty twenty five.
Speaker 1: Right, it's a quality earnings think, right, Like outside investors
Speaker 1: love management fees because they are the same every year,
Speaker 1: and they don't like performance fees because who knows what
Speaker 1: performance will be next year. I think that most people
Speaker 1: who like work at hedge funds think like you were saying,
Speaker 1: like what you would expect, which is like, of course,
Speaker 1: our job is to make the returns good, right, right?
Speaker 1: Of course, our job is to make as much money
Speaker 1: as possible for our clients. Yes, And if you don't
Speaker 1: have outside money at your GP, if you don't have
Speaker 1: outside money at the imagement company, like you just sort
Speaker 1: of think that now you might not think that you
Speaker 1: might like in your secret evil heart, think I'm just
Speaker 1: gonna like gather as much capital as I can and
Speaker 1: charge two percent fees and who cares about their performance?
Speaker 1: But like you don't say that out loud. Inside that
Speaker 1: you probably don't even really think it, right, like like
Speaker 1: that's like a that's like a that's like an insulting
Speaker 1: thing you might say about someone else. But you wouldn't
Speaker 1: like do that because like your whole life is devoted
Speaker 1: to like having the best possible performance and like winning
Speaker 1: at the edge fund game and all this, and so
Speaker 1: it would be very embarrassing and like psychologically damaging to
Speaker 1: sit there and be like, yeah, I just gather assets.
Speaker 1: I'm not worry about performance. But once you have outside
Speaker 1: capital at the management company, then like those people to
Speaker 1: gather assets and charge two percent fees.
Speaker 2: Yeah, they can say that out loud.
Speaker 1: Yeah, so it's a different or they can give you
Speaker 1: the they can that's for their money back. If you
Speaker 1: don't do it. If you own your own hedgehund from
Speaker 1: you are thinking like a hedgphone manager. But once you
Speaker 1: have outside capital, you're like, you know, steward of shareholder
Speaker 1: value and you're becoming a asset accumulator. And this, by
Speaker 1: the way, has some relevance to the publicly traded aults managers,
Speaker 1: who you know, why is private credit so big because
Speaker 1: you can charge fees on them capital I was wont
Speaker 1: to briefly Bi Blackman, who I don't think I've ever
Speaker 1: actually written about this, but we've talked about on the podcast.
Speaker 1: When he took his management company public, he had this
Speaker 1: structure that he thought and I think is really interesting,
Speaker 1: which is where basically, like the company the management company,
Speaker 1: and thus the shareholders get a preferred return on the
Speaker 1: incentive fees. So like, they get the incentive fees in
Speaker 1: the first like, let's say five percent of performance, so
Speaker 1: I like Pershing Square funds go up five percent a
Speaker 1: year the management company, the shareholders get the performance fees
Speaker 1: on that, and then the rest, like if they go
Speaker 1: up thirty percent a year, the other twenty five percent
Speaker 1: the employees get that. So basically the employees get the
Speaker 1: like upper tail performance fees and the shareholders get the
Speaker 1: like preferred performance fees. So they've turned the performance fees
Speaker 1: into something more like a management fee that is a
Speaker 1: little bit more stable, a little bit more high quality
Speaker 1: of earnings, and so they're giving that to their public
Speaker 1: shaholders well, they take the like juicy upside options for
Speaker 1: the hedge on managers, which I think is a good
Speaker 1: way to like, yeah, split this and like give the
Speaker 1: public shareholders what they want, which is steady returns, and
Speaker 1: give the actual hedge on management employees the incentives to
Speaker 1: make returns go up. Yeah, possibly Bridgewater should it on that.
Speaker 2: Yeah. I will say, you make the point and money
Speaker 2: stuff that the employees probably care more about returns, Like
Speaker 2: it's it's it's more exciting to work.
Speaker 1: It's not necessarily true, right, like if yeah, if you
Speaker 1: just get a bigger check for running a giant pull
Speaker 1: of assets, then like a good big check. But I
Speaker 1: think it's I think it's true. I think most of
Speaker 1: them would rather have higher time. Then they go beat
Speaker 1: their hedgehund friends and we're up thirty five percent this year.
Speaker 1: It's like great, Yeah, it's good.
Speaker 2: Well. Bloomberg reported that it looks like Bridgewater employees are
Speaker 2: on board with this sort of reset. Apparently, the hedge
Speaker 2: fund recently offered current and former staffers a chance to
Speaker 2: sell their shares back to the company. In all but
Speaker 2: four said no, according to people familiar with the matter.
