Speaker 1: Bloomberg Audio Studios, podcasts, radio news. So you're on vacation
Speaker 1: next week.
Speaker 2: I am. I'll be in the mountains of Colorado. Yeah,
Speaker 2: you know, the snow isn't great this time of year,
Speaker 2: but you know, love of the game.
Speaker 1: What are you going to do for money stuff?
Speaker 2: We should do something?
Speaker 1: Should we should have some mail bags.
Speaker 2: We should have some mail bags. I will log onto
Speaker 2: zoom for an hour and we'll take questions from the audience. Okay,
Speaker 2: not live, not live, but that would be fun maybe
Speaker 2: one day.
Speaker 1: Right, So, if you want Katie to answer questions with
Speaker 1: Colorado with me, send them to us now.
Speaker 2: We need them. Should we tell them where to send questions?
Speaker 1: I believe it's money pot at Bloomberg dot Net.
Speaker 2: That sounds right it, Yeah, just yell them into the
Speaker 2: sky and it'll get to us.
Speaker 1: Definitely, don't have me on Twitter.
Speaker 2: Do you still go on Twitter?
Speaker 1: Not never, but I don't look at my notifications or
Speaker 1: dms anymore. Yeah, I'm pretty much.
Speaker 2: It's kind of sad.
Speaker 1: It's really sad. This is like, you know, especially life.
Speaker 2: That's the thing, Like the pandemic, it scratched so many
Speaker 2: social issues. I don't know. I still go on all
Speaker 2: the time. But I don't tweet as much anymore.
Speaker 1: I don't. I'm not like performatively quitting. But I still
Speaker 1: like tweet my columns when I remember too.
Speaker 2: But yeah, I used to tweet a cat, like my
Speaker 2: Friday cat.
Speaker 1: I remember some of your Twitter sticks. I feel like
Speaker 1: you had good Twitter.
Speaker 2: I did have good sticks. No, And like yesterday on
Speaker 2: FED Day, usually I tweet time for the best day
Speaker 2: of our lives. I haven't done that in a while.
Speaker 2: I feel like, you know, no longer the best day everlast.
Speaker 3: No, Yesterday, Yeah, yesterday was the best day of your life.
Speaker 2: No, it was fine. I mean they cut they cut
Speaker 2: twenty five base points, which is pretty cool. Would have
Speaker 2: been awesome for the chaos factor if they either held
Speaker 2: rates or cut fifty basis points.
Speaker 1: Yeah. Yeah, you want to just like, yeah, expectations.
Speaker 2: Want to burn the world down.
Speaker 1: Yeah yeah yeah.
Speaker 2: But I really just want to talk about.
Speaker 1: This is going to be that's the first thing, clanging, transition,
Speaker 1: whatever is on paper in front of me.
Speaker 2: I really want to talk about the arc innovation, ETF
Speaker 2: and whatever the heck is going on with these IPO trades.
Speaker 1: That was pretty good.
Speaker 2: It has been every day I wake.
Speaker 1: Up none of that. Hello, and welcome to The Money
Speaker 1: Stuff Podcast, your weekly podcast where we talk about stuff
Speaker 1: related to money. I'm Matt Levien and I wrte the
Speaker 1: Money Stuff column 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: Katie, I gather that you're fascinated by r gtfs.
Speaker 2: I opened my eyes in the morning horizontal in debt,
Speaker 2: and I just think about heartbeat trades. Yeah, but this
Speaker 2: isn't strictly a heartbeat.
Speaker 1: I don't know exactly what the qualification.
Speaker 2: If you take a look at the chart of inflows
Speaker 2: and outflows, it looks like a heartbeat, but I don't
Speaker 2: think that there are taxes involved.
Speaker 1: It's not a tax heart beat, but is a different
Speaker 1: kind of heartbeat. Yeah, right, So runs some ETFs. Kathy
Speaker 1: would famous part of her ETF active manager and because
Speaker 1: they're like active dfs, and because she's like a celebrity
Speaker 1: tech investor, they get to invest in hot tech IPOs,
Speaker 1: which hasn't been a thing for a long time, but
Speaker 1: it's coming back, right, There's been some hot tech ips
Speaker 1: so much have gone up a lot and so this
Speaker 1: RTF gets to get small ish allocations in some hot
Speaker 1: tech IPOs, and if you think those IPOs will go up,
Speaker 1: you'll be like, oh, I'd like to invest in this
Speaker 1: RKTF to get my tiny se life exposure to that.
Speaker 1: But if you're really tidy minded about it, you're like, well,
Speaker 1: I don't want all the other stuff in the CTF.
