Prof. Jayanth R. Varma's Financial Markets Blog (comments) http://www.iima.ac.in/~jrvarma/blog/index.cgi A Blog on Financial Markets and Their Regulation en Copyright Prof. Jayanth R. Varma blosxom simplerss20 modified http://blogs.law.harvard.edu/tech/rss <![CDATA[Re: The rationality of r/wallstreetbets]]> Comment relating to The rationality of r/wallstreetbets (posted Sun, 31 Jan 2021 20:19:00 +0530)
Ritwik Priya wrote on Sat, 13 Feb 2021 03:14

Sir

I believe the r/wsb and GME episode is yet another illustration that the 'revolution' is never a question of mass revolt, but of elite competition. You provide some snippets that show that there are people on it displaying rational behaviour with non-pecuniary motives, but it is more likely and equally compelling that these non-pecuniary interests are being manipulated by financially-sophisticated-but-not-quite-establishment players to provide liquidity and well-priced exits for the inevitable reversal in momentum. It's the new version of a pump and dump, but much harder to prosecute because the behaviour appears emergent or memetic and the people egging on the price action do not have fiduciary roles or compensation deriving from said egging. A key thing to note is the level of volumes that existed in GME even as the price kept gapping - something we wouldn't expect to see unless there was a lot of 'passing the parcel' between delta-hedging market makers, retail activity and big money playing silently.

I would like to believe that the r/wsb redditors are stoic heroes, but most evidence points to some of them displaying predatory behaviour on the others, who are simply the latest batch of individuals fooled into buying snake oil. Non-pecuniary snake-oil being even more potent than the more straightforward version in a world where material needs have been taken care of and a nihilistic boredom prevails.

A number of aspects of modern single-name security markets allow for short term negative convexity phenomena to build up, with only the truly sophisticated and resourced being in a position to manage the fall. The inclusion of certain names into the benchmark index forcing large pools of institutional indexed or index-tracking capital to shift into these names is yet another such situation ripe for disaster. But not before some meme-ing creates liquidity for the exit!

]]>
Sat, 13 Feb 2021 03:14:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/wallstreetbets.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/wallstreetbets.discuss#0
<![CDATA[Re: Re: The rationality of r/wallstreetbets]]> Comment relating to The rationality of r/wallstreetbets (posted Sun, 31 Jan 2021 20:19:00 +0530)
Prof. Jayanth R. Varma wrote on Sat, 13 Feb 2021 11:28

That is true. There is a great deal of diversity of players as well as a lot of churn both on the long and short side.

]]>
Sat, 13 Feb 2021 11:28:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/wallstreetbets.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/wallstreetbets.discuss#0-0
<![CDATA[Re: Bankruptcy hardball and bank dividends]]> Comment relating to Bankruptcy hardball and bank dividends (posted Thu, 10 Dec 2020 17:46:00 +0530)
Ritwik Priya wrote on Sat, 13 Feb 2021 02:50

Sir In my view it is very easy to forget with banks or dealers that they are actual firms with employees and opex, and not simply asset and liability vehicles. If we take the view that equity holders in an arms-length joint stock corporation are owners of residual claims, and not owners in any meaningful sense of propreitorship, the modern bank is the canonical corner case for that view.

P/B in banks therefore reflects: 1. A discount for complexity and quality of assets 2. A discount for all the embedded claims that employees have, particularly in a high-but-deferred compensation regime, which makes cost reduction or efficiency improvement hard. 3. A discount for all 'regulatory' claims - potential increases in countercyclical buffers, ability to stop dividends, variability in impact of future regulation on capital etc.

In other words, equity owners of a bank have to contend with and reserve for a number of 2nd order effects on the seniority of their claims, not merely on the value of the assets that these claims are over. In return, the regulators are usually willing to write fairly generous put options on the value of these assets.

A low P/B being correlated with high dividends should surprise no one then - the dividend stream is the only way an equity holder gets to extract any value at all from a firm that may have surplus book equity but which they don't meaningfully control in any sense.