Speaker 2: So I mean it has the backing of the people
Speaker 2: who actually work there.
Speaker 1: There's like ten market structure. Sick guys who listen to
Speaker 1: this podcast or read my newsletter and you know what
Speaker 1: market structure cechos don't like.
Speaker 2: Tell me right, NMS, Well, what a wonderful week that
Speaker 2: they've been having.
Speaker 1: So like twenty years ago, the SEC two and created
Speaker 1: rules that say that if a stock is available for
Speaker 1: sale at a lower price on one stock exchange, you
Speaker 1: can't buy it at a higher price on another stocking change.
Speaker 1: But that's not a correct summary of the rule, and
Speaker 1: like there's like a technical error there that people will
Speaker 1: complain about. It's essentially useful summary of the rule. Basically,
Speaker 1: it's like there's like twelve stock exchanges now are fourteen.
Speaker 1: There's a lot of stock exchanges, and the SEC twenty
Speaker 1: years ago created what's called a National Market System or NMS,
Speaker 1: where essentially all those stocking changes are linked and like
Speaker 1: whichever exchange offers the best price, like you trade there.
Speaker 1: And I'm sure that that seemed very intuitive and sensible.
Speaker 2: It does, right, I mean I had to really read
Speaker 2: hence and search for the unintended consequences because at first blush,
Speaker 2: that seems reasonable, right, and so like brokers have a.
Speaker 1: Best execution requirement, so Burger's supposed to get their clients
Speaker 1: the best price for stock, and so separate from that,
Speaker 1: but obviously related to that, is like this Raygani Mass
Speaker 1: rule that says, you know, if it's available at a
Speaker 1: low price, you got to buy it at a low
Speaker 1: price and not at a high price. And so this
Speaker 1: is like a sensible rule, and everyone's like, sure, yeah,
Speaker 1: let's do it. And that's not true. People objected at
Speaker 1: the time, but that's a long time yo, But I
Speaker 1: think that since then, many people have decided that there
Speaker 1: are some unintended consequence, that there are some unintended consequences
Speaker 1: of it that are bad. And one of them, which
Speaker 1: I think we maybe talked about in this podcast, is
Speaker 1: that like if I start a stock exchange, every hyper insistrator,
Speaker 1: every broker has to connect to my stock exchange because like,
Speaker 1: what if I have the lower price, he might I
Speaker 1: might never have the lower price, but like they don't
Speaker 1: know that until they pay me a lot for a
Speaker 1: data feed and like a fast connection and all this stuff.
Speaker 1: So it like essentially subsidizes the creation of weird new
Speaker 1: stock exchanges. So you put all these were new stock exchanges,
Speaker 1: like you know, the Texas Stock Exchange, and I've written
Speaker 1: about all of them. Like, some of what's going on
Speaker 1: here is like marketing positioning, like really thinking you've got
Speaker 1: a better mouse shrap. But some of it is just
Speaker 1: like you start a stock exchange and every trader is like, okay,
Speaker 1: we got to connect to your stock exchange. How much
Speaker 1: you charge in? So there is some inefficiencies there.
Speaker 2: Yeah, that was interesting to me. I mean, I have
Speaker 2: to admit I haven't spent a lot of time thinking
Speaker 2: about Reagan MS, but I mean looking at this proposal,
Speaker 2: there is that feeling there that there are too many
Speaker 2: stock exchanges that you know, the.
Speaker 1: Calls that out specifically, yeah, exactly fewer stock exchanges to a.
Speaker 2: Casual person, you just think it's so top heavy, the
Speaker 2: exchanges that you don't really think about like the little guys.
Speaker 1: Right in a world where it was just competitive, a
Speaker 1: burger might say, look, I'm sad it's my best execution
Speaker 1: obligations by sending orders to a big liquid exchange for
Speaker 1: most of the orders. And if like somewhere there's one
Speaker 1: share available at a penny better price, like it doesn't matter,
Speaker 1: Like I'm doing the best I can for my clients,
Speaker 1: and I'm saving on connection fees and everything. That's like
Speaker 1: kind of a reasonable judgment to make. But in a
Speaker 1: world of reage n MS, you sort of have to
Speaker 1: send the orders wherever you know the best order is,
Speaker 1: and so you all those smaller exchanges just kind of
Speaker 1: continue bopping along, whereas like in a more competitive world,
Speaker 1: maybe like more volume would be consolidated at the biggest exchanges.
