
Mark Cuban:  What Business is Wall Street in? - fraXis
http://blogmaverick.com/2011/08/08/what-business-is-wall-street-in-2/
======
T_S_
Simple solution. Penny a share transfer tax for all trades. Corresponding
amounts on bonds and other instruments. Watch the amazing reduction in volume
and volatility. Then watch the return to focus on value trading.

Like that idea? Next, open up public companies books. Not in the formal but
phony SEC/GAAP way. No, I mean realtime journal entries. I will do the
accounting myself. You can too. Link the trading tax to how often the company
updates its numbers. Want more liquidity for your stock? Give more
information.

Still on board? Ok, now if a company releases forecasts, they must release the
model they used to generate the forecast. Yes, the code. Doesn't matter how
simple or complex. Bullshit forecasts will be self-evident. Data for better
ones will be more available.

Now all those things would make finance productive again by putting the focus
back on capital allocation and moving it away from trading, speculation and
lies. Make regulators focus on enforcing real transparency, since they don't
know how to regulate behavior. This takes away the upside from the
regulator/industry revolving door. It would be a great world for analysts and
investors.

In olden days (1980) all this would have been technically infeasible. Now we
have the computing power to handle it.

~~~
jrockway
_Penny a share transfer tax for all trades._

What's a "share"? Equities are one of many financial markets, but not the only
one and not necessarily the most important. People trade bonds, treasuries,
foreign currencies, commodities, interest rates and various derivatives on top
of these securities: equity options, FX options, interest rate swap options,
FX forwards, etc., etc. How would you tax options contracts? Tax when
exercised? But you wanted it to be a trade tax, so should it be a dollar per
standard contract?

Your model is too simple and does not reflect the reality of the financial
markets. And anyway, if there's one thing banks are great about, it's passing
on the fees to their clients. A one cent per-share transfer tax doesn't mean
Wall Street is out of business. It means you won't have enough money in your
401k to retire.

 _Still on board? Ok, now if a company releases forecasts, they must release
the model they used to generate the forecast. Yes, the code. Doesn't matter
how simple or complex. Bullshit forecasts will be self-evident. Data for
better ones will be more available._

Why do companies have to have "a model"? You wouldn't ask da Vinci for the
"code" behind the Mona Lisa; why should accounting be automatically less
creative than painting? All regulations will do is force companies to get
money from source other than a public offering -- private investment, bond
issues, etc.

Anyway, I'm not saying that taxing trades is a bad idea, I'm saying that your
idea doesn't make much sense in the real world. Communism is a good idea. On
paper.

~~~
Cushman
I'm with you aside from this: "why should accounting be automatically less
creative than painting?"

I'm sure you don't mean what it looks like, but I can't imagine what that
could mean.

~~~
jrockway
Why can't your "gut" be involved in forecasting the success of your company?
People often come up with the right answer without knowing how; making them
write down every assumption they made while coming up with an answer would
make coming up with an answer impossible.

The real world is not 9th grade math.

~~~
Cushman
People often come up with the wrong answer without knowing how, too. They just
forget about those times.

It's been well documented— your perception of the "real world" is heavily
distorted. That's why we _have math_ — to figure out the right answer despite
human biases.

------
dkarl
_It is getting increasingly difficult to just invest in companies you believe
in._

This is a key point, and he doesn't justify it at all. Are value investors
negatively affected by someone making a penny when the value investor makes a
$1000 trade? Or are they positively affected by liquidity? He is either
unaware that it's a controversy with plenty of history, or he prefers to gloss
over it. He seems bothered by the fact that there's a lot going on besides
simple value investing, as if any other activity _must_ be detrimental to the
operation of the market. He seems to be implying that the other activities on
Wall Street are preventing stock values from reflecting investors' rational
estimates of the value of the underlying businesses. _Seems_ to be, I can't be
entirely sure. If that's his point, he needs to muster some evidence, because
plenty of people claim the opposite.

