12 ms·

A Plan for a Long-Term Stock Exchange

270 points by jackgavigan 10y ago

rdlecler1 10y ago
Does anyone else find it ironic that the guy who invented The Lean Startup philosophy is trying to take a zero to one leap to start an exchange? Wouldn't it make more sense to start a crowdfunding platform or secondary market for private shares and evolve that into a public market exchange, rather than trying to start something denovo?
- blowski 10y ago
  Perhaps discussing feasibility with the SEC and putting out feelers via a press release is the MVP.
  - afarrell 10y ago
    And sometimes, if your goal is to actually test viability, the MVP is in fact quite large.
  - rdlecler1 10y ago
    The articles states that he's assembled a team of 20 engineers. That doesn't sound like a MVP to me.
- twoarrays 10y ago
  Well, he used Lean Startup hype to be a well-connected person and have a "more optimal" approach. Whereas LS may help an ambitious young student, it's not the best approach if you have monopolistic ideas.
- npt4279 10y ago
  Agreed. That's exactly our plan at Wefunder. We're using Regulation Crowdfunding and Regulation A+ to create a new secondary market for riskier ventures. With a few minor Congressional fixes to current laws (including one being voted on soon), we expect this to be workable in 2017. https://wefunder.com/wefunder https://wefunder.com/wefunder
ianpurton 10y ago
"Everyone's being told, 'Don't go public,'" Ries said. "The most common conventional wisdom now is that going public will mean the end of your ability to innovate." I thought no one went public because going public requires you to divulge revenues.
- ng12 10y ago
  Stop it you're breaking the narrative.
- JustSomeNobody 10y ago
  Because they're too busy chasing the QER.
- bduerst 10y ago
  Maybe. I worked for a time with Epic Systems, which is an EMR company that saw record growth in the 2000's, and they're still privately traded today because they didn't want to focus on the bottom line. Anyone in the know could possibly argue that the CEO is also a control freak, but she's used that control to keep the company focused on a high-quality/safe user experience for patients, which isn't a bad thing IMO.
  - siculars 10y ago
    ...and monopolistic control over that EMR via no HL7 integration.
    - bduerst 10y ago
      Epic Bridges sends/receives HL7 messages to just about any software with an interface. I'm not sure what you're talking about.
      - casparz 10y ago
        In addition to that, they are well underway to supporting HL7 FHIR (the new version of HL7).
Chris2048 10y ago
Maybe this would be better done outside the US? Since BTC etc, the fed seems more interested in interfering with financial disruption...
- Chris2048 10y ago
  downvote must be the fed :-) They're everywhere!
sergiosgc 10y ago
Public company management is in need of some innovation, namely when it comes to communication between companies and stockholders. I see two avenues where technology enables evolutionary leaps: 1) Accounting: Accounting, today, is mostly the same as it was a century ago. Namely, from an engineer's perspective, it does not contain the notion of error, which is obviously essential. If you go look at, say, Coca-Cola's financial statements, you'll find a value for their brand defined to the second decimal point. I know one thing about that value: it is wrong. It should be X(+/- error at 99% confidence). 2) Governance: Communication between management and stockholders is limited to the annual meeting, complemented by the board of directors. This model is flawed, the board of directors band-aid is ineffective, and there's room for much much fine grained communication and hence better governance. Since stock exchanges mandate over these aspects of listed organizations, there is space for innovation, hopefully attracting investors and guaranteeing the spread of the next generation of business governance.
- Naga 10y ago
  Accounting is actually very different today than it was ten years ago. The rise of spreadsheets has made things possible that wouldn't have been when manual calculation was necessary. What is unfortunate are that estimates are required in many cases, but it is just the way it is. For example, how can you know for certain what the present value of the cost of decommissioning a nuclear power plant in fifty years? These estimates are already included in the notes of the financial statements, which in many ways are more important than the actual financial statements. But as to your Coca-Cola example, internally generated brands are not included on the balance sheet as assets. "Coca-Cola" isn't considered an asset to the company because of how difficult it is to value it.
  - sergiosgc 10y ago
    Yup, the Coca-Cola example is bad, as it was a brand never valuated in the market. However, the reasoning holds for many other assets. Think of an office tower. It will be in the balance as an asset, with a given valuation and no error margin. That's insane.
sandworm101 10y ago
Voting rights tied to the length of time one has held shares? That cannot fly. It certainly sounds like a great deal for founders, who would have owned their shares longer than anyone else, but is totally unworkable for outside investors. How does one value a share that, if sold, would immediately diminish in value? How is a lender to grant credit based on such collateral? Options would be massively difficult, leading to a secondary market for shell contracts in order that shares need not officially change hands. I see massive instability. Say everyone votes on some matter on day one. If that same vote occurs later in time the results may shift, even if nobody sells any shares. So any decision taken by shareholders is time-specific. That doesn't promote long-term thinking. Rather, it promotes gamesmanship and trickery to ensure that votes happen when most advantageous to whomever is in control of the schedule. Markets are not some invention that can be re-invented overnight. They are the result of a thousand years of contract law, codified recently but based on long-standing principals. Altering those principals to suit the desires of founders cannot happen overnight. Don't like it? Don't take the windfall. Don't go public.
