
Dole Food Had Too Many Shares - ot
https://www.bloomberg.com/view/articles/2017-02-17/dole-food-had-too-many-shares
======
maxander
It's fascinating that the financial system has evolved this kind of layered
abstraction (humans owning stocks is a fiction maintained by brokers owning
stocks, which is a fiction maintained by DTC owning stocks, which is a fiction
maintained...) reminiscent of hallowed engineering kludges like TCP/IP. Its
especially interesting since, unlike data packets, stocks are _purely an
abstraction to begin with_ , but the systems around them have become
sufficiently complicated that it can't function without this kind of
structure.

A blockchain likely wouldn't help this issue either- high-speed traders would
inevitably be dissatisfied with blockchain latencies and re-invent brokers
that abstracted over blockchain transactions at a faster pace. These brokers
would wind up causing bureaucratic meltdowns and become managed by some
overarching structure similar to the DTC. Etc. If anything, a blockchain-based
system would become _more_ complicated, because it reduces the task of adding
another financial sub-mechanism to an engineering problem.

Something about large distributed systems of non- or imperfectly-cooperative
agents breed complexity. (There's probably already formalized versions of that
principle, but none are presently coming to mind.)

~~~
nostrademons
It reminds me of the last wave of distributed P2P filesharing, c. 2000-2005.
First we got Napster, which realized that by taking advantage of the
bidirectional nature of TCP/IP, we could distribute copyright infringement so
widely that it would become impossible to enforce. Then some techies at
NullSoft realized that you don't actually need a central server for discovery
_at all_ , you can broadcast the existence of and metadata about files
throughout the network for discovery, and put out Gnutella. Lots of excitement
followed, with many people of that era believing P2P would be the Next Big
Thing (among people working on this were such folks as Travis Kalanick of Red
Swoosh -> Uber, Mark Zuckerburg of WireHog -> Facebook, Friis & Zenstrom of
Kazaa -> Skype -> Rdio, and Robert Tappan Morris of Chord -> YCombinator).

And then folks realized that Gnutella was slow. Really slow, because folks on
transient dialup connections in Estonia were critical nodes in file discovery.
So they created the idea of super-peers, where the protocol was adapted to
realize that some nodes are more equal than others and route requests through
nodes with known-good connections. Then the next-generation P2P network
(BitTorrent) decided that it was easier just to rely on HTTP for metadata
exchange and went to centralized trackers, and the ecosystem that grew up
around BitTorrent realized branding & centralized search engines were
important for non-technical users and we got big torrent search engines like
ThePirateBay and Mininova.

Eventually, the market seemed to settle on convenience & performance over
distribution, and the real winners in the mass market were DropBox, Google,
and Apple. There's probably a lesson in there, but as someone who's been
fascinated by P2P technologies since high school and wasted a lot of time
thinking about the problem in college, the lesson is pretty depressing. If
hierarchy, market concentration, and single points of failure don't already
exist, they will be reinvented.

~~~
will_hughes
> Then the next-generation P2P network (BitTorrent) decided that it was easier
> just to rely on HTTP for metadata exchange and went to centralized trackers,
> and the ecosystem that grew up around BitTorrent realized branding &
> centralized search engines were important for non-technical users and we got
> big torrent search engines like ThePirateBay and Mininova.

Followed by those trackers getting taken down, we went from distributing
.torrent files over HTTP, to distributing magnet links and getting the torrent
metadata over DHT.

~~~
nostrademons
Yeah, Bittorrent has actually gotten _more_ decentralized in recent years,
both on the tracker front and on an increasing number of Torrent search
engines being small operations.

I just find it sad that apparently the only reason that things tend to get
more distributed is to evade some powerful authority. I wanted distributed
systems to become mainstream, because of their freedom, equality, &
competition benefits, but it appears that when given the choice, the
mainstream would rather play kingmaker and live under centralized overlords.

~~~
badloginagain
> Yeah, Bittorrent has actually gotten more decentralized in recent years

Only due to sustained pressure to keep it decentralized. If TPB was acquired
by Google and rebranded to 'Google Bay', bittorrent would be just another
Google fiefdom, and be as entrenched as Docs or YouTube.

