15 ms·

Dole Food Had Too Many Shares

418 points by ot 10y ago

blakesterz 10y ago
That was way more interesting than I thought it might be. I really liked the writing style, kinda snarky, but still explained well: ""But what if ...," you start to ask, and I reply: Shh, shh. It just works."
- manacit 10y ago
  Matt Levine is a treasure, he writes a daily newsletter called "Money Stuff" (https://www.bloomberg.com/view/topics/money-stuff https://www.bloomberg.com/view/topics/money-stuff) that I really enjoy
  - mbesto 10y ago
    Was just about to say this. His writing is pure gold. As a techie and not a public finance person, he does an incredible job explaining seemingly very complex topics, and adds some very healthy snark to his analysis.
  - monksy 10y ago
    He has his own RSS feed, which is even better! https://www.bloomberg.com/view/rss/topics/money-stuff.rss https://www.bloomberg.com/view/rss/topics/money-stuff.rss
    - sparky_z 10y ago
      That's just a feed for his newsletter, Money Stuff. Here's[0] a more complete feed that also includes his standalone articles for Bloomberg View (like the current Dole article). https://www.bloomberg.com/view/rss/contributors/matt-levine.rss https://www.bloomberg.com/view/rss/contributors/matt-levine....
- sparky_z 10y ago
  Congratulations, today is your day to discover Matt Levine! Here are a few good ones from the archives: https://www.bloomberg.com/view/articles/2015-07-14/banks-forgot-who-was-supposed-to-own-dell-shares https://www.bloomberg.com/view/articles/2015-07-14/banks-for... https://www.bloomberg.com/view/articles/2015-01-28/yahoo-would-rather-not-pay-taxes-on-its-alibaba-shares https://www.bloomberg.com/view/articles/2015-01-28/yahoo-wou... https://www.bloomberg.com/view/articles/2015-07-07/can-you-really-game-index-funds- https://www.bloomberg.com/view/articles/2015-07-07/can-you-r...
  - snikeris 10y ago
    I liked this bit: > A regular human retail trader could have read the S&P news release on Monday afternoon, had dinner with friends, seen a movie, gotten a good night's sleep, spent Tuesday morning doing research to confirm that American was in fact going to join the S&P 500 and that a lot of index fund money tracks the S&P 500, gone out for a two-martini lunch, had 40 martinis, gotten blackout drunk, woken up in the hospital, spent 48 hours recovering and still had time to buy the stock before it joined the S&P on Friday afternoon.
  - AceJohnny2 10y ago
    Don't forget "Oreos, Vomitoxin and the Price of Wheat" (with the best alt-URL) https://www.bloomberg.com/view/articles/2015-04-02/my-dog-is-gluten-free https://www.bloomberg.com/view/articles/2015-04-02/my-dog-is... "Arbitrage Discovered" about the best/worse life insurance contract ever (whether you're the beneficiary or the insurer), and includes possibly the best financial punchline in an opening paragraph ever: https://www.bloomberg.com/view/articles/2015-02-27/arbitrage-discovered https://www.bloomberg.com/view/articles/2015-02-27/arbitrage... There were others, but I can't remember them offhand. The Vomitoxin article is the one that put him (well, Bloomberg View really) in my feed :)
- bsimpson 10y ago
  I really enjoyed reading "new phone, who dis?" in Bloomberg.
- stephensikes 10y ago
  Levine is easily the best Wall Street / finance columnist out there, glad to see he's made his way to HN. Which makes me wonder, is there anyone similar writing about the SV / tech world?
  - throwaway40483 10y ago
    Yeah, been looking for someone like this in tech. The closest thing you'll come is VCs pushing their own investments.
  - shalmanese 10y ago
    Ben Thompson of stratechery does good work. Most of his stuff is behind a paywall but it's worth the $.
- SilasX 10y ago
  I'm just glad that the first 10 paragraphs weren't an intimate description of the clothing and mannerisms of the key people, as in most long-form journalism.
  - throwaway40483 10y ago
    That's when you know that the article wasn't written by someone with technical insight.
chollida1 10y ago
In before someone mentions blockchain as a solution (IBSMBAAS). There already exists a database that works and has been well tested over the past 30+ years of securities settlement. The issues was the database wasn't updated properly. So if a blockchain was used ti would stand to reason that that also wouldn't have been updated properly
- drcode 10y ago
  The difference is with a blockchain system every individual actor pushes in the transactions that update the data, whereas with the existing system you have to trust an arbitrary central party to perform the updates. The problem with existing systems is that the incentives of the entity owning the asset and the entity responsible for updating the database are not aligned.
  - maxerickson 10y ago
    The problem with existing systems is that the incentives of the entity owning the asset and the entity responsible for updating the database are not aligned. Sure they are. An exchange is a combination of some physical systems and credibility. People won't trade on an exchange they don't trust.
  - notahacker 10y ago
    If you don't trust the company you're investing in and the securities regulator to record things faithfully on a non-distributed ledger and uphold the law, update privileges to and mutability of the transaction record is the least of your problems when it comes to investing.
- dragonwriter 10y ago
  Neither of the two problems were that the existing databases weren't updated properly. OTOH, neither of the two seems to be uniquely well corrected by blockchain: the first problem (the "chill" problem) seems to to be correctable by not having the central database ignore updates in certain periods to rely only on peripheral DBs. A blockchain providing a single source of truth in place of multiple different DBs solves this, but so does any single source of truth, or even something in outline like the current heirarchical system of DBs without the central one taking time outs. The "shorts open at the time were closed long before the decision, and the entities that held them may not even exist anymore" problem is obviously not addressed by blockchain at all.
deleted 10y ago
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Mathnerd314 10y ago
tl;dr cloud computing has yet to reach stock offerings. Probably too much regulatory burden for a startup though: https://www.sec.gov/divisions/marketreg/mrclearing.shtml https://www.sec.gov/divisions/marketreg/mrclearing.shtml
- jandrese 10y ago
