tag:blogger.com,1999:blog-4039434.post2111991971083388279..comments2024-02-26T06:46:53.171-05:00Comments on Rajiv Sethi: Market Microstructure and Capital FormationRajivhttp://www.blogger.com/profile/13667685126282705505noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-4039434.post-12172293923475828562010-07-05T18:34:05.402-04:002010-07-05T18:34:05.402-04:00Hmmfph- if Sarbox encourages delisting, it also su...Hmmfph- if Sarbox encourages delisting, it also supplies a large inventory of companies to the private equity industry. So they're definitely in favor of it.<br /><br />Sarbox did nothing to remedy the Enron problem. The accounting scandal side of Enron happened because the consulting side drove auditing to be capture by the customer. There were a lot of people who switched jobs between Arthur Andersen and Enron. <br /><br />The only way to kill this problem is to destroy the structural incentives towards auditor capture. Ditto with rating agencies.epileptikittyhttps://www.blogger.com/profile/08292310265859705099noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-8364644551990455752010-07-05T14:29:10.786-04:002010-07-05T14:29:10.786-04:00Excellent post, thanks. I recommend it to any rea...Excellent <a href="http://fridayinvegas.blogspot.com/2009/10/dark-pools-are-not-scary-shady-places.html" rel="nofollow"> post</a>, thanks. I recommend it to any readers on this comment thread, and I'll follow up with a post of my own at some point.Rajivhttps://www.blogger.com/profile/13667685126282705505noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-36212723484586449122010-07-05T14:00:43.591-04:002010-07-05T14:00:43.591-04:00rajiv:
http://fridayinvegas.blogspot.com/2009/10/...rajiv:<br /><br />http://fridayinvegas.blogspot.com/2009/10/dark-pools-are-not-scary-shady-places.htmlKid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-63297280454236273622010-07-05T12:41:10.328-04:002010-07-05T12:41:10.328-04:00"I think the ideal market would be one big co..."I think the ideal market would be one big consolidated dark pool."<br /><br />I've been thinking along the same lines recently, especially after May 6. Algorithms can still use data on executions to make short-term price forecasts, or make experimental trades to test the depth of a market, but overall the balance should shift to longer holding periods which I believe would be a good thing. <br /><br />Could you give me a link to a post of yours on this?Rajivhttps://www.blogger.com/profile/13667685126282705505noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-27823495579866950072010-07-05T11:03:10.980-04:002010-07-05T11:03:10.980-04:00yes Rajiv - I've said multiple times that I th...yes Rajiv - I've said multiple times that I think the ideal market would be one big consolidated dark pool.<br /><br />dark pools are probably the most misunderstood and incorrectly maligned piece of the market structure. <br /><br />oh by the way, please note that "There is a fear that the owners of prominent dark pools will be capricious in deciding who can have access to their liquidity" sounds an AWFUL lot like David's alternative marketplace where issuers could choose to list...of course, in David's perfect fantasy land, they wouldn't let HFT algos trade, right? right...Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-70768585384720951732010-07-05T10:10:46.883-04:002010-07-05T10:10:46.883-04:00KD, agreed. But dark pools may eventually give way...KD, agreed. But dark pools may eventually give way to hidden orders on exchanges, which would have the advantage of <a href="http://tinyurl.com/35rglum" rel="nofollow">consolidating liquidity</a>:<br /><br />"Despite their benefits in reducing slippage, stand-alone dark pools have been controversial primarily because access to them is not universal. There is a fear that the owners of prominent dark pools will be capricious in deciding who can have access to their liquidity, and, indeed, we have seen some of this behavior in the marketplace. But this is not a long-term problem - with the recent introduction of hidden order types on the major exchanges and ECNs, stand-alone dark pools likely will shrink in volume. Most exchanges and ECNs now offer essentially the same "dark" product as dark pools, but with much greater liquidity and lower fees."Rajivhttps://www.blogger.com/profile/13667685126282705505noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-61665261638196784112010-07-05T09:09:55.017-04:002010-07-05T09:09:55.017-04:00i feel the need to address Jim's comment on Da...i feel the need to address Jim's comment on Dark Pools, because it illustrates a common misunderstanding. all trades are reported to the tape - including dark pool trades. all dark pools do is hide bids and offers, in an attempt to limit precisely the type of "information extracting" strategies Rajiv refers to in this post.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-88334098817797145492010-07-05T07:16:03.170-04:002010-07-05T07:16:03.170-04:00KD and Jim, thanks for your comments.