>I wanted distributed systems to become mainstream, because of their freedom,
equality, & competition benefits

Unfortunately you're in the vast minority of people who understand what
distributed systems are, and how to connect them to anything as abstract as
freedom, equality, etc. Most people just want an easy-to-remember, easier-to-
use, not sketchy looking way to consume content. Profit-seeking companies are
simply better equipped and more motivated to provide that service than the
open-source community is, because they don't have to worry about freedom,
equality, and certainly competition.

------
vpribish
Levine is such fun to read!

The solution to the problem he ends up with seems pretty easy to me - this is
just counterparty risk:

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

------
Animats
No, a "blockchain" wouldn't help. It wouldn't help finding the holders of
three years ago. Also, putting all stock transactions for the entire market
into one blockchain would have huge traffic and synchronization issues. All
the players have to agree on transaction order. You'd have one giant file that
was petabytes long. If you used one of those schemes that "summarizes" the
blockchain, you wouldn't have an authoritative record of who owned something
years ago.

Bitcoin only works because transactions are few and slow transaction commit is
acceptable. Most schemes for scaling Bitcoin involve "off-chain transactions".

DTIC predates high-speed trading. It was designed when it was assume that if
you bought a stock, you'd probably hold it for weeks or months, not seconds or
minutes.

~~~
biscuitt
Also, with DTC there is a continuous net settlement system that basically nets
a brokers transactions together for the day and basically lets them know which
securities are credited or debited from their account and how much they need
to pay or receive for the day. It helps solve the issue of high speed trading
and nets each brokers obligations out at the end of each day. In its simplest
form if a broker had two customers and Customer A sold a share of AAPL and
Customer B bought 2 shares of AAPL. The CNS system would basically net those
two transactions together and calculates that the broker is going to receive 1
share and that they will pay x amount of dollars.

There is definitely room for improvement because sales don't settle till T+3
(however the settlement cycle is shortening to T+2 as of Sept 5th)

------
clort

      1. Mr. A owns a share of stock.
      2. Mr. B borrows Mr. A's share of stock. 
      3 .Mr. B sells the share to Mr. C.
    

well now, and the article says that Mr B borrows Mr A's stock _without asking
or telling him_ and sells Mr C a share.

I understand that this is the way it has worked for some time, but franky I
don't see how this is anything but fraud.

~~~
fhubert
Most broker agreements allow them to lend out your shares without your consent
or knowledge. It actually works against the long stock holders, but it does
help brokers to lower their customers' transaction fees.

Even worse is Naked Short Selling, a practise where short sellers don't borrow
the shares in the first place. This artificially creates shares and dilutes
the value of the stock being shorted. Although illegal since Reg SHO was
introduced, it still goes on due to lack of enforcement and comically low
fines - google "Reg SHO Violations".

Some public pension funds forbid the lending of the shares they own for
shorting. The minimal interest gained by lending shares is not worth the
downward pressure to the stock price created by the short which undermines the
asset value.

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

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

~~~
scott00
> Most broker agreements allow them to lend out your shares without your
> consent or knowledge.

This is straddling the line between completely untrue and highly misleading.
For cash accounts, brokers cannot lend your shares without a written agreement
allowing it. Although the standard agreement could include agreeing to a
securities lending program, this is not common in retail brokerage contracts.
Additionally, even if that clause was in your contract, they have to notify
you whenever they lend your shares. That right to notification CANNOT be
waived in the agreement. So if you have a cash account, no one is lending your
shares without your knowledge, period.

Even for margin accounts, the same requirements hold for fully paid
securities. So if you have a margin account, but you're not actually borrowing
any money, no one is lending your shares without your knowledge.

The only case where your broker might lend your securities without your
knowledge is when you have a margin account and you are actually borrowing
money.

~~~
ohgoshgolly
> brokers cannot lend your shares without a written agreement allowing it.