]]>
Sat, 13 Feb 2021 02:50:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/bankruptcy-hardball-bank-dividends.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/bankruptcy-hardball-bank-dividends.discuss#0
<![CDATA[Re: Re: Bankruptcy hardball and bank dividends]]> Comment relating to Bankruptcy hardball and bank dividends (posted Thu, 10 Dec 2020 17:46:00 +0530)
Prof. Jayanth R. Varma wrote on Sat, 13 Feb 2021 11:35

You are right that it is possible to give a benign interpretation to the phenomenon for which I gave a sinister interpretation. Another benign view is that a low P/B indicates a low franchise value and therefore low growth oppportunities that would make high payouts optimal under standard finance theory.

]]>
Sat, 13 Feb 2021 11:35:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/bankruptcy-hardball-bank-dividends.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/bankruptcy-hardball-bank-dividends.discuss#0-0
<![CDATA[Re: Re: Re: Bankruptcy hardball and bank dividends]]> Comment relating to Bankruptcy hardball and bank dividends (posted Thu, 10 Dec 2020 17:46:00 +0530)
Ritwik Priya wrote on Mon, 15 Feb 2021 15:32

Indeed, fewer future growth opportunities should be correlated with both low P/B and higher dividend payouts.

And another is to see dividends as economically entirely similar to buybacks - a cash/liquidity-rich firm stepping in to make the outside spread or put a floor on the value of its own liabilities. The exact decision on buybacks vs dividends will depend on the tax regime, regulatory discussions, willingness and quantum of the marginal shareholder to crystallise a potential loss through an outright sale etc.

]]>
Mon, 15 Feb 2021 15:32:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/bankruptcy-hardball-bank-dividends.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/bankruptcy-hardball-bank-dividends.discuss#0-0-0
<![CDATA[Re: Re: Re: Bankruptcy hardball and bank dividends]]> Comment relating to Bankruptcy hardball and bank dividends (posted Thu, 10 Dec 2020 17:46:00 +0530)
Ritwik Priya wrote on Mon, 15 Feb 2021 20:49

Indeed, fewer future growth opportunities should be correlated with both low P/B and higher dividend payouts.

And another is to see dividends as economically entirely similar to buybacks - a cash/liquidity-rich firm stepping in to make the outside spread or put a floor on the value of its own liabilities. The exact decision on buybacks vs dividends will depend on the tax regime, regulatory discussions, willingness and quantum of the marginal shareholder to crystallise a potential loss through an outright sale etc.

]]>
Mon, 15 Feb 2021 20:49:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/bankruptcy-hardball-bank-dividends.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/bankruptcy-hardball-bank-dividends.discuss#0-0-1
<![CDATA[Re: Negative beta stocks: The case of Zoom]]> Comment relating to Negative beta stocks: The case of Zoom (posted Sun, 23 Aug 2020 17:37:00 +0530)
Harshika paliwal wrote on Tue, 06 Oct 2020 13:44

Sir can Ruchi soya also be considered as negative beta stock just as zoom share price from march 10 to 30 march the price direction was like that of zoom.

]]>
Tue, 06 Oct 2020 13:44:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/negative-beta-stocks.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/negative-beta-stocks.discuss#0
<![CDATA[Re: Indian corporate bonds need a buyer and not a lender]]> Comment relating to Indian corporate bonds need a buyer and not a lender (posted Tue, 28 Apr 2020 19:09:00 +0530)
Palash Ranjan wrote on Thu, 18 Jun 2020 21:11

Hello Professor,

Won't there be a risk that the portfolio the SPV ends up with won't be a decent quality, well diversified portfolio ( one that can deliver some gains when normalcy resumes ) ?

Market participants will have an incentive to sell all their poor quality paper, trading at e.g. 40-80 INR, to the SPV. While at the same time selling good quality paper in the normal market. The SPV portfolio may later lose more than 10% and the sovereign would have to take the remaining loss.

To avoid such adverse selection the SPV should go out and actively build a diversified portfolio on its own, including buying beaten down bonds.

I hope you are well otherwise.

Palash

]]>
Thu, 18 Jun 2020 21:11:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/mf-bond-liquidity.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/mf-bond-liquidity.discuss#0
<![CDATA[Re: WTI crude futures in India]]> Comment relating to WTI crude futures in India (posted Thu, 23 Apr 2020 21:10:00 +0530)
GANESH wrote on Sun, 26 Apr 2020 15:35

Very insightful.. Thank You Sir..

