Money Stuff: Dallas Gets Some Equities

There is arguably something a bit weird about stock exchanges as for-profit businesses. In the olden days, stock exchanges were often nonprofit members’ organizations: There’d be 20 stockbrokers in a city, and they would all meet up under a tree or on a sidewalk to trade stocks with each other, and then it would rain, and they’d be like “what if we traded stocks indoors,” and they’d find a building to trade stocks in, and they’d need to buy the building, so they’d all go in on it together as a sort of cooperative of stockbrokers. And they’d own the building, and they’d write rules governing how they traded stocks, and the stockbrokers would be members of the exchange and have a say over the rules. And the exchange would need money to pay for, like, building maintenance and stuff, so it would collect some fees from its members. And then eventually the exchanges realized that they could become for-profit public companies: They could raise the fees and turn a profit, and they could issue shares to the public, and the shares could be worth a lot of money (because of the profits), and the old memberships could be turned into shares, and the old nonprofit members could sell their shares for lots of money. And now most exchanges are big for-profit companies, and they operate online electronic exchanges rather than buildings where traders meet up.

But the exchanges are also still sort of collectives of traders, in the sense that the trading activity that happens on the exchanges is still largely like 20 brokerages and trading firms trading stocks with each other. Now, though, instead of being member-owners of the exchange, the trading firms are just customers, and they pay fees to the exchanges, which then become profits for the exchanges’ shareholders. Occasionally the traders get annoyed by this. “Why should we pay big fees to for-profit exchange operators just to match our orders up with each other,” they ask. “We could just trade with each other without the exchange, and keep the fees for ourselves.”

This dissatisfaction manifests in various ways. Sometimes it’s, like, trading firms objecting to exchanges’ fee increases. Mostly it’s off-exchange trading: Banks and trading firms and brokerages will use dark pools to trade among themselves, or will directly internalize retail customers’ orders, to save on exchange fees. But we have also talked once or twice about MEMX, the Members Exchange, a stock exchange whose basic pitch is (1) it’s owned by big banks and trading firms and (2) it charges low fees. This is not quite a return to the old nonprofit governance system. But maybe a little, kind of? Like the idea is roughly that the value of a stock exchange comes from the traders who meet there to trade stocks, so those traders should capture that value.

That is an intuitive idea, but it is not the only possibility. The modern for-profit exchanges would probably tell you that the value of a stock exchange comes from its investments in technology, its fair and neutral rules, etc.: The exchanges are providing a valuable service and should turn a profit. But another possibility might be: Maybe the value of a stock exchange comes from the companies whose stocks are traded there. Maybe, every time two traders meet up and sell each other stock, the exchange should take a tiny cut of the trade and give it to the company whose stock it is. The company created the stock, the stock is the reason that everyone is there, so why shouldn’t the company get a cut of the action?

I have never seen anyone make this case explicitly about stocks, though it is not uncommon in crypto. With stocks, normally, the theory is that the company benefits from trading in its stock — it can sell more stock, it can pay employees in stock, etc. — and so the exchange is providing a service to the company, rather than the reverse. (Normally companies pay fees to be listed on the exchanges.) But I am not sure that every company believes that theory. We talked the other day about AMC Entertainment Holdings Inc. getting mad about increased liquidity in its stock. I feel like there are a lot of companies that, if you told them they could take a $0.0001 cut of every trade in their stock, but it would be bad for their liquidity, would say “what’s the downside?”

This is, like, 98% idle musing, but it was inspired by this:

Two energy companies are switching their listings to the Texas Stock Exchange from the New York Stock Exchange in a major win for the upstart marketplace that’s revving up its bid to grab business from established competitors.

Fuel distributor Sunoco LP said its units will cease trading on the NYSE on Oct. 2, according to a statement on Thursday. Pipeline giant Energy Transfer LP said its units will begin trading on the TXSE on Oct. 5. Energy Transfer owns a stake in Sunoco, while an entity tied to the pipeline company’s billionaire chairman, Kelcy Warren has a significant holding in TXSE Group Inc.

The moves will be the debut primary listings for Dallas-based TXSE, which is backed by investors including JPMorgan Chase & Co., Citadel Securities and BlackRock Inc.

This is not quite “Energy Transfer will get a cut of the fees for trading in its shares,” for several reasons. For one thing, Energy Transfer isn’t an investor in TXSE; “an entity tied to” its chairman is. For another thing, it’s not totally clear that shifting Energy Transfer’s primary listing from NYSE to TXSE will move most of its trading: There are lots of US stock exchanges, and they all cheerfully trade stocks listed on NYSE or Nasdaq; it’s possible that a lot of the trading in Energy Transfer will still happen outside of Texas even though the shares are listed on TXSE. Still, it does make a kind of sense that the first companies to list on TXSE will be ones with economic ties to TXSE. “List your stock on our exchange and you’ll get a cut of the trading” would be a good pitch!