KD, yes, D...KD and Jim, thanks for your comments. <br /><br />KD, yes, David is arguing that decimalization and Regulation NMS had some unintended negative effects on capital formation because of the decline in spreads. Regarding the causality issue, we don't have a randomized controlled trial here to establish this, and he offers correlations along with some plausible mechanisms. Doesn't mean he's wrong, and perhaps an econometrician can look at the data and see if some causal inferences can be made using instrumental variables. I think this is worth exploring. <br /><br />Jim, you're absolutely right about David's proposals but he doesn't want to turn back the clock, he wants an alternative marketplace in which issuers could choose to list. He suspects that only small caps will choose this. Agenda or not, I think the effects he describes are worth thinking about.Rajivhttps://www.blogger.com/profile/13667685126282705505noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-55392072896462605022010-07-05T06:49:13.895-04:002010-07-05T06:49:13.895-04:00Weild, same guy that advocates setting up an alter...Weild, same guy that advocates setting up an alternative market with only broker intermediated trading against market maker quotes with a dime or two spread. Phone only, no electronic execution. Basically the old school NASDAQ system. Seems like he's got an agenda.<br /><br />How about we start by killing dark pools instead and make all trades show on the consolidated tape. That's one real problem with price discovery at the moment - if the majority of trading is off market and invisible, the displayed price is much less meaningful.<br /><br />http://www.thefreelibrary.com/Grant+Thornton+Announces+Update+to+U.S.+IPO+Market+Study.-a0229462580Jimhttps://www.blogger.com/profile/02821140907098092257noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-24078245374847470192010-07-04T23:43:32.482-04:002010-07-04T23:43:32.482-04:00"Aftermarket support for IPOs has withered be..."Aftermarket support for IPOs has withered because issuers lose money providing it "<br /><br />lol - why? because spreads are too narrow? (sarcasm)...<br /><br />David's mistake is one of correlation vs causation... one of the oldest in the book. Perhaps the decline in listings has something to do with the end of the greatest leverage bubble our world has ever seen??? <br /><br />see, this may be true: "Fundamental investing, or so‐called “information increasing” activities, are being displaced by trading, or so‐called “information mining” activities. The growth in indexing and ETFs may be exacerbating this problem. "<br /><br />but that conflicts with what he's saying about a lack of liquidity in smaller cap names. you can't have it both ways. HFT algos are not trading microcap stocks that trade 1200 shares a day. by DEFINITIONKid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-77269043389039314782010-07-04T17:55:18.974-04:002010-07-04T17:55:18.974-04:00Agreed - thanks for your comment.Agreed - thanks for your comment.Rajivhttps://www.blogger.com/profile/13667685126282705505noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-22080144864702821452010-07-04T17:53:11.750-04:002010-07-04T17:53:11.750-04:00I accept that and did not intend to imply otherwis...I accept that and did not intend to imply otherwise.<br /><br />My point was that the change in total listed stocks is equal to the number of new listings minus the number of delistings. Both of these are moving in the wrong direction. <br /><br />IPOs are declining, and the reasons you give are compelling.<br /><br />Meanwhile, delistings accelerated dramatically after 2002, for the regulatory reason.<br /><br />Not that regulation is unnecessary -- it's painfully obvious we have an endemic fraud problem. But adding complex reporting regimes that enrich the big accountancies (who are themselves implicated in the fraud problem) is perhaps not the highest ROI way to fix things. It also acts as a regressive tax on smaller businesses, though most fraud losses have been from large caps.Gemfinderhttps://www.blogger.com/profile/16530412594905013281noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-16713747853514203692010-07-04T16:15:39.627-04:002010-07-04T16:15:39.627-04:00Gemfinder, if you follow the link to Weild's s...Gemfinder, if you follow the link to Weild's statement and supporting documentation (especially page 9) you'll see that the number of IPOs raising less than $25 million fell very sharply from 1996-2000, well before Sarbanes-Oxley was enacted in 2002. I don't doubt your story but there more to this than accounting regulation.Rajivhttps://www.blogger.com/profile/13667685126282705505noreply@blogger.comtag:blogger.com,1999:blog-4039434.post-35739501567642732662010-07-04T02:18:45.575-04:002010-07-04T02:18:45.575-04:00This doesn't explain the rash of delistings. ...This doesn't explain the rash of delistings. But I spoke with the CFO of a voluntarily delisting microcap RLEC, and his explanation was simple: compliance with Sarbanes Oxley was costing him $1m per year, or 10% of net earnings.<br /><br />Under such conditions, stable, mature, cash-positive small firms are those most able and willing to delist -- they don't need access to equity markets. When they leave, the overall quality of remaining listed micro caps falls.<br /><br />I spoke to an SEC attorney about this, and he told me that in his opinion the SEC had been captured on this issue by the major accounting firms, who see SarBox as a gravy train. This was near the end of the previous administration -- don't know if it has improved.Gemfinderhttps://www.blogger.com/profile/16530412594905013281noreply@blogger.com