
A Plan for a Long-Term Stock Exchange - jackgavigan
http://www.bloomberg.com/news/articles/2016-06-12/silicon-valley-s-audacious-plan-to-create-a-new-stock-exchange
======
Lambent_Cactus
I like where this is going - you want to apply some pressure to organizations
to set up internal incentives that push for longer-term thinking. But if the
value of being on the LTSE is that it sends a signal that your org is
optimized for the long term, couldn't you accomplish some of that function
with a voluntary certification process, instead of a whole new stock exchange?

Like, why not just publish a version of the famous Joel Test
([http://www.joelonsoftware.com/articles/fog0000000043.html](http://www.joelonsoftware.com/articles/fog0000000043.html)),
but for management incentives compatible with long-term thinking? Then
companies can submit to voluntary review (maybe with a nominal fee) by your
Long-Term Business Bureau, and you can issue certifications for ones that meet
certain standards. Your go-to-market strategy is the same - you can target
mid-sized startups that are looking to differentiate themselves and hoping one
or two of them grow into norm-setting behemoths, but you don't have to ask
those companies to jeopardize their (and their investors') liquidation
strategies.

~~~
ctlby
Nailed it. The problems they're trying to address are entirely in the realm of
corporate governance. None of their stated aims require a new exchange.

~~~
jerf
I'm not sure if they're planning this or not, but one thing a new exchange
could do is quantize the trading. I have seen serious suggestions that having
trades execute only on the hour, or even as radically as once per day, could
perhaps significantly reduce the short-term focus of the stock. The idea here
is to greatly reduce the influence of the stock's price movement on its own
price. Since that sentence probably looks like a typo, let me say it another
way: Stock prices react to information, and one of the loudest and most
continuous bits of information is the stock's own minute-by-minute motion, far
dominating things like "press releases", actual news, or quarterly reports for
which it is sensible to see significant motion on the stock price.

Even if people set up the inevitable backchannels or side markets, the fact
that shares can only change hands once per day may still have a significant
impact on the shape of the market, even if it isn't perfect.

~~~
heavenlyhash
I had the pleasure of attending a talk about "Combinatorial Auctions"[1]
lately which describes some interesting market designs that might apply here.
In particular, there are some designs out there for "multi-round" auctions,
and some great reading on how those work out. On-the-hour trading schemes
would be essentially the same.

I can't find slides for the talk (just [2]), but there's also some really
interesting publications reviewing outcomes when auctions like this were used
to deal out resources to big companies who really had an incentive to do their
math: [http://ftp.cramton.umd.edu/papers2000-2004/cramton-
schwartz-...](http://ftp.cramton.umd.edu/papers2000-2004/cramton-schwartz-
collusive-bidding.pdf)

\---

[1]
[http://sessions.minnestar.org/sessions/336](http://sessions.minnestar.org/sessions/336)

[2]
[http://markgritter.livejournal.com/747077.html](http://markgritter.livejournal.com/747077.html)

------
ianpurton
_" Everyone's being told, 'Don't go public,'" Ries said. "The most common
conventional wisdom now is that going public will mean the end of your ability
to innovate."_

I thought no one went public because going public requires you to divulge
revenues.

~~~
xal
> "Everyone's being told, 'Don't go public,'" Ries said.

In my experience, If there is consensus around something, it's often a great
idea to do the opposite.

I decided to take my company public last year and it has been exactly the
right thing for us. As far as I can see it, there is absolutely no reason to
wait if your company and your team is ready.

~~~
swalsh
With a tiny chance you might answer, I'm curious.. how did Shopify come about?
Did you start an eCommerce store yourself, have bad luck, but then say "hey we
could take all this tech we just built and sell that instead"? Or was shopify
always the goal?

~~~
xal
Exactly as you said. I build a online store to sell Snowboards back in 2004.
The business worked really well but the software was clearly even better. The
snowboards ended up financing building Shopify. The first checkin into the
Shopify git repository was the first checkin to the original online store
(although I used Darcs as SCM back then, I converted the history over to Git
).