]]>
Sun, 26 Apr 2020 15:35:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/MCX-crude.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/MCX-crude.discuss#0
<![CDATA[Re: WTI crude futures in India]]> Comment relating to WTI crude futures in India (posted Thu, 23 Apr 2020 21:10:00 +0530)
Rajeev wrote on Sun, 26 Apr 2020 14:43

Thank you, Prof Varma for such detailed post on this rare phenomenon of -ve price.

]]>
Sun, 26 Apr 2020 14:43:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/MCX-crude.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2020-21/MCX-crude.discuss#1
<![CDATA[Re: Structuring the Yes Bank rescue]]> Comment relating to Structuring the Yes Bank rescue (posted Sat, 07 Mar 2020 20:16:00 +0530)
Sagar Trapasia wrote on Sat, 07 Mar 2020 20:33

Sir, While I understand the argument that there needs to be a narrative to counter AT1 bond holders being wiped but equity kept intact, I resent the idea that quiescent shareholders be punished. Its like punishing school teachers for a crime committed by student. One one hand, govt wants to strengthen the equity market for retail holders and on another hand, you are suggesting that they be punished for being quiescent.

Looks like when we can't hold anyone else accountable, lets find the one who fits the noose.

]]>
Sat, 07 Mar 2020 20:33:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/yes-bank-rescue.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/yes-bank-rescue.discuss#0
<![CDATA[Re: bZx attack translated into mainstream finance]]> Comment relating to bZx attack translated into mainstream finance (posted Fri, 21 Feb 2020 17:54:00 +0530)
wrote on Wed, 04 Mar 2020 08:41

Sir, thanks very much for this nice article on bzx hack. I appreciate your approach to draw parallels to mainstream finance - it is very interesting!

Thanks, Justin https://ratelooter.com

]]>
Wed, 04 Mar 2020 08:41:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/arbitrage-with-unlimited-leverage.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/arbitrage-with-unlimited-leverage.discuss#0
<![CDATA[Re: “Low for long” interest rates and retirement planning]]> Comment relating to “Low for long” interest rates and retirement planning (posted Mon, 20 Jan 2020 16:27:00 +0530)
Siddhant Nayak wrote on Mon, 27 Jan 2020 16:46

Would love to read more about this topic. Sir, if you can recommend me something that may help me to get in-depth of this topic.

]]>
Mon, 27 Jan 2020 16:46:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/low-for-long-and-retirement.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/low-for-long-and-retirement.discuss#0
<![CDATA[Re: Resolution of stock broking firms]]> Comment relating to Resolution of stock broking firms (posted Wed, 04 Dec 2019 17:37:00 +0530)
BC wrote on Sat, 07 Dec 2019 15:32

I am afraid that the issue can snowball if and when pilferage of securities are discovered. The Exchange IPFs cover upto 15 lakh only and there too, abundant confusion may emerge on which securities are to be covered by which exchange, particularly in running accounts with large volumes.

]]>
Sat, 07 Dec 2019 15:32:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/stock-broker-resolution.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/stock-broker-resolution.discuss#0
<![CDATA[Re: Can India seize the Hong Kong opportunity?]]> Comment relating to Can India seize the Hong Kong opportunity? (posted Wed, 14 Aug 2019 16:56:00 +0530)
Anon wrote on Thu, 22 Aug 2019 20:38

Nice observation and good ambitious thinking. From a less academic standpoint - strong financial centres tend to have liberal social freedoms - alcohol, non-veg food options, and the ability to have a good party. Quality of life is important to Westerners and HK residents, hence the likes of Dubai turning a blind eye on social matters - something Gujarat would have to be willing to consider.

]]>
Thu, 22 Aug 2019 20:38:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/India-HK-opportunity.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/India-HK-opportunity.discuss#0
<![CDATA[Re: A petty money dispute holds market to ransom]]> Comment relating to A petty money dispute holds market to ransom (posted Thu, 25 Jul 2019 16:06:00 +0530)
gaurav wrote on Fri, 26 Jul 2019 11:17

Very nicely put.