 _Individual investors and the funds that just invest in stocks and bonds are
not going to crash the market._

Individual investors are very much among those who panic and sell when the
market goes down, or who establish stop-loss orders with their brokers that
cause market losses to irrationally cascade. Plenty of individual investors
are eager to turn into gold bugs at the faintest whiff of a downturn. If
amateur investors or stock analysts are better at value investing than
"traders", they should eat the traders' lunch when the market panics. If it's
the other way around, then the traders aren't the ones crashing the market.

~~~
yummyfajitas
He also seems to miss the point that if it is more difficult to invest in
value companies, it's because the market is doing a better job of value
investing.

I.e., once upon a time, Promising Tech, Inc. might have been a great value
play. This means that the stock price of PT was too low. In today's market,
the stock price of PT is set at a level where you don't know whether to buy or
short - that is to say, the stock price of PT is just right. PT is getting
exactly as much money as they deserve.

Sounds like Cuban is just annoyed that Wall St. is doing a better job than he
is.

~~~
MikeCapone
Are you saying that the Efficient Market Theory (EMT) is correct?

The market is mostly efficient, but there are still many efficiencies that can
be exploited by people who do their homework and are ready to stick around
through volatility and/or wait for catalysts.

~~~
yummyfajitas
I'm saying that if Cuban is correct, the market is closer to efficient than it
was before and Wall St. is doing a better job than it used to.

~~~
MikeCapone
I kind of doubt it. Just in the past decade we've had the tech bubble, the
housing bubble, and now this massive correction based mostly on panic.

The market is mostly controlled by greed and fear, as always, and that makes
it overshoot in both directions.

------
lotharbot
Here's my response from the HN discussion a year ago [0]:

\-----

If Mark Cuban thinks the market is now all about exotic derivatives rather
than buying stock in companies you believe in, he's listening to the wrong
people. Commission-based brokers talk about exotic derivatives; Warren Buffet
still talks about buy-and-hold.

The biggest wins and losses in day trading will come from exotic derivatives
simply by their nature: they're highly leveraged bets. Those firms that create
the vehicles to make those bets aren't "hackers", they're "Vegas". You ask for
a bet against the housing market or for cattle, they set up a structure to let
you make that bet, and you play the odds -- and you might beat the other
betters in the market over the short term, but it's the house (taking its
percentage off the top) that always wins long term. Mark Cuban is right to be
uncomfortable playing that game.

Meanwhile, people like Warren Buffet continue to look for healthy companies
that are underpriced and buy into them for the long term. Day-to-day the
market might be driven by short-term bets, but over the course of 3 decades
it's still driven by the fundamental health of companies. If anything, those
who care about _"the performance of specific companies and their returns"_
benefit from the fact that occasionally, as a result of day traders' bets,
healthy companies' stocks get sold at bargain prices.

If you try to play Vegas' game, you'll probably get burned. But if you stand
back, watch the game, and buy when their game creates a bargain price on good
long-term stocks, you stand to get very solid returns. \-----

[0] <http://news.ycombinator.com/item?id=1332422>

~~~
Tichy
What I don't understand is: why doesn't evolution weed out the Vegas types?
Where does the steady new influx of money come from? Or was it just the
housing bubble that provided the money (in the end even tapping into
retirement funds of iceland)?

Maybe now we have reached a point where most Vegas types will be eliminated.
Perhaps not a bad thing? Except they are probably just poor individuals who
were too lazy to think about finances for themselves. The first thing I
learned about investing is "don't invest in anything you don't understand",
which pretty much excludes complicated investments constructs, and is not that
hard to digest.

But what would be the solution? Forbidding "gambling" to individuals would
possibly result in communism, as it would imply the state would have to
dictate the investments.

~~~
lionhearted
> What I don't understand is: why doesn't evolution weed out the Vegas types?

People have short memories.