- spacecowboy_lon 10y ago
  Look at how hard and expensive it is for the average person to have individual membership of the LSE and from what i can see NSY and NSADAQ dont allow it at all. This is favoring insiders
- daveguy 10y ago
  > How does one value a share that, if sold, would immediately diminish in value? v2 = a * v1 > How is a lender to grant credit based on such collateral? v2 = a^2 * v1 The first where a share is bought to be held for voting rights or long term investment and the second where a share is bought to be sold. Where "a" is the value retained. It would be priced in like any other commission, fee or tax. I don't think that it would sow chaos -- financial institutions and investors are pretty good at estimating value. > Options would be massively difficult, leading to a secondary market for shell contracts in order that shares need not officially change hands. Like derivatives? How about we just regulate those across the board.
  - 10y ago
brc 10y ago
I would have thought most of the issues with publicly listing are the regulatory environment rather than the lack of a specialised listing market. Isn't this way the Nasdaq used to be? I'm all for innovation but I can see the various levels of bureaucrats sharpening their pencils with a 'tsk tsk' noise. Perhaps the energy could be well spent getting the wider public to accept investing and risk taking in a way that it used to. That would at least prepare the ground for tech companies to get listed again. Maybe all the people who got burnt in 2000 have finally retired now.
deleted 10y ago
[deleted]
deleted 10y ago
[deleted]
jasode 10y ago
Eric Ries has noble intentions but it seems like he overestimates the power of a trading platform to dictate (for good or bad) the companies' ethos. >A company that wants to list its stock on Ries’s exchange will have to choose from a menu of LTSE-approved compensation plans designed to make sure executive pay is not tied to short-term stock performance. If a company wants to buck the trend of short-term thinking, it doesn't need a new Ries exchange to do it. Jeff Bezos's Amazon is listed on NASDAQ and he continually reported 0 profits quarter after quarter. He avoided earnings manipulation for short term gains and yet, the stock price went up anyway. Likewise, if a company wants to provide a minimum wage of $70k to all employees including the janitor, they can do so while listing on NASDAQ or NYSE. The company doesn't require a hypothetical MLWSE (Minimum Living Wage Stock Exchange.) I can't think of any example in a hundred years of corporate history where a new company can attract a significant (and profitable!) customer base based just on "aspirations". No, you must offer concrete benefits with obvious connections to the bottom line. As an analogy, it's like proposing a new shipping company (Patriotic Shippers Inc) as an alternative FedEx/UPS. As a rule, they won't allow you to be a customer unless you pledge that anything you ship is made in the USA instead of cheap labor in China. Why would companies care about that aspiration? Either you can ship packages for half the price of FedEx, or you can ship them faster for the same price. The aspiration is just the cherry on top and not the primary motivator. Or you propose to create a new airline hub in Iowa. You only allow airlines that provide adequate leg room and do not charge fees for checked baggage. Why would airlines move their fleet from Chicago O'Hare to Iowa based on those rules? No, the hub in the cornfield needs better enticements than that. Maybe if your Iowa hub has new patented deep learning neural nets that predict weather patterns better than the meteorologists in Chicago, and/or your scheduling algorithm for runways can handle 3x the traffic... then maybe the airlines will look at the new location. Also, if your new Iowa airport can play the politics game and convince Iowa state legislature to provide basic income to every resident and thereby cause a massive population exodus from Chicago to Des Moines, that would be another carrot to get airlines' attention. Ries LTSE platform must offer profitable benefits such as technology advantages, or rebates to brokers, etc.
- notahacker 10y ago
  To put it even more straightforwardly, there's no economically sound reason to believe a firm which chooses to write its corporate governance rules in a certain way wouldn't perform at least as well on the NASDAQ as on a special exchange designed for the purpose.[1] If enough funds believe that shorter term traders are undervaluing a particular NASDAQ stock because they've become so caught up in profit warnings they've missed the long term potential of its R&D, they pile in and pump the price back up again. If there aren't enough investors that believe a particular firm's long term strategy more than justifies conservative short term forecasts and a profit warning due to unanticipated increases in the research budget on NASDAQ, they won't be found on a LTSE either. It's not like the public markets are niche arenas that contrarian investors don't get involved with [1]There's one possible non-economic reason. If existing exchanges' [but not SEC] rules prevent firms from issuing extra information pertaining to their long term research and development or restrict executive bonuses, then there is a point to doing this; afaik they don't.
padobson 10y ago
The idea that stock exchanges provide disincentives for long term strategic planning at public companies is not just an economic problem, but a political problem. As an entrepreneur, I'm proud of Reese for trying to tackle a big political problem with a startup, rather than through the political process. I can't help but think a lot of big problems that interested parties try to solve with lobbying, campaigning, and legislation could instead be solved with a market-based solution that doesn't necessitate government coercion.