  The other part was about how short selling tossed a huge monkeywrench in the court settlement, one that can't be solved by improved recordkeeping. Ultimately the solution is to have everyone who had a short position 3 years ago come back and pay a bit more to their partner. But obviously this is problematic for many reasons, first and foremost being that they probably have not been depositing money into a collateral account for a position they closed three years ago. Some may be dead or gone. It's a huge mess.
  - mirimir 10y ago
    Why can't they just make Dole responsible for covering payments from missing short sellers? I mean, there is a judgment that Dole is responsible, overall.
- dsacco 10y ago
  The "cloud" is someone else's computer. What are you actually suggesting that would have preempted this issue? The DTC's issue was one of volume, which is certainly a technological issue, but what precisely would "cloud" computing do about it? By design it is supposed to be centralized, and it would likely be out of the question for the DTC to utilize the computing resources of a private company (especially one for which it owns all or nearly all the extant shares).
  - Mathnerd314 10y ago
    The problem is the chain of responsibility: company -> DTC -> brokers -> investors With "IPO as a service", the chain of responsibility is instead: cloud-IPO -> company -> investors Because of centralization, the DTC isn't as accountable to the company as a cloud service would be. I guess there are actually companies in the space, e.g. https://www.startengine.com/ https://www.startengine.com/
davidu 10y ago
This is why eShares or someone like them will disrupt this entire ecosystem. ComputerShares should be killed off too. The entire system is amazingly broken.
- toomuchtodo 10y ago
  Just like BankSimple/Simple was going to crush banking. You underestimate the power of monolithic financial organisms. What they lack in agility, they make up for in resources and sheer brute force.
  - publicfig 10y ago
    I should start by saying that I agree with your response to the above statement, but would add that while Simple/similar services may not have crushed the banking institutions, they definitely did bring forward a lot of technologies over the past few years that have now become absolutely expected from a bank, which was not the case before services like them came around. Now this could just as much be contributed to natural development of the banks that happened alongside these new banks, but it could be a similar case that where these newer stock solutions may not crush the existing players, they may force the hand of a lot of technological innovation that we may not see otherwise.
- cma 10y ago
  Voting rights aren't even accurately tracked. People who buy non-existent shares from naked shorters get voting rights. Not too many people can naked short anymore, but I think voting rights also come along when you buy from people who shorted with borrowed shares, yet the people who lended the shares still get voting rights too.
  - quantumhobbit 10y ago
    This is what bothers me. What stops someone from shorting and then buying the shares (likely through an intermediary) in order to gain votes. Seems like it would be enough to tip the vote in a close shareholder vote. I don't think there is anything like a negative vote to balance it out as with negative shares and dividends.
draw_down 10y ago
Mmmm, that good old market efficiency. Really hits the spot.
- jerf 10y ago
  Yeah, the market really cocked up here. We should replace it with a scheme where all the stock is actually owned by one central entity and when stocks are traded it directly tracks ownership. Looking at this as a "free market" vs. "regulation" problem is looking at the entirely wrong dimension. This is "just" a complicated system doing complicated things in a complicated situation. Neither regulations nor freedom, be they the real sorts or the fake rhetorical sorts that are entirely good or bad of either, will prevent that from occurring.
  - korethr 10y ago
    Unless I'm grossly misunderstanding the article, that's pretty much what we already have here. This situation came about because that central entity decided it didn't want to hear about the sheer mass of trades happening with this stock for for a few days.
    - Dylan16807 10y ago
      The first line was sarcasm.
- mikeash 10y ago
  Market efficiency would pay out a certain amount of money per share and then be done with it. The trouble was caused by government interference in the form of a lawsuit that required paying an additional amount years after the transaction had supposedly been completed. (This is not intended to be an argument for or against said government interference. I have no opinion either way and it may well be totally great. But this particular problem obviously wouldn't have happened without it.)
  - dsacco 10y ago
    Sure, but then you can also argue that if the market were more efficient, the government would not have had to resolve an unfair transaction. Seems like a rabbit hole of a debate.
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clort 10y ago
1. Mr. A owns a share of stock. 2. Mr. B borrows Mr. A's share of stock. 3 .Mr. B sells the share to Mr. C. well now, and the article says that Mr B borrows Mr A's stock without asking or telling him and sells Mr C a share. I understand that this is the way it has worked for some time, but franky I don't see how this is anything but fraud.
- hbosch 10y ago
  I believe the logical conclusion to this scenario is that Mr. B suspects the stock price will drop. He has borrowed from Mr. A, and promised to give it back later. When the stock price drops, Mr. B re-purchases a share at a price lower than what he sold it for to Mr. C. Mr. B returns the share to Mr. A, and pockets the difference. This isn't fraud, it's relatively common.
  - pravula 10y ago
    As long as you borrow. AFAIK, naked shorting is not legal.
    - llccbb 10y ago
      Naked shorting is practically legal, and basically unenforced. The seller only has to claim that there was "good faith reason to believe" that shares could be reasonably acquired within the settlement period (3 days). See Goldman Sach's infamous "Easy to Borrow List"[0]. Coordinated naked shorting attacks are real and legal. Flood the market with false shares and tiny lots of low-asks. Rapidly drop the price down to capture the easy stop-losses that retail investors might set. It is fool-proof because you know those shares can be obtained at a certain price (hedge-funds and market-makers can see the stop-losses). As soon as you acquire the stop-loss shares, pull off the selling pressure and use the shares just obtained to fulfill the short-contract. There is no borrowing. [0]https://www.deepcapture.com/2015/07/goldman-sachs-internal-memo-yesterday-easy-to-borrow-list-to-be-discontinued/ https://www.deepcapture.com/2015/07/goldman-sachs-internal-m...
      - 10y ago
Animats 10y ago