We actually put together a mini documentary about Shopify for our IPO
Roadshow:
[https://www.youtube.com/watch?v=QYl8iwD-6tk](https://www.youtube.com/watch?v=QYl8iwD-6tk)
It's worth the watch if you are into this kind of thing. We decided to do this
because Shopify grew out outside of the Silicon Valley sphere and wasn't that
well known before our IPO. That has clearly changed since.

~~~
shostack
How did you approach getting your first customers when you had an MVP?

~~~
xal
I developed an early (technical) following because I was one of the people
behind Ruby on Rails. That lead to the first few customers because technical
people are often asked for recommendations for software. Keep in mind this was
in 2006, a very different time from today.

~~~
shostack
Awesome. If you had to do it all over again, do you think you could have been
successful with Shopify if you'd started today?

~~~
xal
Building companies is 90% luck (timing, competition, demand, macro trends,
technology penetration, also health & passion of the team). So... I doubt it.

------
grondilu
> granting stronger voting rights to long-term shareholders would make
> takeovers harder,

That sounds like a reasonable idea, but I think it fails to see how capital
markets work.

The thing is, voting rights can be sold. If you create different voting rights
with weights, you will just create different prices for different voting
rights. It will make things unnecessarily complicated, and if you try to
prohibit some kinds of voting rights to be sold, you will likely just fuel a
black market.

Can a 10-year voting right be sold? In theory you can't, since as soon as the
share changes hands, it would become a 0-year voting right. Except the voter
can sell his right in a different way, that is by just agreeing to vote on
command in exchange for money.

By making every such conceivable transaction transparent and controlled by
Law, the market is supposed to avoid these kinds of shady practices.

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

------
sandworm101
Voting rights tied to the length of time one has held shares? That cannot fly.
It certainly sounds like a great deal for founders, who would have owned their
shares longer than anyone else, but is totally unworkable for outside
investors. How does one value a share that, if sold, would immediately
diminish in value? How is a lender to grant credit based on such collateral?
Options would be massively difficult, leading to a secondary market for shell
contracts in order that shares need not officially change hands.

I see massive instability. Say everyone votes on some matter on day one. If
that same vote occurs later in time the results may shift, even if nobody
sells any shares. So any decision taken by shareholders is time-specific. That
doesn't promote long-term thinking. Rather, it promotes gamesmanship and
trickery to ensure that votes happen when most advantageous to whomever is in
control of the schedule.

Markets are not some invention that can be re-invented overnight. They are the
result of a thousand years of contract law, codified recently but based on
long-standing principals. Altering those principals to suit the desires of
founders cannot happen overnight. Don't like it? Don't take the windfall.
Don't go public.

~~~
vidarh
> Voting rights tied to the length of time one has held shares? That cannot
> fly.

It also raises the question of how in the world they'd expect to prevent
working around it by using something similar to the Depository Trust Company
so that the actual shares don't change ownership.

Given that large markets _already_ have mechanisms in place where
nominees/trusts/proxies are used to work around other inefficiencies in the
current systems, it seems a bit naive to think this wouldn't be worked around
too.

~~~
sandworm101
Or what about something as simple as inheritance? Does passing a stock by
bequest reset the voting clock? If not, then we can rig people's wills to pass
ownership, creating a perverse market for the nearly-dead to sell their
services in exchange for cash up front.

------
DennisP
> Google's 2004 attempt during its IPO to distribute its shares more equitably
> via a "Dutch" auction led to a disappointing first day of trading and never
> caught on.

What's disappointing is that people see it that way, even though it worked
exactly as designed. The whole point was to find a fair opening value that
made a level playing field for all investors. By opening at a stable value, it
did exactly that.

The experiment hasn't been repeated because the people making decisions prefer
a model that gives them short-term profit, at the expense of the general
public.

------
rdlecler1
Does anyone else find it ironic that the guy who invented The Lean Startup
philosophy is trying to take a zero to one leap to start an exchange? Wouldn't
it make more sense to start a crowdfunding platform or secondary market for
private shares and evolve that into a public market exchange, rather than
trying to start something denovo?

~~~
blowski
Perhaps discussing feasibility with the SEC and putting out feelers via a
press release is the MVP.