- repomies691 10y ago
  > The idea that stock exchanges provide disincentives for long term strategic planning at public companies Is this really true? Quite many public companies seem to innovate in long-term. In fact, to me it feels that private companies are often more short-term, because they don't have access to the liquidity the stock market provides, and therefore they have to generate more revenues short-term.
peter303 10y ago
The number of public US companies has fallen from 7800 in the late 1990s to 3700 in 2015. These include bankruptcies, mergers, taken private, never gone public etc. In the long term this could mean difficulties for savings plans like 401K who buy lots of equity. In a related story, the number of shareholders per company has been plummenting too. Part of this is that money funds like ETFs only count as one shareholder, but have many owners. The other is the trend towatd just one or few private equity holders.
jackgavigan 10y ago
> ..it could be years before the LTSE gets SEC approval... By the time they launch, the notion of a centralised stock exchange may well be outdated.
- ycombobreaker 10y ago
  The "stock exchange" is already decentralized [0]. It has been this way since electronic trading really took off on... i think Instinet (now NASDAQ) and Archipelago (now NYSE ARCA) in the 1990's. The National Market System [1] is a piece of legislation from 2005 that attempts to unify the markets from a customer's perspective, but it is a very leaky abstraction. That said, it is interesting to see what happens with any new exchange. [0] https://www.sec.gov/divisions/marketreg/mrexchanges.shtml https://www.sec.gov/divisions/marketreg/mrexchanges.shtml [1] https://en.m.wikipedia.org/wiki/Regulation_NMS https://en.m.wikipedia.org/wiki/Regulation_NMS
JoelBennett 10y ago
I'd think an easier way to tame the existing stock market would lock all trades in for 90 days. It'd basically eliminate all this short term thinking.
- umanwizard 10y ago
  What would be the advantages of that?
- rm_-rf_slash 10y ago
  That would not work in aggregate. Lightning-fast quants would lurch the stock price back and forth every three months, and would require a premium to be paid for the lack of liquidity.
- toss1 10y ago
  I've long thought that an even better way would be a strong curve in the capital gains tax structure. Currently, if held ,1yr it counts as ordinary income, >1yr gets cap gains treatment of 28%. Better would be something like the following holding periods and tax rates (obviously a mere sketch subject to tuning): <1 minute = 95% cap gains tax rate <1 hour = 80% <1 day = 70% <1 week = 60% <1 mth = 50% <1 qtr = 40% <1 year = 30% <2 yrs = 20% <5 yrs = 10% <10 yrs = 5% >10yrs = 0 The short end would eliminate the volatility, unfairness and flash-crashes created by submillisecond trading. The encouragement to the longer end would get everyone to think longer-term. The 0% for decade+ holdings would prevent a lot of silliness around inheritance (e.g., you inherit a few shares from your grandfather, and have no records or reasonable way to figure the cost basis, but are required to assert one). Of course, I doubt it would happen because it isn't in the short-term interest of the bankers.
  - a13n 10y ago
    I like your approach but a 95% tax rate is insane and would cause the market to be incredibly illiquid. Something like 50% to 0% seems a lot more appropriate.
    - 10y ago
ryan606 10y ago
Rather than penalizing short-term trades, why not build an exchange that only allows trading once per week, or once per month?
kgwgk 10y ago
Matt Levine comments on this today: http://www.bloomberg.com/view/articles/2016-06-13/long-termism-weather-and-risk http://www.bloomberg.com/view/articles/2016-06-13/long-termi...
leroy_masochist 10y ago
This strikes me as a well-intentioned dumb idea, kind of like B-Corporations [0]. The whole point of a stock exchange is to allow the market to provide nearly instant feedback on a company's reported operational/financial performance and the decisions of its leadership. I agree that there is moral hazard in companies giving executives pay packages in which most of the upside is tied to short-term market performance. It's important to note that a large portion of the professional investor community feels the same way, and a lot of short positions are born of the observation, "looks like the CEO is just trying to fluff numbers for his bonus". This is where a strong board makes a huge difference. "Corporate governance" is not just wanker-jargon, it's a real thing. As far as public markets limiting R&D....that's a weak argument. Five of the ten biggest companies in the world by market cap are tech companies that spend billions of dollars a year on R&D, most of which has no clear path to GAAP profitability [1]. To borrow from Churchill, liquid securities markets constitute the worst system of company ownership with the exception of all the other systems available. [0]: https://en.wikipedia.org/wiki/Benefit_corporation https://en.wikipedia.org/wiki/Benefit_corporation [1]: Apple, Alphabet, Microsoft, Amazon, Facebook
sailfast 10y ago
This may be a stupid question, but can't you sell long term value in current markets? Isn't that what Amazon has done successfully? The only thing that seems to differentiate long term vs. short term companies is how much they care culturally about their stock price day to day, and the kinds of investors they court. Is it impossible to go public with a longer term vision these days, or is it just harder?
Lambent_Cactus 10y ago