Just read my brokers agreement - they can indeed lend my shares without
notifying me for any purpose.

~~~
scott00
You didn't mention whether it was a cash account or a margin account, or if
there's an exception for fully paid securities. If it's a margin account, that
is indeed how it works for non-fully paid securities. If it's a cash account,
or there's no exception for fully paid securities, regulators will probably
not view that agreement favorably. You can file a complaint at
[https://www.sec.gov/complaint/tipscomplaint.shtml](https://www.sec.gov/complaint/tipscomplaint.shtml).
In my experience, they actually read and act on complaints. (Well, at least
small easy to investigate ones... ones requiring a lot of investigatory work
like the Madoff case are a different story.) The relevant regulation is 17 CFR
§240.15c3-3, paragraphs b(1), b(3), and b(3)ii. ([http://www.ecfr.gov/cgi-
bin/text-idx?SID=f07570958d348a3f75d...](http://www.ecfr.gov/cgi-bin/text-
idx?SID=f07570958d348a3f75d9c979186842b8&mc=true&node=se17.4.240_115c3_63&rgn=div8))

------
NelsonMinar
Eventual consistency strikes again.

------
rphlx
If you own an equity ETF in a retail brokerage, you actually own a claim on a
claim on a claim on a fund that owns a claim on a claim on a claim on
corporate stock which is itself a secondary or tertiary claim (behind debt
and/or preferred stock) on tangible and intangible assets.

It is a common & legal practice for the fund to lend its claim on a claim on a
claim on corporate stock to other parties, for a small amount of interest, to
help reduce its fees. See
[https://personal.vanguard.com/pdf/ISGSL.pdf](https://personal.vanguard.com/pdf/ISGSL.pdf)

If the potential for fraud and error in this system doesn't give you a bit of
a pause, it probably should.

~~~
KKKKkkkk1
And yet it works so much better than stashing a bar of gold under your pillow.

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

------
peterburkimsher
"That system has worked pretty well for 40 years." \- Wait, so I'm saving for
retirement (40 years from now) in a system that isn't even that old?

Somehow I don't trust it to still be around when I need to get money back.

------
mjevans
Ultimately I don't think it's fair to have BOTH short selling AND resolution
of sale price YEARS later.

I actually don't like either of those as features, but both together is
clearly incompatible.

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

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

~~~
ggchappell
Is it this?

[http://blog.arkency.com/2016/12/techniques-for-dealing-
with-...](http://blog.arkency.com/2016/12/techniques-for-dealing-with-
uncertainity/)

I haven't read it yet, but it looks worthwhile.

~~~
poorman
yes

------
Kiro
> took it private for $13.50 a share

How do you take something private? What does it mean?

~~~
drewkett
Taking a company private is when a company buys back all the publicly traded
shares, so that one can no longer purchase shares in the company on a publicly
traded market. Usually a company doesn't have enough cash to accomplish this,
so they take on additional debt or outside investment to afford buying all of
the publicly available shares.

~~~
Kiro
Thanks. So why didn't it happen at market price? How do you set a price if the
shares are public?

~~~
refurb
There are usually shareholder agreements in place that not every single
shareholder has to agree to a acquisition. Otherwise, you'd never be able to
acquire a company if just one shareholder, holding one unit of stock said
"no".

~~~
ptaipale
I think in most jurisdictions there is a law that enables a supermajority
shareholder to take possession by a forced buy-out of remaining stock, at a
"fair price". Thus a separate shareholder agreement is not necessarily
required.

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

------
blakesterz
That was way more interesting than I thought it might be. I really liked the
writing style, kinda snarky, but still explained well:

 _" "But what if ...," you start to ask, and I reply: Shh, shh. It just
works."_

~~~
sparky_z
Congratulations, today is your day to discover Matt Levine! Here are a few
good ones from the archives:

[https://www.bloomberg.com/view/articles/2015-07-14/banks-
for...](https://www.bloomberg.com/view/articles/2015-07-14/banks-forgot-who-
was-supposed-to-own-dell-shares)

[https://www.bloomberg.com/view/articles/2015-01-28/yahoo-
wou...](https://www.bloomberg.com/view/articles/2015-01-28/yahoo-would-rather-
not-pay-taxes-on-its-alibaba-shares)

[https://www.bloomberg.com/view/articles/2015-07-07/can-
you-r...](https://www.bloomberg.com/view/articles/2015-07-07/can-you-really-
game-index-funds-)

~~~
AceJohnny2
Don't forget "Oreos, Vomitoxin and the Price of Wheat" (with the best alt-URL)
[https://www.bloomberg.com/view/articles/2015-04-02/my-dog-
is...](https://www.bloomberg.com/view/articles/2015-04-02/my-dog-is-gluten-
free)