No, a "blockchain" wouldn't help. It wouldn't help finding the holders of three years ago. Also, putting all stock transactions for the entire market into one blockchain would have huge traffic and synchronization issues. All the players have to agree on transaction order. You'd have one giant file that was petabytes long. If you used one of those schemes that "summarizes" the blockchain, you wouldn't have an authoritative record of who owned something years ago. Bitcoin only works because transactions are few and slow transaction commit is acceptable. Most schemes for scaling Bitcoin involve "off-chain transactions". DTIC predates high-speed trading. It was designed when it was assume that if you bought a stock, you'd probably hold it for weeks or months, not seconds or minutes.
- biscuitt 10y ago
  Also, with DTC there is a continuous net settlement system that basically nets a brokers transactions together for the day and basically lets them know which securities are credited or debited from their account and how much they need to pay or receive for the day. It helps solve the issue of high speed trading and nets each brokers obligations out at the end of each day. In its simplest form if a broker had two customers and Customer A sold a share of AAPL and Customer B bought 2 shares of AAPL. The CNS system would basically net those two transactions together and calculates that the broker is going to receive 1 share and that they will pay x amount of dollars. There is definitely room for improvement because sales don't settle till T+3 (however the settlement cycle is shortening to T+2 as of Sept 5th)
- tinkerrr 10y ago
  You're assuming the blockchain would work similar to Bitcoin, where every 'trade' (transfer) is a settlement, written into the blockchain. While this is the holy grail, you've rightly pointed out issues with high-frequency trading, synchronization across nodes, etc. The current system does T+3 due to this. A 'blockchain' could conceivably do better - even if it doesn't record every single trade like Bitcoin, it might record transfers at better granularity and better frequency.
- lenocinor 10y ago
  I think you mean DTCC, not DTIC, for the record.
teslacar 10y ago
The problem is that the courts can amend a buyout, which goes against the principles of free market capitalism ..a buyout represents a significant gain above the market price even if the offer is low relative to what it 'should' be. Matt is blaming the wrong target.
- harryh 10y ago
  I don't think that Matt is really blaming anyone. He's just saying "Look at this situation that has happened and the oddball problems it has caused. It's kind of weird and no one quite knows how to deal with it." It also doesn't seem that crazy to me that shareholders can sue management if they feel that management defrauded them.
- notahacker 10y ago
  There's nothing particularly "free" about being compelled by majority vote to sell your shares at a price you don't agree to either. But, like executives' fidicuary duty not to act against the interests of their shareholders before mounting a takeover bid, it's baked into the rules of the market that shareholders and executives have freely chosen to participate in. If you don't accept that in the interests of better functioning markets the law allows for both compulsory purchase of outstanding shares in the event of a successful takeover bid and litigation against those accused of ripping shareholders off by running down the value of the company before bidding on it, the principles of free market capitalism allow you to not even think of buying or managing a publicly owned company.
- deleted 10y ago
  [deleted]
maxander 10y ago
It's fascinating that the financial system has evolved this kind of layered abstraction (humans owning stocks is a fiction maintained by brokers owning stocks, which is a fiction maintained by DTC owning stocks, which is a fiction maintained...) reminiscent of hallowed engineering kludges like TCP/IP. Its especially interesting since, unlike data packets, stocks are purely an abstraction to begin with, but the systems around them have become sufficiently complicated that it can't function without this kind of structure. A blockchain likely wouldn't help this issue either- high-speed traders would inevitably be dissatisfied with blockchain latencies and re-invent brokers that abstracted over blockchain transactions at a faster pace. These brokers would wind up causing bureaucratic meltdowns and become managed by some overarching structure similar to the DTC. Etc. If anything, a blockchain-based system would become more complicated, because it reduces the task of adding another financial sub-mechanism to an engineering problem. Something about large distributed systems of non- or imperfectly-cooperative agents breed complexity. (There's probably already formalized versions of that principle, but none are presently coming to mind.)
- notahacker 10y ago
  The irony is that if you were to build a securities markets from scratch as an electronic system, blockchain architecture for the ledger is one way you could absolutely guarantee that the authoritative record would only be eventually consistent with microsecond trades people actually place, and brokers' own independent records would still be absolutely essential to determining who owned what when a particular acquisition was allowed to go through. There's no benefit to trustlessness in settling a transaction when you're still reliant on a counterparty to actually make it for you, especially not in a situation like the one in the article which begins with legislation that means the regulator can determine if and when a takeover is allowed to go through. Even if it could settle transactions at market speed, there's not really much point in aiming for a distributed ledger if one party's legal status means they must be given sufficient control to hard fork it anyway.
  - chromox 10y ago
    What if the "broker" is not a centralized entity. Bitsquare, BitShares are good examples of a decentralized exchange. > There's no benefit to trustlessness in settling a transaction when you're still reliant on a counterparty to actually make it for you The whole point of a blockchain is that you don't rely on the counter-party to actually make the trade for you. The exchange happens at the exact same time on a blockchain. > if one party's legal status means they must be given sufficient control to hard fork it anyway. I don't think hard fork is the right concept here. Hard fork implies an entire network change; I think what you are talking about is the ability for a company to issue more shares, etc... They could be given this control through smart contracts. https://aragon.one/ https://aragon.one/
NelsonMinar 10y ago
