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Comment by bricemo | Hacker News Reader

Let me try to summarize everyone’s same question:

- The idea of a stock exchange that allows companies and investors to focus on 5, 10, 25 year horizons sounds great!

- However companies on normal stock exchanges now already try to do this, but it’s hard because of quarterly earnings, pressure for quarterly growth, etc

- How is LTSE different? Seems like: Companies and investors “promise” to have a longer term focus via planning

- seems like that wouldn’t be enough and the same financial pressures would result in the same focus

- We were expecting something like: “investors must hold positions for 10 years”, or, “earnings only reported every 2 years”, etc etc. but there’s nothing like that.

- So, what is the big idea, the teeth, the new rule, that makes long term focus enforceable?

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I used to be part of the system that built machines that auto traded on arbitrage opportunities due to millsec/nanosec differences in reported prices in different exchanges.

Although probably not popular I would suggest that long term stocks needs to incorporate features that actively block certain trading patterns: limit price changes, limit buy/ sell frequency, & disallow shorting.

I have been heavily involved in the gamification of the stock market and the above are used to maximise immediate returns to day traders and auto-trading machines. By fixing a price for the day, then there is less incentive to 'rush' to get to the price. Also, limit how quickly someone can buy and then sell a trade, rather than milliseconds (or smaller). I would strongly urge disallowing the buying of a stock by the same person, if they'd sold in the previous week. Shorting is never a long-term game and should be banned, as it never does the company any favours.

But what I see on this LTSE is nothing of what would actually constitute long term ownership of stocks. What I actually see with this LTSE.com is the opposite of value for a stock, as it is only driving increased gamification of the metrics mentioned above.

That is, if I were an automated machine trader, I would add LTSE and their slow price changes and compare them to NYSE and make zillions.

I don't see how this encourages any kind of long term investment, nor stability for a stock.

Regarding limited trading: anyone but a retail trader could trade the forward OTC rather than this illiquid thing on the exchange. We can trade our guesses for tomorrow's price (which is really the live current price) as much as we want, and it will just wash out tomorrow.

Regarding length of ownership: so I make a fund which owns an LTSE-listed stock for a longer term, and people trade my fund instead.

Ultimately, neither of those things is much use, nor even necessary. A much stronger driver for long-termism would be to derive the dividend from the last 3 years of profits; since prices are estimates of future value and future dividend, the actual value of those would be smoothed; if any action can only make a small difference to the dividend, there is much less focus on quarterly results.

A formula or at least limits on dividends (no windfalls) would reduce the interest to activist investors who might see a pot of cash and seek to liberate it.

> That is, if I were an automated machine trader, I would add LTSE and their slow price changes and compare them to NYSE and make zillions.

Limiting trading frequency, limiting order types, and disallowing shorting would create even better opportunities for automated trading than what LTSE would provide.

> Shorting is never a long-term game and should be banned, as it never does the company any favours.

The economy benefits when market prices more accurately reflect relative value between assets. Hampering the ability of the market to lower a price that is too high never does the economy any favors. More specifically, it harms investors who buy the overpriced stock and it harms other companies raising capital who merit a higher relative price.

> & disallow shorting.

Why would you completely disallow shorting ?

I'd think that in such a framework, shorting would just need to become a longer term bet. So one could offer something like 2,5,10 year LEAPs, but restrict their trading to a window of 1 week per year (e.g. one can trade derivatives as much as one wants, but only during week X, which is the week when all derivatives expire, and all derivatives are long term).

Also for options, one would need to always require traders to be covered with the actual stock.

Not only it's a bad idea to ban shorting, but it's almost impossible to do outside regulatory action by the SEC and even then.

Shorting is essentially borrowing the control of stock to some other party. That's it. It doesn't have to be done on the market, it can be done in a private, confidential contract where I oblige myself to sell my stock when directed to do so by yourself, provided adequate warranties exist that you will cover the price difference when I want to purchase it back.

For this ceding of control, I get paid. The market only "sees" regular buying and selling of stock.

Ignoring the SEC for a moment, I don’t follow your reasoning. Why couldn’t buying shares require you to sign a contract that you’re not going to engage in various activities such as shorting? That would preempt any private arrangement you attempt to make. You of course could make an illicit secret agreement but you’d still be breaking and invalidating the contract you bought your shares under exposing yourself to various risks and penalties

How would you detect that, though?

