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The Long-Term Stock Exchange Is Worth a Shot

238 points by dsri 9y ago

cujic9 9y ago
Interesting idea, but seems impractical because it causes very weird incentives: * Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? If so, can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time? * Many (most?) consumer-facing brokerages make a significant portion of their revenue by lending out their customers' securities. Voting rights transfer to the borrower of the security. Would this be the same in a long-term exchange? If yes, then this will break the existing revenue model. Online brokerages will need to make the money elsewhere (likely by charging higher trading fees), and this will push consumers back into existing exchanges with low cost trades. * How long until there is a secondary market for buying and selling voting rights?
- jessriedel 9y ago
  > Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? The fact that a company is listed on multiple exchanges doesn't mean it has different sorts of stock for each exchange. This real subject of this article is tenure voting, which is an aspect of the stock (not the exchange). The reason exchanges are mentioned is that exchanges have rules about the sorts of stock they will list. But to have tenure voting, you only need one exchange to allow out (like the proposed long-term exchange). And most stocks aren't cross-listed to multiple exchanges anyways. > How long until there is a secondary market for buying and selling voting rights? Yes, this strikes me as the obvious problem. The equilibrium is for third party to buy and hold all the tenure-voting stock and then sell stakes in the dividends of the company plus allowing voting by proxy. Basically, the third party becomes an exchange, and all stock effectively has maximal tenure. This problem is so obvious that it must have been addressed by the people proposing this.
  - conistonwater 9y ago
    > This problem is so obvious that it must have been addressed by the people proposing this. I think this is just optimism, it would be nice to have an actual reason to think this is the case.
    - hkmurakami 9y ago
      I looked at the people backing the exchange and as far as I can tell, no one actually has a proper finance background, let alone a background in exchanges (which is, from what I've read, a pretty esoteric and specialized area within finance). The idea of Eric Reis running a stock exchange is... strange to me.
      - eries 9y ago
        Me too! Luckily the rest of the team is way more qualified
        hkmurakami 9y ago
        Hi Eric. I recall the times when making long term equity holdings tax advantaged (ex: 0% cap gains after holding for 10 years) as a path to achieve similar goals to what LTSE is trying to achieve. Details (and general HN cynicism) aside, we hope your venture is a success. As a greater man than I once said, your success is our success. We'll be rooting for you.
  - Fomite 9y ago
    > This problem is so obvious that it must have been addressed by the people proposing this. I feel like this sentence could be found on the graves of many a failed startup.
    - eries 9y ago
      And also on many IPO tombstones :)
  - 9y ago
- ThrustVectoring 9y ago
  Even if there isn't a normal exchange, there's usually a market in options and futures. And if it isn't a full market, there are players who can make bespoke deals. Someone who holds on the "long term" exchange along with a costless collar (long OTM put / short OTM call) has much less economic exposure to the stock but has "held" it for the same amount of time.
- adventured 9y ago
  > can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time? Buying voting power on the long-term exchange isn't free, your capital is allocated. You have finite capital. Your cost for each unit of voting power declines perpetually so long as you hold it, it never goes to zero (free). You can view the shorting as paying for your purchase in the long-term position, however you could view it that way for shorting any other company just as well. It's meaningless as a premise or issue.
  - cujic9 9y ago
    Contrived? Yes. Meaningless? No. Voting rights are powerful. That's the point of the long-term exchange. In existing exchanges, going long and short in equal amounts on the same stock simply cancel each other out. But in a "long-term exchange", taking this same position (or lack thereof) gives me a valuable asset: voting power that grows over time.
    - stale2002 9y ago
      Sure, but the price of the stock probably reflects that voting power. For example, right now there are different share types that you can buy from the same company that have different voting rights.
      - cujic9 9y ago
        Yes, but... the article suggests that in the long-term exchange, the voting power resets with a change in ownership. So while a share that has accumulated a lot of voting power is valuable to me, you wouldn't necessarily pay any more for it, since the power doesn't transfer to you.
        hkmurakami 9y ago
        this is reminding me of LLCs holding real estate in California, where the LLC and bought and sold but not the real estate, thereby preserving the low tax basis for prop13 purposes.
- JumpCrisscross 9y ago
  > Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? Strictly speaking, nobody needs an exchange to implement a corporate voting regime where one's vote per share increases as a function of holding time. You just amend your certificate of incorporation and/or bylaws and, assuming the state in which you're incorporate allows it, it happens. The trouble is most stock exchanges have rules about voting rights. If you aren't compliant, you can't list with them. A big-ticket IPO, e.g. Uber, Airbnb or Saudi Aramco, might be able to convince an exchange to change its rules. This is an exchange pre-empting that negotiation. If a quality company listed with these voting rights, there would be nowhere you could buy its shares where voting rights would be different because they'd all trace to the same corporate charter. There might just, at least for some time, fewer places where one could buy them. (Stock lending would have to be dealt with. It doesn't strike me as a particularly challenging issue to solve, and not everyone has to solve it the same way. The bigger issue is where to sever legal and beneficial ownership. If I have a bunch of LLCs who have held a company's stock since IPO, it might make more sense to sell the LLCs with their voting rights intact than sell out of them. This torpedoes most of the benefits of public over private markets.)
  - taurath 9y ago
    That all but guarantees a lower stock price over time for the company, as newer shares are literally less valuable than older shares. If you have “high priority” voting shares worth $100, they could be worth $90 or less to the investor that is buying them because they decrease in value on every trade.
    - JumpCrisscross 9y ago
      > That all but guarantees a lower stock price over time for the company, as newer shares are literally less valuable than older shares Which is why you see private companies experimenting with all manner of super-voting classes of stock (usually for founders) but never with this idea. New money would be reticent to invest. Devil's advocate: investors didn't seem to care about Snaps' zero-vote stock.
mooneater 9y ago
How that plays out would be very sensitive to the exact formula for tenure. Ie. A voting "cliff" where you can only vote after year 1. Vs votes per years held * shares, in which case an early investor could get entrenched.
- Retric 9y ago
  I would probably go for some middle ground such as if (year > 0) then shares * Square root (years). Just because someone has held a stock for 20 years does not necessarily mean they are currently interested in the long term. But, it probably points in that direction.
  - rocqua 9y ago
    You might want an upper limit, so either logistic growth [1] or something like 1 - exp(-(T + T_0)) feels like it makes more sense. I especially like logistic growth for having slow growth at the start and end, only growing quickly in the middle. [1] https://www.khanacademy.org/science/biology/ecology/population-growth-and-regulation/a/exponential-logistic-growth https://www.khanacademy.org/science/biology/ecology/populati...
    - SomeStupidPoint 9y ago
      You don't need an upperbound as long as your function is sufficiently slow growing. Example: Log(years) doesn't have a bound, but is unlikely to cause problems over any reasonable time scale.
  - jshaqaw 9y ago
    Or it means they are so utterly passive and unthinking that they are just the voters entrenched management dreams about.
Someone1234 9y ago
That sounds very interesting conceptually. Businesses have been moving further and further into short-termism; with the next quarter being the most important metric. This is partly due to investors also being short-term, and voting on the board who will bring the most value in the shortest period. I'd be interested in taking part in a Long-Term stock exchange, even if it is an experiment at this point.
- WalterBright 9y ago
  > Businesses have been moving further and further into short-termism; with the next quarter being the most important metric. That's the conventional wisdom, I've heard it my whole life, and I see no evidence of it. AMZN, MSFT, etc. I've known CEOs who believed it, and manipulated the books to make the short term look better at the expense of the long term. Investors weren't fooled and the stocks would tank.