"Arbitrage Discovered" about the best/worse life insurance contract ever
(whether you're the beneficiary or the insurer), and includes possibly the
best financial punchline in an opening paragraph ever:
[https://www.bloomberg.com/view/articles/2015-02-27/arbitrage...](https://www.bloomberg.com/view/articles/2015-02-27/arbitrage-
discovered)

There were others, but I can't remember them offhand. The Vomitoxin article is
the one that put him (well, Bloomberg View really) in my feed :)

------
0x445442
Three words... Counter Party Risk

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

~~~
notahacker
There's nothing particularly "free" about being compelled by majority vote to
sell your shares at a price you don't agree to either. But, like executives'
fidicuary duty not to act against the interests of their shareholders before
mounting a takeover bid, it's baked into the rules of the market that
shareholders and executives have freely chosen to participate in.

If you don't accept that in the interests of better functioning markets the
law allows for both compulsory purchase of outstanding shares in the event of
a successful takeover bid and litigation against those accused of ripping
shareholders off by running down the value of the company before bidding on
it, the principles of free market capitalism allow you to not even think of
buying or managing a publicly owned company.

------
davidu
This is why eShares or someone like them will disrupt this entire ecosystem.

ComputerShares should be killed off too.

The entire system is amazingly broken.

~~~
cma
Voting rights aren't even accurately tracked. People who buy non-existent
shares from naked shorters get voting rights. Not too many people can naked
short anymore, but I think voting rights also come along when you buy from
people who shorted with borrowed shares, yet the people who lended the shares
still get voting rights too.

~~~
quantumhobbit
This is what bothers me. What stops someone from shorting and then buying the
shares (likely through an intermediary) in order to gain votes. Seems like it
would be enough to tip the vote in a close shareholder vote. I don't think
there is anything like a negative vote to balance it out as with negative
shares and dividends.

~~~
logfromblammo
It is very likely that the people who know they are casting a negative vote
will vote strategically for the opposite of the thing they actually want to
happen, thus turning their negative vote into an anti-negative vote.

I don't think that is resolvable unless each vote has an intrinsic auction
process wherein each vote is accompanied by a dollar-valued bid, which is what
it would cost for you to not vote your shares on that issue.

The costs are ordered, and the cost of the lowest N votes are sold to the N
anti-shares of open short positions, and so each short pays 1/N of the total
cost. Any vote not cast or cast-by-proxy or explicitly cast as "abstain" is
intrinsically a $0 bid for not-voting that share.

So if there are 10000 real shares in circulation, and 4000 shadow shares, and
4000 shadow anti-shares, then 14000 shares are eligible to vote, but the
shadow anti-share holders are also on the hook for collectively buying off the
proxy for the 4000 least-interested shareholders, and not-voting those shares.
If 2000 people don't vote or fail to assign their proxy, and the next-lowest
2000 bids amount to $80, then each short pays $0.02 per shorted share, and the
brokers distribute that to all the low bidders, including those who didn't
vote or assign proxy.

------
jcoffland
> There are little cracks that give us brief glimpses of the abyss below. Why
> not cover them up with a fresh, cool coat of blockchain?

This is a great example of Wall Street's continued but lessening snark towards
blockchain and vicariously Bitcoin. That much of the complex system you know
and revere and spent so long learning can be replaced by new fangled
technology is still a hard pill to swallow. The snark is a coping mechanism.

~~~
dsacco
As currently implemented, blockchain technology cannot scale to the
requirements of Wall St. It simply lacks the transaction volume. That's
leaving aside other computation and synchronization difficulties inherent to
distributing resources rather than centralizing them.

Furthermore, finance is not a homogenous group of luddites. Blockchains are
being actively explored in the industry. There's even a consortium of large
banks developing one - they're just doing it without all the decentralized
sugar that bitcoin has.

Finally, as others have mentioned in this thread, a blockchain wouldn't have
obviated this problem. The primary difficulty isn't identifying the owners of
shares from three years ago, it's in correctly finding them and arranging for
rightful reimbursement.

I think your characterization of the industry is misinformed and unfair.

~~~
jcoffland
> As currently implemented, blockchain technology cannot scale to the
> requirements of Wall St. It simply lacks the transaction volume.