Speaker 1: Reagan ms also became very controversial around the flashboys ix
Speaker 1: situation because basically AX launched an exchange with like a
Speaker 1: sort of speed bump situation more or less just called
Speaker 1: the speed bump, so we'll keep calling it. A few
Speaker 1: don't and a lot of people are like, well, how
Speaker 1: can I be forced to connect to this thing that
Speaker 1: delays quotes? And basically, I guess it sees like it's fine,
Speaker 1: but every decision that an exchange makes is more fraud
Speaker 1: and controversial when you have to route to that exchange
Speaker 1: and you have to trade on that exchange, And so
Speaker 1: getting rid of rag animss might just make it a
Speaker 1: little bit easier for exchange just to like do different things,
Speaker 1: because if you don't like it, you don't have to
Speaker 1: trade there. I do want to say that the other
Speaker 1: thing that is like going on with this is crypto
Speaker 1: Crypto really doesn't like the trade through rules, no, because
Speaker 1: it just does not work with crypto and market structure.
Speaker 1: For one, thing, like the funding mechanisms are different, where
Speaker 1: like stock exchange trades settle t plus one, and so
Speaker 1: you could do a trade on whichever exchange has the
Speaker 1: best price and then settle out the next day. Crypto,
Speaker 1: like if you're pre funding trades, if you're like doing
Speaker 1: trades on a blockchain, like it is harder to do
Speaker 1: that if you're forced to execute wherever the best price is.
Speaker 1: And then also like crypto is just slower in regular markets,
Speaker 1: like crypto operates on block time, where like you know,
Speaker 1: blockchain does a batch of trends actions every six seconds
Speaker 1: or every second or whatever the lifetime the lifetime f
Speaker 1: equity market structure, and so it's very hard to think
Speaker 1: about how a crypto exchange could be held to these rules.
Speaker 1: Now you might say crypto exchanges aren't held to these rules,
Speaker 1: but everyone wants to tokenize thoughts. Everyone's list stocks on
Speaker 1: crypto exchanges, and if you list stocks on crypto exchanges,
Speaker 1: you have to get around regain MS and the simplest
Speaker 1: way to do that is to get rid of these rules.
Speaker 2: Yeah, that was definitely the reaction on crypto Twitter. And
Speaker 2: there's a great piece out by Scott Patterson on the
Speaker 2: Bloomberg terminal and he does quote Alex Thorn, who's you
Speaker 2: know at Galaxy and Alex Thorn, I think he tweeted
Speaker 2: something to the effect of this is one of the
Speaker 2: biggest unlocks yet for tokenized stocks, right, so it's all happening.
Speaker 1: It's all happening.
Speaker 2: Tokenization is one of those things that's been on my
Speaker 2: list to take seriously and like really like do some
Speaker 2: homework on for a while now, and I keep hoping
Speaker 2: that maybe when I'm on attorney leave, I'm going to
Speaker 2: get serious about it, which is really naive. I think
Speaker 2: it's been on.
Speaker 1: My list of things to not take seriously. I've made
Speaker 1: fun of it. Tokenization is to think some of it
Speaker 1: is like market structure stuff, where like crypto people would love, love,
Speaker 1: love to just list all the stocks on coinbase rather
Speaker 1: than listening on the stock exchange. But then some of
Speaker 1: it is like genuinely getting around US registration requirements and
Speaker 1: like listing all the private stocks on coinbase, so that
Speaker 1: like you can go public without going public. I will
Speaker 1: say that like that was how I interpreted tokenization for
Speaker 1: a long time, because it's like what everyone said, and
Speaker 1: I don't think that's what's happening. Like, I think that
Speaker 1: has been kind of like pushed back a little bit.
Speaker 1: Like everyone's like, no, you can't really like just list
Speaker 1: tokens on robinhood of like you know, anthropic stock that's
Speaker 1: not allowed. No, But the other stuff, the market structure stuff,
Speaker 1: They're like, well, let's list stocks on crypto exchange is happening,
Speaker 1: and this is part of that.
Speaker 2: Yeah, I don't know. I feel like getting rid as
Speaker 2: a trade through rule would suggest that maybe I should
Speaker 2: take tokenization seriously. Alex Thorn says this is one of
Speaker 2: the biggest unlocks yet for toke my stocks. Probably yeah,
Speaker 2: but I mean that's a future problem. I'm here for
Speaker 2: five more weeks.
Speaker 1: And that was the Money Stuff Podcast.
Speaker 2: I'm Matt Levine and I'm Katie Greifeld.
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Speaker 1: The Money Stuff Podcast is produced by Anamazerakis, Moses Onam,
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