Seriously, that's the answer.

~~~
aero142
Because USG bails them out when it blows up.

------
snagage
Being a private investor, I agree a lot with what Cuban is saying.

Strangely enough Australia, which Cuban suggests he's been investing in, has a
few investor friendly (or trader unfriendly) regulations built in.

1\. Hold a stock for over a year and capital gains tax is halved.

2\. Tax (franking) credits are given out when dividends are paid. This stops
double-taxing and encourages companies to pay dividends and investors to
demand them.

3\. You must hold a stock for 45 days to take advantage of the franking
credits if you accumulate more than $5k worth.

~~~
cturner
That's a rose-tinted view. All of the things you list as investor-friendly
involve exceptions whereby the government fails to swipe money from you.

The effect of policies that tax most investment scenarios is to discourage
investment because it reduces your options. Consider this situation: you think
that the drop in the ASX is unjustified and want to speculate on this. You're
discouraged from doing it: even if you pick it right and provide liquidity
when the market is dropping, they'll tax your upside when you to exit. That
is, unless they sit on it for those periods, which discourages the first
interaction because on that kind of trade you're not necessarily going to want
liquidity tied up for a long period.

You get all the risk, but in addition the government eats into your upside.

A quirk of the Australian arrangement - non-residents aren't subject to
capital gains tax. This puts them in a better position to supply liquidity in
opportunity times, which some people consider the current market to be.

------
ryanisinallofus
"...no capital gains tax on any shares of stock (private or public company)
held for 5 years or more, and no tax on dividends paid to shareholders who
have held stock in the company for more than 5 years."

Wow. That would change Wall Street in a hurry. I don't know the full macro
economic effect this would have on our system but I know the effect it would
have on my personal investment.

"And solutions won’t come from bureaucrats trying to prevent the traders from
hacking the system."

This is obvious to anyone... except lawmakers unfortunately.

Damn. I think of Mark Cuban as a one hit wonder from the golden ages who
freaks out at basketball games but this article was pretty damn intriguing.

~~~
angstrom
I really wish this wasn't considered ground breaking. The same has been spoken
of CEO compensation vesting rather than guaranteed compensation packages.

The idea of separating measured performance from compensation is a joke.

~~~
msg
What metric could you come up with that wouldn't be gamed? Other than say,
overachieving profit targets. The CEO has a lot of latitude to screw the
company for their benefit.

------
Be-The-Water
I think he is right but the biggest issue is that Wall Street has become
solely a place for 'transfer of wealth'. They do not care about value or know
what it is, i.e. people like Warren Buffet stepping in recognizing value and
investing when the price does not match the value.

But I think the biggest problem is the market is so huge and the more money
you feed it the more irrational it gets, doesn't matter wether algorithms or
humans are doing the trading.

Irrational trading creates bubbles and they gamble value away until the bubble
burst. And even after the bubble burst its just a reset to the market.

I do not know where it is headed but I think one day countries will realize
that they were better off with out mr.market because when the value companies
build are traded away and in turn the middle class/country suffers, wall
street walks away with the money, i.e. the house always wins in the end.

------
yason
_It is getting increasingly difficult to just invest in companies you believe
in._

Uh, I think it goes:

Buy stocks when it's cheap in comparison to your valuation metric and hold.
Collect dividends, or if the stock becomes too overvalued, sell for profit.
Start from beginning.

What did I miss?

~~~
javanix
You missed the part where creating that valuation metric is becoming harder
and harder due to an increasingly chaotic and fast-moving market.

~~~
dkarl
If you're just trying to predict how a stock's price will change in the next
couple of weeks or months under whatever market conditions happen to prevail
over that time period, that's speculation. That's what the vast majority of
individual investors engage in -- "I think the price of this stock will go up,
so I'm going to buy it." Arguing that speculation is hard in a chaotic market
gets no sympathy. Actual value investing means you think you have an idea of
what shares in a particular company are worth, plus faith that the market
price of a stock will reflect that underlying value over the long term.
Arguing that value investing is affected requires arguing that market chaos
has the power to prevent market prices from reflecting underlying value over
the long haul. That's a pretty big claim and requires some justification.

~~~
three14
Doesn't gold behave that way? Market forces prevent gold from reflecting the
value of using gold for jewelry or industry or whatever else other than
playing the market. It seems like an unexceptional claim that there are other
financial instruments that are similar.