Speaker 1: I just want this IPO exposure. I can't get the
Speaker 1: IPO exposure myself because I am not on the list
Speaker 1: of people who get allocated shares on these IPOs. But
Speaker 1: I can get exposure to the ETF because anyone can
Speaker 1: get exposure to the EDF. And then the further thought
Speaker 1: you could have is I could hedge my exposure to
Speaker 1: everything else on the ETF by, you know, for instance,
Speaker 1: shorting all of the stocks that are currently in the ETF,
Speaker 1: which it discloses, so that i'd be left with you know,
Speaker 1: if you're long the ETF and short all of the
Speaker 1: stocks in the ETF, you're left only with like the
Speaker 1: possibility of it getting an IPO allocation and the IPO
Speaker 1: going up. And so it seems like people are doing
Speaker 1: some sort of trade like that, and the best way
Speaker 1: to operationalize that trade is not to buy the ETF
Speaker 1: and short the stocks. The best way to do it
Speaker 1: is to borrow all of the stocks that are in
Speaker 1: the ETF, deliver them to ARC, to the ETF to
Speaker 1: create the ETF, get back shares of the ETF. Now
Speaker 1: you have the ETF and you're effectively short the underlying
Speaker 1: slides because you bar them and gave them to ARC.
Speaker 1: And then when the IPEA happens, you reverse the trade.
Speaker 1: You deliver back the shares, get back the underlying stuff,
Speaker 1: You deliver the underlying stuff back to your share lender,
Speaker 1: and you're left with only the popped IPO.
Speaker 2: Yeah. I guess what I don't understand about this is
Speaker 2: how big of a gamble is it to do this
Speaker 2: in the ARC Innovation ETF. Like, I wonder if the
Speaker 2: person or whoever was behind this trade knew for sure
Speaker 2: that they're getting allocated some of Klarna or some of Bullish.
Speaker 1: My impression is that in Bullish it was pretty telegraphed
Speaker 1: that ARC was getting some of it. But I'm not sure.
Speaker 1: These are trades that have been going on, and like
Speaker 1: they went on with the ipea of Bullish a while back,
Speaker 1: and then Klarina last week and Robin Wiggils at the
Speaker 1: ft has been reporting about it. But like my impression
Speaker 1: is that the main the flagship Arc Innovation ETF got
Speaker 1: an allocation in Bullish and not in Klarina. R ETF
Speaker 1: got an allegation in Klina like f. Yeah, so like
Speaker 1: people did this. I mean, no one really knows, but
Speaker 1: it looks like this trade, right, it looks like the
Speaker 1: trade is you heart beat in you like borrow the
Speaker 1: underlying shows you heart beat into the ETF, you take
Speaker 1: your stuff out the next day to capture the IPO.
Speaker 1: It looks like people did that with our innovation around
Speaker 1: the Clarina IPO and there was no allegation, And so
Speaker 1: I just like missed. It's not a huge risk yause
Speaker 1: you know, you're long in short the same thing.
Speaker 2: Basically, I'm just wondering, like I wonder if we'll start
Speaker 2: to see this pop up in other sort of shiny
Speaker 2: active ETFs.
Speaker 1: Sure, I don't know how many shiny active ETFs there.
Speaker 2: There's not a ton, but there's definitely some that you
Speaker 2: might think would get allocated.
Speaker 1: Yeah, Like in general, you know, index ones don't buy
Speaker 1: IPOs because they're not in the index, and so you
Speaker 1: don't see you know, the traditional ETFs, you don't see
Speaker 1: this as a big thing. But like someone like Kathy
Speaker 1: Wood who is an investor and yeah stive tech companies,
Speaker 1: it does make sense that she would be interested in
Speaker 1: buying an IPOs. And it does make sense that someone
Speaker 1: would notice that and be like, I can create my
Speaker 1: own IPR allocation by engineering the r ETFs.
Speaker 2: Yeah, because, for example, there's an ETF dedicated just to
Speaker 2: buying IPO stocks, like recent IPO stocks.
Speaker 1: Which accomplishes nothing whatsoever. I know, the trade here is
Speaker 1: the IPO pop.
Speaker 2: Yeah.
Speaker 1: Trade here is not Klarna, it's the IPO pop.
Speaker 2: Yeah, it's the one day Yeah. I don't think they're
Speaker 2: getting allocated IPOs.
Speaker 1: Yeah. I mean, like maybe that's the next step. Right,
Speaker 1: you're like, hey, guys, I buy all the IPOs, want
Speaker 1: to allocate be an IPO. But then, you know, traditionally
Speaker 1: the way you get allocated an IPI is like one,
Speaker 1: you are a big investor who pays a lot of
Speaker 1: commissions to a bank, and two you are a long
Speaker 1: term investor who creates a good relationship with the management
Speaker 1: of the company. So the company is like I want
Speaker 1: those people to own seven percent of my stock, so
Speaker 1: I'm going to allocate them in the IPO and then
Speaker 1: like you have like a nice relationship where you are
Speaker 1: a long term holder you on the stock. You have
Speaker 1: a nice marked market gain because they sold you the
Speaker 1: stock of the IPI price. Those are the people that
Speaker 1: the banks and the companies want to allocate at the IPO.
Speaker 1: Someone whose businesses I buy recent IPOs and then sell
Speaker 1: them when they're no longer recent.