I like where this is going - you want to apply some pressure to organizations to set up internal incentives that push for longer-term thinking. But if the value of being on the LTSE is that it sends a signal that your org is optimized for the long term, couldn't you accomplish some of that function with a voluntary certification process, instead of a whole new stock exchange? Like, why not just publish a version of the famous Joel Test (http://www.joelonsoftware.com/articles/fog0000000043.html http://www.joelonsoftware.com/articles/fog0000000043.html), but for management incentives compatible with long-term thinking? Then companies can submit to voluntary review (maybe with a nominal fee) by your Long-Term Business Bureau, and you can issue certifications for ones that meet certain standards. Your go-to-market strategy is the same - you can target mid-sized startups that are looking to differentiate themselves and hoping one or two of them grow into norm-setting behemoths, but you don't have to ask those companies to jeopardize their (and their investors') liquidation strategies.
- ctlby 10y ago
  Nailed it. The problems they're trying to address are entirely in the realm of corporate governance. None of their stated aims require a new exchange.
  - jerf 10y ago
    I'm not sure if they're planning this or not, but one thing a new exchange could do is quantize the trading. I have seen serious suggestions that having trades execute only on the hour, or even as radically as once per day, could perhaps significantly reduce the short-term focus of the stock. The idea here is to greatly reduce the influence of the stock's price movement on its own price. Since that sentence probably looks like a typo, let me say it another way: Stock prices react to information, and one of the loudest and most continuous bits of information is the stock's own minute-by-minute motion, far dominating things like "press releases", actual news, or quarterly reports for which it is sensible to see significant motion on the stock price. Even if people set up the inevitable backchannels or side markets, the fact that shares can only change hands once per day may still have a significant impact on the shape of the market, even if it isn't perfect.
fullshark 10y ago
I agree that this is a problem, I don't think this will solve it. Of the three reforms, the first one is basically "Force your company to be organized this way" which is not a real reform, just a filter in terms of what companies will be listed on the exchange. The 2nd reform: if companies share more information on expenditures (especially on R&D) it's just going to make public money more anxious. The third reform: Maybe, but it's hardly different than how companies like Google and FB are set up to ensure their founders never lose control so why bother?
grondilu 10y ago
> granting stronger voting rights to long-term shareholders would make takeovers harder, That sounds like a reasonable idea, but I think it fails to see how capital markets work. The thing is, voting rights can be sold. If you create different voting rights with weights, you will just create different prices for different voting rights. It will make things unnecessarily complicated, and if you try to prohibit some kinds of voting rights to be sold, you will likely just fuel a black market. Can a 10-year voting right be sold? In theory you can't, since as soon as the share changes hands, it would become a 0-year voting right. Except the voter can sell his right in a different way, that is by just agreeing to vote on command in exchange for money. By making every such conceivable transaction transparent and controlled by Law, the market is supposed to avoid these kinds of shady practices.
- gerbal 10y ago
  A trust buys shares; control of that trust is then sold on secondary markets. Or a very, very long term fulfillment contract that grants rights to the contracts current owner. Which is also sold on secondary markets.
cft 10y ago
Is this an attempt to float and liquidate the hugely funded walking dead unicorns that have no chance of going public otherwise?
zymhan 10y ago
I just want to take a moment to appreciate the image at the top of the article.
tunesmith 10y ago
What would the effects be if the data reported quarterly were instead reported continually?
DennisP 10y ago
> Google's 2004 attempt during its IPO to distribute its shares more equitably via a "Dutch" auction led to a disappointing first day of trading and never caught on. What's disappointing is that people see it that way, even though it worked exactly as designed. The whole point was to find a fair opening value that made a level playing field for all investors. By opening at a stable value, it did exactly that. The experiment hasn't been repeated because the people making decisions prefer a model that gives them short-term profit, at the expense of the general public.
stcredzero 10y ago
Once companies go public, employees “are on Yahoo Finance every day, and it’s palpable how much that is affecting the decision-making of ordinary managers,” he says. This is believed by most everyone I know. It makes sense to me. However, is there any hard data to support this?
- throwaway60453 10y ago
  > is there any hard data to support this No, so you should drop whatever you're doing and get right on that. Oh ... so you were expecting somebody else to service you for free?
  - stcredzero 10y ago
    Oh ... so you were expecting somebody else to service you for free? Maybe someone would've done that study for the PhD. Hey, you sound touchy. I guess you're letting your biases show. I think the notion is correct, but I understand the "evidence based life." To be sincere about rigorousness, you need to check the the ideas you like as much as the ideas you don't like. But anyhow thanks for letting your biases show for free.
obiefernandez 10y ago
My favorite overheard comment about this: "...just love how minimal his MVP is. And how he's launching privately with no press coverage." :P
grandalf 10y ago
It seems silly to create a new exchange when all it does is require companies to agree to specific business practices. The list of requirements could simply be a set of rules, and a company's auditors (and CEO) could sign off that the company is in compliance. I don't see what the LTSE offers that goes beyond that.