There are so many implementations. Many of these can process orders of
magnitude more transactions than Bitcoin.

~~~
dsacco
How many orders of magnitude, exactly?

Bitcoin's maximum throughput is about 7 transactions per second. Superior
blockchain implementations can generally achieve ~30 transactions per second
for long term, effective operation.

Nasdaq's daily trades would require over 430 transactions per second. There
are tradeoffs to be made (such as block size or integrity), but it's
fundamentally not feasible to port our existing centralized ledger to a
decentralized blockchain ledger.

This is just Nasdaq. Imagine trying to scale a decentralized blockchain to
multiple markets, or to Visa's requirements, which are over 2000 transactions
per second.

There is a variety of research on this topic:

[http://fc16.ifca.ai/bitcoin/papers/CDE+16.pdf](http://fc16.ifca.ai/bitcoin/papers/CDE+16.pdf)

[http://www.tik.ee.ethz.ch/file/74bc987e6ab4a8478c04950616612...](http://www.tik.ee.ethz.ch/file/74bc987e6ab4a8478c04950616612f69/main.pdf)

[http://fc16.ifca.ai/bitcoin/papers/CDE+16.pdf](http://fc16.ifca.ai/bitcoin/papers/CDE+16.pdf)

~~~
jcoffland
Your numbers are nonsense. A blockchain can be made to handle any number of
transactions per second. It's simply a matter of increasing the number of
transactions per block, the frequency of the blocks or both. The trade off is
in the increasing storage requirements. The Bitcoin blockchain currently sits
at just over 100GiB. This is an insignificant amount of data for a bank.
Furthermore, you can reduce the blockchain storage requirements through
checkpointing. Every so many blocks the participants in the blockchain can
agree to and cryptographically sign the latest balance sheet. All previous
transactions can then be archived. IMO, the Bitcoin Core developers shouldn't
be focusing on anything but checkpointing right now.

~~~
dsacco
Do you have any evidence to support what you're saying? The research I cited
directly contradicts your claim.

You cannot scale up blockchains arbitrarily without making fundamental
tradeoffs to increase their performance (for example, increasingly
centralizing it).

~~~
jcoffland
It is self-evident.

Increasing the block size may indeed make a coin more centralised but we are
talking about using cryptocurrency to replace outdated systems among banks,
government agencies and brokers. In this case, it's not unreasonable to assume
that the participants could afford to dedicate sufficient storage space to
handle high transaction rates. There is no fixed limit on the transaction
rate.

------
Mathnerd314
tl;dr cloud computing has yet to reach stock offerings.

Probably too much regulatory burden for a startup though:
[https://www.sec.gov/divisions/marketreg/mrclearing.shtml](https://www.sec.gov/divisions/marketreg/mrclearing.shtml)

~~~
dsacco
The "cloud" is someone else's computer. What are you actually suggesting that
would have preempted this issue? The DTC's issue was one of volume, which is
certainly a technological issue, but what precisely would "cloud" computing do
about it?

By design it is supposed to be centralized, and it would likely be out of the
question for the DTC to utilize the computing resources of a private company
(especially one for which it owns all or nearly all the extant shares).

~~~
Mathnerd314
The problem is the chain of responsibility: company -> DTC -> brokers ->
investors With "IPO as a service", the chain of responsibility is instead:
cloud-IPO -> company -> investors Because of centralization, the DTC isn't as
accountable to the company as a cloud service would be.

I guess there are actually companies in the space, e.g.
[https://www.startengine.com/](https://www.startengine.com/)

------
chollida1
In before someone mentions blockchain as a solution (IBSMBAAS).

There already exists a database that works and has been well tested over the
past 30+ years of securities settlement.

The issues was the database wasn't updated properly. So if a blockchain was
used ti would stand to reason that that also wouldn't have been updated
properly

~~~
drcode
The difference is with a blockchain system every individual actor pushes in
the transactions that update the data, whereas with the existing system you
have to trust an arbitrary central party to perform the updates.

The problem with existing systems is that the incentives of the entity owning
the asset and the entity responsible for updating the database are not
aligned.

~~~
notahacker
If you don't trust the company you're investing in and the securities
regulator to record things faithfully on a non-distributed ledger and uphold
the law, update privileges to and mutability of the transaction record is the
_least_ of your problems when it comes to investing.