~~~
dkarl
Gold isn't a good example of any market principle because of its historical
and symbolic significance. There's a reason the term "gold bug" exists but not
"wheat bug", and there's a reason it was a perfect match for Glenn Beck's
theatrics. Who hasn't had a conversation in a bar about the price of gold? Who
_has_ had a conversation in a bar about the price of sugar or aluminum? Gold
is a magnet for all kinds of emotion, from paranoia to get-rich-quick mania.

~~~
three14
Gold is the longest term example I can think of, but it's hard to believe that
the stock market game is not a significant percentage of the price of AAPL and
that it's solely fundamentals. Stocks in general get that same goldbug
enthusiasm when people plan for retirement - buying stocks is partly based on
fundamentals, but partly an act of faith in the game.

Are you asserting that almost everything is priced according to fundamentals
over the long term, with the single exception of gold?

------
cpeterso
At a very basic level, I don't understand the stock market. A private company
can raise capital through an IPO. But what are the investors _really_ buying?
The company might pay a dividend, but many don't. Investors can purportedly
elect the board of directors, but in reality, few investors have any
influence. So what (liquid) investment have the shareholders bought that is
actually appreciating in value?

~~~
adamjernst
The fact that most companies don't pay a dividend is really a tax hack. Before
1980, most companies did pay dividends.

When the tax rate on capital gains (now 20%) dropped far below that for
dividends (30%+), companies realized they could spend the same amount of money
buying back shares. This should drive up the share price by the same amount as
an issued dividend (do the math). The difference is that investors can sell
shares and only pay 20% instead of 30%+.

~~~
orangecat
"Qualified dividends" are taxed as long-term capital gains, or not taxed at
all if you're in the 15% or 10% bracket:
<http://en.wikipedia.org/wiki/Qualified_dividend>. Although apparently the
reduced rates will expire in 2012 unless they're extended again.

~~~
yuhong
Not to mentioned that this only started in 2003, which was of course too late.

------
troyastorino
> To traders, whether day traders or high frequency or somewhere in between,
> Wall Street has nothing to do with creating capital for businesses, its
> original goal. Wall Street is a platform. It’s a platform to be exploited by
> every technological and intellectual means possible.

Just because the day to day work of traders on Wall Street has been abstracted
away from it's original intention doesn't mean that it doesn't continue to
serve that function. When working in any large system, your focus can be
absorbed by whatever smaller task you are working on, and you can loose sight
of what your piece of the puzzle does. When working on a software team of many
hundreds of developers, it's easily possible that the code you are working on
is not at all specific to the problem you're solving. That doesn't mean that
your work isn't helping to solve the problem.

The financial system is very complex, and I won't pretend to have the
expertise or knowledge to explicitly explain the service that high frequency
traders, for example, are providing. The way Wall Street currently operates
might not be the most efficient system for allocating capital. But I don't
think that you can immediately write off modern trading on the basis that it
doesn't directly deal with the original purpose of Wall Street.

------
chopsueyar
Remember your roots, Cuban!

[http://www.nytimes.com/2000/03/05/magazine/the-idled-
workaho...](http://www.nytimes.com/2000/03/05/magazine/the-idled-
workaholic.html)