Speaker 2: It's not that good, yeah, And it's also a smaller
Speaker 2: funds of millions.
Speaker 1: Right. Like when you're a bank and a company and
Speaker 1: you're allocating the IPO, you're in many cases literally sitting
Speaker 1: down with a list and going through it and being
Speaker 1: like these guys are good to give it, you know,
Speaker 1: and you don't want to have a thousand names on
Speaker 1: that list and get to like, we're gonna give this
Speaker 1: guy fifty shares, right, Yeah, you want to be efficient, right,
Speaker 1: So if you have a big investor, you get them
Speaker 1: a big, big slug of shares. So right, because Kathywood
Speaker 1: is a celebrity because of the argannivation ATF is pretty
Speaker 1: big because she is a long term supporter of like some.
Speaker 2: Of the company take her five year time for him,
Speaker 2: Like she's a.
Speaker 1: Good institution and that to have in your stock, and
Speaker 1: so it makes sense that she gets alecated ips. Yeah,
Speaker 1: but it's not obvious that every IVTF but also would
Speaker 1: have the same benefit.
Speaker 2: This isn't something that I've sawt comment on, but I
Speaker 2: do wonder how Kathy would and the ARC team feel
Speaker 2: about this trade.
Speaker 1: Oh yeah, like assuming this trade is what it seems like,
Speaker 1: which is someone massively inflating the assets of.
Speaker 2: These ETFs by billions of dollars.
Speaker 1: Billions of dollars for like a week in order to
Speaker 1: extract a large chunk of the IPO pop. Right, Like
Speaker 1: the RCF trade was like on the order of like
Speaker 1: you know, it's like a one ish billion dollar ETF
Speaker 1: and someone pumped in on the order of like seven
Speaker 1: hundred million dollars. I might be a little wrong about that, Billy.
Speaker 1: It's like that kind of thing. It's like basically doubling
Speaker 1: the size of the ETF. When you do that, you
Speaker 1: now own half of the ETF and then you take
Speaker 1: your money out, So you take out half of the ETF.
Speaker 1: It also means you take out half of essentially the
Speaker 1: IPO shows, right, So the person doing this or the
Speaker 1: people doing this are extracting kind of half of that
Speaker 1: IPO pop for themselves, meaning that the long term retail
Speaker 1: investors who love Kathy Wood and are you know, invested
Speaker 1: in the ETF don't get that half of the ip
Speaker 1: but that just goes to someone who is just doing
Speaker 1: this arbitrage. So they must feel bad about it. Yeah,
Speaker 1: it's not good. It's not like what they want. Yeah,
Speaker 1: they do extract like an extra two days of management vice.
Speaker 2: But can they stop it? Though?
Speaker 1: You know, when I read about it, I was like,
Speaker 1: you call them up and you say, I'd like to
Speaker 1: pump a billion dollars in and you say yes, because
Speaker 1: that's life in the ETF business, like it is the
Speaker 1: point of an ETF is like people can create and redeem.
Speaker 1: There is like there are ways to I believe, you know,
Speaker 1: most ttfs like have ways to limit, you know, creations
Speaker 1: and redemptions.
Speaker 2: I don't know. I mean, you can't stop money flowing
Speaker 2: in or out, but not every inflow or outflow has
Speaker 2: to result in the creation or redemption.
Speaker 1: That's what an inflow is.
Speaker 2: No, but people always say that it does isn't necessarily
Speaker 2: always created creation or redemption. They give enough. People are
Speaker 2: letting each other out.
Speaker 1: Yeah, but like net inflows create creations.
Speaker 2: Yeah, net inflows.
Speaker 1: But I'm saying they can't sell people trading on the exchange.
Speaker 1: But this is not a trade on the exchange. This
Speaker 1: is a creation. Yeah, okay, it creates to make sense,
Speaker 1: it's a creation. It does to make sense. Someone has
Speaker 1: borrowed a big package of the underlying, delivered it to
Speaker 1: the ETF and gotten out these shares, which is why
Speaker 1: you see this heartbeat. Look where the assets of the
Speaker 1: ETF increase.
Speaker 2: All yeah, okay, fair, okay, Then how would they limit that?
Speaker 1: One answer is like the person doing this is either
Speaker 1: an authorized participant in the ETF, like someone who has
Speaker 1: a relationship with ARC. Yeah, you can create and redeem shares,
Speaker 1: or they're like some hedge fund working through an authorised participant,
Speaker 1: because again you have to do a creation. So like
Speaker 1: these assets are coming into the ETF from someone and
Speaker 1: the ETF can say, hey, knock that off, yeah, or
Speaker 1: you'll stop being an authorised participant. Right, Yeah, it's one
Speaker 1: fairly STRAIGHTFORARDA. I assume most ttfs have some other way
Speaker 1: to like limit creations to avoid getting too big or
Speaker 1: you know.
Speaker 2: I don't know if they do.
Speaker 1: I don't know either.