Eventual consistency strikes again.
poorman 10y ago
I read an article recently on "Patterns for dealing with uncertainty". It never ceases to amaze me how often these concurrency patterns apply to more antiquated business models.
- ggchappell 10y ago
  Is it this? http://blog.arkency.com/2016/12/techniques-for-dealing-with-uncertainity/ http://blog.arkency.com/2016/12/techniques-for-dealing-with-... I haven't read it yet, but it looks worthwhile.
  - poorman 10y ago
    yes
0x445442 10y ago
Three words... Counter Party Risk
jcoffland 10y ago
> There are little cracks that give us brief glimpses of the abyss below. Why not cover them up with a fresh, cool coat of blockchain? This is a great example of Wall Street's continued but lessening snark towards blockchain and vicariously Bitcoin. That much of the complex system you know and revere and spent so long learning can be replaced by new fangled technology is still a hard pill to swallow. The snark is a coping mechanism.
- dsacco 10y ago
  As currently implemented, blockchain technology cannot scale to the requirements of Wall St. It simply lacks the transaction volume. That's leaving aside other computation and synchronization difficulties inherent to distributing resources rather than centralizing them. Furthermore, finance is not a homogenous group of luddites. Blockchains are being actively explored in the industry. There's even a consortium of large banks developing one - they're just doing it without all the decentralized sugar that bitcoin has. Finally, as others have mentioned in this thread, a blockchain wouldn't have obviated this problem. The primary difficulty isn't identifying the owners of shares from three years ago, it's in correctly finding them and arranging for rightful reimbursement. I think your characterization of the industry is misinformed and unfair.
  - mikeyouse 10y ago
    Bitcoin - capable of 250,000 transactions per day. NASDAQ - 11 million transactions per day.[1] I can't see any issues here! [1] - https://www.nasdaqtrader.com/Trader.aspx?id=DailyMarketSummary https://www.nasdaqtrader.com/Trader.aspx?id=DailyMarketSumma...
  - jcoffland 10y ago
    > As currently implemented, blockchain technology cannot scale to the requirements of Wall St. It simply lacks the transaction volume. There are so many implementations. Many of these can process orders of magnitude more transactions than Bitcoin.
    - 10y ago
Kiro 10y ago
> took it private for $13.50 a share How do you take something private? What does it mean?
- vpribish 10y ago
  Here's the official word on it : https://www.sec.gov/answers/gopriv.htm https://www.sec.gov/answers/gopriv.htm The part that is usually not explained is that there are state-by-state, and company-by-company, mechanisms to compel the left-over minority of shareholders who do not exchange their shares to be "squeezed-out" and paid the same cash value everyone else got. After this all of the shares are held by the private owner and the security is delisted/unregistered from the public markets
- vanattab 10y ago
  You offer a price to all the public share holders and if they agree you buy up all the shares.
- ptaipale 10y ago
  Going public means public offering, that anyone can buy its stock at the stock exchange. Taking a company private is the inverse of that: the company is no longer traded at the stock exchange. Typical, but not the only scenarios are a management buy-out and a private entity offering to buy all stock. To make this work, it is usually necessary to offer a premium price.
- drewkett 10y ago
  Taking a company private is when a company buys back all the publicly traded shares, so that one can no longer purchase shares in the company on a publicly traded market. Usually a company doesn't have enough cash to accomplish this, so they take on additional debt or outside investment to afford buying all of the publicly available shares.
  - Kiro 10y ago
    Thanks. So why didn't it happen at market price? How do you set a price if the shares are public?
gist 10y ago
Unfortunately I just keep staring at the woman in the picture at the top of the page.
mjevans 10y ago
Ultimately I don't think it's fair to have BOTH short selling AND resolution of sale price YEARS later. I actually don't like either of those as features, but both together is clearly incompatible.
- euroclydon 10y ago
  The years later resolution is a court dictate. I'd hardly call it a feature, like short selling.
vpribish 10y ago
Levine is such fun to read! The solution to the problem he ends up with seems pretty easy to me - this is just counterparty risk: When you lend your shares (or let them be lent on on your behalf) there are counterparty risks. You charge interest and accept collateral as compensation for these risks. Usually these risks are gone after the shares are returned or the position closed and settled out - but not always. Tracking down the short and making him cough up the extra $2.74 is the broker's job. If the broker can't find him, then if it was a case of a normal margin account the broker is on the hook. If it was a case of the client directly accessing the stock lending market then the broker is probably (fine print time!) not liable for the counterparty failure.
rphlx 10y ago
If you own an equity ETF in a retail brokerage, you actually own a claim on a claim on a claim on a fund that owns a claim on a claim on a claim on corporate stock which is itself a secondary or tertiary claim (behind debt and/or preferred stock) on tangible and intangible assets. It is a common & legal practice for the fund to lend its claim on a claim on a claim on corporate stock to other parties, for a small amount of interest, to help reduce its fees. See https://personal.vanguard.com/pdf/ISGSL.pdf https://personal.vanguard.com/pdf/ISGSL.pdf If the potential for fraud and error in this system doesn't give you a bit of a pause, it probably should.
- KKKKkkkk1 10y ago
  And yet it works so much better than stashing a bar of gold under your pillow.
  - rphlx 10y ago
    Why not both.. based on Chinese/Indian/Russian/German central bank action I do find the argument that gold is now a "worthless, obsolete shiny rock" unconvincing & I think a good case has been made for a modest allocation to physical PMs as insurance against tail risks. The goal is not to "outperform everything else" during normal market conditions but rather to limit worst-case draw down in the unlikely event of a major and sustained equity collapse, currency collapse, etc.
peterburkimsher 10y ago
"That system has worked pretty well for 40 years." - Wait, so I'm saving for retirement (40 years from now) in a system that isn't even that old? Somehow I don't trust it to still be around when I need to get money back.
deleted 10y ago
[deleted]