  - jshaqaw 9y ago
    100 percent agree. Corporate management repeats that short term thinking is a disease so much media just parrots this without thinking that it serves powerful vested interests.
  - TuringNYC 9y ago
    AMZN ist the stand-out example, but AMZN, FB, GOOG are exceptions. Think back to 2006/2007 when PE and activist investors would take board seats and force companies to over-lever and do stock buy-backs while stocks were all-time high. How many companies can survive short-term incented PE or activist investors?
    - WalterBright 9y ago
      A short term investor still has to sell the stock. Why would someone buy it at a high price if that high price was based on short term thinking that sacrificed long term results? The only hope of the short term investor is that the buyer will be incompetent. How viable is that for people who devote their careers to stock analysis and trading?
aceon48 9y ago
One of the mainly value of a stock exchange is that it is super cheap and liquid to sell your security and access your funds. A long term holding is just PE, VC, or some other type of funding.
- pishpash 9y ago
  And people should get access to participate in that, not just private millionaires.
wpietri 9y ago
This article doesn't mention it, but this is a project of Eric Ries, of Lean Startup fame. An earlier article is here: https://qz.com/704657/eric-ries-ltse-long-term-stock-exchange/ https://qz.com/704657/eric-ries-ltse-long-term-stock-exchang...
- glenneroo 9y ago
  This article has considerably more information and answers a lot of questions in the comments. IMHO it should replace the original article.
timthelion 9y ago
This article misses the reason why short term investors are potentially harmfull. The author writes: "One basic and important implication of this theory is that, if you hold a share of stock for a minute, you will want the company to increase its long-term earnings power during that minute. If, during your minute of ownership, the company announces "we have sold all our factories and ruined our productive capacity, but we booked a big profit for this minute," you will be sad. " This is so simple it is wrong. The truth is, that the short term investor cares how PUBLIC KNOWLEDGE changes during that minute. For example, if Kobe steel holds off on making a fraud scandal public during that minute, that's a good thing, even if keeping the fraud skandal secret will hurt in the long term. The short term investor wants the IPhone X to be announced NOW, even if holding off on the announcment could give apple a leg up against the competitors. The short term investor wants toshiba to announce they've got a good deal selling off their memory business NOW, even if that makes it harder for toshiba to improve the price they get even further with a bidding war.
- amelius 9y ago
  Yes. The original premise of the article is: > The value of a share of a company is equal to the market's expectation of the present value of its future free cash flows. Emphasis on "expectation". It may change wildly in the short term; reasons include hype, speculation, and news that has only short term relevance.
  - jmh530 9y ago
    I think you're right that we don't really understand yet the implications of this idea. For instance, it's not just expectation that should be emphasized, it's the discount rate at which the present value is performed. Conditional on the expected value of the earnings over the future, one can calculate the implied discount rate given a company's price (equity risk premium). When this value is higher, the market is effectively more present-oriented, they care less about future cash flows. And vice-versa. Would the equity risk premium fall under this type of market? Would that mean lower equity prices? I don't know.
- Yizahi 9y ago
teemwerk 9y ago
I am by no means stating it as a conclusion, but rather just as a discussion point, how does this differ from the mutual funds and etfs under a single umbrella, i.e. something like vanguard? Where the stated mission is sort of long term stewardship over the short term activist role. Now, how well that mission is fulfilled is another thing. The reason I note vanguard specifically is because of the current activist spat between P&G and Nelson Peltz/Trian Partners. Of the top 3 holders (vanguard, black rock, state street), only vanguard voted against the activist shakeup. I guess I'm just having trouble seeing the difference between giving a bunch of small investors more power, vs a large amount of krill with similar goals making up a whale the company can't ignore. It seems the tenure setup complicates a lot without immediately perceptible benefit, at least to me.
- eldavido 9y ago
  It's worth asking why we make the distinction between "activists" and big fund managers in the first place. Shouldn't all fund managers be doing what's best for their shareholders? You should check out John Bogle's "Clash of Cultures" (founder of Vanguard), he discusses this problem at length. In general I'm inclined to agree with you though. This thing has a lot of hype around it because it's backed by Eric Ries, the "Lean Startup" author, but I don't really see a problem with the NYSE/Nasdaq in their current form. People overlook the liquidity, depth, and other benefits of such well-run exchanges; it's not at all clear to me that an average investor would be better off on this "long-term" exchange, where I'm sure volumes will be a lot lower, and bid/ask spreads will be wider than on a "bad" exchange with many "short-term" players, who, as a side-effect of their actions, create tons of liquidity for small-potatoes investors. Frankly, I don't understand the point of this at all. There's nothing stopping a long-term oriented investor from holding shares a long period of time in today's markets. And there are real risks of corporations being too long-term focused. The existence of Amazon, at a minimum, should show that companies with 10-20 year investment horizons are tenable under the current system.
  - walshemj 9y ago
    Multiple classes of shares with different voting rights are though
ThrustVectoring 9y ago
How would this work with someone pulling something similar to Altaba? Suppose you have $1B worth of stock, and 10% of the value is in the vested voting rights that you'd lose by selling it. Instead of selling part of it on the open market, you sell shares in a shell corporation that holds that stock. Surely the discount in ShellCorp's stock price compared to UnderlyingCorp is less than 10%? And the cost of setting up ShellCorp is going to be far less than losing 10% of the value of your holding.
- notahacker 9y ago
  Perhaps you'd tie voting rights to a named human beneficial owner, so the prospective purchaser of your shell corporation wouldn't inherit them[1] Though it might have the interesting side effect of fund managers who exercise their voting rights being better compensated and staying in their jobs longer... [1]possible to devise some kind of unusual contractual arrangement where the "beneficial owner" retained formal title to the shares but accepted an obligation to both hand over stock yields and vote in the interests of the other party. But this is something you could effectively ban.
  - ThrustVectoring 9y ago
    You can't ban separating out economic interest and formal title to the shares without banning options, forward contracts, and other derivatives on the stock. Like, these are not unusual contractual arrangements. These are standardized and sold on the market. Put options transfer the downside risk to the writer, call options transfer the upside risk to the buyer, futures contracts essentially do both.
    - notahacker 9y ago
      My point was you'd ban titleholders from selling a contract directing them to exercise their votes as a delegate of the purchaser, not the more general separation of title and economic interest which is obviously valuable for a large number of reasons. (I mean, it's still a bit messy because fund managers have a fidicuary duty to exercise their voting rights on behalf of their own shareholders, but I don't have the ability to dictate a new aggressively activist investor policy to Vanguard)
grandalf 9y ago