~~~
rdlecler1
The articles states that he's assembled a team of 20 engineers. That doesn't
sound like a MVP to me.

------
padobson
The idea that stock exchanges provide disincentives for long term strategic
planning at public companies is not just an economic problem, but a political
problem.

As an entrepreneur, I'm proud of Reese for trying to tackle a big political
problem with a startup, rather than through the political process. I can't
help but think a lot of big problems that interested parties try to solve with
lobbying, campaigning, and legislation could instead be solved with a market-
based solution that doesn't necessitate government coercion.

~~~
repomies691
> The idea that stock exchanges provide disincentives for long term strategic
> planning at public companies

Is this really true? Quite many public companies seem to innovate in long-
term. In fact, to me it feels that private companies are often more short-
term, because they don't have access to the liquidity the stock market
provides, and therefore they have to generate more revenues short-term.

------
sergiosgc
Public company management is in need of some innovation, namely when it comes
to communication between companies and stockholders. I see two avenues where
technology enables evolutionary leaps:

1) Accounting: Accounting, today, is mostly the same as it was a century ago.
Namely, from an engineer's perspective, it does not contain the notion of
error, which is obviously essential. If you go look at, say, Coca-Cola's
financial statements, you'll find a value for their brand defined to the
second decimal point. I know one thing about that value: it is wrong. It
should be X(+/\- error at 99% confidence).

2) Governance: Communication between management and stockholders is limited to
the annual meeting, complemented by the board of directors. This model is
flawed, the board of directors band-aid is ineffective, and there's room for
much much fine grained communication and hence better governance.

Since stock exchanges mandate over these aspects of listed organizations,
there is space for innovation, hopefully attracting investors and guaranteeing
the spread of the next generation of business governance.

~~~
Naga
Accounting is actually very different today than it was ten years ago. The
rise of spreadsheets has made things possible that wouldn't have been when
manual calculation was necessary. What is unfortunate are that estimates are
required in many cases, but it is just the way it is. For example, how can you
know for certain what the present value of the cost of decommissioning a
nuclear power plant in fifty years? These estimates are already included in
the notes of the financial statements, which in many ways are more important
than the actual financial statements.

But as to your Coca-Cola example, internally generated brands are not included
on the balance sheet as assets. "Coca-Cola" isn't considered an asset to the
company because of how difficult it is to value it.

~~~
fitchjo
Just to clarify, the main reason that the "Coca-Cola" tradename is not a
recognized asset is because it was generated by the Company and not purchased,
not because of how difficult it is to value. I agree that accounting is very
different than it was ten years ago, but I think that has more to do with SOX
and the increased requirements related to financial controls. The FASB
(accounting rule-making body) has tried to improve the disclosures for those
items that are difficult to value, but the subjectivity of these valuations
will continue to exist for the foreseeable future.

~~~
Naga
You're right. Difficult was probably the wrong word. It would open the door to
too many overstatements if companies could value their own brands.

------
jasode
Eric Ries has noble intentions but it seems like he overestimates the power of
a trading platform to dictate (for good or bad) the companies' ethos.

 _> A company that wants to list its stock on Ries’s exchange will have to
choose from a menu of LTSE-approved compensation plans designed to make sure
executive pay is not tied to short-term stock performance. _

If a company wants to buck the trend of short-term thinking, it doesn't need a
new Ries exchange to do it. Jeff Bezos's Amazon is listed on NASDAQ and he
continually reported 0 profits quarter after quarter. He avoided earnings
manipulation for short term gains and yet, the stock price went up anyway.
Likewise, if a company wants to provide a minimum wage of $70k to all
employees including the janitor, they can do so while listing on NASDAQ or
NYSE. The company doesn't require a hypothetical MLWSE (Minimum Living Wage
Stock Exchange.)

I can't think of any example in a hundred years of corporate history where a
new company can attract a significant (and profitable!) customer base based
just on "aspirations". No, you must offer concrete benefits with obvious
connections to the bottom line.

