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The Long-Term Stock Exchange Is Worth a Shot (bloomberg.com)
238 points by dsri on Oct 16, 2017 | hide | past | web | favorite | 132 comments



This article misses the reason why short term investors are potentially harmfull. The author writes: "One basic and important implication of this theory is that, if you hold a share of stock for a minute, you will want the company to increase its long-term earnings power during that minute. If, during your minute of ownership, the company announces "we have sold all our factories and ruined our productive capacity, but we booked a big profit for this minute," you will be sad. "

This is so simple it is wrong. The truth is, that the short term investor cares how PUBLIC KNOWLEDGE changes during that minute. For example, if Kobe steel holds off on making a fraud scandal public during that minute, that's a good thing, even if keeping the fraud skandal secret will hurt in the long term. The short term investor wants the IPhone X to be announced NOW, even if holding off on the announcment could give apple a leg up against the competitors. The short term investor wants toshiba to announce they've got a good deal selling off their memory business NOW, even if that makes it harder for toshiba to improve the price they get even further with a bidding war.


Exactly this. I'm observing how a midsized company shares fluctuate completely unrelated to the progress of our development efforts and actual relations and sales to customers. Product A was frozen and discarded after 2 year intense dev cycle (a failure), product B is not faring well in the competition, but we announced product C that may or may not succeed in 1+ years on a major tech show - shares go up. Next year product D is succeeding immensely, record contracts are signed with biggest customers in the world, product is ahead of competition - shares are down, because nobody knows.

tl;dr - PR is everything, often shadowing actual hw or sw "stuff" people make, and HFT capitalizes on this.


PR is nothing. The institutional investors who actually move stock prices barely even look at it. Humans try to make sense of random events by looking for causality, but ascribing stock movements to single factors is often like ascribing weather changes to animal sacrifices.


You have a good point but remember that there are other factors that affect stock price completely external to the company -- the biggest one is interest rates.

Also, external happennings in other companies such as competitors, purchasers, suppliers have an impact on your company. So those should technically feed a model some factors (and in fact they do at hedge funds.)


Yes. The original premise of the article is:

> The value of a share of a company is equal to the market's expectation of the present value of its future free cash flows.

Emphasis on "expectation". It may change wildly in the short term; reasons include hype, speculation, and news that has only short term relevance.


I think you're right that we don't really understand yet the implications of this idea. For instance, it's not just expectation that should be emphasized, it's the discount rate at which the present value is performed. Conditional on the expected value of the earnings over the future, one can calculate the implied discount rate given a company's price (equity risk premium). When this value is higher, the market is effectively more present-oriented, they care less about future cash flows. And vice-versa. Would the equity risk premium fall under this type of market? Would that mean lower equity prices? I don't know.


What I don't understand yet, is why the company would care about the short term investor. Sure the short term fluctuations are high. But on the long term they should average out based on average long term value of the company. Shouldn't the CEO just ignore the stock price swings?


Yes. Short-term investors get unfairly blamed for problems that are caused by incompetent CEOs.


Interesting idea, but seems impractical because it causes very weird incentives:

* Can a company exist in both the "normal" exchange and the "long term" exchange at the same time? If so, can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time?

* Many (most?) consumer-facing brokerages make a significant portion of their revenue by lending out their customers' securities. Voting rights transfer to the borrower of the security. Would this be the same in a long-term exchange? If yes, then this will break the existing revenue model. Online brokerages will need to make the money elsewhere (likely by charging higher trading fees), and this will push consumers back into existing exchanges with low cost trades.

* How long until there is a secondary market for buying and selling voting rights?


> Can a company exist in both the "normal" exchange and the "long term" exchange at the same time?

The fact that a company is listed on multiple exchanges doesn't mean it has different sorts of stock for each exchange. This real subject of this article is tenure voting, which is an aspect of the stock (not the exchange). The reason exchanges are mentioned is that exchanges have rules about the sorts of stock they will list. But to have tenure voting, you only need one exchange to allow out (like the proposed long-term exchange). And most stocks aren't cross-listed to multiple exchanges anyways.

> How long until there is a secondary market for buying and selling voting rights?

Yes, this strikes me as the obvious problem. The equilibrium is for third party to buy and hold all the tenure-voting stock and then sell stakes in the dividends of the company plus allowing voting by proxy. Basically, the third party becomes an exchange, and all stock effectively has maximal tenure.

This problem is so obvious that it must have been addressed by the people proposing this.


>Yes, this strikes me as the obvious problem. The equilibrium is for third party to buy and hold all the tenure-voting stock and then sell stakes in the dividends of the company plus allowing voting by proxy. Basically, the third party becomes an exchange, and all stock effectively has maximal tenure.

You've essentially just described the current system. Most shares on NASDAQ and NYSE etc. are technically held by Depository Trust Company via its nominee, Cede & Co. [1]. Through a complicated set of regulatory and contractual arrangements, public companies, the beneficial owners of their stock (i.e. the investor at the end of the chain) and each intermediary (banks and brokers, etc.) all maintain a sort of legal fiction that the shares are "owned" by Joe Schmoe, even though all he really has is an attenuated set of contractual rights that flow through the various intermediaries between him and "his" shares held by Cede.

Joe Schmoe does not technically or legally own those shares. Cede does. Believe it or not, you were spot on in predicting that the third party would allow "voting by proxy." That's exactly how Joe Schmoe (i.e. all of us) must vote our shares if we want to participate in a stockholder vote. We can't just show up at the meeting (or fill out the company's proxy card). You send a "voting instruction form" telling your broker how you'd like to vote, and your broker then tells Cede & Co. how to vote your shares at the stockholder meeting.[2]

To address your specific point, tenure voting would surely be based on the tenure of the beneficial owner (i.e. the person at the end of the chain who gets to vote) not the nominee holding the shares in "street name" on the beneficial owner's behalf. This might take some reworking of the arrangements between the brokers, DTC, clearinghouses, etc. (likely needing to be be built into the financial systems that log transfers and ownership, if not already provided for) but would not really pose a significant barrier.