There is a pervasive idea that longer term investments are somehow better (morally superior, more socially responsible) than short-term. This stems from the ancient prejudice toward financiers (usually jews) and the corresponding ancient prejudice against speculation. Let me debunk it: - Suppose an 18 year old and a 80 year old each buy a share of company XYZ's stock. Whatever their goals might otherwise be, the 80 year old might quite plausibly have a different time horizon expectation for returns than the 18 year old. If both choose to buy the same stock, they must both believe the stock is a good investment for their respective time horizon goals. Maybe it will be, maybe it won't be. In both cases, someone else sold each of the shares they both bought. The person who sold the shares had deemed the stock a not-so-good investment compared to other options and wished to liquidate. - Now, suppose that we add a day trader to the mix, who also buys a share because she thinks that company XYZ offers a good investment based on her specific time-horizon goals. The demand she induced on the available stock helped to support the validity of whatever the current price appears to be. By being willing to buy, she helped create a market for the 18 year old and 70 year old to sell, should one of them change their mind about the stock. - Now imagine we have 1000 day traders, 1000 18-25 year olds, and 1000 70-80 year olds participating in the market for this stock, with some buying and some selling every day. Due to all the transactions, we have high levels of liquidity for the stock and low "inventory risk" associated with holding the stock in inventory as a market maker, and thus lower spreads. Market maker spreads are a function of risk, which is correlated with supply and demand. The more supply and demand, the less risk there is to holding inventory. - Now suppose we decide we don't like anyone who wishes to invest on a less-than-10-year time horizon. We determine that they are acting to incentivize the company to focus only on short-term profits. So we pull some strings and simply kick out those investors and limit investment only to those promising a long-term view. Now, there is less demand for shares, making them cheaper and limiting XYZ company's ability to fundraise. With less capital, XYZ must rein in its growth projections. - What good were those projections anyway if they were based on short-term investors' dollars being available? Wasn't the capital invested by short-term investors likely to disappear at the first sign that short-term results might be floundering? How can a business adequately plan for the long term if it is distracted by the need to fundraise from such a fickle lot? - The answer is simple: If a company's business activity is focused on long-term goals and long-term thinking, then it will attract like-minded investors. Like the random walk of day to day stock price, day to day information and speculation will result in short-term transactions occurring, but those transactions benefit the firm significantly as they provide an excellent price discovery mechanism. The day-to-day price will also reflect both short-term and long-term industry-wide shifts, and this will be true both in a long-term constrained exchange and an unconstrained exchange. If the firm is doing wind farms and has a 30-50 year view, and then suddenly a company doing solar comes up with a 100x efficiency improvement, that is going to impact the long-term viability of wind tech, as it should. While I agree that firms embodying short-term thinking is a problem, the market mechanism offered by the exchange is not the problem, the problem is that executives and employees are generally given predominantly short-term incentives to care about. Imagine the following: - Instead of ISOs issue employees a basket of different time-deferred options, so that each employee gets his/her comp incentive spread over time. - Instead of giving the CEO shares of stock, give the CEO both present and future shares, and leverage the future ones to the point where any bias the CEO might have had toward short-term thinking is washed out by the appeal of the longer-term incentive. Any hypothetical business results can be used to preview what the CEO would earn in each scenario. If the owners of the company want long-term results, let that be the way the CEO will make the most (time and risk-adjusted) money. Just as $100 now is worth more than $100 next year to any rational person, the comp incentives for future-looking payouts would need to be more generous in order to impact behavior in a comparable way. They would also need to be invulnerable to termination, since being worried about getting terminated and losing some or all of one's stock is a big disincentive for long-term thinking. The employee should be incentivized to act as if the role is a great fit and he/she will be there for the rest of his/her career, even though we all know that is highly unlikely if not absurd. I think the ideal scenario for employees including the CEO would be a daily payout of cash salary, plus a daily payout of some basket of immediately vesting, future-weighted non-salary compensation. In startups, this would look bad to the accountants who had to account for the future-weighted stuff in terms of some mythical hockey stick graph, but without it there really is very little incentive to care about the future in any non-unicorn startup. Big companies manage to create longer-term focus on retaining employment and benefits, and thus end up with a lot of 9-to-5'ers but do a terrible job of preventing organizations from doing repeated short-term-oriented fire drills. Unicorn startups create strong future incentives, but those immediately disappear once the company stops being a unicorn (or the handwriting on the wall suggests it might). It should also be noted that startups are almost by definition not long-term in nature. The seed investors need a buyer so there needs to be a series A, and the series A investors need a buyer so there needs to be a series B, etc. It's a sales process that (when it works as intended) results in an IPO where each phase of investors get a nice leveraged payout when an IPO occurs, but the whole ecosystem is meant to create that IPO payout, which is fundamentally short-term thinking. The sales pitch at each phase boils down to "wow check out this long term win available to you at a discount because the market doesn't yet realize this is a long term win".
oconnor663 9y ago
> shareholders who hold their shares for a long time will get more votes What prevents me from selling my vote, without technically selling my share?
grondilu 9y ago
> Anyway here's a story about the Long-Term Stock Exchange, which is a new planned stock exchange backed by Silicon Valley venture capitalist types that will have "tenure voting," in which shareholders who hold their shares for a long time will get more votes. This has been discussed already on HN, and I believe it's a bad idea. All that would do would be to create two kinds of shares : the normal ones and those with high voting power. The market would then want to price them differently, and if you want to prevent long-term owners to sell their shares (for instance if they want to enjoy the increased value), then you are doing some kind of capital control. It's just a bad idea. In a free country capital can be bought and sold : if you give voting rights to someone, he should be able to sell them, which would probably defeat whatever purpose you had when you gave those rights in the first place.
- danmaz74 9y ago
  If I got this correctly, when you sell your shares with high voting power, they lose their high voting power.
  - grondilu 9y ago
    Then you'd just create an incentive to sell the share in dark markets. You'd officially still be the owner of the share, but in secret you would have sold your voting right by agreeing with someone to vote on command in exchange for money. As is said in the 1981 movie "rollover", capitalism is like a force of nature : you can try to fight it, but in the end it always win[1] And even if somehow you succeed, you would have created capital that can not be bought nor sold, or can only be bought and sold from and to a particular category of investors. You would have introduced a bit of communism in the system (in the sense that in communism, buying or selling capital is forbidden). I guess some people will be happy about that, but I won't. 1. https://youtu.be/m1aQ-XGWors?t=151 https://youtu.be/m1aQ-XGWors?t=151
    - WalterBright 9y ago
      For an analogy, look at the effects of California's Prop 13, where holding property long term gets you dramatically lower property taxes.
thisisit 9y ago
This is so contrived. Why not have different classes selling in the same market? Something like DVR or differential voting rights. Depending on the market and need prices of DVR might be less or more.
Timothycquinn 9y ago
IMO, short term investing including stock options does nothing but move money from one group to another by creating artificial Flux. The stock market for the most part is a closed cycle in which a large group of investors, mostly the loosing ones, think that the stock market creates value and the ones who make the money from these ignorant "investors" are completely aware of and dependent on the loosing parties stupidity. We should open gambling shops for those who want to day trade or deal in Stock options because that is all that they are doing. The only stock market that promotes long term growth and profitability of businesses is one that awards long term investment.
- wyager 9y ago
  The market isn’t a mechanism to let salarymen invest their retirement money in something. The market is a mechanism to plan and optimize all production and resource allocation across the entire world, all the time. This has to be fast. If you think options (your example, not mine) are somehow inherently nothing more than gambling, it’s because you don’t understand how options work. Options are one of the least exotic and most straightforwardly useful securities.
- erikb 9y ago
  Oha, you really seem to have hit a self-illusioning wound here. And I'd say actually stock trading is the high stake gambling. If you increase the gambling sizes too high with card games etc, the public will believe it's unserious. But if you put it in a context of business, suits, and skyscrapers then it seems serious enough. That's why you cannot just make Casinos with bigger stakes and instead need to rely on that farce.