Even basic functions of organizations don't work anymore because of paralysis.

]]>
Fri, 26 Jul 2019 11:17:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/petty-money-dispute.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/petty-money-dispute.discuss#0
<![CDATA[Re: US wants to nurture single stock futures]]> Comment relating to US wants to nurture single stock futures (posted Thu, 11 Jul 2019 12:23:00 +0530)
David Downey wrote on Tue, 16 Jul 2019 20:50

Nurture is not the word. This request was filed with the CFTC and SEC 11 years ago after substantial pre-file discussions. It is an abomination.

If the CFTC were the regulator SSF would be using SPAN margin instead of strategy based levels. Today's 20% requirement (as much as 20 times higher than SPAN for some products) means 92% of our listings are significantly over margined vis-a-vis SPAN. The move to 15% improves that to 85% being over margined. The question is why? Futures first line of defense is the daily variation pay/collect cycle. That is the discipline which makes the futures market safe. There is no build up of liabilities requiring excessive margin. The SEC staff knows they are stifling innovation and they lean on language in the Act that erroneously equates SSF with options. This is wrong. Options do not have daily variation pay/collect. If they did they wouldn't need the hefty margin requirement. So what is really going on? Profits. Broker dealers use margin collateral to create risk free rates of return in the Repo market each night. Brokers dealers generate large profits from lending money to their customers and using the securities purchased as collateral for the loan allowing them to lend those securities out and create risk-free rates of return using client's assets. SSF is a delta one derivative, as characteristic shared by only one other derivative....Total Return Swaps. When and if these swaps move to a clearing house the SEC will allow the clearing house to decide on margin levels. They will be risk based.

It makes no sense. The SEC must know they are protecting Broker Dealer profits at the expense of the participants in the capital markets.

Securities Lending, Equity Repo and risk-less funding trades should be opened up to all users of the capital markets. It is not rocket science. While the SEC provides the needed protection of excessive margin the status quo is protected.

]]>
Tue, 16 Jul 2019 20:50:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/US-SSF.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/US-SSF.discuss#0
<![CDATA[Re: US wants to nurture single stock futures]]> Comment relating to US wants to nurture single stock futures (posted Thu, 11 Jul 2019 12:23:00 +0530)
David Downey wrote on Wed, 17 Jul 2019 20:31

Nurture is not the word. This request was filed with the CFTC and SEC 11 years ago after substantial pre-file discussions. It is an abomination.

If the CFTC were the regulator SSF would be using SPAN margin instead of strategy based levels. Today's 20% requirement (as much as 20 times higher than SPAN for some products) means 92% of our listings are significantly over margined vis-a-vis SPAN. The move to 15% improves that to 85% being over margined. The question is why? Futures first line of defense is the daily variation pay/collect cycle. That is the discipline which makes the futures market safe. There is no build up of liabilities requiring excessive margin. The SEC staff knows they are stifling innovation and they lean on language in the Act that erroneously equates SSF with options. This is wrong. Options do not have daily variation pay/collect. If they did they wouldn't need the hefty margin requirement. So what is really going on? Profits. Broker dealers use margin collateral to create risk free rates of return in the Repo market each night. Brokers dealers generate large profits from lending money to their customers and using the securities purchased as collateral for the loan allowing them to lend those securities out and create risk-free rates of return using client's assets. SSF is a delta one derivative, as characteristic shared by only one other derivative....Total Return Swaps. When and if these swaps move to a clearing house the SEC will allow the clearing house to decide on margin levels. They will be risk based.

It makes no sense. The SEC must know they are protecting Broker Dealer profits at the expense of the participants in the capital markets.

Securities Lending, Equity Repo and risk-less funding trades should be opened up to all users of the capital markets. It is not rocket science. While the SEC provides the needed protection of excessive margin the status quo is protected.

]]>
Wed, 17 Jul 2019 20:31:00 +0530 https://faculty.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/US-SSF.discuss http://www.iima.ac.in/~jrvarma/blog/index.cgi/Y2019-20/US-SSF.discuss#1