270 points by jackgavigan 10y ago

Does anyone else find it ironic that the guy who invented The Lean Startup philosophy is trying to take a zero to one leap to start an exchange? Wouldn't it make more sense to start a crowdfunding platform or secondary market for private shares and evolve that into a public market exchange, rather than trying to start something denovo?

blowski 10y ago
Perhaps discussing feasibility with the SEC and putting out feelers via a press release is the MVP.
- afarrell 10y ago
  And sometimes, if your goal is to actually test viability, the MVP is in fact quite large.
- rdlecler1 10y ago
  The articles states that he's assembled a team of 20 engineers. That doesn't sound like a MVP to me.
twoarrays 10y ago
Well, he used Lean Startup hype to be a well-connected person and have a "more optimal" approach. Whereas LS may help an ambitious young student, it's not the best approach if you have monopolistic ideas.
npt4279 10y ago
Agreed. That's exactly our plan at Wefunder. We're using Regulation Crowdfunding and Regulation A+ to create a new secondary market for riskier ventures. With a few minor Congressional fixes to current laws (including one being voted on soon), we expect this to be workable in 2017. https://wefunder.com/wefunder https://wefunder.com/wefunder

ianpurton 10y ago

"Everyone's being told, 'Don't go public,'" Ries said. "The most common conventional wisdom now is that going public will mean the end of your ability to innovate." I thought no one went public because going public requires you to divulge revenues.

ng12 10y ago
Stop it you're breaking the narrative.
JustSomeNobody 10y ago
Because they're too busy chasing the QER.
bduerst 10y ago
Maybe. I worked for a time with Epic Systems, which is an EMR company that saw record growth in the 2000's, and they're still privately traded today because they didn't want to focus on the bottom line. Anyone in the know could possibly argue that the CEO is also a control freak, but she's used that control to keep the company focused on a high-quality/safe user experience for patients, which isn't a bad thing IMO.
- siculars 10y ago
  ...and monopolistic control over that EMR via no HL7 integration.
  - bduerst 10y ago
    Epic Bridges sends/receives HL7 messages to just about any software with an interface. I'm not sure what you're talking about.
    - casparz 10y ago
      In addition to that, they are well underway to supporting HL7 FHIR (the new version of HL7).

Chris2048 10y ago

Maybe this would be better done outside the US? Since BTC etc, the fed seems more interested in interfering with financial disruption...

Chris2048 10y ago
downvote must be the fed :-) They're everywhere!

sergiosgc 10y ago

Public company management is in need of some innovation, namely when it comes to communication between companies and stockholders. I see two avenues where technology enables evolutionary leaps: 1) Accounting: Accounting, today, is mostly the same as it was a century ago. Namely, from an engineer's perspective, it does not contain the notion of error, which is obviously essential. If you go look at, say, Coca-Cola's financial statements, you'll find a value for their brand defined to the second decimal point. I know one thing about that value: it is wrong. It should be X(+/- error at 99% confidence). 2) Governance: Communication between management and stockholders is limited to the annual meeting, complemented by the board of directors. This model is flawed, the board of directors band-aid is ineffective, and there's room for much much fine grained communication and hence better governance. Since stock exchanges mandate over these aspects of listed organizations, there is space for innovation, hopefully attracting investors and guaranteeing the spread of the next generation of business governance.

Naga 10y ago
Accounting is actually very different today than it was ten years ago. The rise of spreadsheets has made things possible that wouldn't have been when manual calculation was necessary. What is unfortunate are that estimates are required in many cases, but it is just the way it is. For example, how can you know for certain what the present value of the cost of decommissioning a nuclear power plant in fifty years? These estimates are already included in the notes of the financial statements, which in many ways are more important than the actual financial statements. But as to your Coca-Cola example, internally generated brands are not included on the balance sheet as assets. "Coca-Cola" isn't considered an asset to the company because of how difficult it is to value it.
- sergiosgc 10y ago
  Yup, the Coca-Cola example is bad, as it was a brand never valuated in the market. However, the reasoning holds for many other assets. Think of an office tower. It will be in the balance as an asset, with a given valuation and no error margin. That's insane.

sandworm101 10y ago

Voting rights tied to the length of time one has held shares? That cannot fly. It certainly sounds like a great deal for founders, who would have owned their shares longer than anyone else, but is totally unworkable for outside investors. How does one value a share that, if sold, would immediately diminish in value? How is a lender to grant credit based on such collateral? Options would be massively difficult, leading to a secondary market for shell contracts in order that shares need not officially change hands. I see massive instability. Say everyone votes on some matter on day one. If that same vote occurs later in time the results may shift, even if nobody sells any shares. So any decision taken by shareholders is time-specific. That doesn't promote long-term thinking. Rather, it promotes gamesmanship and trickery to ensure that votes happen when most advantageous to whomever is in control of the schedule. Markets are not some invention that can be re-invented overnight. They are the result of a thousand years of contract law, codified recently but based on long-standing principals. Altering those principals to suit the desires of founders cannot happen overnight. Don't like it? Don't take the windfall. Don't go public.