kolbe 9y ago
Forget all the practical hurdles, tell me why this premise is even correct. Just because I've owned a share for a long time, that implies that I have more interest in the long term performance of the company going forward? Just because the word "long" is part of the description of a past action doesn't mean it's in any way correlated with an expected future action. And it's often negative. See: basketball games, retirement, and (gasp) stock vesting. You think a VC who's owned a company for 9.9 years and is reaching the end of its fund has more incentive to vote in the long term interest of the company than a pension who just bought?
- andreasklinger 9y ago
  Explicit expectations by the market towards the leadership. As in: Do not worry about quarterly profits but longterm success
  - jshaqaw 9y ago
    Does anyone report to you? If they do, how would you respond if they said “I’d like to check in with you on my progress/metrics/etc... just once a year.” Sound like a good idea? It’s a terrible idea for managing people and a terrible idea for corporate governance. As high performance organizations move to daily if internal accountability it’s laughable that they complain accountability every 90 days to them owners of the company is too much.
    - andreasklinger 9y ago
      there is a difference between long term planning and short term execution yes short term execution should be monitored but it should not lead long term execution plans
      - valuearb 9y ago
        Owners should be able to decide at any moment it’s time to throw out management and start fresh.
joshu 9y ago
My gut sense is that the important time period is length of hold going forward, not length of past hold. Maybe the vote strength should instead go with the period of lockup instead? That is, I agree to hold my shares for ten years, so I get ten votes. Perhaps it could even be slightly nonlinear with respect to the length of time? (years * 1+log(years)) or similar? Edit: LTSE reminds me of LTCM. Not a great connotation?
- deleted 9y ago
  [deleted]
- Godel_unicode 9y ago
  Do you perhaps mean years*(1+log(years))?
  - joshu 9y ago
    Yes, of course.
- jmh530 9y ago
  There is some research in political science on paying for votes in elections. They came to the conclusion that you should pay $x and receive sqrt(x) votes. 100 dollars -> 10 votes. I would think the same reasoning would work here. Hold stock $x days, receive sqrt(x) votes (years is tricky because you can hold less than 1 year and the value increases quite a bit during that period).
  - chirau 9y ago
    Would such a political system not spiral into chaos really rapidly?
    - jmh530 9y ago
      It's all theoretical. God knows.
- eries 9y ago
bluetwo 9y ago
The quote at the very end of the article seems to summarize my feelings: "Skeptics wonder whether the LTSE is just another way for tech founders and elite Silicon Valley investors to maintain control at the expense of other shareholders."
DINKDINK 9y ago
This strategy is Small-Game fallacy. Reducing the complexity of the real world -> If only shares held for a long term have full rights, you will obfuscate how you pay for those rights. either the stock will have a depreciated market price to what it 'should' trade at or the voting rights will be acquired through rent seeking by long-term holders.
maxk42 9y ago
You want a long-term exchange? Istitute a mandatory holding period and/or limited trading times. This is the exact kind of experimental BS that lead to the derivative bubble.
cjlars 9y ago
And when an owner wants to raise liquidity? They'll take a hit due to the cliff issue (voting rights have value and you destroy voting rights by selling). So any company with tenured voting rights will have created a system that forces owners to sell shares at a discount to their current value. And because they can't sell for more value than they get from holding, they would tend to prefer value-destroying and excessive short term cash distributions up and until the point where the damage from those distributions equalizes with the value destroyed at sale. I'm sure some economist smarter than me could formalize the issue, but unless the cliff issue is solved, this sort of ownership scheme will not result in shareholders maximizing long term value. A dominant founder-CEO could mitigate or overpower the incentives described above, but my guess is that any company that successfully gets of the ground using this scheme will replace their tenured shares with ordinary common shares at some point.
kevinr 9y ago
I think it's all going to depend on how the tenure mechanism is implemented. There's got to be some way for new money to "catch up" to old money within some reasonable time horizon, say 10 years, rather than old money's voting power growing unbounded.
yuhong 9y ago
At this point I think the problem is that the economy is debt based and depends on stocks going up anyway.
dade_ 9y ago
Regardless of my strategy, one benefit of stocks is liquidity. If something comes up, I can cash out pretty much immediately thought I may not like the return. kes th This proposal sounds like tenure, being in place for a long time entitles me to something. It makes the market more complicated and for no proven benefit. No thanks.
IvyMike 9y ago
I want a reddit (or hackernews) with this style voting. The longer you've been a member, the more your vote counts. There would probably be unintended consequences galore but it would interesting to see if it helped preserve culture and avoid the "it was better in the early days" syndrome.
Iv 9y ago
When I learned about high-frequency trading, I toyed with the idea of opening up a stock-exchange with different rules: - one quote per day - transactions of the day are processed in a random order (using a provable random deterministic algorithm) - shares have to be kept for at least 3 months (Warren Buffet recommends 6 months) before being sold. When Steve Jobs died, which was obviously an event that would have an impact on Apple's shares, the quotation was suspended for a day, so that people could take their time to evaluate the significance of the event. This was a confession that they knew that the high frequency changes is just noise and that the signal has a lower time resolution of about a day. The prospects of future profits do not change every nanosecond.
- dna_polymerase 9y ago
  > The prospects of future profits do not change every nanosecond. That's what people get wrong all of the time. Most of HFT is not about seeing a trend and acting on it. Most of that is front-running on data obtained from deals with brokerage firms and the likes.
  - Iv 9y ago
    And how does this add value anywhere? A timestep of a day seems to have all the benefits of regular stock exchanges without any drawbacks.
    - dna_polymerase 9y ago
      Just wanted to point this out. HFT is not only really fast trading in order to gain from the typical "sell higher than you bought" scheme. Of course front-running adds no value. Though of course those companies will say that the "add liquidity". Which is BS.
- RhysU 9y ago
  How often does someone decide they want to sell (buy)? Market makers are reacting to demands for immediate liquidity in a distributed marketplace comprised of multiple equities exchanges.
skywhopper 9y ago
This seems like a lot of very highly directed, complex, and confusing artificial policy-making in order to achieve something that could probably be approximated far more simply and understandably by placing a small tax on equity transactions. Long term investors would be barely affected, high frequency traders would be forced to re-evaluate their approach, and the government could collect some highly needed revenue.
- eries 9y ago
  If you get the political coalition assembled to make this, please give me a call
eries 9y ago
Hey everybody, Eric Ries here, founder of the LTSE. I am coming late to the thread as I’ve been focused on launching my new book and am only seeing this now. I love a lot of the comments here. I think many of the assumptions both in this piece and in the comments are reasonable guesses about what we are doing - but in a lot of cases wrong. Part of the reason it has taken me more than five years to figure out how to build this company is that we have to be able to: 1. Offer companies full liquidity and full protection from short-termism even if their stock trades on another exchange or they dual-list 2. Build support among many financial system stakeholders and regulators to get approval to do this 3. Build a multi-disciplinary team that is literate in the arcane ways of SF NY and DC all at once We aren’t quite ready to take the hood off and reveal how we solved all of these problems quite yet. This is stil a sensitive regulatory process and I’m limited in what I can say publicly. But to the extend I can, I’ll try and answer questions in this thread. Please keep them coming. Thanks for taking a look at what we are building!
- erikb 9y ago
  Your name sounds familiar. Can you give a short summary of what else you've been doing? *edit: Ah, I found something myself. You're the lean startup guy right? https://en.wikipedia.org/wiki/Lean_startup https://en.wikipedia.org/wiki/Lean_startup
  - eries 9y ago
    Indeed I am :)