[1] https://www.bloomberg.com/view/articles/2015-07-14/banks-for... [2] https://www.sec.gov/spotlight/proxymatters/proxy_materials.s...


> tenure voting would surely be based on the tenure of the beneficial owner

This only works if the intermediate holder of the stocks is coordinating with the exchange and/or company. The problem is that there is a financial incentive for someone else who is not working with them to buy up the stock, immediately resell it with the normal guarantees (that they will pass on dividends, allow voting by proxy etc.), but not pass on such re-sell information to the exchange/company.

Does the exchange/company have some sort of a right to prevent resale unless tenure information is tracked? Naively Id guess that they can't, or otherwise they's try to prevent stuff like short-selling too.


> The problem is that there is a financial incentive for someone else who is not working with them to buy up the stock, immediately resell it with the normal guarantees (that they will pass on dividends, allow voting by proxy etc.), but not pass on such re-sell information to the exchange/company. Does the exchange/company have some sort of a right to prevent resale unless tenure information is tracked?

Yes, absolutely. That same financial incentive already exists in all sorts of variations. As a result, brokers (i.e. your hypothetical entity that gobbles up all the shares and then loans them or sells economic/voting rights) must be registered with FINRA and are subject to very extensive regulations, including rules from FINRA, the SEC and the public exchanges.

For an example, look at how long and complicated the NYSE rules are, mostly involving member organizations like brokers (click on "Operation of Member Organizations" or any of the other subheadings at the link below and then see, for example, rule 402):

> .30 Securities Callable in Part.—Member organizations which have in their possession or under their control bonds or preferred stocks of issues which are callable in part, whether specifically set aside or otherwise, shall identify each such bond or preferred stock so that their records shall clearly show for whose account it is held, except in the case of [two limited exceptions]

http://wallstreet.cch.com/NYSE/Rules/


> As a result, brokers (i.e. your hypothetical entity that gobbles up all the shares and then loans them or sells economic/voting rights) must be registered with FINRA and are subject to very extensive regulations, including rules from FINRA, the SEC and the public exchanges.

I still don't get it, length and complicatedness of rules notwithstanding. Why can't a holding company not subject to these regulations simply buy from the broker and then resell? Why can't I personally buy and hold a bunch of shares and then sell stakes to people in my office completely off the books? What if I only sell a partial stake (e.g, 90% of dividends and 40% of voting rights)? Repackaging/Securitization happens all the time and in a million forms; is every allowed form simply listed exhaustively in a broker contract somewhere?


Not your fault--I didn't make this clear enough: there is absolutely no way to legally engage in what you proposed without being a qualified securities professional who is very much "subject to these regulations" from, e.g., NYSE, NASDAQ, FINRA and the SEC.

You can't just buy shares from a registered securities professional (e.g. broker, dealer or underwriter) and then start engaging in "off the books" securities transactions. That is, unless you don't mind a lengthy prison sentence.

The activities you are describing (buy securities and then sell "stakes" and/or profits interests and/or voting rights) fall very squarely within many of the various definitions of securities professional required to register and comply with these extensive regulations. For example, see definitions 11 and 12 here [1]. Also note that the definition of "sell" includes selling any interest in a security--not just selling an entire security outright.

> (11) The term “underwriter” means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission. As used in this paragraph the term “issuer” shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.

> (12) The term “dealer” means any person who engages either for all or part of his time, directly or indirectly, as agent, broker, or principal, in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person.

Here's just a random example from Google of the penalties your hypothetical "off the books" broker could face [2].

[1] https://www.law.cornell.edu/uscode/text/15/77b

[2] http://companycounsel.net/2010/01/21/you-dont-have-to-know-t...


That's very interesting! Is it possible to buy some stock "for real" and actually own it alongside others who use the DTC system? What are the reasons for this strange system existing?


Since most stock ownership has become a digital ledger, there are incentives for consolidation toward central custodianship for clearing and settling of trades.

The DTC is part of the subsidiary family of the DTCC, which also operates the NSCC. The NSCC handles security clearing for almost all equities trading in the US (all transaction systems basically report here at the end of their reporting chain).

This basically allows the NSCC to simply update the ownership accounting of a number of shares, as opposed to hunting down the physical stock certificates, validating their authenticity, and then handling the transfer.

This has ultimately greatly reduced the settlement window (from Trade date + however long it takes to find the certificates, to, as of a month or two ago T + 2 days), which allows firms to free up capital (the cash doesn't exist until the trade settles) to commit to other endeavors.

A shorter settlement window (and the consolidation down to a single system), also reduce overall counterparty risk, as once the trade is settled you don't necessarily have to be concerned with the financial well being of the firm you did the trade with.


> legal fiction that the shares are "owned" by Joe Schmoe, even though all he really has is an attenuated set of contractual rights

What is a stock really, if not "a set of contractual rights"?


To oversimplify, property rights are often said to be good against the world, while contract rights are good against specific others.

A share of stock is itself a set of contractual rights, but the record owner has a property right in the share (and often a physical certificate). It doesn't matter if someone takes your share or inadvertently/accidentally sells it to an innocent buyer. It's still yours and you have a better claim to it than any buyer or later holder.

But a beneficial owner of a share held in "street name" has only a contractual right to his shares--essentially a promise from his broker that the broker will have at least [x] shares for him (note this means he does not have a claim to any specific or identifiable shares and his broker surely holds many times more since they'll have many other clients). And on top of that, his broker has an account with DTC that involves a second layer of contractual rights to the stock--essentially a promise from DTC to the broker that DTC will have at least [x] shares for the broker (again not specific or identifiable shares and DTC certainly has many times more shares since DTC holds nearly all shares held in "street name")

If your broker or DTC accidentally or inadvertently disposes of too many shares (and this can happen surprisingly often) you only have recourse against your broker or DTC. The agreements between [you and your broker] and [your broker and DTC] do not bind the new owner of the shares, who has no obligation under those agreements and, as a bona fide buyer + current holder, also has a better claim to the shares than you do.