------
veyron
I don't believe that Wall Street is well-intentioned in 99.5% of its actions,
but still Wall Street creates capital for business: when a company goes
through its motions to file and launch an IPO, the banks are the ones who
commit to finding X investor dollars. It's easy to ignore the difficulties of
that process, given the glut of VC firms champing at the bit to flood the next
startup with cash, but it still plays a role.

~~~
gamble
The difference between Wall Street today and a century ago is the availability
of capital. A century ago capital was much more scarce and was mostly held by
wealthy private (mostly European) individuals. The stock market was one of the
few ways for American companies connect with those people and fund expansion.

Capital is anything but scarce today. Where a century ago the vast majority of
people bought savings bonds, if they were wealthy enough to save anything,
today the majority of adults need to own stock to fund their retirement.
(Itself a novel concept) In addition, vast amounts of capital are held by
private equity groups, pension funds, sovereign wealth funds, etc - all
chasing the few opportunities for outsized returns.

At some point we reached an inflection point where the need of capital to
obtain a return exceeded the demand for capital. Since then the overriding
goal of the financial industry has been to obtain those returns by taking them
from another player. The original function of providing capital for corporate
expansion is almost irrelevant.

------
kevinpet
The exchanges operate for the benefit of the listed companies. NASDAQ and NYSE
can compete on features and trading rules. Leaving aside the problem of
company officers trying to screw the stockholders (I'm not a fan of stock
classes that give different voting rights), companies will list wherever the
rules give the highest value to their current shareholders. And the highest
value to the shareholders is provided by the market with the parasitic HFTs.

I don't understand. I though Mark Cuban was a fairly sophisticated investor,
but he seems to be marveling that Australia taxes short term capital as
ordinary income and LTCG at a lower rate, which is of course exactly what the
US does.

~~~
astrec
What you describe applies to investors. He's "marvelling" over the parallel
tax system for traders where capital income is treated as revenue.

------
Astrohacker
It's odd to me that he thinks Wall Street was ever in the business of
"creating capital for business". The only thing that can create capital is
producing more than you consume and saving the difference. Now I have nothing
against trading, speculating, or whatever else most people on Wall Street do.
However, I think fractional reserve banking, which creates new money, is an
extremely destructive practice equivalent to counterfeiting. Presumably it's
fractional reserve banking that he thinks "creates capital". I recently gave a
highly upvoted description of why fractional reserve banks are a scam here:
<http://news.ycombinator.com/item?id=2844528>

It's a myth that banks create capital by employing fractional reserves. All
they do is take purchasing power from some people, give it to themselves, and
then charge a toll (interest) to the people they loan it to. It's unethical
and it should be illegal. Unfortunately this isn't going to change until
people stop believing the myth that printing new money is the same as creating
capital.

~~~
rorrr
> _The only thing that can create capital is producing more than you consume
> and saving the difference_

Here are a few ways to create capital without producing anything:

1) Buy wholesale, sell retail

2) Buy in area A, sell for more in area B.

3) Buy all of product X, create a monopoly, sell at whatever price you want

4) Buy product X, hold until price goes up (or manipulate the price), sell

5) Steal

~~~
Astrohacker
Stealing doesn't create capital. It moves it. Your points 3 and 4 also
indicate you don't seem to understand the difference between creating capital
and moving it.

As for buying and selling stuff for a profit, you may not be producing stuff
with your own hands, but you are enabling more production to occur.

~~~
rorrr
By that "logic" the only way to produce capital is to print money. Everything
else is moving it.

~~~
kruhft
Or to borrow it from a bank. See "The Mystery of Banking".

------
throwaway1129
HFTs and hedge funds are very different entities. If you want to blame someone
for man-made crashes, blame the people with large capital outlays, who are
forced to unwind their positions when the equity goes down (or up) enough,
thus further exacerbating the movement.

------
jasonzemos
Cuban's tl;dr point is that Wall Street has become a simulacrum. Now go read
Baudrillard.

------
known
Govt will not impose new taxes. HNIs and Corporations are bullying Govt that
they'll _permanently_ move their businesses to low cost countries.

------
ulf
Wall street just followed a general theme among banks. Once upon a time they
were institutions built to control capital flow, from where it was available
to where it was needed, to provide some social value by allowing enterprises
to thrive. But apparently the credit interest was not a big enough margin, so
they decided to do all kinds of other shit, investment banking was born. Which
mostly makes rich people richer, without any kind of social benefit.

Wall Street just followed that model.

------
Jarred
Arguably, they're in the business of making money (and nothing else).