238 points by dsri 9y ago

Interesting idea, but seems impractical because it causes very weird incentives: * Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? If so, can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time? * Many (most?) consumer-facing brokerages make a significant portion of their revenue by lending out their customers' securities. Voting rights transfer to the borrower of the security. Would this be the same in a long-term exchange? If yes, then this will break the existing revenue model. Online brokerages will need to make the money elsewhere (likely by charging higher trading fees), and this will push consumers back into existing exchanges with low cost trades. * How long until there is a secondary market for buying and selling voting rights?

jessriedel 9y ago
> Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? The fact that a company is listed on multiple exchanges doesn't mean it has different sorts of stock for each exchange. This real subject of this article is tenure voting, which is an aspect of the stock (not the exchange). The reason exchanges are mentioned is that exchanges have rules about the sorts of stock they will list. But to have tenure voting, you only need one exchange to allow out (like the proposed long-term exchange). And most stocks aren't cross-listed to multiple exchanges anyways. > How long until there is a secondary market for buying and selling voting rights? Yes, this strikes me as the obvious problem. The equilibrium is for third party to buy and hold all the tenure-voting stock and then sell stakes in the dividends of the company plus allowing voting by proxy. Basically, the third party becomes an exchange, and all stock effectively has maximal tenure. This problem is so obvious that it must have been addressed by the people proposing this.
- conistonwater 9y ago
  > This problem is so obvious that it must have been addressed by the people proposing this. I think this is just optimism, it would be nice to have an actual reason to think this is the case.
  - hkmurakami 9y ago
    I looked at the people backing the exchange and as far as I can tell, no one actually has a proper finance background, let alone a background in exchanges (which is, from what I've read, a pretty esoteric and specialized area within finance). The idea of Eric Reis running a stock exchange is... strange to me.
    - eries 9y ago
      Me too! Luckily the rest of the team is way more qualified
      - hkmurakami 9y ago
        Hi Eric. I recall the times when making long term equity holdings tax advantaged (ex: 0% cap gains after holding for 10 years) as a path to achieve similar goals to what LTSE is trying to achieve. Details (and general HN cynicism) aside, we hope your venture is a success. As a greater man than I once said, your success is our success. We'll be rooting for you.
- Fomite 9y ago
  > This problem is so obvious that it must have been addressed by the people proposing this. I feel like this sentence could be found on the graves of many a failed startup.
  - eries 9y ago
    And also on many IPO tombstones :)
- 9y ago
ThrustVectoring 9y ago
Even if there isn't a normal exchange, there's usually a market in options and futures. And if it isn't a full market, there are players who can make bespoke deals. Someone who holds on the "long term" exchange along with a costless collar (long OTM put / short OTM call) has much less economic exposure to the stock but has "held" it for the same amount of time.
adventured 9y ago
> can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time? Buying voting power on the long-term exchange isn't free, your capital is allocated. You have finite capital. Your cost for each unit of voting power declines perpetually so long as you hold it, it never goes to zero (free). You can view the shorting as paying for your purchase in the long-term position, however you could view it that way for shorting any other company just as well. It's meaningless as a premise or issue.
- cujic9 9y ago
  Contrived? Yes. Meaningless? No. Voting rights are powerful. That's the point of the long-term exchange. In existing exchanges, going long and short in equal amounts on the same stock simply cancel each other out. But in a "long-term exchange", taking this same position (or lack thereof) gives me a valuable asset: voting power that grows over time.
  - stale2002 9y ago
    Sure, but the price of the stock probably reflects that voting power. For example, right now there are different share types that you can buy from the same company that have different voting rights.
    - cujic9 9y ago
      Yes, but... the article suggests that in the long-term exchange, the voting power resets with a change in ownership. So while a share that has accumulated a lot of voting power is valuable to me, you wouldn't necessarily pay any more for it, since the power doesn't transfer to you.
      - hkmurakami 9y ago
        this is reminding me of LLCs holding real estate in California, where the LLC and bought and sold but not the real estate, thereby preserving the low tax basis for prop13 purposes.
JumpCrisscross 9y ago
> Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? Strictly speaking, nobody needs an exchange to implement a corporate voting regime where one's vote per share increases as a function of holding time. You just amend your certificate of incorporation and/or bylaws and, assuming the state in which you're incorporate allows it, it happens. The trouble is most stock exchanges have rules about voting rights. If you aren't compliant, you can't list with them. A big-ticket IPO, e.g. Uber, Airbnb or Saudi Aramco, might be able to convince an exchange to change its rules. This is an exchange pre-empting that negotiation. If a quality company listed with these voting rights, there would be nowhere you could buy its shares where voting rights would be different because they'd all trace to the same corporate charter. There might just, at least for some time, fewer places where one could buy them. (Stock lending would have to be dealt with. It doesn't strike me as a particularly challenging issue to solve, and not everyone has to solve it the same way. The bigger issue is where to sever legal and beneficial ownership. If I have a bunch of LLCs who have held a company's stock since IPO, it might make more sense to sell the LLCs with their voting rights intact than sell out of them. This torpedoes most of the benefits of public over private markets.)
- taurath 9y ago
  That all but guarantees a lower stock price over time for the company, as newer shares are literally less valuable than older shares. If you have “high priority” voting shares worth $100, they could be worth $90 or less to the investor that is buying them because they decrease in value on every trade.
  - JumpCrisscross 9y ago
    > That all but guarantees a lower stock price over time for the company, as newer shares are literally less valuable than older shares Which is why you see private companies experimenting with all manner of super-voting classes of stock (usually for founders) but never with this idea. New money would be reticent to invest. Devil's advocate: investors didn't seem to care about Snaps' zero-vote stock.

mooneater 9y ago

How that plays out would be very sensitive to the exact formula for tenure. Ie. A voting "cliff" where you can only vote after year 1. Vs votes per years held * shares, in which case an early investor could get entrenched.

Retric 9y ago
I would probably go for some middle ground such as if (year > 0) then shares * Square root (years). Just because someone has held a stock for 20 years does not necessarily mean they are currently interested in the long term. But, it probably points in that direction.
- rocqua 9y ago
  You might want an upper limit, so either logistic growth [1] or something like 1 - exp(-(T + T_0)) feels like it makes more sense. I especially like logistic growth for having slow growth at the start and end, only growing quickly in the middle. [1] https://www.khanacademy.org/science/biology/ecology/population-growth-and-regulation/a/exponential-logistic-growth https://www.khanacademy.org/science/biology/ecology/populati...
  - SomeStupidPoint 9y ago
    You don't need an upperbound as long as your function is sufficiently slow growing. Example: Log(years) doesn't have a bound, but is unlikely to cause problems over any reasonable time scale.
- jshaqaw 9y ago
  Or it means they are so utterly passive and unthinking that they are just the voters entrenched management dreams about.

Someone1234 9y ago

That sounds very interesting conceptually. Businesses have been moving further and further into short-termism; with the next quarter being the most important metric. This is partly due to investors also being short-term, and voting on the board who will bring the most value in the shortest period. I'd be interested in taking part in a Long-Term stock exchange, even if it is an experiment at this point.