If that wasn't specific enough, here's a very detailed summary and analysis of the current stock ownership structure and mechanics:

http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article...


The key word is "attenuated". When you have in a drawer the stock certificate issued by the company the situation is much simpler.


Interesting in the UK you can directly own the shares slightly more expensive though when held by a third party (Td direct) I had no problem in getting a voting card from them (at no cost)


> This problem is so obvious that it must have been addressed by the people proposing this.

I think this is just optimism, it would be nice to have an actual reason to think this is the case.


I looked at the people backing the exchange and as far as I can tell, no one actually has a proper finance background, let alone a background in exchanges (which is, from what I've read, a pretty esoteric and specialized area within finance).

The idea of Eric Reis running a stock exchange is... strange to me.


Me too!

Luckily the rest of the team is way more qualified


Hi Eric. I recall the times when making long term equity holdings tax advantaged (ex: 0% cap gains after holding for 10 years) as a path to achieve similar goals to what LTSE is trying to achieve.

Details (and general HN cynicism) aside, we hope your venture is a success.

As a greater man than I once said, your success is our success. We'll be rooting for you.


> This problem is so obvious that it must have been addressed by the people proposing this.

I feel like this sentence could be found on the graves of many a failed startup.


And also on many IPO tombstones :)


> Can a company exist in both the "normal" exchange and the "long term" exchange at the same time?

Strictly speaking, nobody needs an exchange to implement a corporate voting regime where one's vote per share increases as a function of holding time. You just amend your certificate of incorporation and/or bylaws and, assuming the state in which you're incorporate allows it, it happens.

The trouble is most stock exchanges have rules about voting rights. If you aren't compliant, you can't list with them. A big-ticket IPO, e.g. Uber, Airbnb or Saudi Aramco, might be able to convince an exchange to change its rules. This is an exchange pre-empting that negotiation.

If a quality company listed with these voting rights, there would be nowhere you could buy its shares where voting rights would be different because they'd all trace to the same corporate charter. There might just, at least for some time, fewer places where one could buy them.

(Stock lending would have to be dealt with. It doesn't strike me as a particularly challenging issue to solve, and not everyone has to solve it the same way. The bigger issue is where to sever legal and beneficial ownership. If I have a bunch of LLCs who have held a company's stock since IPO, it might make more sense to sell the LLCs with their voting rights intact than sell out of them. This torpedoes most of the benefits of public over private markets.)


That all but guarantees a lower stock price over time for the company, as newer shares are literally less valuable than older shares. If you have “high priority” voting shares worth $100, they could be worth $90 or less to the investor that is buying them because they decrease in value on every trade.


> That all but guarantees a lower stock price over time for the company, as newer shares are literally less valuable than older shares

Which is why you see private companies experimenting with all manner of super-voting classes of stock (usually for founders) but never with this idea. New money would be reticent to invest.

Devil's advocate: investors didn't seem to care about Snaps' zero-vote stock.


We believe our proposal is way more investor favorable than zero-vote shares. But it’s also way more company-favorable than standard governance


Even if there isn't a normal exchange, there's usually a market in options and futures. And if it isn't a full market, there are players who can make bespoke deals. Someone who holds on the "long term" exchange along with a costless collar (long OTM put / short OTM call) has much less economic exposure to the stock but has "held" it for the same amount of time.


> can I short on the normal exchange and buy on the long term exchange for some free voting power that increases over time?

Buying voting power on the long-term exchange isn't free, your capital is allocated. You have finite capital. Your cost for each unit of voting power declines perpetually so long as you hold it, it never goes to zero (free).

You can view the shorting as paying for your purchase in the long-term position, however you could view it that way for shorting any other company just as well. It's meaningless as a premise or issue.


Contrived? Yes. Meaningless? No.

Voting rights are powerful. That's the point of the long-term exchange.

In existing exchanges, going long and short in equal amounts on the same stock simply cancel each other out.

But in a "long-term exchange", taking this same position (or lack thereof) gives me a valuable asset: voting power that grows over time.


> Voting rights are powerful. That's the point of the long-term exchange.

> In existing exchanges, going long and short in equal amounts on the same stock simply cancel each other out.

Not really, for voting purposes. You can buy the stock, borrow the stock, sell the borrowed shares and end up with "free" voting rights and no economic exposure to the stock. I say "free" because you may have to pay someone a few percent to lend you the stock.

You might say centralised clearing prevents this from happening - that my account will always just show a position of zero shares so I have no votes. But even in that case, I can open two accounts, one long and one short, with the same effect.


Actually our mechanism prevents this. It’s pretty clever if I do say so myself, but until we go public with the details you’ll have to take my word for it


it’s a dumb idea solving an imaginary problem. Better to spend your energies on something more productive.

The governance problem is that public companies are allowed to restrict shareholder rights to the point they have no say over board composition. Boards are incestous collaborations between insiders and friendly outsiders, whose purpose is to maximize their compensation at the expense of shareholders.

That’s the problem to solve and your idea only makes it worse.


We'll see more strategies like voting against the company's interest in order to benefit one's other portfolio holdings. You just need enough to tip a split vote (which at least means a large number probably don't believe it is against the company's interest; but if the voter has inside info there wouldn't be much stopping them as it isn't an inside trade..).


Sure, but the price of the stock probably reflects that voting power.

For example, right now there are different share types that you can buy from the same company that have different voting rights.


Yes, but... the article suggests that in the long-term exchange, the voting power resets with a change in ownership.

So while a share that has accumulated a lot of voting power is valuable to me, you wouldn't necessarily pay any more for it, since the power doesn't transfer to you.


this is reminding me of LLCs holding real estate in California, where the LLC and bought and sold but not the real estate, thereby preserving the low tax basis for prop13 purposes.


Does this really hold up? I don't think so. I remember reading that under the law that an LLC that just holds property for the purpose of subverting re-assessment upon transfer, is not legal (or the reassessment happens when the LLC is sold, no free ride under prop 13). I would also think this doesn't work or every piece of property in California would just be owned by a separate company. If it does work, I'd like to know so I can set up my LLC for my house when I want to sell it. Reducing the property tax by $1000 a month should be worth quite a bit in this low interest environment.