Speaker 2: There was a recent example of this. You had this
Speaker 2: one very popular small cap funds ticker CALF, which ended
Speaker 2: up switching indexes because I think at one point, like
Speaker 2: for its holdings, it held like more than twenty percent
Speaker 2: of the outstanding shares.
Speaker 1: And you should be able to stop that.
Speaker 2: Yeah, but you can't, like you have to like switch
Speaker 2: your strategy.
Speaker 1: Yeah, I don't know if they can stop it and
Speaker 1: haven't yet.
Speaker 2: I don't know either. But you do touch on the
Speaker 2: fact that this.
Speaker 1: Is the thing, like the rketfs are like a modern
Speaker 1: rapper for like Cathy would running an investment fund. But like,
Speaker 1: also ETFs are plumbing, right, And we've talked about like
Speaker 1: portfolio trades in the bond market, Right, Like an ETF
Speaker 1: is like a piece of plumbing that allows people to
Speaker 1: do bond trades. Right. This is like a portfolio trade, right.
Speaker 1: This is like it's a widget that you can take
Speaker 1: down and be like, I'm going to distract the IPO
Speaker 1: value out of this ETF, and so you can just
Speaker 1: do it. And it just operates independently in the stock
Speaker 1: market and has its own set of rules, and like
Speaker 1: you know, Kathy would is actively managing it, but it's
Speaker 1: like it's not purely her investment vehicle. It's also this
Speaker 1: like you know, pre property.
Speaker 2: Of the market. Yeah, that's an interesting way to look
Speaker 2: at it, that it's basically just a portfolio trade, but inequities.
Speaker 1: It's almost the reverse of a portfolio trade, right. A
Speaker 1: portfolio trade is like you have a bunch of bonds
Speaker 1: and you go to a market maker and you're like,
Speaker 1: I want to sell this bunch of bonds and the
Speaker 1: market maker is like, wow, you can probably squeeze most
Speaker 1: of them into an ETF and I'll take the rest,
Speaker 1: and you can sort of like squeeze your stuff into
Speaker 1: these you have here. It's like, I'm going to extract
Speaker 1: exactly one security from the ETF. And it's the reverse
Speaker 1: of the.
Speaker 2: Portfolio Ty, I want the needle, forget about all the
Speaker 2: hay and you can just do it. Yeah, I was
Speaker 2: gonna say, you do touch on the fact that this
Speaker 2: is a fun who done it? Like, who is doing this?
Speaker 2: And it has to be a fairly small universe of
Speaker 2: potential suspects.
Speaker 1: It seems to me that the most logical person to
Speaker 1: do it would be one of the authorized participants who
Speaker 1: can trade directly with the fund. Yeah, but maybe that's
Speaker 1: like a little too confrontational and it's like someone trading
Speaker 1: through an authorised participant.
Speaker 2: Yeah, let's see. I don't want to name names necessarily,
Speaker 2: but I mean, you look at some of ARC's filings,
Speaker 2: it looks like they're aps, or at least the busiest
Speaker 2: aps are Hudson River, Jane Street, Avian Amro, Bank of America,
Speaker 2: Bnpever two, et cetera.
Speaker 1: So right, the normal people.
Speaker 2: Anyway, if you're the one behind the ARC trade right
Speaker 2: some money pod at Bloomberg dot net.
Speaker 1: I feel like at this point, like this has been
Speaker 1: pretty widely rumbored and like praised, and if someone's going
Speaker 1: to claim credit for that, they would have been like, yeah,
Speaker 1: we did that. I feel like there's probably some reason
Speaker 1: not to claim credit for it. Also, it's like imitatable, right,
Speaker 1: like now anyone can do it, that's true. I don't
Speaker 1: know how many opportunities there will be to do it.
Speaker 2: It seems like a lot of squeezing for not like
Speaker 2: enough juice.
Speaker 3: But I don't know, you know, it's like a few
Speaker 3: days of Stockboro cost Yeah, for potentially like low tens
Speaker 3: of millions of dollars of games.
Speaker 1: It's like it's it's real. I will say though that like,
Speaker 1: like if I had the guess, I would say that,
Speaker 1: like this trade became exciting when there was that rash
Speaker 1: of IPOs that like went up one hundred percent. Yeah,
Speaker 1: and then like they actually did it and like bullish
Speaker 1: IPOs did well and Clarina which did fine, and then
Speaker 1: I think we talked about this, like the IPOs earlier
Speaker 1: this year had the huge pops because no one had
Speaker 1: seen an ipo in years, and now it's like, yeah,
Speaker 1: you know, like stuff had went public this week and
Speaker 1: went down right, So it's not as exciting a trade now.
Speaker 1: I like, you're not expecting one hundred percent pop in
Speaker 1: every APA.