As an analogy, it's like proposing a new shipping company (Patriotic Shippers
Inc) as an alternative FedEx/UPS. As a rule, they won't allow you to be a
customer unless you pledge that anything you ship is made in the USA instead
of cheap labor in China. Why would companies care about that aspiration?
Either you can ship packages for half the price of FedEx, or you can ship them
faster for the same price. The aspiration is just the cherry on top and not
the primary motivator.

Or you propose to create a new airline hub in Iowa. You only allow airlines
that provide adequate leg room and do not charge fees for checked baggage. Why
would airlines move their fleet from Chicago O'Hare to Iowa based on those
rules? No, the hub in the cornfield needs better enticements than that. Maybe
if your Iowa hub has new patented deep learning neural nets that predict
weather patterns better than the meteorologists in Chicago, and/or your
scheduling algorithm for runways can handle 3x the traffic... then maybe the
airlines will look at the new location. Also, if your new Iowa airport can
play the politics game and convince Iowa state legislature to provide basic
income to every resident and thereby cause a massive population exodus from
Chicago to Des Moines, that would be another carrot to get airlines'
attention.

Ries LTSE platform must offer profitable benefits such as technology
advantages, or rebates to brokers, etc.

~~~
notahacker
To put it even more straightforwardly, there's no economically sound reason to
believe a firm which chooses to write its corporate governance rules in a
certain way wouldn't perform at least as well on the NASDAQ as on a special
exchange designed for the purpose.[1]

If enough funds believe that shorter term traders are undervaluing a
particular NASDAQ stock because they've become so caught up in profit warnings
they've missed the long term potential of its R&D, they pile in and pump the
price back up again. If there aren't enough investors that believe a
particular firm's long term strategy more than justifies conservative short
term forecasts and a profit warning due to unanticipated increases in the
research budget on NASDAQ, they won't be found on a LTSE either. It's not like
the public markets are niche arenas that contrarian investors don't get
involved with

[1]There's one possible non-economic reason. If existing exchanges' [but not
SEC] rules prevent firms from issuing extra information pertaining to their
long term research and development or restrict executive bonuses, then there
is a point to doing this; afaik they don't.

------
leroy_masochist
This strikes me as a well-intentioned dumb idea, kind of like B-Corporations
[0].

The whole point of a stock exchange is to allow the market to provide nearly
instant feedback on a company's reported operational/financial performance and
the decisions of its leadership. I agree that there is moral hazard in
companies giving executives pay packages in which most of the upside is tied
to short-term market performance. It's important to note that a large portion
of the professional investor community feels the same way, and a lot of short
positions are born of the observation, "looks like the CEO is just trying to
fluff numbers for his bonus". This is where a strong board makes a huge
difference. "Corporate governance" is not just wanker-jargon, it's a real
thing.

As far as public markets limiting R&D....that's a weak argument. Five of the
ten biggest companies in the world by market cap are tech companies that spend
billions of dollars a year on R&D, most of which has no clear path to GAAP
profitability [1].

To borrow from Churchill, liquid securities markets constitute the worst
system of company ownership with the exception of all the other systems
available.

[0]:
[https://en.wikipedia.org/wiki/Benefit_corporation](https://en.wikipedia.org/wiki/Benefit_corporation)

[1]: Apple, Alphabet, Microsoft, Amazon, Facebook

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

------
brc
I would have thought most of the issues with publicly listing are the
regulatory environment rather than the lack of a specialised listing market.
Isn't this way the Nasdaq used to be?

I'm all for innovation but I can see the various levels of bureaucrats
sharpening their pencils with a 'tsk tsk' noise.

Perhaps the energy could be well spent getting the wider public to accept
investing and risk taking in a way that it used to. That would at least
prepare the ground for tech companies to get listed again.

Maybe all the people who got burnt in 2000 have finally retired now.

------
peter303
The number of public US companies has fallen from 7800 in the late 1990s to
3700 in 2015. These include bankruptcies, mergers, taken private, never gone
public etc. In the long term this could mean difficulties for savings plans
like 401K who buy lots of equity.

In a related story, the number of shareholders per company has been
plummenting too. Part of this is that money funds like ETFs only count as one
shareholder, but have many owners. The other is the trend towatd just one or
few private equity holders.

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

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

------
grandalf
It seems silly to create a new exchange when all it does is require companies
to agree to specific business practices.

The list of requirements could simply be a set of rules, and a company's
auditors (and CEO) could sign off that the company is in compliance. I don't
see what the LTSE offers that goes beyond that.

------
ryan606
Rather than penalizing short-term trades, why not build an exchange that only
allows trading once per week, or once per month?

------
stcredzero
_Once companies go public, employees “are on Yahoo Finance every day, and it’s
palpable how much that is affecting the decision-making of ordinary managers,”
he says._

This is believed by most everyone I know. It makes sense to me. However, is
there any hard data to support this?