418 points by ot 10y ago

That was way more interesting than I thought it might be. I really liked the writing style, kinda snarky, but still explained well: ""But what if ...," you start to ask, and I reply: Shh, shh. It just works."

manacit 10y ago
Matt Levine is a treasure, he writes a daily newsletter called "Money Stuff" (https://www.bloomberg.com/view/topics/money-stuff https://www.bloomberg.com/view/topics/money-stuff) that I really enjoy
- mbesto 10y ago
  Was just about to say this. His writing is pure gold. As a techie and not a public finance person, he does an incredible job explaining seemingly very complex topics, and adds some very healthy snark to his analysis.
- monksy 10y ago
  He has his own RSS feed, which is even better! https://www.bloomberg.com/view/rss/topics/money-stuff.rss https://www.bloomberg.com/view/rss/topics/money-stuff.rss
  - sparky_z 10y ago
    That's just a feed for his newsletter, Money Stuff. Here's[0] a more complete feed that also includes his standalone articles for Bloomberg View (like the current Dole article). https://www.bloomberg.com/view/rss/contributors/matt-levine.rss https://www.bloomberg.com/view/rss/contributors/matt-levine....
sparky_z 10y ago
Congratulations, today is your day to discover Matt Levine! Here are a few good ones from the archives: https://www.bloomberg.com/view/articles/2015-07-14/banks-forgot-who-was-supposed-to-own-dell-shares https://www.bloomberg.com/view/articles/2015-07-14/banks-for... https://www.bloomberg.com/view/articles/2015-01-28/yahoo-would-rather-not-pay-taxes-on-its-alibaba-shares https://www.bloomberg.com/view/articles/2015-01-28/yahoo-wou... https://www.bloomberg.com/view/articles/2015-07-07/can-you-really-game-index-funds- https://www.bloomberg.com/view/articles/2015-07-07/can-you-r...
- snikeris 10y ago
  I liked this bit: > A regular human retail trader could have read the S&P news release on Monday afternoon, had dinner with friends, seen a movie, gotten a good night's sleep, spent Tuesday morning doing research to confirm that American was in fact going to join the S&P 500 and that a lot of index fund money tracks the S&P 500, gone out for a two-martini lunch, had 40 martinis, gotten blackout drunk, woken up in the hospital, spent 48 hours recovering and still had time to buy the stock before it joined the S&P on Friday afternoon.
- AceJohnny2 10y ago
  Don't forget "Oreos, Vomitoxin and the Price of Wheat" (with the best alt-URL) https://www.bloomberg.com/view/articles/2015-04-02/my-dog-is-gluten-free https://www.bloomberg.com/view/articles/2015-04-02/my-dog-is... "Arbitrage Discovered" about the best/worse life insurance contract ever (whether you're the beneficiary or the insurer), and includes possibly the best financial punchline in an opening paragraph ever: https://www.bloomberg.com/view/articles/2015-02-27/arbitrage-discovered https://www.bloomberg.com/view/articles/2015-02-27/arbitrage... There were others, but I can't remember them offhand. The Vomitoxin article is the one that put him (well, Bloomberg View really) in my feed :)
bsimpson 10y ago
I really enjoyed reading "new phone, who dis?" in Bloomberg.
stephensikes 10y ago
Levine is easily the best Wall Street / finance columnist out there, glad to see he's made his way to HN. Which makes me wonder, is there anyone similar writing about the SV / tech world?
- throwaway40483 10y ago
  Yeah, been looking for someone like this in tech. The closest thing you'll come is VCs pushing their own investments.
- shalmanese 10y ago
  Ben Thompson of stratechery does good work. Most of his stuff is behind a paywall but it's worth the $.
SilasX 10y ago
I'm just glad that the first 10 paragraphs weren't an intimate description of the clothing and mannerisms of the key people, as in most long-form journalism.
- throwaway40483 10y ago
  That's when you know that the article wasn't written by someone with technical insight.

chollida1 10y ago

In before someone mentions blockchain as a solution (IBSMBAAS). There already exists a database that works and has been well tested over the past 30+ years of securities settlement. The issues was the database wasn't updated properly. So if a blockchain was used ti would stand to reason that that also wouldn't have been updated properly

drcode 10y ago
The difference is with a blockchain system every individual actor pushes in the transactions that update the data, whereas with the existing system you have to trust an arbitrary central party to perform the updates. The problem with existing systems is that the incentives of the entity owning the asset and the entity responsible for updating the database are not aligned.
- maxerickson 10y ago
  The problem with existing systems is that the incentives of the entity owning the asset and the entity responsible for updating the database are not aligned. Sure they are. An exchange is a combination of some physical systems and credibility. People won't trade on an exchange they don't trust.
- notahacker 10y ago
  If you don't trust the company you're investing in and the securities regulator to record things faithfully on a non-distributed ledger and uphold the law, update privileges to and mutability of the transaction record is the least of your problems when it comes to investing.
dragonwriter 10y ago
Neither of the two problems were that the existing databases weren't updated properly. OTOH, neither of the two seems to be uniquely well corrected by blockchain: the first problem (the "chill" problem) seems to to be correctable by not having the central database ignore updates in certain periods to rely only on peripheral DBs. A blockchain providing a single source of truth in place of multiple different DBs solves this, but so does any single source of truth, or even something in outline like the current heirarchical system of DBs without the central one taking time outs. The "shorts open at the time were closed long before the decision, and the entities that held them may not even exist anymore" problem is obviously not addressed by blockchain at all.