Well, but the original owner loses the power. So if you want to convince an owner to throw away their voting power, you'd have to pay them a higher price.


How bout that...


When I learned about high-frequency trading, I toyed with the idea of opening up a stock-exchange with different rules:

- one quote per day - transactions of the day are processed in a random order (using a provable random deterministic algorithm) - shares have to be kept for at least 3 months (Warren Buffet recommends 6 months) before being sold.

When Steve Jobs died, which was obviously an event that would have an impact on Apple's shares, the quotation was suspended for a day, so that people could take their time to evaluate the significance of the event. This was a confession that they knew that the high frequency changes is just noise and that the signal has a lower time resolution of about a day.

The prospects of future profits do not change every nanosecond.


How often does someone decide they want to sell (buy)? Market makers are reacting to demands for immediate liquidity in a distributed marketplace comprised of multiple equities exchanges.


To add to this, this model only works if the entire market place operates this way. If any other venue is providing pricing updates a venue that is halted, or somehow contributing to a delay in pricing updates, is going to be left behind.

In the hypothetical "one quote a day" market, the quotes will be insanely wide to account for the risk that the natural price of product moves through the quote (with no way to provide pricing/quoting updates).

That said, I like the idea of a slower market, but, much like the debate over Maker/Taker, it will take an entire industry shift and can't be done on a single venue.


It won't be insanely wide, it will be on par with the intra-day variations. What they may make a seller lose are on par with what they would lose by taking a few hours to think about their decisions.

> If any other venue is providing pricing updates a venue that is halted, or somehow contributing to a delay in pricing updates, is going to be left behind.

My suspicion is that some companies would prefer to only have investors instead of speculators. I suspect that a SE with such rules would favor long term investments over short term profits.


How is that the stock exhcange's responsibility to provide for liquidities?


> When Steve Jobs died, which was obviously an event that would have an impact on Apple's shares, the quotation was suspended for a day, so that people could take their time to evaluate the significance of the event.

Steve Jobs's death was announced after the closure of New York markets on October 5, 2011.

Apple stock shares traded in Frankfurt the next day: https://www.theguardian.com/technology/2011/oct/06/apple-sto...

Apple stock also traded on its primary exchange, Nasdaq, the following day with no suspensions: http://abcnews.go.com/Business/steve-jobs-death-apple-stock-...

It appears that the stock continued trading without incident in all markets following Steve Job's death, until the BATS IPO went haywire in March 2012.


Ah yes, they delayed the announce until after the closure. I don;t remember on which similar event they suspended trading for a day.


According to his death certificate, Steve Jobs died at 3pm PT on October 5, 2011. http://www.nytimes.com/2011/10/11/business/steve-jobss-cause...

New York markets close at 4pm ET, which is 1pm PT.


> The prospects of future profits do not change every nanosecond.

That's what people get wrong all of the time. Most of HFT is not about seeing a trend and acting on it. Most of that is front-running on data obtained from deals with brokerage firms and the likes.


And how does this add value anywhere?

A timestep of a day seems to have all the benefits of regular stock exchanges without any drawbacks.


Just wanted to point this out. HFT is not only really fast trading in order to gain from the typical "sell higher than you bought" scheme. Of course front-running adds no value. Though of course those companies will say that the "add liquidity". Which is BS.


"Provable" algorithms aren't all they are cracked up to be, see the Krack attack on WPA2. The algorithm may well be perfect. But everything around it is still attackable.


My gut sense is that the important time period is length of hold going forward, not length of past hold.

Maybe the vote strength should instead go with the period of lockup instead? That is, I agree to hold my shares for ten years, so I get ten votes.

Perhaps it could even be slightly nonlinear with respect to the length of time? (years * 1+log(years)) or similar?

Edit: LTSE reminds me of LTCM. Not a great connotation?


There is some research in political science on paying for votes in elections. They came to the conclusion that you should pay $x and receive sqrt(x) votes. 100 dollars -> 10 votes. I would think the same reasoning would work here. Hold stock $x days, receive sqrt(x) votes (years is tricky because you can hold less than 1 year and the value increases quite a bit during that period).


Would such a political system not spiral into chaos really rapidly?


It's all theoretical. God knows.


Do you perhaps mean years*(1+log(years))?


Yes, of course.


LT is ready for a comeback


Hey everybody, Eric Ries here, founder of the LTSE. I am coming late to the thread as I’ve been focused on launching my new book and am only seeing this now.

I love a lot of the comments here. I think many of the assumptions both in this piece and in the comments are reasonable guesses about what we are doing - but in a lot of cases wrong.

Part of the reason it has taken me more than five years to figure out how to build this company is that we have to be able to:

1. Offer companies full liquidity and full protection from short-termism even if their stock trades on another exchange or they dual-list

2. Build support among many financial system stakeholders and regulators to get approval to do this

3. Build a multi-disciplinary team that is literate in the arcane ways of SF NY and DC all at once

We aren’t quite ready to take the hood off and reveal how we solved all of these problems quite yet. This is stil a sensitive regulatory process and I’m limited in what I can say publicly. But to the extend I can, I’ll try and answer questions in this thread. Please keep them coming.

Thanks for taking a look at what we are building!


Your name sounds familiar. Can you give a short summary of what else you've been doing?

*edit: Ah, I found something myself. You're the lean startup guy right? https://en.wikipedia.org/wiki/Lean_startup


Indeed I am :)


This article doesn't mention it, but this is a project of Eric Ries, of Lean Startup fame. An earlier article is here: https://qz.com/704657/eric-ries-ltse-long-term-stock-exchang...


This article has considerably more information and answers a lot of questions in the comments. IMHO it should replace the original article.


The quote at the very end of the article seems to summarize my feelings:

"Skeptics wonder whether the LTSE is just another way for tech founders and elite Silicon Valley investors to maintain control at the expense of other shareholders."