Exercise to be left to the reader. How is collusion and conspiracy detected now?

I suppose, mostly by chance, or by technical mistakes if the perpetrators?

I believe that's the SEC's job.

Presumably by auditing all the prime brokers.

If traders have to be covered with the actual stock, would that mean they can only short Foo shares up to the amount they own? Surely that's equivalent to just selling your holdings?

Or are there people who'll loan out their stocks for 10 years, trusting the borrower has enough cash not to go bankrupt in 10 years no matter what happens?

> If traders have to be covered with the actual stock, would that mean they can only short Foo shares up to the amount they own? Surely that's equivalent to just selling your holdings?

I had selling a call option in mind.

If you own stock, you’re loaning it out to short sellers all the time. Almost any brokerage includes in its contracts the right to loan out its customer’s interest to shorts.

The short seller has an account with a brokerage, the broker is ultimately on the hook for making sure that any borrowed short interest is returned. This is why brokers have margin requirements.

Betting is contrary to investing but anyway, going along on your argument : Betting on a company failure on long term is called "Insurance". Insurance companies bet that your house will burn for example. Do you think it's viable on long term for individuals (a.k.a, lambda people) to bet ( "invest" ) this way ?

continuous trading isn't really necessary... could do a once a week or once a day crossing.

i feel like "more votes the longer you hold the stock" is also a mistake - it should be, your votes are higher weighted if you agree to a longer lockup. 10 year lockup, lots of votes. no lockup, very little...

That's an interesting idea, but in practice surely shareholder voting power has negligible influence on company management compared to share price incentives?

Maybe? But that's the whole LTSE schtick, right?

I like that voting idea a lot!

> Shorting should be banned... as it never does the company any favours.

No, here are my 5 reasons or examples why shorting is good.

_1) Shorts can be beneficial to the company:_

Tesla made a killing from being one of the most shorted stocks. As the stock price rows, it experienced frequent short squeezes as the $TSLAQ short positions holders experienced forced liquidation. Their capital became transferred from the shorts to the longs further boosting the positions of the long investors. $NKLA, $BYND, and $PTON as well.

_2) Shorts Beneficial to long investors:_

Long investors sometimes receive interest payments from short sellers. Heavily shorted stocks become Hard to Borrow (HTB) due to high short interest. HTB stocks cost money to short as represented by an annual interest payment. Robinhood traders with large blocks of HTB stock receive interest payments. IBKR traders using the stock yield enhancement program also receive interest payments. Furthermore, investors of popular Vanguard Index Funds such as VOO and VTI outperform the benchmark by a tiny amount. This is because Vanguard lends out a small portion of the heavily shorted stocks in it's index for interest payments. Then it takes those interest payments and reinvests it back into the ETF further boosting the price.

_3) Shorts allow smart investors to profit regardless of the type of market:_

Hedge funds will short overvalued stocks and long undervalued stocks so that regardless of the market direction, the hedge fund will still make a profit. This stance can reduce portfolio volatility and performance rollercoaster long-only investing can be.

Despite all of these positives for short selling, it would be interesting to see an exchange that bans short selling just for the sake of differentiation. It could never be a popular exchange due to the lack of traded options but the differentiation might be enough to allow it to succeed.

I agree. I ran a DMA/Equity algo and internal prop desk's tech at 2 major banks and you are 100% right. Any delay (artificial or real) would be what we would target for artibitrage.

Best case scenario you make wider spreads and folks somewhere get paid more to market make with higher risks...

> & disallow shorting.

That's a very bad idea.

> Shorting is never a long-term game and should be banned, as it never does the company any favours.

The purpose of shorting isn't to help the company.

If shorting wasn't allowed, Wirecard would've gone on for much longer. Short sellers are an important part of the market.

Are naked shorts still allowed? Maybe prevent those.

I'm curious re the issue of shorting and fixing about your thoughts with respect to liquidity being a good. The derivatives tend to be justified as market liquidity boosters. But if we are intentionally aiming to move out the time horizon of trades, is there then a way to distinguish those techniques as "unhealthy liquidity"?

This reminds me of an article on HN from earlier this year by a reviewer of grant proposals, about how often they receive applications that clearly describe the problem the applicant wants to solve, but don't describe an idea with which to solve it: https://billwadge.wordpress.com/2020/02/10/im-good-enough-im...