Speaker 2: That's true. So maybe it was just a brief, sweet
Speaker 2: moment in time. But it'll be fun to see if
Speaker 2: this continues and if it's sprints. So you know how
Speaker 2: I anchor a financial news TV show. Okay, well, surprise,
Speaker 2: That's what I do when I leave this room. It's
Speaker 2: called the Clothes. It's from three to five pm daily.
Speaker 2: This isn't just a plug. I bring it up because
Speaker 2: after the closing bell usually companies report their earnings and
Speaker 2: because the US follows a quarterly earning schedule, that means
Speaker 2: that there's almost always earnings to break on air, which
Speaker 2: is exciting and I look forward to it. But maybe
Speaker 2: now instead of doing that four times a year, I'll
Speaker 2: only do it twice a year.
Speaker 1: Yeah, I'm like, now.
Speaker 2: I bring this up.
Speaker 1: Yeah, you bring it up because present Trump is just
Speaker 1: randomly out there being like, yeah, hey, if the SEC
Speaker 1: wants to, we could move to six month reporting for
Speaker 1: companies instead of reporting every three months.
Speaker 2: I'm surprised he cares.
Speaker 1: You know, someone mentioned it to him, so it just
Speaker 1: as Sabody cares cares.
Speaker 2: It seems like a off the beaten track issue for him.
Speaker 1: He tried it last time, he did back before the
Speaker 1: unitary executive It is an odd thing to care about
Speaker 1: in the scheme of things. Yeah, but it marginally increases
Speaker 1: the power and reduces the oversight over corporate executives, right, Like,
Speaker 1: if you only have to report every six months, then
Speaker 1: you have more time to do stuff without anyone paying
Speaker 1: attention to it. That's probably good for like the lifestyle
Speaker 1: of corporate executives.
Speaker 2: Well, I was going to say I love this topic
Speaker 2: because I can honestly see both sides of the argument,
Speaker 2: one being Okay, the quarterly reporting schedule investors like transparency.
Speaker 2: That's proven, we should have as much information as we
Speaker 2: possibly can. But then on the other side, three months
Speaker 2: is arbitrary, and I could be persuaded that it does
Speaker 2: incentivize shorter term thinking on some level.
Speaker 1: Yeah, I think a lot about this, Like there's no
Speaker 1: like necessary reason that reporting every three months should encourage
Speaker 1: shorter term thinking. Like it's just like a mistake to
Speaker 1: think that investors only care about next quarter's earnings, right,
Speaker 1: and like the shorter the reporting cycle than like the
Speaker 1: less long term they'll care about. Like that can't be true, right,
Speaker 1: Like companies report every three months and they report guidance
Speaker 1: and they report like, you know, their investments for the
Speaker 1: long term, and like people understand that.
Speaker 2: I think you're being really generous.
Speaker 1: Like everyone loves to say that the US stock market
Speaker 1: only rewards short term thinking, and like, you know who
Speaker 1: really loves to say that is Elon Musk. Yeah, who's
Speaker 1: like got a you know, trillion dollar company and did
Speaker 1: for a long time before it made money, right, and
Speaker 1: like even now its valuation is entirely based on like ooh,
Speaker 1: robots in the future. Yeah, it's just like false to
Speaker 1: think that the US stock market only cares about next
Speaker 1: quarters earnings, right, Yeah, there's just like no reason to
Speaker 1: think that. Now. Yeah, it is the case that, like
Speaker 1: there is volatility around quarterly earnings, right, Like people do
Speaker 1: look at quarterly earnings and use them as a data
Speaker 1: point to extrapolate future earnings. And if you have bad
Speaker 1: earnings this quarter, people are like, oh, maybe they're not
Speaker 1: gonna have good earnings in the long run, right, and
Speaker 1: so like there are like high frequency data points, but
Speaker 1: it's not logically entailed that, like if you report every
Speaker 1: three months, then people only pay attention to three month earnings, right,
Speaker 1: And that's clearly the case that, Yeah, it does long
Speaker 1: term bets get made.
Speaker 2: Yeah, it just does introduce volatility into the stock price.
Speaker 2: And you could see a CEO who's you know, getting
Speaker 2: beaten up on his earnings call maybe doing things to
Speaker 2: minimize that.
Speaker 1: Yes, but it's or her I think about Cliff is
Speaker 1: this point about volatility laundering, where you know, if you
Speaker 1: have a private investment that doesn't get marked to market
Speaker 1: every day, it is and sometimes less volatile than most
Speaker 1: public stocks, but only in the sense that you don't
Speaker 1: look every day, right, Yeah, Like it's not economically less volatile.
Speaker 1: It's just like you see the price of one thing
Speaker 1: every day and you don't see the price of the
Speaker 1: other thing every day. Yeah, it's a little like that,
Speaker 1: where like if you just stop reporting earnings, then you
Speaker 1: have less earnings volatility, you have less news driven volatility,
Speaker 1: but you're just masking like what is actually happening. And
Speaker 1: the other thing is like, I'm not sure you get
Speaker 1: less stock price volatility, right, because you have you still
Speaker 1: have trading. Right. It's just like if definitive financial statements
Speaker 1: and like you know, guidance get reported every six months
Speaker 1: instead of every three months, then you have a six
Speaker 1: month window where people are trading based on.