deleted 10y ago

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Mathnerd314 10y ago

tl;dr cloud computing has yet to reach stock offerings. Probably too much regulatory burden for a startup though: https://www.sec.gov/divisions/marketreg/mrclearing.shtml https://www.sec.gov/divisions/marketreg/mrclearing.shtml

jandrese 10y ago
The other part was about how short selling tossed a huge monkeywrench in the court settlement, one that can't be solved by improved recordkeeping. Ultimately the solution is to have everyone who had a short position 3 years ago come back and pay a bit more to their partner. But obviously this is problematic for many reasons, first and foremost being that they probably have not been depositing money into a collateral account for a position they closed three years ago. Some may be dead or gone. It's a huge mess.
- mirimir 10y ago
  Why can't they just make Dole responsible for covering payments from missing short sellers? I mean, there is a judgment that Dole is responsible, overall.
dsacco 10y ago
The "cloud" is someone else's computer. What are you actually suggesting that would have preempted this issue? The DTC's issue was one of volume, which is certainly a technological issue, but what precisely would "cloud" computing do about it? By design it is supposed to be centralized, and it would likely be out of the question for the DTC to utilize the computing resources of a private company (especially one for which it owns all or nearly all the extant shares).
- Mathnerd314 10y ago
  The problem is the chain of responsibility: company -> DTC -> brokers -> investors With "IPO as a service", the chain of responsibility is instead: cloud-IPO -> company -> investors Because of centralization, the DTC isn't as accountable to the company as a cloud service would be. I guess there are actually companies in the space, e.g. https://www.startengine.com/ https://www.startengine.com/

davidu 10y ago

This is why eShares or someone like them will disrupt this entire ecosystem. ComputerShares should be killed off too. The entire system is amazingly broken.

toomuchtodo 10y ago
Just like BankSimple/Simple was going to crush banking. You underestimate the power of monolithic financial organisms. What they lack in agility, they make up for in resources and sheer brute force.
- publicfig 10y ago
  I should start by saying that I agree with your response to the above statement, but would add that while Simple/similar services may not have crushed the banking institutions, they definitely did bring forward a lot of technologies over the past few years that have now become absolutely expected from a bank, which was not the case before services like them came around. Now this could just as much be contributed to natural development of the banks that happened alongside these new banks, but it could be a similar case that where these newer stock solutions may not crush the existing players, they may force the hand of a lot of technological innovation that we may not see otherwise.
cma 10y ago
Voting rights aren't even accurately tracked. People who buy non-existent shares from naked shorters get voting rights. Not too many people can naked short anymore, but I think voting rights also come along when you buy from people who shorted with borrowed shares, yet the people who lended the shares still get voting rights too.
- quantumhobbit 10y ago
  This is what bothers me. What stops someone from shorting and then buying the shares (likely through an intermediary) in order to gain votes. Seems like it would be enough to tip the vote in a close shareholder vote. I don't think there is anything like a negative vote to balance it out as with negative shares and dividends.

draw_down 10y ago

Mmmm, that good old market efficiency. Really hits the spot.

jerf 10y ago
Yeah, the market really cocked up here. We should replace it with a scheme where all the stock is actually owned by one central entity and when stocks are traded it directly tracks ownership. Looking at this as a "free market" vs. "regulation" problem is looking at the entirely wrong dimension. This is "just" a complicated system doing complicated things in a complicated situation. Neither regulations nor freedom, be they the real sorts or the fake rhetorical sorts that are entirely good or bad of either, will prevent that from occurring.
- korethr 10y ago
  Unless I'm grossly misunderstanding the article, that's pretty much what we already have here. This situation came about because that central entity decided it didn't want to hear about the sheer mass of trades happening with this stock for for a few days.
  - Dylan16807 10y ago
    The first line was sarcasm.
mikeash 10y ago
Market efficiency would pay out a certain amount of money per share and then be done with it. The trouble was caused by government interference in the form of a lawsuit that required paying an additional amount years after the transaction had supposedly been completed. (This is not intended to be an argument for or against said government interference. I have no opinion either way and it may well be totally great. But this particular problem obviously wouldn't have happened without it.)
- dsacco 10y ago
  Sure, but then you can also argue that if the market were more efficient, the government would not have had to resolve an unfair transaction. Seems like a rabbit hole of a debate.

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clort 10y ago

1. Mr. A owns a share of stock. 2. Mr. B borrows Mr. A's share of stock. 3 .Mr. B sells the share to Mr. C. well now, and the article says that Mr B borrows Mr A's stock without asking or telling him and sells Mr C a share. I understand that this is the way it has worked for some time, but franky I don't see how this is anything but fraud.

hbosch 10y ago
I believe the logical conclusion to this scenario is that Mr. B suspects the stock price will drop. He has borrowed from Mr. A, and promised to give it back later. When the stock price drops, Mr. B re-purchases a share at a price lower than what he sold it for to Mr. C. Mr. B returns the share to Mr. A, and pockets the difference. This isn't fraud, it's relatively common.
- pravula 10y ago
  As long as you borrow. AFAIK, naked shorting is not legal.
  - llccbb 10y ago
    Naked shorting is practically legal, and basically unenforced. The seller only has to claim that there was "good faith reason to believe" that shares could be reasonably acquired within the settlement period (3 days). See Goldman Sach's infamous "Easy to Borrow List"[0]. Coordinated naked shorting attacks are real and legal. Flood the market with false shares and tiny lots of low-asks. Rapidly drop the price down to capture the easy stop-losses that retail investors might set. It is fool-proof because you know those shares can be obtained at a certain price (hedge-funds and market-makers can see the stop-losses). As soon as you acquire the stop-loss shares, pull off the selling pressure and use the shares just obtained to fulfill the short-contract. There is no borrowing. [0]https://www.deepcapture.com/2015/07/goldman-sachs-internal-memo-yesterday-easy-to-borrow-list-to-be-discontinued/ https://www.deepcapture.com/2015/07/goldman-sachs-internal-m...
    - 10y ago