That’s probably not the real pitch. “The move aligns [the companies’] Texas-based legacy with TXSE’s technology-driven platform, creating opportunities to enhance value and support [their] continued growth,” say Energy Transfer and Sunoco, though I don’t really know what that means. I once wrote about what I think is probably the main pitch: 

In recent years, people have had complaints about the rules imposed by Delaware law and by NYSE and Nasdaq listings requirements. Some people think those rules are too unfriendly to controlling shareholders, or too woke. In response, there has been a push to move the seat of corporate governance from the East Coast to Texas.

One important part of this push has been that companies — most notably Tesla Inc. — have reincorporated in Texas, where state law is different (more Elon-Musk-friendly, more restrictive of shareholders lawsuits) than in Delaware. But some aspects of corporate governance are set by exchange listing standards rather than by state law, and so there is an obvious parallel opportunity for a stock exchange. Companies that want to incorporate in Texas, you might think, will also want an exchange with listing standards that are less woke and more management-friendly than those of NYSE and Nasdaq. And the way to signal to companies that your stock exchange’s listing standards will be less woke and more management-friendly is by putting “Texas” in the name of the exchange.

TXSE’s fact sheet says things like “TXSE is working in collaboration with Texas Gov. Abbott and the state legislature to create the most pro-business environment in the country and fuel the Texas economic juggernaut,” and mentions the Texas state law that allows companies listed on Texas exchanges (like TXSE) to limit annoying shareholder proposals. The main pitch is probably that, in the medium term, being listed in Texas will give management a bit more flexibility than being listed in New York. But owning a bit of the exchange doesn’t hurt.

There is some hipsterism in the financial industry, and the pinnacle of a certain sort of financial prestige is to work at a very selective, very lucrative firm that almost nobody has ever heard of. If nobody has heard of it you can’t brag about it to anyone; you want a firm with almost no mainstream public profile that is nonetheless well known among the right people. For quite a while, Jane Street Capital — selective, lucrative, weird, famously low-profile — was, by this measure, perhaps the peak financial employer. But eventually it becomes hard to distinguish “famously low-profile” from “just famous,” and certainly after the SBF stuff (and the Indian options!) everyone knows about Jane Street. “I knew about Jane Street before it was cool,” its partners have to grumble now, though it remains lucrative.

I assume the cycle is going to start over with Hudson River Trading, where you will start reading a few articles a year about how low-profile HRT is, and then it will become a few articles a month, and then a few a week, and then eventually you will get hourly push alerts like “Low-Profile Quant Firm Hudson River Trading Has Ice Cream in Cafeteria Today” and you’ll be like “okay I get it.” For now: still kinda low-profile! Kinda. Today Bloomberg’s Tom Maloney has a profile of the firm and its founder, Jason Carroll:

Hudson River Trading [is] one of Wall Street’s most lucrative high-speed traders and market-makers. For Carroll, the sole founder still there, it has generated a personal fortune surpassing $27 billion, according to the Bloomberg Billionaires Index, which is valuing his wealth for the first time.

HRT’s more than 1,200 employees are reeling in twice as much profit as bigger and better-known rival Citadel Securities. Like Citadel’s boss, fellow Harvard alumnus Ken Griffin, Carroll pioneered the use of new technologies on Wall Street and stays active in their development.

Honestly it sounds nice:

We “read books about this cutthroat company culture that sometimes happens, where people want to be the one that gets credit for an idea or wants to look good at someone else’s expense,” [co-founder Alex] Morcos said. “We had a visceral hatred of that.” …

“You work with people you wouldn’t mind going on vacation with, because we actually do go on vacation with them,” one of the company’s recruitment videos says.

“I really hope that people think of HRT as a kind place,” [partner Prashant] Lal said. “We never did our time at a big bank. We never were in consulting. Just starting off working in the West Village with friends, the way you would want to work.”

I really like that Morcos felt the need to specify that he has read about mean workplaces in books. Just a blissful state of nature where no one has ever experienced a tough company culture firsthand. [1] But they read books about it in their free time, just to get that little frisson of horror. “Eeehhh, imagine working there,” they think, and then go back to building algorithms with their friends.

We talk sometimes about how billionaires are created. Carroll was not on Bloomberg’s, or as far as I can tell anyone else’s, list of billionaires last week; today he is the 90th-richest person in the world. The main way to become a billionaire is:

1. You have some business that generates at least nine digits of annual cash flow for you; and
2. The people who keep the lists notice.

Like, if you have made $100 million a year for a few years, and you spend a lot of it, you will probably have less than $1 billion in your bank account. But if someone looks at your cash flow and says “hmm, $100 million a year at a 10% discount rate is worth like $1 billion,” they will call you a billionaire. The act of putting a valuation on your recurring cash flows — multiplying them by a multiple, or projecting them forward and discounting them by a discount rate — is normally what makes you a billionaire.