~~~
throwaway60453
> is there any hard data to support this

No, so you should drop whatever you're doing and get right on that.

Oh ... so you were expecting somebody else to service you for free?

~~~
stcredzero
_Oh ... so you were expecting somebody else to service you for free?_

Maybe someone would've done that study for the PhD.

Hey, you sound touchy. I guess you're letting your biases show. I think the
notion is correct, but I understand the "evidence based life." To be sincere
about rigorousness, you need to check the the ideas you like as much as the
ideas you don't like. But anyhow thanks for letting your biases show for free.

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

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

:P

------
jackgavigan
_> ..it could be years before the LTSE gets SEC approval..._

By the time they launch, the notion of a centralised stock exchange may well
be outdated.

~~~
ycombobreaker
The "stock exchange" is already decentralized [0]. It has been this way since
electronic trading really took off on... i think Instinet (now NASDAQ) and
Archipelago (now NYSE ARCA) in the 1990's. The National Market System [1] is a
piece of legislation from 2005 that attempts to unify the markets from a
customer's perspective, but it is a very leaky abstraction. That said, it is
interesting to see what happens with any new exchange.

[0]
[https://www.sec.gov/divisions/marketreg/mrexchanges.shtml](https://www.sec.gov/divisions/marketreg/mrexchanges.shtml)
[1]
[https://en.m.wikipedia.org/wiki/Regulation_NMS](https://en.m.wikipedia.org/wiki/Regulation_NMS)

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

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

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

~~~
toss1
I've long thought that an even better way would be a strong curve in the
capital gains tax structure. Currently, if held ,1yr it counts as ordinary
income, >1yr gets cap gains treatment of 28%.

Better would be something like the following holding periods and tax rates
(obviously a mere sketch subject to tuning):

<1 minute = 95% cap gains tax rate

<1 hour = 80%

<1 day = 70%

<1 week = 60%

<1 mth = 50%

<1 qtr = 40%

<1 year = 30%

<2 yrs = 20%

<5 yrs = 10%

<10 yrs = 5%

>10yrs = 0

The short end would eliminate the volatility, unfairness and flash-crashes
created by submillisecond trading. The encouragement to the longer end would
get everyone to think longer-term. The 0% for decade+ holdings would prevent a
lot of silliness around inheritance (e.g., you inherit a few shares from your
grandfather, and have no records or reasonable way to figure the cost basis,
but are required to assert one).

Of course, I doubt it would happen because it isn't in the short-term interest
of the bankers.

~~~
a13n
I like your approach but a 95% tax rate is insane and would cause the market
to be incredibly illiquid. Something like 50% to 0% seems a lot more
appropriate.

~~~
toss1
I see why it seems nuts, but then holding a position for less than a minute
seems nuts also.

That kind of trading is not primarily providing liquidity, its primarily
skimming and front-running. IMO, it should probably be banned.

However, I think that providing a 95% tax rate is a lighter touch, and allows
people to do it if they can find sufficient profit.

I also mentioned being open to tuning the amounts. What rate would you think
would be good for such short term trading?

------
Chris2048
Maybe this would be better done outside the US?

Since BTC etc, the fed seems more interested in interfering with financial
disruption...

~~~
Chris2048
downvote must be the fed :-)

They're everywhere!