WalterBright 9y ago
> Businesses have been moving further and further into short-termism; with the next quarter being the most important metric. That's the conventional wisdom, I've heard it my whole life, and I see no evidence of it. AMZN, MSFT, etc. I've known CEOs who believed it, and manipulated the books to make the short term look better at the expense of the long term. Investors weren't fooled and the stocks would tank.
- jshaqaw 9y ago
  100 percent agree. Corporate management repeats that short term thinking is a disease so much media just parrots this without thinking that it serves powerful vested interests.
- TuringNYC 9y ago
  AMZN ist the stand-out example, but AMZN, FB, GOOG are exceptions. Think back to 2006/2007 when PE and activist investors would take board seats and force companies to over-lever and do stock buy-backs while stocks were all-time high. How many companies can survive short-term incented PE or activist investors?
  - WalterBright 9y ago
    A short term investor still has to sell the stock. Why would someone buy it at a high price if that high price was based on short term thinking that sacrificed long term results? The only hope of the short term investor is that the buyer will be incompetent. How viable is that for people who devote their careers to stock analysis and trading?

aceon48 9y ago

One of the mainly value of a stock exchange is that it is super cheap and liquid to sell your security and access your funds. A long term holding is just PE, VC, or some other type of funding.

pishpash 9y ago
And people should get access to participate in that, not just private millionaires.

wpietri 9y ago

This article doesn't mention it, but this is a project of Eric Ries, of Lean Startup fame. An earlier article is here: https://qz.com/704657/eric-ries-ltse-long-term-stock-exchange/ https://qz.com/704657/eric-ries-ltse-long-term-stock-exchang...

glenneroo 9y ago
This article has considerably more information and answers a lot of questions in the comments. IMHO it should replace the original article.

timthelion 9y ago

This article misses the reason why short term investors are potentially harmfull. The author writes: "One basic and important implication of this theory is that, if you hold a share of stock for a minute, you will want the company to increase its long-term earnings power during that minute. If, during your minute of ownership, the company announces "we have sold all our factories and ruined our productive capacity, but we booked a big profit for this minute," you will be sad. " This is so simple it is wrong. The truth is, that the short term investor cares how PUBLIC KNOWLEDGE changes during that minute. For example, if Kobe steel holds off on making a fraud scandal public during that minute, that's a good thing, even if keeping the fraud skandal secret will hurt in the long term. The short term investor wants the IPhone X to be announced NOW, even if holding off on the announcment could give apple a leg up against the competitors. The short term investor wants toshiba to announce they've got a good deal selling off their memory business NOW, even if that makes it harder for toshiba to improve the price they get even further with a bidding war.

amelius 9y ago
Yes. The original premise of the article is: > The value of a share of a company is equal to the market's expectation of the present value of its future free cash flows. Emphasis on "expectation". It may change wildly in the short term; reasons include hype, speculation, and news that has only short term relevance.
- jmh530 9y ago
  I think you're right that we don't really understand yet the implications of this idea. For instance, it's not just expectation that should be emphasized, it's the discount rate at which the present value is performed. Conditional on the expected value of the earnings over the future, one can calculate the implied discount rate given a company's price (equity risk premium). When this value is higher, the market is effectively more present-oriented, they care less about future cash flows. And vice-versa. Would the equity risk premium fall under this type of market? Would that mean lower equity prices? I don't know.
Yizahi 9y ago

teemwerk 9y ago

I am by no means stating it as a conclusion, but rather just as a discussion point, how does this differ from the mutual funds and etfs under a single umbrella, i.e. something like vanguard? Where the stated mission is sort of long term stewardship over the short term activist role. Now, how well that mission is fulfilled is another thing. The reason I note vanguard specifically is because of the current activist spat between P&G and Nelson Peltz/Trian Partners. Of the top 3 holders (vanguard, black rock, state street), only vanguard voted against the activist shakeup. I guess I'm just having trouble seeing the difference between giving a bunch of small investors more power, vs a large amount of krill with similar goals making up a whale the company can't ignore. It seems the tenure setup complicates a lot without immediately perceptible benefit, at least to me.

eldavido 9y ago
It's worth asking why we make the distinction between "activists" and big fund managers in the first place. Shouldn't all fund managers be doing what's best for their shareholders? You should check out John Bogle's "Clash of Cultures" (founder of Vanguard), he discusses this problem at length. In general I'm inclined to agree with you though. This thing has a lot of hype around it because it's backed by Eric Ries, the "Lean Startup" author, but I don't really see a problem with the NYSE/Nasdaq in their current form. People overlook the liquidity, depth, and other benefits of such well-run exchanges; it's not at all clear to me that an average investor would be better off on this "long-term" exchange, where I'm sure volumes will be a lot lower, and bid/ask spreads will be wider than on a "bad" exchange with many "short-term" players, who, as a side-effect of their actions, create tons of liquidity for small-potatoes investors. Frankly, I don't understand the point of this at all. There's nothing stopping a long-term oriented investor from holding shares a long period of time in today's markets. And there are real risks of corporations being too long-term focused. The existence of Amazon, at a minimum, should show that companies with 10-20 year investment horizons are tenable under the current system.
- walshemj 9y ago
  Multiple classes of shares with different voting rights are though

ThrustVectoring 9y ago

How would this work with someone pulling something similar to Altaba? Suppose you have $1B worth of stock, and 10% of the value is in the vested voting rights that you'd lose by selling it. Instead of selling part of it on the open market, you sell shares in a shell corporation that holds that stock. Surely the discount in ShellCorp's stock price compared to UnderlyingCorp is less than 10%? And the cost of setting up ShellCorp is going to be far less than losing 10% of the value of your holding.

notahacker 9y ago
Perhaps you'd tie voting rights to a named human beneficial owner, so the prospective purchaser of your shell corporation wouldn't inherit them[1] Though it might have the interesting side effect of fund managers who exercise their voting rights being better compensated and staying in their jobs longer... [1]possible to devise some kind of unusual contractual arrangement where the "beneficial owner" retained formal title to the shares but accepted an obligation to both hand over stock yields and vote in the interests of the other party. But this is something you could effectively ban.
- ThrustVectoring 9y ago
  You can't ban separating out economic interest and formal title to the shares without banning options, forward contracts, and other derivatives on the stock. Like, these are not unusual contractual arrangements. These are standardized and sold on the market. Put options transfer the downside risk to the writer, call options transfer the upside risk to the buyer, futures contracts essentially do both.
  - notahacker 9y ago
    My point was you'd ban titleholders from selling a contract directing them to exercise their votes as a delegate of the purchaser, not the more general separation of title and economic interest which is obviously valuable for a large number of reasons. (I mean, it's still a bit messy because fund managers have a fidicuary duty to exercise their voting rights on behalf of their own shareholders, but I don't have the ability to dictate a new aggressively activist investor policy to Vanguard)