Animats 10y ago

No, a "blockchain" wouldn't help. It wouldn't help finding the holders of three years ago. Also, putting all stock transactions for the entire market into one blockchain would have huge traffic and synchronization issues. All the players have to agree on transaction order. You'd have one giant file that was petabytes long. If you used one of those schemes that "summarizes" the blockchain, you wouldn't have an authoritative record of who owned something years ago. Bitcoin only works because transactions are few and slow transaction commit is acceptable. Most schemes for scaling Bitcoin involve "off-chain transactions". DTIC predates high-speed trading. It was designed when it was assume that if you bought a stock, you'd probably hold it for weeks or months, not seconds or minutes.

biscuitt 10y ago
Also, with DTC there is a continuous net settlement system that basically nets a brokers transactions together for the day and basically lets them know which securities are credited or debited from their account and how much they need to pay or receive for the day. It helps solve the issue of high speed trading and nets each brokers obligations out at the end of each day. In its simplest form if a broker had two customers and Customer A sold a share of AAPL and Customer B bought 2 shares of AAPL. The CNS system would basically net those two transactions together and calculates that the broker is going to receive 1 share and that they will pay x amount of dollars. There is definitely room for improvement because sales don't settle till T+3 (however the settlement cycle is shortening to T+2 as of Sept 5th)
tinkerrr 10y ago
You're assuming the blockchain would work similar to Bitcoin, where every 'trade' (transfer) is a settlement, written into the blockchain. While this is the holy grail, you've rightly pointed out issues with high-frequency trading, synchronization across nodes, etc. The current system does T+3 due to this. A 'blockchain' could conceivably do better - even if it doesn't record every single trade like Bitcoin, it might record transfers at better granularity and better frequency.
lenocinor 10y ago
I think you mean DTCC, not DTIC, for the record.

teslacar 10y ago

The problem is that the courts can amend a buyout, which goes against the principles of free market capitalism ..a buyout represents a significant gain above the market price even if the offer is low relative to what it 'should' be. Matt is blaming the wrong target.

harryh 10y ago
I don't think that Matt is really blaming anyone. He's just saying "Look at this situation that has happened and the oddball problems it has caused. It's kind of weird and no one quite knows how to deal with it." It also doesn't seem that crazy to me that shareholders can sue management if they feel that management defrauded them.
notahacker 10y ago
There's nothing particularly "free" about being compelled by majority vote to sell your shares at a price you don't agree to either. But, like executives' fidicuary duty not to act against the interests of their shareholders before mounting a takeover bid, it's baked into the rules of the market that shareholders and executives have freely chosen to participate in. If you don't accept that in the interests of better functioning markets the law allows for both compulsory purchase of outstanding shares in the event of a successful takeover bid and litigation against those accused of ripping shareholders off by running down the value of the company before bidding on it, the principles of free market capitalism allow you to not even think of buying or managing a publicly owned company.
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maxander 10y ago

It's fascinating that the financial system has evolved this kind of layered abstraction (humans owning stocks is a fiction maintained by brokers owning stocks, which is a fiction maintained by DTC owning stocks, which is a fiction maintained...) reminiscent of hallowed engineering kludges like TCP/IP. Its especially interesting since, unlike data packets, stocks are purely an abstraction to begin with, but the systems around them have become sufficiently complicated that it can't function without this kind of structure. A blockchain likely wouldn't help this issue either- high-speed traders would inevitably be dissatisfied with blockchain latencies and re-invent brokers that abstracted over blockchain transactions at a faster pace. These brokers would wind up causing bureaucratic meltdowns and become managed by some overarching structure similar to the DTC. Etc. If anything, a blockchain-based system would become more complicated, because it reduces the task of adding another financial sub-mechanism to an engineering problem. Something about large distributed systems of non- or imperfectly-cooperative agents breed complexity. (There's probably already formalized versions of that principle, but none are presently coming to mind.)

notahacker 10y ago
The irony is that if you were to build a securities markets from scratch as an electronic system, blockchain architecture for the ledger is one way you could absolutely guarantee that the authoritative record would only be eventually consistent with microsecond trades people actually place, and brokers' own independent records would still be absolutely essential to determining who owned what when a particular acquisition was allowed to go through. There's no benefit to trustlessness in settling a transaction when you're still reliant on a counterparty to actually make it for you, especially not in a situation like the one in the article which begins with legislation that means the regulator can determine if and when a takeover is allowed to go through. Even if it could settle transactions at market speed, there's not really much point in aiming for a distributed ledger if one party's legal status means they must be given sufficient control to hard fork it anyway.
- chromox 10y ago
  What if the "broker" is not a centralized entity. Bitsquare, BitShares are good examples of a decentralized exchange. > There's no benefit to trustlessness in settling a transaction when you're still reliant on a counterparty to actually make it for you The whole point of a blockchain is that you don't rely on the counter-party to actually make the trade for you. The exchange happens at the exact same time on a blockchain. > if one party's legal status means they must be given sufficient control to hard fork it anyway. I don't think hard fork is the right concept here. Hard fork implies an entire network change; I think what you are talking about is the ability for a company to issue more shares, etc... They could be given this control through smart contracts. https://aragon.one/ https://aragon.one/

NelsonMinar 10y ago

Eventual consistency strikes again.