spacecowboy_lon 10y ago
Look at how hard and expensive it is for the average person to have individual membership of the LSE and from what i can see NSY and NSADAQ dont allow it at all. This is favoring insiders
daveguy 10y ago
> How does one value a share that, if sold, would immediately diminish in value? v2 = a * v1 > How is a lender to grant credit based on such collateral? v2 = a^2 * v1 The first where a share is bought to be held for voting rights or long term investment and the second where a share is bought to be sold. Where "a" is the value retained. It would be priced in like any other commission, fee or tax. I don't think that it would sow chaos -- financial institutions and investors are pretty good at estimating value. > Options would be massively difficult, leading to a secondary market for shell contracts in order that shares need not officially change hands. Like derivatives? How about we just regulate those across the board.
- 10y ago

brc 10y ago

I would have thought most of the issues with publicly listing are the regulatory environment rather than the lack of a specialised listing market. Isn't this way the Nasdaq used to be? I'm all for innovation but I can see the various levels of bureaucrats sharpening their pencils with a 'tsk tsk' noise. Perhaps the energy could be well spent getting the wider public to accept investing and risk taking in a way that it used to. That would at least prepare the ground for tech companies to get listed again. Maybe all the people who got burnt in 2000 have finally retired now.

deleted 10y ago

[deleted]

deleted 10y ago

[deleted]

jasode 10y ago

Eric Ries has noble intentions but it seems like he overestimates the power of a trading platform to dictate (for good or bad) the companies' ethos. >A company that wants to list its stock on Ries’s exchange will have to choose from a menu of LTSE-approved compensation plans designed to make sure executive pay is not tied to short-term stock performance. If a company wants to buck the trend of short-term thinking, it doesn't need a new Ries exchange to do it. Jeff Bezos's Amazon is listed on NASDAQ and he continually reported 0 profits quarter after quarter. He avoided earnings manipulation for short term gains and yet, the stock price went up anyway. Likewise, if a company wants to provide a minimum wage of $70k to all employees including the janitor, they can do so while listing on NASDAQ or NYSE. The company doesn't require a hypothetical MLWSE (Minimum Living Wage Stock Exchange.) I can't think of any example in a hundred years of corporate history where a new company can attract a significant (and profitable!) customer base based just on "aspirations". No, you must offer concrete benefits with obvious connections to the bottom line. As an analogy, it's like proposing a new shipping company (Patriotic Shippers Inc) as an alternative FedEx/UPS. As a rule, they won't allow you to be a customer unless you pledge that anything you ship is made in the USA instead of cheap labor in China. Why would companies care about that aspiration? Either you can ship packages for half the price of FedEx, or you can ship them faster for the same price. The aspiration is just the cherry on top and not the primary motivator. Or you propose to create a new airline hub in Iowa. You only allow airlines that provide adequate leg room and do not charge fees for checked baggage. Why would airlines move their fleet from Chicago O'Hare to Iowa based on those rules? No, the hub in the cornfield needs better enticements than that. Maybe if your Iowa hub has new patented deep learning neural nets that predict weather patterns better than the meteorologists in Chicago, and/or your scheduling algorithm for runways can handle 3x the traffic... then maybe the airlines will look at the new location. Also, if your new Iowa airport can play the politics game and convince Iowa state legislature to provide basic income to every resident and thereby cause a massive population exodus from Chicago to Des Moines, that would be another carrot to get airlines' attention. Ries LTSE platform must offer profitable benefits such as technology advantages, or rebates to brokers, etc.

notahacker 10y ago
To put it even more straightforwardly, there's no economically sound reason to believe a firm which chooses to write its corporate governance rules in a certain way wouldn't perform at least as well on the NASDAQ as on a special exchange designed for the purpose.[1] If enough funds believe that shorter term traders are undervaluing a particular NASDAQ stock because they've become so caught up in profit warnings they've missed the long term potential of its R&D, they pile in and pump the price back up again. If there aren't enough investors that believe a particular firm's long term strategy more than justifies conservative short term forecasts and a profit warning due to unanticipated increases in the research budget on NASDAQ, they won't be found on a LTSE either. It's not like the public markets are niche arenas that contrarian investors don't get involved with [1]There's one possible non-economic reason. If existing exchanges' [but not SEC] rules prevent firms from issuing extra information pertaining to their long term research and development or restrict executive bonuses, then there is a point to doing this; afaik they don't.

padobson 10y ago

The idea that stock exchanges provide disincentives for long term strategic planning at public companies is not just an economic problem, but a political problem. As an entrepreneur, I'm proud of Reese for trying to tackle a big political problem with a startup, rather than through the political process. I can't help but think a lot of big problems that interested parties try to solve with lobbying, campaigning, and legislation could instead be solved with a market-based solution that doesn't necessitate government coercion.