Speaker 2: Other stuff, right, body language, body language, TV appearance.
Speaker 1: To the appearances rumor. People talk a ton about alternative data, right,
Speaker 1: like you like sophisticated hedge funds are constantly using information
Speaker 1: other than quarterly financial statements to build their models of
Speaker 1: like how a company is doing. Right, They're you know,
Speaker 1: looking at credit card data or famously satellite pictures of
Speaker 1: parking lots to see how many people are coming to
Speaker 1: the stores. And if you get rid of some of
Speaker 1: the quarterly financial reporting, then those pieces of data will
Speaker 1: be relatively more valuable. They will still exist hedgehunes will
Speaker 1: still trade on them, but like you won't, right, It'll
Speaker 1: be there'll be a lot more information asymmetry because some
Speaker 1: people will have information about how companies are doing and
Speaker 1: other people won't. Yeah, and then the other kind of
Speaker 1: trading that could happen in six months is insider trading, right,
Speaker 1: because like, the more time you have between announcing news,
Speaker 1: the more opportunity there is to reach from knowing the
Speaker 1: news yourself.
Speaker 2: That'd be great for this podcast. Look, there would be
Speaker 2: great for my TV show having fewer earnings reports but.
Speaker 1: And more insider trading. Yeah, it'd be fun to have
Speaker 1: the insider traders on.
Speaker 2: I like to imagine that this goes through, that the
Speaker 2: US moves to companies only needing to report every six months,
Speaker 2: and think about what that would happen, because in Europe
Speaker 2: they are mandated to only report every six months, but
Speaker 2: many still file quarterly reports. Yeah, so I wonder if
Speaker 2: the companies who report more frequently would get rewarded for
Speaker 2: that from investors, Whether you would see companies like switch around,
Speaker 2: and what the psychological effect would be from that. Like
Speaker 2: if you were reporting on a quarterly basis and then
Speaker 2: went to a six month basis, you know, would that
Speaker 2: be taken as oh, shoot, there's bad news coming and
Speaker 2: they're delaying it.
Speaker 1: Yeah. Like I think if you're a normal company, it's
Speaker 1: a little hard to reduce the freakanci reporting, right, I
Speaker 1: mean you think about who would report six months? Like
Speaker 1: some of it is like you know, Trump brothers back
Speaker 1: to crypto treasury companies right.
Speaker 2: Where it's like American bitcoin basically.
Speaker 1: I do you think Another part of the answer is
Speaker 1: like part of the reason people talk about this is
Speaker 1: some form of like it is to burdensome to be
Speaker 1: a US public company these days, and that is part
Speaker 1: of why big cool tech startups are staying private longer,
Speaker 1: and you know, ordinary people can't invest in them in
Speaker 1: their pro own kids and all that stuff, And so
Speaker 1: it is possible that like if you went to like
Speaker 1: Sam Alton and you're like, hey, would you take open
Speaker 1: a public and he was like, I have to report
Speaker 1: every quarter and you're like, no, good news, you only
Speaker 1: have to report every six months. You may think, okay, fine,
Speaker 1: I'll do it, right, Like, I think it's a pretty
Speaker 1: marginal benefit. But there's probably some quite cool tech startup
Speaker 1: that would feel, like, you know, by saving money on
Speaker 1: reporting costs and also by just having less frequent reporting
Speaker 1: and less frequent like shareholder interference, it would like change
Speaker 1: the bargain of whether or not it's a good idea
Speaker 1: to go public. Right, Yeah, so like some new public
Speaker 1: companies would report on a six month schedule.
Speaker 2: Well to that point, Adina Friedman, who is the CEO
Speaker 2: of NASAC, posted on LinkedIn basically that they supported the
Speaker 2: reforms to reduce the burden on public companies because I'm
Speaker 2: and you have heard that trotted out as a reason
Speaker 2: for why companies are saying private.
Speaker 1: So that is hard for me to imagine that, like
Speaker 1: the costs of like having your accountants to your reports
Speaker 1: every three months is what's giving you know, yeah, tripe private.
Speaker 1: But like I did, there's probably it's a margin that's
Speaker 1: probably true true ish and I say stripe right, But
Speaker 1: like in fact, like the problem is that it is
Speaker 1: hard for smallish companies to go public. Yeah, and this
Speaker 1: is perhaps a material cost savings.
Speaker 2: Yeah, we need more small caps.
Speaker 1: And the sort of thing where it's one thing for
Speaker 1: a big existing public company to say okay, we're going
Speaker 1: to six month reporting, But it's another thing for a
Speaker 1: smallish company to come public saying we're only going to
Speaker 1: report every six months and everyone's like, okay, that's fine.