The most common way for this to happen is when you sell a stake in your cash flows. You have a business that brings in $100 million a year, you sell 10% of it to an outside investor for $120 million, boom, you’re a billionaire: You have a 90% stake of a company with a $1.2 billion valuation. [2] Selling a stake is not logically necessary — owning 100% of a company with a $1.2 billion valuation also makes you a billionaire — but it does tend to validate the numbers and attract the attention of list-makers. There are other ways, though. Taylor Swift is a billionaire not because she has  sold a stake in her catalogue, but because she’s Taylor Swift and people notice her cash flows.

I suspect Carroll takes home a lot of cash so this is somewhat moot, but in any case:

The Bloomberg Billionaires Index credits Carroll with a 62.5% stake in HRT, the midpoint of an ownership range disclosed in a filing. The company’s estimated value exceeds $45 billion excluding a liquidity discount, or roughly six times last year’s earnings of more than $8 billion. The calculation doesn’t account for dividends the firm may have paid. It declined to comment on the figures.

Right if you own more than half of a business that brings in $8 billion a year, you’re pretty comfortably on the list.

Also! I wrote last year:

One of my favorite tropes of financial journalism is when some wealthy financial industry figure is described as being very down-to-earth and humble and not like all the other finance guys, but the proof of that is something like “his most obvious indulgence is a Maserati Ghibli” or “he lives in a house that only cost a few million dollars.” My all-time favorite example is the hedge fund manager who is a “symbol of frugality” with “one foot inside the lucrative hedge-fund industry and one foot out of it,” which is “perhaps most plain on weekends during the summer,” when he usually flies commercial to his house on Nantucket, though he sometimes flies private. Nothing more down-to-earth than only sometimes flying private.

I know Jason Carroll a little — we were college classmates — and I do think that he’s pretty down-to-earth and humble, but he gets a classic entry in this tradition:

Carroll, 48, otherwise eschews the spotlight, business suits and the usual trappings of wealth, such as luxury properties and high-end art. He rides the subway to HRT’s offices in lower Manhattan. His costliest passion outside of work is racing sailboats.

He’s not like other rich guys; his main indulgence is yachts.

I have written a couple of times about the problem of compensation in lucrative industries, which is that you need to pay people enough that they don’t quit to work for your rivals, but not so much that they quit to sit on the beach. In most normal jobs, the minimum competitive pay is well below the maximum call-in-rich pay, so you can pay employees some amount within that range. But for some jobs, the minimum competitive pay is well above most people’s call-in-rich number, and the range breaks down. Like, the going rate for a top restructuring lawyer seems to be like $25 million a year, so you can’t really pay your top restructuring lawyer less than that. But most people, if you gave them $25 million in one year, would be like “sweet I’m set for life” and stop working. How do you get a second year out of your top restructuring lawyer? I wrote last year:

The financial industry has developed sophisticated tools to address this problem, tools like “your office rival has a house closer to the beach in Amagansett so you have to keep working to outdo her.” The main financial centers offer an enormous array of arbitrarily priced positional goods, and the apprenticeship model of finance teaches people to value them, so by the time you are making $20 million a year you will find it perfectly reasonable to think “man if I made $30 million a year life would be good.”

And this basically works in vast swathes of the financial industry; even the humblest and most down-to-earth quant programmer will be like “hmm I could get a bigger yacht.” But the artificial intelligence industry completely broke the model, because (1) the numbers are even bigger and (2) the employees have not been acculturated to these positional goods. “As far as I can tell,” I wrote, “the going rate for a top AI researcher is ‘enough money that you can retire immediately.’ Also the AI researchers are all like 20 minutes out of PhD programs and haven’t had time to learn which Hamptons are déclassé.” How do you get a second year out of your top AI researcher? In May I mentioned that “the market is actually developing a solution to this problem, which is roughly ‘$30 million will buy you a two-bedroom in the San Francisco metro area,’” but that only goes so far. (You could live somewhere else?)

Anyway here’s a Wall Street Journal article about this problem, or I guess the other side of it, which is all the AI researchers getting paid life-changing money and having no idea what to do with it:

“They are not flashy,” says Garret Spiecker, a senior managing director at Citizens Private Bank who runs the pre-IPO, late-stage, private stock-lending program and whose clients include employees at OpenAI and Anthropic. He says he’s never seen so much liquidity in 20 years working in the Bay Area. ...

“They haven’t had the time to just pause and be like, ‘Oh I can afford to fly private now. I can buy this car that I’ve always wanted, I can order this luxury watch,’” he says. …

A former OpenAI employee who sold shares says his biggest-ticket purchase was a new electric vehicle. When the topic of splurges has come up with other alumni, the most commonly cited item has been an espresso machine, he says.