> The idea of a stock exchange that allows companies and investors to focus on 5, 10, 25 year horizons sounds great!

But this already exists. It's just the regular stock exchange.

It's also worth noting that a majority of the capital in the market is already focused on very long term horizons. Most of it is sitting in boring mutual funds, who's investors are looking towards retirement as their horizon.

If you're looking for a market that is so focused on long term horizons that they don't even care whether you have enough revenue to remain solvent, and won't have enough revenue to remain solvent at any time in the foreseeable future, then that market already exists too. You can call it Private Equity, or Venture Capital, and HN often likes to discuss how it's trying to reinvent the 2000s tech bubble. It's also led to some incredible scams, and isn't really something you want consumer investors betting their retirements on.

> something like: “investors must hold positions for 10 years”, or, “earnings only reported every 2 years”

These wouldn't be good rules even if you were focused exclusively on long term results. Your longterm outlook can change from one day to the next.

If you want long term focus, invest in an index. No single company can weather every storm. Sometimes they need short term focus to survive in the long term.

I think the idea is that a lot of the perceived instability in the economy is _caused_ or at least much amplified by the nature of stock markets. Changing how one thinks about stocks and what the ideal of a "healthy" company looks like might alleviate some of these problems.

> a lot of the perceived instability in the economy is _caused_ or at least much amplified by the nature of stock markets.

Where did you get this idea? I don't see anyone saying it. Consider what might happen if you freeze the ability for people to borrow money. The stock market allows capital to move around more freely.

I notice this is your first comment in a year and a half. Welcome back.

'- How is LTSE different? Seems like: Companies and investors “promise” to have a longer term focus via planning'

I don't think "promise" is the word. The fact the exchange says it's focused on long term, would incline companies that wanted to focus on long term to list themselves there. Likewise, it would incline customers to list themselves there. But what incentive is there for short term traders?

Right now, on the normal exchanges, you have both types. And the loudest voices in the room are the short term types. They're the ones paying the closest attention, attending the shareholder meetings, etc. The long term holders are far less engaged.

What does this have for those short term traders? Nothing. There's no reason to pile into this when all the incentives of the companies listing, and existing holders, are aligned to long term. If you're looking short term, why would you want this, knowing all the other players will be aligned to take hits in the short term, if it pays off long term?

Not saying that this will be successful, but I can see it working because of that. Not because it's more attractive to long term holders, but because it's less attractive to short term.

That said, agreed that some ways to enforce it would be nice. But those have some noticeable downsides too (i.e., if a company makes decisions you don't agree with, but you're locked into a hold position...).

That said, as was mentioned elsewhere, it sounds like voting power is tied to how long you've held, as well as number of shares. So that certainly helps silent the churn and burn voices.

all the incentives of the companies listing, and existing holders, are aligned to long term

Are they? In what way?

The only difference from a normal exchange appears to be that companies are "required to publish a series of policies". Why wouldn't that incentivize saying "the right things" in those policies but then otherwise behaving exactly the same as companies listed on a normal exchange?

it sounds like voting power is tied to how long you've held

This is not actually a requirement for companies listed on the LTSE, but even if every company implemented it, in practice surely shareholder voting power has negligible influence on company management compared to share price incentives?

"This stock exchange is intended for long term"

I am a business that wishes to focus on the short term; why would I list there?

I am a customer that wishes to focus on the short term; why would I buy there?

It's not a requirement. It likely doesn't need to be a requirement. The point is, investors and companies both have options; why would they pick the one that is misaligned with them, even if it's just in intention? Starting out there's no reason to (no critical mass to make it worth investing in), and if it picks up traction there'd be no reason to either, because now the incumbent companies, and their stockholders, are already aligned to long term thinking due to their being the only ones inclined to invest initially.

just want to float an idea that occurred to me that might explain the disappointment/confusion from HN:

the LTSE in its current form is a Minimal Viable Product.

It is maximally compatible with existing exchanges in order to encourage trading, listing and adoption from day 1. Eric picked the governance angle to start with, but it's probably not the final vision. He believes it is high leverage; reasonable people might disagree.

but it is perfectly explainable to have v1 of the LTSE be a little disappointing, given that this is the same guy that coined the MVP.

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