Speaker 2: Yeah. I sort of stated it as a fact that
Speaker 2: investors like information and want transparency. But I do think
Speaker 2: there's this transparency barbelle that's developed for investors. Where you
Speaker 2: think about et for example, and part of the reason
Speaker 2: why ETFs have just killed mutual funds is because people
Speaker 2: like to see the daily holdings. But then you think
Speaker 2: about what's going on in private markets, and folks seem
Speaker 2: perfectly happy to try and plow into that. So I
Speaker 2: don't actually think that I can state it as a
Speaker 2: fact that investors like as much information as possible.
Speaker 1: Well, there's different kinds of investors, right, I mean, yeah,
Speaker 1: active asset managers who are making investing decisions want to
Speaker 1: make informed investing decisions, right, But no, right, I mean,
Speaker 1: like if we talk all the time about like the
Speaker 1: retail love for SpaceX and Stripe and open Ai, and
Speaker 1: like those people aren't getting financial statements at any frequency, right,
Speaker 1: that's just like sure, I trust you, right, So that
Speaker 1: makes sense.
Speaker 2: We have seven minutes to talk about structured products and
Speaker 2: what a boom?
Speaker 1: Yeah, I don't know. I love structured products.
Speaker 2: I know you do. Why do people who aren't you
Speaker 2: love structured products? Like? Why are we seeing this boom?
Speaker 2: Are we just bored? Is the S and P five
Speaker 2: hundred not enough?
Speaker 1: The structure products are? Aren't import them, They're they're like storytelling.
Speaker 1: Like the simplest structured product, the secure product that I
Speaker 1: think it was, like the paradigm structured product. Is like,
Speaker 1: if you give me one hundred dollars, I can take
Speaker 1: ninety five dollars you ever take and buy a treasury
Speaker 1: bill ninety six dollars, okay, and by a treasury bill right,
Speaker 1: that will mature at one hundred dollars in a year. Right,
Speaker 1: And then I have four dollars to do something weird with. Right.
Speaker 1: And the simplest weird thing is I spend those four
Speaker 1: dollars like that the money call option on the S
Speaker 1: and P. Right. And so I say to you, if
Speaker 1: you give me one hundred dollars, I'll give you back
Speaker 1: some percentage of the return of the SMP or like
Speaker 1: this is a return of the SMP up to some
Speaker 1: cap or something in a year, but I'll always give
Speaker 1: you one hundred dollars back. If the SMP crashes fifty percent,
Speaker 1: you still get all your money back. Okay, So you
Speaker 1: get SMP upside, right, And all I've done is I
Speaker 1: bought a co option, I bought a Treasury bill, And
Speaker 1: you're like, oh wow, stocks, they can never go down, right,
Speaker 1: And so I write about this periodic that's the simplest
Speaker 1: structure product that's not like the main structured product of
Speaker 1: the current boom. But like that story of like you're
Speaker 1: gonna give me money, I'm gonna park boasted in t
Speaker 1: bills and I'm gonna use the rest to buy weird
Speaker 1: options to give you like some weird payoff profile. You know,
Speaker 1: there are people whose job is to sit in a
Speaker 1: lab cooking up that sort of thing, and then there
Speaker 1: are other people whose job is to like put a
Speaker 1: nice story on that. So we're talking about this, like
Speaker 1: Bloomberg big take about the boom instructured products, and they
Speaker 1: talk you about like half of structured products in America
Speaker 1: are auto callables. Yeah, an auto callable is an installment
Speaker 1: put purchased by a bank from retail investors. Right, And
Speaker 1: so you know, if you're a bank, Like you have
Speaker 1: a lot of people who want to buy index puts
Speaker 1: from you, and you're like, where will I get index puts?
Speaker 1: And you go to the lab and you're like, I
Speaker 1: would like to cook up an installment index put product
Speaker 1: that I can buy from somebody. Maybe I could buy
Speaker 1: it from like an insurance company or Berkshire Hathaway or something.
Speaker 1: And then you're like, no, no, I can buy it
Speaker 1: from retail investors. If instead of saying I'm going to
Speaker 1: buy an installment index put from you, you say I'm
Speaker 1: going to sell you a bond that pays you ten
Speaker 1: percent interests amazing, And it pays you ten percent interest
Speaker 1: every quarter unless the stock market goes up, in which
Speaker 1: case I paid off early and then no problem. It's
Speaker 1: auto called. Right. One of the catch is that if
Speaker 1: the stock market goes down twenty percent, you lose all
Speaker 1: the money. Right, that's just an installment put. Right. But
Speaker 1: like instead of saying that, you say, this is a
Speaker 1: note that pays a very high coupon gets called early
Speaker 1: in certain circumstances, and it's the losses of the stock market.
Speaker 1: Like that's like a great trade. It's like you're not
Speaker 1: selling excitement you're selling. Look, you get ten percent a year.
Speaker 1: You can't lose. The worst thing that happens probably is
Speaker 1: you get paid off early.
Speaker 2: No problem, no problem.