An employee at a leading AI lab has a total annual income including outside investments of around $1 million a year, yet still does her own manicures. Her biggest purchase: several customized computer chips and development boards that ran around $10,000. She says she doesn’t have a life separate from work to spend money on. 

Okay to me, coming from the financial industry, “you get paid millions but you have no time outside of work to spend it” is extremely not a solution to the comp problem. Once you get the life-changing money, you can quit the job, and then you have plenty of time to spend it! 

The AI labs have found a better and more counterintuitive solution to the problem, which is convincing their employees that what they are doing will kill everyone on earth, so they have to spend all of their time working on it rather than getting manicures. Like I said, I came from the financial industry, and I do not entirely understand why this approach works. Part of me is like “if you told people at Goldman Sachs that their work would kill everyone on earth, that would make employee retention harder.” But actually, when I type it out like that, I am not sure it’s true. 

Look, the simple model is that Tether is a bank. Just a big lightly regulated bank with cheap funding. People give Tether dollars, and it gives them back stablecoins (USDT). The people can more or less withdraw their dollars on demand (just like bank deposits), and the stablecoins more or less don’t pay interest (like some bank deposits). Tether has a pool of like $183 billion of cash that it can invest in … something.

Historically Tether would invest that cash in some quite spicy stuff indeed, but as it has grown up — and as the US and other countries have legitimized and regulated stablecoins — it mostly invests it in Treasury bills and repo agreements. Whereas banks traditionally do maturity transformation — they get funding from demand deposits, and invest it in long-term loans — Tether mostly doesn’t. Tether mostly borrows overnight at 0% and invests overnight at like 4%. Which is a great business! Why would you take risk, why would you do maturity transformation, why would you do anything at all when you can invest your customers’ money in risk-free short-term assets and keep all of the interest for yourself?

On the other hand, as a big lightly regulated bank with cheap funding, Tether is getting into the business of making loans to small and medium-sized businesses. But, just like a real bank these days, it is not just doing that with deposit funding. That would be risky! The Financial Times reports:

Tether, the world’s largest stablecoin issuer, has launched a $400mn private credit fund as it seeks to boost the use of its dollar-linked cryptocurrency.

The company said on Wednesday it was creating the vehicle, dubbed StableFund, with London-based digital asset investor Fasanara Capital and is targeting up to $3bn in third-party capital.

It marks the latest effort by Tether to expand the use of its dollar-linked stablecoin USDT, which is the reserve currency of the digital asset market but whose market capitalisation of $183bn has been flat this year. ...

Tether said the private credit fund would focus on small and medium-sized businesses “targeting borrowers that conventional funding channels have historically underserved”.

It has $183 billion of its own money, but it’s raising third-party capital to do lending. 

A reader emailed me this tweet (from @GoatBots last week) and told me that it relates to alleged insider trading in “virtual Magic: The Gathering Online cards.” The tweet says:

Someone involved with the Pauper Format Panel is profiting from inside information, buying more than 250 copies of Baleful Strix, Vandalblast and Dispatch from our bots yesterday before the Zeta Set announcement. I can only imagine how many copies they bought elsewhere.

I have not confirmed anything about this, I’m not even 100% sure that this is actually about “virtual Magic: The Gathering Online cards,” but:

• Probably some of my readers will be tickled by the notion of insider trading in Magic: The Gathering Online cards, and
• “Someone involved with the Pauper Format Panel is profiting from inside information, buying more than 250 copies of Baleful Strix, Vandalblast and Dispatch from our bots yesterday before the Zeta Set announcement” is just a terrific sequence of words no matter what it’s about.

Latham & Watkins buys Nvidia servers to set up in-house AI systems. Wall Street’s Favorite AI Startup Sets Its Sights on Wealth Management. Meet Deere’s JD, an AI Assistant Aimed at Helping Farmers — and Its Sales. Hedge Funds Restart Fight Over Paschi’s €1 Billion Bond Wipeout. London hedge fund Arini hit by Europe’s thorniest credit trades. Musk’s Boring Co. Raises Funds at Valuation of $23 Billion. Chinese Regulators Seek Higher Bar for Humanoid-Robotics Listings. Private Credit Investors Clash Over £36 Billion BHP Dam Collapse Litigation. They Lost Their Money to Scammers — and Now Battle the U.S. Government to Recover It. Legoland Operator Gets £657 Million New Debt to Refinance Bonds. City of London set to drop century-old rule against logos on buildings. Chewy Shares Slide as Consumers Pare Back Spending on Pet Treats. Starbucks bets $1bn on coffee house antidote to lonely digital lives. The Dorchester hotel to sell Qatari sheikh’s car over unpaid £460,000 bill.

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