repomies691 10y ago
> The idea that stock exchanges provide disincentives for long term strategic planning at public companies Is this really true? Quite many public companies seem to innovate in long-term. In fact, to me it feels that private companies are often more short-term, because they don't have access to the liquidity the stock market provides, and therefore they have to generate more revenues short-term.

peter303 10y ago

The number of public US companies has fallen from 7800 in the late 1990s to 3700 in 2015. These include bankruptcies, mergers, taken private, never gone public etc. In the long term this could mean difficulties for savings plans like 401K who buy lots of equity. In a related story, the number of shareholders per company has been plummenting too. Part of this is that money funds like ETFs only count as one shareholder, but have many owners. The other is the trend towatd just one or few private equity holders.

jackgavigan 10y ago

> ..it could be years before the LTSE gets SEC approval... By the time they launch, the notion of a centralised stock exchange may well be outdated.

ycombobreaker 10y ago
The "stock exchange" is already decentralized [0]. It has been this way since electronic trading really took off on... i think Instinet (now NASDAQ) and Archipelago (now NYSE ARCA) in the 1990's. The National Market System [1] is a piece of legislation from 2005 that attempts to unify the markets from a customer's perspective, but it is a very leaky abstraction. That said, it is interesting to see what happens with any new exchange. [0] https://www.sec.gov/divisions/marketreg/mrexchanges.shtml https://www.sec.gov/divisions/marketreg/mrexchanges.shtml [1] https://en.m.wikipedia.org/wiki/Regulation_NMS https://en.m.wikipedia.org/wiki/Regulation_NMS

JoelBennett 10y ago

I'd think an easier way to tame the existing stock market would lock all trades in for 90 days. It'd basically eliminate all this short term thinking.

umanwizard 10y ago
What would be the advantages of that?
rm_-rf_slash 10y ago
That would not work in aggregate. Lightning-fast quants would lurch the stock price back and forth every three months, and would require a premium to be paid for the lack of liquidity.
toss1 10y ago
I've long thought that an even better way would be a strong curve in the capital gains tax structure. Currently, if held ,1yr it counts as ordinary income, >1yr gets cap gains treatment of 28%. Better would be something like the following holding periods and tax rates (obviously a mere sketch subject to tuning): <1 minute = 95% cap gains tax rate <1 hour = 80% <1 day = 70% <1 week = 60% <1 mth = 50% <1 qtr = 40% <1 year = 30% <2 yrs = 20% <5 yrs = 10% <10 yrs = 5% >10yrs = 0 The short end would eliminate the volatility, unfairness and flash-crashes created by submillisecond trading. The encouragement to the longer end would get everyone to think longer-term. The 0% for decade+ holdings would prevent a lot of silliness around inheritance (e.g., you inherit a few shares from your grandfather, and have no records or reasonable way to figure the cost basis, but are required to assert one). Of course, I doubt it would happen because it isn't in the short-term interest of the bankers.
- a13n 10y ago
  I like your approach but a 95% tax rate is insane and would cause the market to be incredibly illiquid. Something like 50% to 0% seems a lot more appropriate.
  - 10y ago

ryan606 10y ago

Rather than penalizing short-term trades, why not build an exchange that only allows trading once per week, or once per month?

kgwgk 10y ago

Matt Levine comments on this today: http://www.bloomberg.com/view/articles/2016-06-13/long-termism-weather-and-risk http://www.bloomberg.com/view/articles/2016-06-13/long-termi...

leroy_masochist 10y ago

This strikes me as a well-intentioned dumb idea, kind of like B-Corporations [0]. The whole point of a stock exchange is to allow the market to provide nearly instant feedback on a company's reported operational/financial performance and the decisions of its leadership. I agree that there is moral hazard in companies giving executives pay packages in which most of the upside is tied to short-term market performance. It's important to note that a large portion of the professional investor community feels the same way, and a lot of short positions are born of the observation, "looks like the CEO is just trying to fluff numbers for his bonus". This is where a strong board makes a huge difference. "Corporate governance" is not just wanker-jargon, it's a real thing. As far as public markets limiting R&D....that's a weak argument. Five of the ten biggest companies in the world by market cap are tech companies that spend billions of dollars a year on R&D, most of which has no clear path to GAAP profitability [1]. To borrow from Churchill, liquid securities markets constitute the worst system of company ownership with the exception of all the other systems available. [0]: https://en.wikipedia.org/wiki/Benefit_corporation https://en.wikipedia.org/wiki/Benefit_corporation [1]: Apple, Alphabet, Microsoft, Amazon, Facebook

sailfast 10y ago

This may be a stupid question, but can't you sell long term value in current markets? Isn't that what Amazon has done successfully? The only thing that seems to differentiate long term vs. short term companies is how much they care culturally about their stock price day to day, and the kinds of investors they court. Is it impossible to go public with a longer term vision these days, or is it just harder?