And when an owner wants to raise liquidity? They'll take a hit due to the cliff issue (voting rights have value and you destroy voting rights by selling). So any company with tenured voting rights will have created a system that forces owners to sell shares at a discount to their current value. And because they can't sell for more value than they get from holding, they would tend to prefer value-destroying and excessive short term cash distributions up and until the point where the damage from those distributions equalizes with the value destroyed at sale.

I'm sure some economist smarter than me could formalize the issue, but unless the cliff issue is solved, this sort of ownership scheme will not result in shareholders maximizing long term value.

A dominant founder-CEO could mitigate or overpower the incentives described above, but my guess is that any company that successfully gets of the ground using this scheme will replace their tenured shares with ordinary common shares at some point.


That sounds very interesting conceptually.

Businesses have been moving further and further into short-termism; with the next quarter being the most important metric. This is partly due to investors also being short-term, and voting on the board who will bring the most value in the shortest period.

I'd be interested in taking part in a Long-Term stock exchange, even if it is an experiment at this point.


> Businesses have been moving further and further into short-termism; with the next quarter being the most important metric.

That's the conventional wisdom, I've heard it my whole life, and I see no evidence of it. AMZN, MSFT, etc.

I've known CEOs who believed it, and manipulated the books to make the short term look better at the expense of the long term. Investors weren't fooled and the stocks would tank.


AMZN ist the stand-out example, but AMZN, FB, GOOG are exceptions. Think back to 2006/2007 when PE and activist investors would take board seats and force companies to over-lever and do stock buy-backs while stocks were all-time high. How many companies can survive short-term incented PE or activist investors?


A short term investor still has to sell the stock. Why would someone buy it at a high price if that high price was based on short term thinking that sacrificed long term results?

The only hope of the short term investor is that the buyer will be incompetent. How viable is that for people who devote their careers to stock analysis and trading?


100 percent agree. Corporate management repeats that short term thinking is a disease so much media just parrots this without thinking that it serves powerful vested interests.


How would this work with someone pulling something similar to Altaba?

Suppose you have $1B worth of stock, and 10% of the value is in the vested voting rights that you'd lose by selling it. Instead of selling part of it on the open market, you sell shares in a shell corporation that holds that stock. Surely the discount in ShellCorp's stock price compared to UnderlyingCorp is less than 10%? And the cost of setting up ShellCorp is going to be far less than losing 10% of the value of your holding.


Perhaps you'd tie voting rights to a named human beneficial owner, so the prospective purchaser of your shell corporation wouldn't inherit them[1]

Though it might have the interesting side effect of fund managers who exercise their voting rights being better compensated and staying in their jobs longer...

[1]possible to devise some kind of unusual contractual arrangement where the "beneficial owner" retained formal title to the shares but accepted an obligation to both hand over stock yields and vote in the interests of the other party. But this is something you could effectively ban.


You can't ban separating out economic interest and formal title to the shares without banning options, forward contracts, and other derivatives on the stock. Like, these are not unusual contractual arrangements. These are standardized and sold on the market. Put options transfer the downside risk to the writer, call options transfer the upside risk to the buyer, futures contracts essentially do both.


My point was you'd ban titleholders from selling a contract directing them to exercise their votes as a delegate of the purchaser, not the more general separation of title and economic interest which is obviously valuable for a large number of reasons.

(I mean, it's still a bit messy because fund managers have a fidicuary duty to exercise their voting rights on behalf of their own shareholders, but I don't have the ability to dictate a new aggressively activist investor policy to Vanguard)


Actually you can do this, without banning those instruments. You have to find a way to make sure when someone creates one of those derivatives the system automatically forfeits the associated votes.


The term "beneficial owner" also includes anyone who has sole or shared voting power over the security (not just those with sole or shared "formal title", economic interests and/or power to sell or transfer the security).

A major reason for that is trying to prevent "gaming" of votes, along the lines of your footnote [1]. Just like right now, I don't think the LTSE proposal would require an outright ban on these arrangements--it just requires the issuer/exchange to make sure the disclosure requirements for "beneficial owners" are sufficient for them to "reset" the voting clock if/when voting power is transferred.


How that plays out would be very sensitive to the exact formula for tenure. Ie. A voting "cliff" where you can only vote after year 1. Vs votes per years held * shares, in which case an early investor could get entrenched.


I would probably go for some middle ground such as if (year > 0) then shares * Square root (years).

Just because someone has held a stock for 20 years does not necessarily mean they are currently interested in the long term. But, it probably points in that direction.


You might want an upper limit, so either logistic growth [1] or something like 1 - exp(-(T + T_0)) feels like it makes more sense.

I especially like logistic growth for having slow growth at the start and end, only growing quickly in the middle.

[1] https://www.khanacademy.org/science/biology/ecology/populati...


You don't need an upperbound as long as your function is sufficiently slow growing.

Example:

Log(years) doesn't have a bound, but is unlikely to cause problems over any reasonable time scale.


Or it means they are so utterly passive and unthinking that they are just the voters entrenched management dreams about.


This strategy is Small-Game fallacy.

Reducing the complexity of the real world -> If only shares held for a long term have full rights, you will obfuscate how you pay for those rights. either the stock will have a depreciated market price to what it 'should' trade at or the voting rights will be acquired through rent seeking by long-term holders.


> Anyway here's a story about the Long-Term Stock Exchange, which is a new planned stock exchange backed by Silicon Valley venture capitalist types that will have "tenure voting," in which shareholders who hold their shares for a long time will get more votes.

This has been discussed already on HN, and I believe it's a bad idea.

All that would do would be to create two kinds of shares : the normal ones and those with high voting power. The market would then want to price them differently, and if you want to prevent long-term owners to sell their shares (for instance if they want to enjoy the increased value), then you are doing some kind of capital control.

It's just a bad idea. In a free country capital can be bought and sold : if you give voting rights to someone, he should be able to sell them, which would probably defeat whatever purpose you had when you gave those rights in the first place.