grandalf 9y ago

There is a pervasive idea that longer term investments are somehow better (morally superior, more socially responsible) than short-term. This stems from the ancient prejudice toward financiers (usually jews) and the corresponding ancient prejudice against speculation. Let me debunk it: - Suppose an 18 year old and a 80 year old each buy a share of company XYZ's stock. Whatever their goals might otherwise be, the 80 year old might quite plausibly have a different time horizon expectation for returns than the 18 year old. If both choose to buy the same stock, they must both believe the stock is a good investment for their respective time horizon goals. Maybe it will be, maybe it won't be. In both cases, someone else sold each of the shares they both bought. The person who sold the shares had deemed the stock a not-so-good investment compared to other options and wished to liquidate. - Now, suppose that we add a day trader to the mix, who also buys a share because she thinks that company XYZ offers a good investment based on her specific time-horizon goals. The demand she induced on the available stock helped to support the validity of whatever the current price appears to be. By being willing to buy, she helped create a market for the 18 year old and 70 year old to sell, should one of them change their mind about the stock. - Now imagine we have 1000 day traders, 1000 18-25 year olds, and 1000 70-80 year olds participating in the market for this stock, with some buying and some selling every day. Due to all the transactions, we have high levels of liquidity for the stock and low "inventory risk" associated with holding the stock in inventory as a market maker, and thus lower spreads. Market maker spreads are a function of risk, which is correlated with supply and demand. The more supply and demand, the less risk there is to holding inventory. - Now suppose we decide we don't like anyone who wishes to invest on a less-than-10-year time horizon. We determine that they are acting to incentivize the company to focus only on short-term profits. So we pull some strings and simply kick out those investors and limit investment only to those promising a long-term view. Now, there is less demand for shares, making them cheaper and limiting XYZ company's ability to fundraise. With less capital, XYZ must rein in its growth projections. - What good were those projections anyway if they were based on short-term investors' dollars being available? Wasn't the capital invested by short-term investors likely to disappear at the first sign that short-term results might be floundering? How can a business adequately plan for the long term if it is distracted by the need to fundraise from such a fickle lot? - The answer is simple: If a company's business activity is focused on long-term goals and long-term thinking, then it will attract like-minded investors. Like the random walk of day to day stock price, day to day information and speculation will result in short-term transactions occurring, but those transactions benefit the firm significantly as they provide an excellent price discovery mechanism. The day-to-day price will also reflect both short-term and long-term industry-wide shifts, and this will be true both in a long-term constrained exchange and an unconstrained exchange. If the firm is doing wind farms and has a 30-50 year view, and then suddenly a company doing solar comes up with a 100x efficiency improvement, that is going to impact the long-term viability of wind tech, as it should. While I agree that firms embodying short-term thinking is a problem, the market mechanism offered by the exchange is not the problem, the problem is that executives and employees are generally given predominantly short-term incentives to care about. Imagine the following: - Instead of ISOs issue employees a basket of different time-deferred options, so that each employee gets his/her comp incentive spread over time. - Instead of giving the CEO shares of stock, give the CEO both present and future shares, and leverage the future ones to the point where any bias the CEO might have had toward short-term thinking is washed out by the appeal of the longer-term incentive. Any hypothetical business results can be used to preview what the CEO would earn in each scenario. If the owners of the company want long-term results, let that be the way the CEO will make the most (time and risk-adjusted) money. Just as $100 now is worth more than $100 next year to any rational person, the comp incentives for future-looking payouts would need to be more generous in order to impact behavior in a comparable way. They would also need to be invulnerable to termination, since being worried about getting terminated and losing some or all of one's stock is a big disincentive for long-term thinking. The employee should be incentivized to act as if the role is a great fit and he/she will be there for the rest of his/her career, even though we all know that is highly unlikely if not absurd. I think the ideal scenario for employees including the CEO would be a daily payout of cash salary, plus a daily payout of some basket of immediately vesting, future-weighted non-salary compensation. In startups, this would look bad to the accountants who had to account for the future-weighted stuff in terms of some mythical hockey stick graph, but without it there really is very little incentive to care about the future in any non-unicorn startup. Big companies manage to create longer-term focus on retaining employment and benefits, and thus end up with a lot of 9-to-5'ers but do a terrible job of preventing organizations from doing repeated short-term-oriented fire drills. Unicorn startups create strong future incentives, but those immediately disappear once the company stops being a unicorn (or the handwriting on the wall suggests it might). It should also be noted that startups are almost by definition not long-term in nature. The seed investors need a buyer so there needs to be a series A, and the series A investors need a buyer so there needs to be a series B, etc. It's a sales process that (when it works as intended) results in an IPO where each phase of investors get a nice leveraged payout when an IPO occurs, but the whole ecosystem is meant to create that IPO payout, which is fundamentally short-term thinking. The sales pitch at each phase boils down to "wow check out this long term win available to you at a discount because the market doesn't yet realize this is a long term win".

oconnor663 9y ago

> shareholders who hold their shares for a long time will get more votes What prevents me from selling my vote, without technically selling my share?

grondilu 9y ago

> Anyway here's a story about the Long-Term Stock Exchange, which is a new planned stock exchange backed by Silicon Valley venture capitalist types that will have "tenure voting," in which shareholders who hold their shares for a long time will get more votes. This has been discussed already on HN, and I believe it's a bad idea. All that would do would be to create two kinds of shares : the normal ones and those with high voting power. The market would then want to price them differently, and if you want to prevent long-term owners to sell their shares (for instance if they want to enjoy the increased value), then you are doing some kind of capital control. It's just a bad idea. In a free country capital can be bought and sold : if you give voting rights to someone, he should be able to sell them, which would probably defeat whatever purpose you had when you gave those rights in the first place.

danmaz74 9y ago
If I got this correctly, when you sell your shares with high voting power, they lose their high voting power.
- grondilu 9y ago
  Then you'd just create an incentive to sell the share in dark markets. You'd officially still be the owner of the share, but in secret you would have sold your voting right by agreeing with someone to vote on command in exchange for money. As is said in the 1981 movie "rollover", capitalism is like a force of nature : you can try to fight it, but in the end it always win[1] And even if somehow you succeed, you would have created capital that can not be bought nor sold, or can only be bought and sold from and to a particular category of investors. You would have introduced a bit of communism in the system (in the sense that in communism, buying or selling capital is forbidden). I guess some people will be happy about that, but I won't. 1. https://youtu.be/m1aQ-XGWors?t=151 https://youtu.be/m1aQ-XGWors?t=151
  - WalterBright 9y ago
    For an analogy, look at the effects of California's Prop 13, where holding property long term gets you dramatically lower property taxes.

thisisit 9y ago

This is so contrived. Why not have different classes selling in the same market? Something like DVR or differential voting rights. Depending on the market and need prices of DVR might be less or more.

Timothycquinn 9y ago

IMO, short term investing including stock options does nothing but move money from one group to another by creating artificial Flux. The stock market for the most part is a closed cycle in which a large group of investors, mostly the loosing ones, think that the stock market creates value and the ones who make the money from these ignorant "investors" are completely aware of and dependent on the loosing parties stupidity. We should open gambling shops for those who want to day trade or deal in Stock options because that is all that they are doing. The only stock market that promotes long term growth and profitability of businesses is one that awards long term investment.

wyager 9y ago
The market isn’t a mechanism to let salarymen invest their retirement money in something. The market is a mechanism to plan and optimize all production and resource allocation across the entire world, all the time. This has to be fast. If you think options (your example, not mine) are somehow inherently nothing more than gambling, it’s because you don’t understand how options work. Options are one of the least exotic and most straightforwardly useful securities.
erikb 9y ago
Oha, you really seem to have hit a self-illusioning wound here. And I'd say actually stock trading is the high stake gambling. If you increase the gambling sizes too high with card games etc, the public will believe it's unserious. But if you put it in a context of business, suits, and skyscrapers then it seems serious enough. That's why you cannot just make Casinos with bigger stakes and instead need to rely on that farce.