Lambent_Cactus 10y ago

I like where this is going - you want to apply some pressure to organizations to set up internal incentives that push for longer-term thinking. But if the value of being on the LTSE is that it sends a signal that your org is optimized for the long term, couldn't you accomplish some of that function with a voluntary certification process, instead of a whole new stock exchange? Like, why not just publish a version of the famous Joel Test (http://www.joelonsoftware.com/articles/fog0000000043.html http://www.joelonsoftware.com/articles/fog0000000043.html), but for management incentives compatible with long-term thinking? Then companies can submit to voluntary review (maybe with a nominal fee) by your Long-Term Business Bureau, and you can issue certifications for ones that meet certain standards. Your go-to-market strategy is the same - you can target mid-sized startups that are looking to differentiate themselves and hoping one or two of them grow into norm-setting behemoths, but you don't have to ask those companies to jeopardize their (and their investors') liquidation strategies.

ctlby 10y ago
Nailed it. The problems they're trying to address are entirely in the realm of corporate governance. None of their stated aims require a new exchange.
- jerf 10y ago
  I'm not sure if they're planning this or not, but one thing a new exchange could do is quantize the trading. I have seen serious suggestions that having trades execute only on the hour, or even as radically as once per day, could perhaps significantly reduce the short-term focus of the stock. The idea here is to greatly reduce the influence of the stock's price movement on its own price. Since that sentence probably looks like a typo, let me say it another way: Stock prices react to information, and one of the loudest and most continuous bits of information is the stock's own minute-by-minute motion, far dominating things like "press releases", actual news, or quarterly reports for which it is sensible to see significant motion on the stock price. Even if people set up the inevitable backchannels or side markets, the fact that shares can only change hands once per day may still have a significant impact on the shape of the market, even if it isn't perfect.

fullshark 10y ago

I agree that this is a problem, I don't think this will solve it. Of the three reforms, the first one is basically "Force your company to be organized this way" which is not a real reform, just a filter in terms of what companies will be listed on the exchange. The 2nd reform: if companies share more information on expenditures (especially on R&D) it's just going to make public money more anxious. The third reform: Maybe, but it's hardly different than how companies like Google and FB are set up to ensure their founders never lose control so why bother?

grondilu 10y ago

> granting stronger voting rights to long-term shareholders would make takeovers harder, That sounds like a reasonable idea, but I think it fails to see how capital markets work. The thing is, voting rights can be sold. If you create different voting rights with weights, you will just create different prices for different voting rights. It will make things unnecessarily complicated, and if you try to prohibit some kinds of voting rights to be sold, you will likely just fuel a black market. Can a 10-year voting right be sold? In theory you can't, since as soon as the share changes hands, it would become a 0-year voting right. Except the voter can sell his right in a different way, that is by just agreeing to vote on command in exchange for money. By making every such conceivable transaction transparent and controlled by Law, the market is supposed to avoid these kinds of shady practices.

gerbal 10y ago
A trust buys shares; control of that trust is then sold on secondary markets. Or a very, very long term fulfillment contract that grants rights to the contracts current owner. Which is also sold on secondary markets.

cft 10y ago

Is this an attempt to float and liquidate the hugely funded walking dead unicorns that have no chance of going public otherwise?

zymhan 10y ago

I just want to take a moment to appreciate the image at the top of the article.

tunesmith 10y ago

What would the effects be if the data reported quarterly were instead reported continually?

DennisP 10y ago

> Google's 2004 attempt during its IPO to distribute its shares more equitably via a "Dutch" auction led to a disappointing first day of trading and never caught on. What's disappointing is that people see it that way, even though it worked exactly as designed. The whole point was to find a fair opening value that made a level playing field for all investors. By opening at a stable value, it did exactly that. The experiment hasn't been repeated because the people making decisions prefer a model that gives them short-term profit, at the expense of the general public.

stcredzero 10y ago

Once companies go public, employees “are on Yahoo Finance every day, and it’s palpable how much that is affecting the decision-making of ordinary managers,” he says. This is believed by most everyone I know. It makes sense to me. However, is there any hard data to support this?

throwaway60453 10y ago
> is there any hard data to support this No, so you should drop whatever you're doing and get right on that. Oh ... so you were expecting somebody else to service you for free?
- stcredzero 10y ago
  Oh ... so you were expecting somebody else to service you for free? Maybe someone would've done that study for the PhD. Hey, you sound touchy. I guess you're letting your biases show. I think the notion is correct, but I understand the "evidence based life." To be sincere about rigorousness, you need to check the the ideas you like as much as the ideas you don't like. But anyhow thanks for letting your biases show for free.

obiefernandez 10y ago

My favorite overheard comment about this: "...just love how minimal his MVP is. And how he's launching privately with no press coverage." :P

grandalf 10y ago

It seems silly to create a new exchange when all it does is require companies to agree to specific business practices. The list of requirements could simply be a set of rules, and a company's auditors (and CEO) could sign off that the company is in compliance. I don't see what the LTSE offers that goes beyond that.