If I got this correctly, when you sell your shares with high voting power, they lose their high voting power.


Then you'd just create an incentive to sell the share in dark markets. You'd officially still be the owner of the share, but in secret you would have sold your voting right by agreeing with someone to vote on command in exchange for money.

As is said in the 1981 movie "rollover", capitalism is like a force of nature : you can try to fight it, but in the end it always win[1]

And even if somehow you succeed, you would have created capital that can not be bought nor sold, or can only be bought and sold from and to a particular category of investors. You would have introduced a bit of communism in the system (in the sense that in communism, buying or selling capital is forbidden). I guess some people will be happy about that, but I won't.

1. https://youtu.be/m1aQ-XGWors?t=151


For an analogy, look at the effects of California's Prop 13, where holding property long term gets you dramatically lower property taxes.


Are those dark markets contracts enforceable?

By the way, this is nothing like communism, not even close. This is a perfectly market oriented solution, if you don't like the idea, don't buy this kind of shares, nobody forces you to do so. If the model will prove good for companies and their investors, it will prosper, otherwise, it won't.


> Are those dark markets contracts enforceable?

Of course they are. When absurd laws try to prohibit market forces, shadow markets emerge and they tend to have their own enforcement policies. Think mafia, prohibition in the 20s, corruption and stuff. Things get ugly, but they get done. The point of having regulated markets is precisely to put some order and fairness into this.

> This is a perfectly market oriented solution, if you don't like the idea, don't buy this kind of shares

It is not, and the problem is that if that idea were to become popular, then capital would become more and more difficult to buy. So yeah, it's a step towards communism indeed. In the end, it's all about adding restrictions to the circulation of capital.

You can't artificially attach a right to something that would depend on the duration of ownership. In a free country, you can buy and sell stuff, which by definition means their value can not depend on the duration of ownership.

Let me make that reasoning clearer. Imagine I've owned an object for an extended duration, and that this extended duration gives it an additional value V. In a free market, I'm supposed to be able to sell this value V, but if I do, then the buyer will own this object with this extra value V, despite the fact that he's just bought the object. So your initial goal of giving value to duration ownership has been defeated.


So basically a free market is free as long as it only creates contracts that you like, otherwise it's communism. Ok.


We can get around this easily enough with a Total Return Swap. This way we can move the economic interest around with out ever moving the shares.


Our system actually handles this gracefully. If you change the beneficial owner, that’s the same as selling the shares (for voting purposes)


I TRS has nothing to do with the beneficial owner. The company has no way of knowing that the TRS even exists.


The beneficial owner of record will never change.


yes its like if your vote for elections counted for more if you/your family had been a citizen longer great for descendants of the mayflower etc sucks for more recent immigrants


I am by no means stating it as a conclusion, but rather just as a discussion point, how does this differ from the mutual funds and etfs under a single umbrella, i.e. something like vanguard? Where the stated mission is sort of long term stewardship over the short term activist role.

Now, how well that mission is fulfilled is another thing. The reason I note vanguard specifically is because of the current activist spat between P&G and Nelson Peltz/Trian Partners. Of the top 3 holders (vanguard, black rock, state street), only vanguard voted against the activist shakeup.

I guess I'm just having trouble seeing the difference between giving a bunch of small investors more power, vs a large amount of krill with similar goals making up a whale the company can't ignore. It seems the tenure setup complicates a lot without immediately perceptible benefit, at least to me.


It's worth asking why we make the distinction between "activists" and big fund managers in the first place. Shouldn't all fund managers be doing what's best for their shareholders?

You should check out John Bogle's "Clash of Cultures" (founder of Vanguard), he discusses this problem at length.

In general I'm inclined to agree with you though. This thing has a lot of hype around it because it's backed by Eric Ries, the "Lean Startup" author, but I don't really see a problem with the NYSE/Nasdaq in their current form. People overlook the liquidity, depth, and other benefits of such well-run exchanges; it's not at all clear to me that an average investor would be better off on this "long-term" exchange, where I'm sure volumes will be a lot lower, and bid/ask spreads will be wider than on a "bad" exchange with many "short-term" players, who, as a side-effect of their actions, create tons of liquidity for small-potatoes investors.

Frankly, I don't understand the point of this at all. There's nothing stopping a long-term oriented investor from holding shares a long period of time in today's markets. And there are real risks of corporations being too long-term focused. The existence of Amazon, at a minimum, should show that companies with 10-20 year investment horizons are tenable under the current system.


Multiple classes of shares with different voting rights are though


Isn't Vanguard just an index house is not the LSE's family trusts a better model which is what the Rosthchilds do with RIT Capital partners


One of the mainly value of a stock exchange is that it is super cheap and liquid to sell your security and access your funds. A long term holding is just PE, VC, or some other type of funding.


And people should get access to participate in that, not just private millionaires.


There is a pervasive idea that longer term investments are somehow better (morally superior, more socially responsible) than short-term. This stems from the ancient prejudice toward financiers (usually jews) and the corresponding ancient prejudice against speculation. Let me debunk it:

- Suppose an 18 year old and a 80 year old each buy a share of company XYZ's stock. Whatever their goals might otherwise be, the 80 year old might quite plausibly have a different time horizon expectation for returns than the 18 year old. If both choose to buy the same stock, they must both believe the stock is a good investment for their respective time horizon goals. Maybe it will be, maybe it won't be. In both cases, someone else sold each of the shares they both bought. The person who sold the shares had deemed the stock a not-so-good investment compared to other options and wished to liquidate.

- Now, suppose that we add a day trader to the mix, who also buys a share because she thinks that company XYZ offers a good investment based on her specific time-horizon goals. The demand she induced on the available stock helped to support the validity of whatever the current price appears to be. By being willing to buy, she helped create a market for the 18 year old and 70 year old to sell, should one of them change their mind about the stock.