poorman 10y ago

I read an article recently on "Patterns for dealing with uncertainty". It never ceases to amaze me how often these concurrency patterns apply to more antiquated business models.

ggchappell 10y ago
Is it this? http://blog.arkency.com/2016/12/techniques-for-dealing-with-uncertainity/ http://blog.arkency.com/2016/12/techniques-for-dealing-with-... I haven't read it yet, but it looks worthwhile.
- poorman 10y ago
  yes

0x445442 10y ago

Three words... Counter Party Risk

jcoffland 10y ago

> There are little cracks that give us brief glimpses of the abyss below. Why not cover them up with a fresh, cool coat of blockchain? This is a great example of Wall Street's continued but lessening snark towards blockchain and vicariously Bitcoin. That much of the complex system you know and revere and spent so long learning can be replaced by new fangled technology is still a hard pill to swallow. The snark is a coping mechanism.

dsacco 10y ago
As currently implemented, blockchain technology cannot scale to the requirements of Wall St. It simply lacks the transaction volume. That's leaving aside other computation and synchronization difficulties inherent to distributing resources rather than centralizing them. Furthermore, finance is not a homogenous group of luddites. Blockchains are being actively explored in the industry. There's even a consortium of large banks developing one - they're just doing it without all the decentralized sugar that bitcoin has. Finally, as others have mentioned in this thread, a blockchain wouldn't have obviated this problem. The primary difficulty isn't identifying the owners of shares from three years ago, it's in correctly finding them and arranging for rightful reimbursement. I think your characterization of the industry is misinformed and unfair.
- mikeyouse 10y ago
  Bitcoin - capable of 250,000 transactions per day. NASDAQ - 11 million transactions per day.[1] I can't see any issues here! [1] - https://www.nasdaqtrader.com/Trader.aspx?id=DailyMarketSummary https://www.nasdaqtrader.com/Trader.aspx?id=DailyMarketSumma...
- jcoffland 10y ago
  > As currently implemented, blockchain technology cannot scale to the requirements of Wall St. It simply lacks the transaction volume. There are so many implementations. Many of these can process orders of magnitude more transactions than Bitcoin.
  - 10y ago

Kiro 10y ago

> took it private for $13.50 a share How do you take something private? What does it mean?

vpribish 10y ago
Here's the official word on it : https://www.sec.gov/answers/gopriv.htm https://www.sec.gov/answers/gopriv.htm The part that is usually not explained is that there are state-by-state, and company-by-company, mechanisms to compel the left-over minority of shareholders who do not exchange their shares to be "squeezed-out" and paid the same cash value everyone else got. After this all of the shares are held by the private owner and the security is delisted/unregistered from the public markets
vanattab 10y ago
You offer a price to all the public share holders and if they agree you buy up all the shares.
ptaipale 10y ago
Going public means public offering, that anyone can buy its stock at the stock exchange. Taking a company private is the inverse of that: the company is no longer traded at the stock exchange. Typical, but not the only scenarios are a management buy-out and a private entity offering to buy all stock. To make this work, it is usually necessary to offer a premium price.
drewkett 10y ago
Taking a company private is when a company buys back all the publicly traded shares, so that one can no longer purchase shares in the company on a publicly traded market. Usually a company doesn't have enough cash to accomplish this, so they take on additional debt or outside investment to afford buying all of the publicly available shares.
- Kiro 10y ago
  Thanks. So why didn't it happen at market price? How do you set a price if the shares are public?

gist 10y ago

Unfortunately I just keep staring at the woman in the picture at the top of the page.

mjevans 10y ago

Ultimately I don't think it's fair to have BOTH short selling AND resolution of sale price YEARS later. I actually don't like either of those as features, but both together is clearly incompatible.

euroclydon 10y ago
The years later resolution is a court dictate. I'd hardly call it a feature, like short selling.

vpribish 10y ago

Levine is such fun to read! The solution to the problem he ends up with seems pretty easy to me - this is just counterparty risk: When you lend your shares (or let them be lent on on your behalf) there are counterparty risks. You charge interest and accept collateral as compensation for these risks. Usually these risks are gone after the shares are returned or the position closed and settled out - but not always. Tracking down the short and making him cough up the extra $2.74 is the broker's job. If the broker can't find him, then if it was a case of a normal margin account the broker is on the hook. If it was a case of the client directly accessing the stock lending market then the broker is probably (fine print time!) not liable for the counterparty failure.

rphlx 10y ago

If you own an equity ETF in a retail brokerage, you actually own a claim on a claim on a claim on a fund that owns a claim on a claim on a claim on corporate stock which is itself a secondary or tertiary claim (behind debt and/or preferred stock) on tangible and intangible assets. It is a common & legal practice for the fund to lend its claim on a claim on a claim on corporate stock to other parties, for a small amount of interest, to help reduce its fees. See https://personal.vanguard.com/pdf/ISGSL.pdf https://personal.vanguard.com/pdf/ISGSL.pdf If the potential for fraud and error in this system doesn't give you a bit of a pause, it probably should.

KKKKkkkk1 10y ago
And yet it works so much better than stashing a bar of gold under your pillow.
- rphlx 10y ago
  Why not both.. based on Chinese/Indian/Russian/German central bank action I do find the argument that gold is now a "worthless, obsolete shiny rock" unconvincing & I think a good case has been made for a modest allocation to physical PMs as insurance against tail risks. The goal is not to "outperform everything else" during normal market conditions but rather to limit worst-case draw down in the unlikely event of a major and sustained equity collapse, currency collapse, etc.

peterburkimsher 10y ago

"That system has worked pretty well for 40 years." - Wait, so I'm saving for retirement (40 years from now) in a system that isn't even that old? Somehow I don't trust it to still be around when I need to get money back.

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