Speaker 1: But then there are other products too that are like
Speaker 1: the reverse, that are like we pay you if the
Speaker 1: stock market goes down, right, because you put any set
Speaker 1: of options into this thing, and so you have like
Speaker 1: this unlimited range of like stories and payoff structures that
Speaker 1: you can sell to retail investors. And this article quotes
Speaker 1: a guy, like a financial advisor, saying that his client
Speaker 1: said him, this sounds illegal, It sounds too good to
Speaker 1: be true. Yeah, because you like you did, like, why
Speaker 1: are we seeing a boom in it? There are two
Speaker 1: kinds of structured products. They're selling options and buying options, right,
Speaker 1: So like the autocoll is like the bank is buying
Speaker 1: an option from the customer. The one that I started with,
Speaker 1: the like you get the S and P, but you
Speaker 1: can't go down. That's the bank is selling an option
Speaker 1: to the customer. This thing I started with, that only
Speaker 1: works if you can buy a treasury built for significantly
Speaker 1: less than one hundred dollars, because then you have money
Speaker 1: to buy options with. Yeah, So like in a very
Speaker 1: low interest rate environment, it's hard to do really cool
Speaker 1: structure products because you just don't have a lot.
Speaker 2: Of Like I find that exciting because we've now entered
Speaker 2: theoretically a ray cutting cycle.
Speaker 1: Yeah, so there are search products the other way, right,
Speaker 1: where like if rates are low, it's very exciting to
Speaker 1: go to a customer and say I'll pay you eight
Speaker 1: percent a year, And the way you get eight percent
Speaker 1: of year is it's not interest, that's option premium, right,
Speaker 1: So there are products for all environments.
Speaker 2: Yeah, I do think it's interesting. They also quote someone
Speaker 2: in here saying that you know, structured products aren't fought,
Speaker 2: they're sold. That can apply to a myriad of things,
Speaker 2: but it also applies here.
Speaker 1: People say that about many, many, many things in finance,
Speaker 1: but I think they most say it about searched notes,
Speaker 1: and they.
Speaker 2: Mean it here. But what's interesting is that now you
Speaker 2: have because no one.
Speaker 1: No retail investors like you know, what I would like
Speaker 1: to do is sell installment puts to a bank.
Speaker 2: Well, now you have an auto callbs ETF It launched
Speaker 2: in June. So there are theoretically investors out there who
Speaker 2: are just buying this on their own, who aren't necessarily.
Speaker 1: Having it so advisor sold ETF.
Speaker 2: Yeah, but it now exists where you don't need to
Speaker 2: have an advisor sell this to you.
Speaker 1: Look at the description of that and it's like, oh,
Speaker 1: you got a ten percent yield.
Speaker 2: Yeah, that's true. Maybe you plug it into Investipedia and
Speaker 2: figure out what an auto callable is yield. Yeah, I'm
Speaker 2: sure there are plenty of folks who just sort by yield, right, right,
Speaker 2: it's yield, don't worry about the rest of it.
Speaker 1: The other thing I think is in structure debts. It's
Speaker 1: like I think of like the auto calables business as
Speaker 1: banks buying crash insurance from retail so they can sell
Speaker 1: crash insurance to other investors. But the overall structure debts
Speaker 1: business is a is a bigger business. And the article
Speaker 1: quotes the penn I heard saying everybody loves this business.
Speaker 1: It prints money most of the time, and then usually
Speaker 1: they find a way to lose money when the markets
Speaker 1: are crashing. That's the banks. It is true that selling
Speaker 1: structured notes is a way to make a lot of money,
Speaker 1: like the edge on these trades is like one to
Speaker 1: three percent, But somehow banks end up with positions in
Speaker 1: these notes that sometimes blow up in crises, which is
Speaker 1: not what's supposed to happen with the autocollable, which is
Speaker 1: really supposed to be the bank's buying crisis insurance from
Speaker 1: the retail customers. But again, there's lots of different profiles,
Speaker 1: and some of them are more the bank selling crisis insurance.
Speaker 2: We would you say your favorite structured product is?
Speaker 1: I mean, they do like the autocollable just because.
Speaker 2: It's like, so do a lot of people, it seems like.
Speaker 1: But the other thing in the story is that, like
Speaker 1: the banks are now off letting their structured note risk
Speaker 1: to hedge funds because that's what banks do with everything. Now.
Speaker 2: Yeah, another theme we've talked about.
Speaker 1: Yeah, the bank has a relationship with the customer, but
Speaker 1: like they're not going to take all this risk on
Speaker 1: their own balance it, so they'll find some hedge fund
Speaker 1: to take the structured note risk.
Speaker 2: Cool, all right. Unfortunately that's all the time we have.
Speaker 1: So we'll see you next week.
Speaker 2: Send questions please, Yeah they're not good enough, maybe I
Speaker 2: just won't open. Yeah, we'll see be skiing.
Speaker 1: And that was the Money Stuff podcast.
Speaker 2: I'm Matt Levine and I'm Katie Greifeld.
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