- Now imagine we have 1000 day traders, 1000 18-25 year olds, and 1000 70-80 year olds participating in the market for this stock, with some buying and some selling every day. Due to all the transactions, we have high levels of liquidity for the stock and low "inventory risk" associated with holding the stock in inventory as a market maker, and thus lower spreads. Market maker spreads are a function of risk, which is correlated with supply and demand. The more supply and demand, the less risk there is to holding inventory.

- Now suppose we decide we don't like anyone who wishes to invest on a less-than-10-year time horizon. We determine that they are acting to incentivize the company to focus only on short-term profits. So we pull some strings and simply kick out those investors and limit investment only to those promising a long-term view. Now, there is less demand for shares, making them cheaper and limiting XYZ company's ability to fundraise. With less capital, XYZ must rein in its growth projections.

- What good were those projections anyway if they were based on short-term investors' dollars being available? Wasn't the capital invested by short-term investors likely to disappear at the first sign that short-term results might be floundering? How can a business adequately plan for the long term if it is distracted by the need to fundraise from such a fickle lot?

- The answer is simple: If a company's business activity is focused on long-term goals and long-term thinking, then it will attract like-minded investors. Like the random walk of day to day stock price, day to day information and speculation will result in short-term transactions occurring, but those transactions benefit the firm significantly as they provide an excellent price discovery mechanism. The day-to-day price will also reflect both short-term and long-term industry-wide shifts, and this will be true both in a long-term constrained exchange and an unconstrained exchange. If the firm is doing wind farms and has a 30-50 year view, and then suddenly a company doing solar comes up with a 100x efficiency improvement, that is going to impact the long-term viability of wind tech, as it should.

While I agree that firms embodying short-term thinking is a problem, the market mechanism offered by the exchange is not the problem, the problem is that executives and employees are generally given predominantly short-term incentives to care about. Imagine the following:

- Instead of ISOs issue employees a basket of different time-deferred options, so that each employee gets his/her comp incentive spread over time.

- Instead of giving the CEO shares of stock, give the CEO both present and future shares, and leverage the future ones to the point where any bias the CEO might have had toward short-term thinking is washed out by the appeal of the longer-term incentive. Any hypothetical business results can be used to preview what the CEO would earn in each scenario. If the owners of the company want long-term results, let that be the way the CEO will make the most (time and risk-adjusted) money.

Just as $100 now is worth more than $100 next year to any rational person, the comp incentives for future-looking payouts would need to be more generous in order to impact behavior in a comparable way. They would also need to be invulnerable to termination, since being worried about getting terminated and losing some or all of one's stock is a big disincentive for long-term thinking. The employee should be incentivized to act as if the role is a great fit and he/she will be there for the rest of his/her career, even though we all know that is highly unlikely if not absurd.

I think the ideal scenario for employees including the CEO would be a daily payout of cash salary, plus a daily payout of some basket of immediately vesting, future-weighted non-salary compensation.

In startups, this would look bad to the accountants who had to account for the future-weighted stuff in terms of some mythical hockey stick graph, but without it there really is very little incentive to care about the future in any non-unicorn startup. Big companies manage to create longer-term focus on retaining employment and benefits, and thus end up with a lot of 9-to-5'ers but do a terrible job of preventing organizations from doing repeated short-term-oriented fire drills. Unicorn startups create strong future incentives, but those immediately disappear once the company stops being a unicorn (or the handwriting on the wall suggests it might).

It should also be noted that startups are almost by definition not long-term in nature. The seed investors need a buyer so there needs to be a series A, and the series A investors need a buyer so there needs to be a series B, etc. It's a sales process that (when it works as intended) results in an IPO where each phase of investors get a nice leveraged payout when an IPO occurs, but the whole ecosystem is meant to create that IPO payout, which is fundamentally short-term thinking. The sales pitch at each phase boils down to "wow check out this long term win available to you at a discount because the market doesn't yet realize this is a long term win".


Isn't the particular problem this is aiming to solve less that the founder CEOs aren't able to think in 30 year time horizons but more that sometimes they are[1], but fear that when most market participants have much higher discount rates, their position is vulnerable to activist takeovers (if the market's preferred yields are sufficiently short term, they'll get a value boost for kicking out the execs who's hockey stick growth is forecast for ten years' time in favour of those promising earlier revenue growth). It's not the market makers they're worried about, it's the people that actually hold stock for long enough to vote, hence the desire to weight the voters in favour of themselves and the investors that bought into their vision, and not the people buying with the intention of flipping after good quarterly figures.

I mean, they're certainly not going to raise bigger IPOs on a brand new marginal exchange with no track record and a lack of liquidity, but I'm not sure that's the real aim here. (You might need a new exchange to introduce rules like making key executives immune to termination too)

That said, I'm not sure how real a problem it is: AMZN has a very long term strategy and unusual approach towards margins and its stock is doing just fine. And cynics might suggest that other tech stocks returning unimpressive quarterly figures might actually not have thirty year plans...

[1]or want to be considered that way to justify still not turning any profits as their growth metrics start to plateau


Since the 1980s activist shareholders have been heavily restricted, it’s a big cause of the explosion in CEO compensation.

We need more activist shareholders, not a plan to kill off the few remaining.


I think your example scenario would have benefited from some qualification as you paint the sentiment around the decision to put a stock up for sale in a somewhat negative light when in fact there can be several factors at play.

> The person who sold the shares had deemed the stock a not-so-good investment compared to other options and wished to liquidate.

That's one possible explanation for the decision to sell. The person could also be motivated to sell (a portion) because the current price would lead to a modest return on the initial investment; or perhaps the person suddenly needs cash and decided that a stock (from among several positions) would yield a certain amount of liquidity, ROI considerations will generally not factor into distress sale decisions.


> you paint the sentiment around the decision to put a stock up for sale in a somewhat negative light

Only to the extent that all stocks, bonds, and investments (in a sense) compete against each other. Thus, selling means that the owner decided that one of the competitors was a better fit. Of course, as you point out, it could just be due to some unrelated cash flow issue.


For a proper debunking, you need to address the fact that it's usually pretty easy to wring cash out of a business, but you can only do it once.