------
levigross
I don't mean to praise wall street but Mark Cuban made his initial cash from
stock options the same things the people on wall street trade. So he knows
very well what businesses they are in.. They made him rich!

------
entrepreneurial
They aren't "hackers", they're engineers

~~~
gamble
Speaking as an engineer, no one in the financial industry remotely qualifies
as an engineer. A real engineer applies physical laws to create a product with
some certainty of functioning properly. Wall street 'engineers' create
products that don't obey physical laws - and on a theoretical level, probably
_can't_ , since their very existence changes the rules of the market. The
financial crisis also demonstrated that even the people creating these
instruments don't understand them, much less the customers... and none of them
particularly care if spectacular failures results, as long as they aren't the
ones left holding the bag.

~~~
starpilot
That would also apply to software engineers. What physical laws do they apply?

~~~
gamble
Most/all people who call themselves software engineers are not engineers. I'm
not convinced that software engineering itself is actually a field of
engineering, for that very reason. At most universities, software engineering
is just a weak-sauce mashup of basic engineering classes, computer
engineering, and compsci. I don't believe there is any agreement about the
basic principles of software construction.

Just because people call themselves software engineers and schools teach it as
a discrete program, doesn't make them true engineers. There are plenty of
schools that offer 'financial engineering' programs. IMO, programmers have a
lot more in common with traditional artisan trades than engineering. They call
themselves 'software engineers' because skilled technical workers prefer to
associate with their cultural equals in an established white-collar profession
than blue-collar craftsmen.

~~~
zmanji
I disagree, by definition in most jurisdictions, being an Engineer is being
accredited by the local Engineering body. In Canada the Canadian Engineering
Accreditation Board [1] accredits undergraduate programs that teach the field
of Software Engineering. I attend such a program at the University of Waterloo
[2][3]. After I graduate I can write the exams offered by Professional
Engineers Ontario [4]. I think this makes Software Engineering a field of
Engineering.

In regards to what is taught at universities, my program involves courses on
Engineering Design, Computer Engineering and Computer Science, but it also has
classes on what constitutes Object-Oriented design, HCI, etc. I think those
courses are more than enough to teach students on the basic principles of
software construction.

Also, what do you define the "basic principles of software construction" to
be?

[1] <http://www.engineerscanada.ca/e/index.cfm> [2] <http://uwaterloo.ca/> [3]
<http://www.softeng.uwaterloo.ca/> [4] <http://www.peo.on.ca/>

~~~
gamble
I guess we'll have to agree to disagree. I don't see accreditation of
engineering programs as proof that software engineering is a legitimate field
of engineering.

The problem for me is that there don't seem to be any basic principles of
software construction. Most programs just teach a selection of software
development fad methodologies. A decade ago, most programs taught some
variation of waterfall development. Now they tend to teach some variation of
agile development. As far as I can tell, there's no scholarship to support one
method over the other - it's pure fashion and industry demand. (The decline of
academic research on software construction methods since the 80s is another
problem) Look at software engineering programs in another ten years and I'm
sure you'll see a different mix of classes emphasizing the business trends of
the day.

In comparison, you could look at the curriculum for almost any electrical
engineering program from thirty years ago and you would see almost the same
classes as a modern program: circuit theory, E&M, electric machines, control,
communication systems, etc. The only significant difference would be the
addition of courses on software and digital electronics.

~~~
AppSec
Interestingly enough, the wiki for Engineering uses the following:

 _Engineering is the discipline, art, skill and profession of acquiring and
applying scientific, mathematical, economic, social, and practical knowledge,
in order to design and build structures, machines, devices, systems, materials
and processes that safely realize improvements to the lives of people._
(<http://en.wikipedia.org/wiki/Engineering>)

By using art, it would indicate that process is not necessarily needed for
something to be classified as engineering. The fact that software engineers do
use mathematical concepts (similar to how a civil, mechanical, or chemical
engineer does) to build systems would make it an engineering discipline.

Disclaimer: I am a software engineer and I don't look at myself as any more or
less of an engineer as any others.