kolbe 9y ago

Forget all the practical hurdles, tell me why this premise is even correct. Just because I've owned a share for a long time, that implies that I have more interest in the long term performance of the company going forward? Just because the word "long" is part of the description of a past action doesn't mean it's in any way correlated with an expected future action. And it's often negative. See: basketball games, retirement, and (gasp) stock vesting. You think a VC who's owned a company for 9.9 years and is reaching the end of its fund has more incentive to vote in the long term interest of the company than a pension who just bought?

andreasklinger 9y ago
Explicit expectations by the market towards the leadership. As in: Do not worry about quarterly profits but longterm success
- jshaqaw 9y ago
  Does anyone report to you? If they do, how would you respond if they said “I’d like to check in with you on my progress/metrics/etc... just once a year.” Sound like a good idea? It’s a terrible idea for managing people and a terrible idea for corporate governance. As high performance organizations move to daily if internal accountability it’s laughable that they complain accountability every 90 days to them owners of the company is too much.
  - andreasklinger 9y ago
    there is a difference between long term planning and short term execution yes short term execution should be monitored but it should not lead long term execution plans
    - valuearb 9y ago
      Owners should be able to decide at any moment it’s time to throw out management and start fresh.

joshu 9y ago

My gut sense is that the important time period is length of hold going forward, not length of past hold. Maybe the vote strength should instead go with the period of lockup instead? That is, I agree to hold my shares for ten years, so I get ten votes. Perhaps it could even be slightly nonlinear with respect to the length of time? (years * 1+log(years)) or similar? Edit: LTSE reminds me of LTCM. Not a great connotation?

deleted 9y ago
[deleted]
Godel_unicode 9y ago
Do you perhaps mean years*(1+log(years))?
- joshu 9y ago
  Yes, of course.
jmh530 9y ago
There is some research in political science on paying for votes in elections. They came to the conclusion that you should pay $x and receive sqrt(x) votes. 100 dollars -> 10 votes. I would think the same reasoning would work here. Hold stock $x days, receive sqrt(x) votes (years is tricky because you can hold less than 1 year and the value increases quite a bit during that period).
- chirau 9y ago
  Would such a political system not spiral into chaos really rapidly?
  - jmh530 9y ago
    It's all theoretical. God knows.
eries 9y ago

bluetwo 9y ago

The quote at the very end of the article seems to summarize my feelings: "Skeptics wonder whether the LTSE is just another way for tech founders and elite Silicon Valley investors to maintain control at the expense of other shareholders."

DINKDINK 9y ago

This strategy is Small-Game fallacy. Reducing the complexity of the real world -> If only shares held for a long term have full rights, you will obfuscate how you pay for those rights. either the stock will have a depreciated market price to what it 'should' trade at or the voting rights will be acquired through rent seeking by long-term holders.

maxk42 9y ago

You want a long-term exchange? Istitute a mandatory holding period and/or limited trading times. This is the exact kind of experimental BS that lead to the derivative bubble.

cjlars 9y ago

And when an owner wants to raise liquidity? They'll take a hit due to the cliff issue (voting rights have value and you destroy voting rights by selling). So any company with tenured voting rights will have created a system that forces owners to sell shares at a discount to their current value. And because they can't sell for more value than they get from holding, they would tend to prefer value-destroying and excessive short term cash distributions up and until the point where the damage from those distributions equalizes with the value destroyed at sale. I'm sure some economist smarter than me could formalize the issue, but unless the cliff issue is solved, this sort of ownership scheme will not result in shareholders maximizing long term value. A dominant founder-CEO could mitigate or overpower the incentives described above, but my guess is that any company that successfully gets of the ground using this scheme will replace their tenured shares with ordinary common shares at some point.

kevinr 9y ago

I think it's all going to depend on how the tenure mechanism is implemented. There's got to be some way for new money to "catch up" to old money within some reasonable time horizon, say 10 years, rather than old money's voting power growing unbounded.

yuhong 9y ago

At this point I think the problem is that the economy is debt based and depends on stocks going up anyway.

dade_ 9y ago

Regardless of my strategy, one benefit of stocks is liquidity. If something comes up, I can cash out pretty much immediately thought I may not like the return. kes th This proposal sounds like tenure, being in place for a long time entitles me to something. It makes the market more complicated and for no proven benefit. No thanks.

IvyMike 9y ago

I want a reddit (or hackernews) with this style voting. The longer you've been a member, the more your vote counts. There would probably be unintended consequences galore but it would interesting to see if it helped preserve culture and avoid the "it was better in the early days" syndrome.

Iv 9y ago

When I learned about high-frequency trading, I toyed with the idea of opening up a stock-exchange with different rules: - one quote per day - transactions of the day are processed in a random order (using a provable random deterministic algorithm) - shares have to be kept for at least 3 months (Warren Buffet recommends 6 months) before being sold. When Steve Jobs died, which was obviously an event that would have an impact on Apple's shares, the quotation was suspended for a day, so that people could take their time to evaluate the significance of the event. This was a confession that they knew that the high frequency changes is just noise and that the signal has a lower time resolution of about a day. The prospects of future profits do not change every nanosecond.

dna_polymerase 9y ago
> The prospects of future profits do not change every nanosecond. That's what people get wrong all of the time. Most of HFT is not about seeing a trend and acting on it. Most of that is front-running on data obtained from deals with brokerage firms and the likes.
- Iv 9y ago
  And how does this add value anywhere? A timestep of a day seems to have all the benefits of regular stock exchanges without any drawbacks.
  - dna_polymerase 9y ago
    Just wanted to point this out. HFT is not only really fast trading in order to gain from the typical "sell higher than you bought" scheme. Of course front-running adds no value. Though of course those companies will say that the "add liquidity". Which is BS.
RhysU 9y ago
How often does someone decide they want to sell (buy)? Market makers are reacting to demands for immediate liquidity in a distributed marketplace comprised of multiple equities exchanges.

skywhopper 9y ago

This seems like a lot of very highly directed, complex, and confusing artificial policy-making in order to achieve something that could probably be approximated far more simply and understandably by placing a small tax on equity transactions. Long term investors would be barely affected, high frequency traders would be forced to re-evaluate their approach, and the government could collect some highly needed revenue.

eries 9y ago
If you get the political coalition assembled to make this, please give me a call

eries 9y ago

Hey everybody, Eric Ries here, founder of the LTSE. I am coming late to the thread as I’ve been focused on launching my new book and am only seeing this now. I love a lot of the comments here. I think many of the assumptions both in this piece and in the comments are reasonable guesses about what we are doing - but in a lot of cases wrong. Part of the reason it has taken me more than five years to figure out how to build this company is that we have to be able to: 1. Offer companies full liquidity and full protection from short-termism even if their stock trades on another exchange or they dual-list 2. Build support among many financial system stakeholders and regulators to get approval to do this 3. Build a multi-disciplinary team that is literate in the arcane ways of SF NY and DC all at once We aren’t quite ready to take the hood off and reveal how we solved all of these problems quite yet. This is stil a sensitive regulatory process and I’m limited in what I can say publicly. But to the extend I can, I’ll try and answer questions in this thread. Please keep them coming. Thanks for taking a look at what we are building!

erikb 9y ago
Your name sounds familiar. Can you give a short summary of what else you've been doing? *edit: Ah, I found something myself. You're the lean startup guy right? https://en.wikipedia.org/wiki/Lean_startup https://en.wikipedia.org/wiki/Lean_startup
- eries 9y ago
  Indeed I am :)