That's why longer term investments are preferable. It puts the focus on building sustainable value for its owners rather than balance sheet gymnastics.

Most of your argument here is in favor of liquidity, but that's not the issue in question.

You're also mistaking the role of stock exchanges, which are secondary markets. It's rare for companies to issue new shares to raise money. Not only does it send a bad signal and piss off existing shareholders, but its also one of the least efficient ways of getting capital. They'd prefer long-term debt.


> For a proper debunking, you need to address the fact that it's usually pretty easy to wring cash out of a business, but you can only do it once.

I don't think that's the primary point, because the CEO should have an incentive to profit from multiplying the future value of that cash, not simply "wring it out" and get a short-term bonus. I meant to lump in "wringing" with all other perverse-incentives for management that a short-term incentive structure creates.

> That's why longer term investments are preferable.

In the same sense that it's better for an employee to receive a single paycheck for the entire year on day 1 of employment. That is not necessarily realistic. If investments were not reversible there would be a lot less of them, just as there would be fewer hires if the entire salary had to be paid on day 1.

> It puts the focus on building sustainable value for its owners rather than balance sheet gymnastics.

Building sustainable value? There are a lot of assumptions baked into that idea. One person's sustainable is another person's "safe" course of action and another person's definition of greed. Suppose someone is starting a restaurant and expects it to be profitable starting in year 10. Most people would consider that foolhardy. Is it? Not necessarily, it depends on how profitable it will be. Notably firms like McDonalds were profitable fairly rapidly but grew in scale significantly over time. Where did the tradeoff between sustainability and short-term greed occur? Arguably early investors were not greedy enough, since the firm had to resort to franchising to fundraise.

> You're also mistaking the role of stock exchanges, which are secondary markets.

I am not sure how the Long-Term Stock Exchange will work, but my point is that simply restricting the behavior of firms that join the exchange will not necessarily change the behavior of that firm's employees, except to the extent that investors/owners are able to create long-term incentives.


> shareholders who hold their shares for a long time will get more votes

What prevents me from selling my vote, without technically selling my share?


Regardless of my strategy, one benefit of stocks is liquidity. If something comes up, I can cash out pretty much immediately thought I may not like the return. kes th This proposal sounds like tenure, being in place for a long time entitles me to something. It makes the market more complicated and for no proven benefit. No thanks.


I want a reddit (or hackernews) with this style voting. The longer you've been a member, the more your vote counts.

There would probably be unintended consequences galore but it would interesting to see if it helped preserve culture and avoid the "it was better in the early days" syndrome.


I think it's all going to depend on how the tenure mechanism is implemented. There's got to be some way for new money to "catch up" to old money within some reasonable time horizon, say 10 years, rather than old money's voting power growing unbounded.


This is so contrived. Why not have different classes selling in the same market? Something like DVR or differential voting rights. Depending on the market and need prices of DVR might be less or more.


You want a long-term exchange? Istitute a mandatory holding period and/or limited trading times.

This is the exact kind of experimental BS that lead to the derivative bubble.


This seems like a lot of very highly directed, complex, and confusing artificial policy-making in order to achieve something that could probably be approximated far more simply and understandably by placing a small tax on equity transactions. Long term investors would be barely affected, high frequency traders would be forced to re-evaluate their approach, and the government could collect some highly needed revenue.


If you get the political coalition assembled to make this, please give me a call


At this point I think the problem is that the economy is debt based and depends on stocks going up anyway.


Forget all the practical hurdles, tell me why this premise is even correct. Just because I've owned a share for a long time, that implies that I have more interest in the long term performance of the company going forward? Just because the word "long" is part of the description of a past action doesn't mean it's in any way correlated with an expected future action. And it's often negative. See: basketball games, retirement, and (gasp) stock vesting. You think a VC who's owned a company for 9.9 years and is reaching the end of its fund has more incentive to vote in the long term interest of the company than a pension who just bought?


Explicit expectations by the market towards the leadership.

As in: Do not worry about quarterly profits but longterm success


Does anyone report to you? If they do, how would you respond if they said “I’d like to check in with you on my progress/metrics/etc... just once a year.” Sound like a good idea? It’s a terrible idea for managing people and a terrible idea for corporate governance. As high performance organizations move to daily if internal accountability it’s laughable that they complain accountability every 90 days to them owners of the company is too much.


there is a difference between long term planning and short term execution

yes short term execution should be monitored but it should not lead long term execution plans


Complaints about how short term focused equity investors to the detriment of long term planning almost always come from people who either don’t really understand what active equity investors do or are entrenched management trying to bury bad short term execution under th hazy and impossible to refute excuses of “we have a long term plan.”


Owners should be able to decide at any moment it’s time to throw out management and start fresh.


this does not contradict my statement


I'm sorry, but I just don't know what you're responding to in my comment. I know about the difference between long term and short term incentives when it comes to corporations. I just don't know how the process that is being proposed does anything to help it.


IMO, short term investing including stock options does nothing but move money from one group to another by creating artificial Flux. The stock market for the most part is a closed cycle in which a large group of investors, mostly the loosing ones, think that the stock market creates value and the ones who make the money from these ignorant "investors" are completely aware of and dependent on the loosing parties stupidity.

We should open gambling shops for those who want to day trade or deal in Stock options because that is all that they are doing.

The only stock market that promotes long term growth and profitability of businesses is one that awards long term investment.


The market isn’t a mechanism to let salarymen invest their retirement money in something. The market is a mechanism to plan and optimize all production and resource allocation across the entire world, all the time. This has to be fast.

If you think options (your example, not mine) are somehow inherently nothing more than gambling, it’s because you don’t understand how options work. Options are one of the least exotic and most straightforwardly useful securities.


Oha, you really seem to have hit a self-illusioning wound here.

And I'd say actually stock trading is the high stake gambling. If you increase the gambling sizes too high with card games etc, the public will believe it's unserious. But if you put it in a context of business, suits, and skyscrapers then it seems serious enough. That's why you cannot just make Casinos with bigger stakes and instead need to rely on that farce.




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