Roger › Comments

"No, I understand the paper. I believe a central counterparty is much more likely to avert a melt-down due to increased transparency and liquidity then a daisy-chain of independent OTC counterparties. I think you'll also have a better shot of pricing collateral correctly in a central exchange than you would separate OTC dealers. Perhaps we simply disagree. That's ok. As for your belief that such a system hasn't been established for reasons other than protecting profits - you are simply wrong. Wall Street has a rich history of using predatory practices with respect to new exchanges both in the US and in Europe, using transactional flow as a threat. Belief that an OTC/CDS exchange doesn't exist for any reason other than greed is simply delusional IMHO." - Roger

"I believe I specifically said that moving to an exchange would not solve all the problems. That said, i do think it goes a long way towards addressing what is a severely broken market. As for the first point, I have been clamoring for all OTC derivatives to be moved to exchanges for a long time, so no disagreement there. As for the second paper, the socialization of losses would be far lower in light of heightened transparency and better collateral management than under the current regime. So I fundamentally disagree. I think it is a "forest for the trees" issue, and that the value of a transparent, vibrant, exchange-based CDS market far outweighs these costs." - Roger

"RD, you raise an extremely important point and I agree. Much of the noise and hype is obfuscating the real issue, that we should be prepared to let institutions fail, with the losses borne by their stock and bond holders and counterparties who were ill-protected. Whether this means limiting the gross size of firms or having more strict capital and leverage guidelines I'm not sure, but this is among the most important issues to be tackled in the wake of the market meltdown. Thanks for your thoughtful comment." - Roger

"EM, pretty much agree with your comment. My position is from the vantage point of informational value and arbitrage, not leveraged speculation. I do think it is possible to have a valuable, vibrant, safe CDS market. I think it is worth the effort and that Einhorn's position is ultimately ill-founded." - Roger

"FU, a. I'm not on Wall Street b. You have no idea what innovation means. You are mixing up innovation with bad behavior, plenty of which happens in the absence of new product development or purported "innovation," e.g. insider trading, fraudulent mortgage originations, etc. I hope people who pen jerky, hostile, poorly thought out comments rot." - Roger

"I fundamentally agree with you as well as with Paul Kedrosky, who makes a similar point. This position is a far cry from Einhorn's blanket ban, however. My post is not in support of the current OTC CDS construct with leveraged speculation, but with an exchange basis that can be appropriately collateralized and managed. Thanks for the comment." - Roger

"If the markets were completely "free," meaning unbridled, unregulated competition in the Adam Smith sense, then retail would be toast. It is only because of regulation to address externalities (such as the massive divergence in power between institutions and retail) that retail has seen its lot in life improve dramatically. So your statement IMHO lacks the texture and depth necessary to really address what is going on here." - Roger

"If the markets were completely "free," meaning unbridled, unregulated competition in the Adam Smith sense, then retail would be toast. It is only because of regulation to address externalities (such as the massive divergence in power between institutions and retail) that retail has seen its lot in life improve dramatically. So your statement IMHO lacks the texture and depth necessary to really address what is going on here." - Roger

"John, a truly seminal piece of work. Kudos for its depth and clarity of thought. The most interesting thing to me, however, is its relevance for all businesses, anywhere. If nothing else this highlights the convergence of the web and non-web businesses, where innovation moves increasingly rapidly, transparency is essential and the users help define the product roadmap. For all its fluidity Google is just another business, and will increasingly be treated as such." - Roger

"Chris, first of all, congrats on the blog. It is terrific. And based on the breadth and intelligence of the comments, this has already become a very exciting ecosystem in which to participate. While I agree with the thrust of your post, you've taken a very horizontal view of the problem. I do not spend time on Google-scale problems, but on much more targeted, vertical solutions to the "big data" problem. By layering domain specificity onto the problem of semantic analysis, many of the pitfalls of NLP and AI become far more manageable. I'm not saying they're a panacea, and certainly not when trying to solve problems in real-time, but they can take you a lot farther than when applying them to horizontal data sets. And yes, tagging rich data and creating additional metadata for analysis holds many of the keys to extracting true meaning from unstructured data sets. I could write on this topic for hours. Thanks for the post. Roger" - Roger

"Scott, thanks for sharing you learnings. You are a smart, honest guy, you tried hard and it didn't work out this time. It will again in the future." - Roger

"Max, a great point. The bottom line is getting the right amount of capital to grow the business with incentives for the entrepreneurs that make sense. This can be done in the context of a down round, especially when earlier valuations got ahead of themselves. If incumbent management can't see the forest for the trees and shun fresh capital from good investors because it is "a down round," then that is a bad sign in and of itself. And good investors won't jam management such that their ownership stake becomes insignificant; that would be insanely short-sighted. In short, deals need be judged on their individual merits. Whether a round is down or not does not indicate good or bad. The issue is much more textured than that." - Roger

"Hi. If you read my blog from from Fall/Winter 2008, you'll see that our views are not dissimilar. This recent post doesn't argue against a bailout, it argues against the way the bailout was structured. I thought that was clear, but perhaps not. In short, the bailout was badly mispriced. Under either a Good Bank/Bad Bank scenario where mark-to-market accounting was strictly imposed or a TARP + warrants structure where the option was structured fairly, I would have had no problem. Instead, GS shareholders (and employees) got a $20+ billion option for ~$1 billion. This is my issue." - Roger

"AAARGH. It pisses me off when you are so realistic and correct, David. I just can't shake my idealism and hope for the future. I thought I would have lost it along with my baby fat but to no avail." - Roger

"Given the uncertainty of ad spending, the tremendous dollars going into digital media, the increasingly competitive landscape and the jittery global financial markets, I have added a few criteria to my check-list: * Initially sells to the enterprise for branding, credibility, awareness and early revenues * Can get to revenues within 6 months, tops * Is sold on the basis of ROI, e.g., helps generate revenues or reduce headcount/costs * Integrates easily with existing platforms and/or programs * Either leverages existing open source programs or can itself become partially or fully open source * Has multiple revenue streams, e.g., software, maintenance, services, etc." - Andrew Badera from Bookmarklet

Gotcha, thanks Roger, makes sense. - Andrew Badera

"This is an excellent point. Honestly, the same applies to start-up founders. If someone just hands them the money, the likelihood that the money will be spent well (and that they are the best ones to build the company) is pretty low. Conversely, if they have to raise the money by pitching, pitching, pitching and pitching, then knowledge and discipline are built into the process. Thanks for chiming in." - Roger

"Well, yes and no. Remember Howard Rubin at Merrill? Drop $377 million (hide a few trade tickets in a desk, etc.), get a new job as head of the Bear Stearns mortgage desk. It happens all the time. There is a twisted perception on Wall Street that if someone has the stones (and got the rope) to lose big, that they must have the stones (and the luck) to win big. It is simply the managerial manifestation of the asymmetrical risk/return faced by those employed by the corporation and the shareholders. Big losers get hired for big guarantees every day. Odd Wall Street logic at work." - Roger

"Dave, isn't Andy Hall one of the top 5 highest paid employees, therefore being disclosed in Citigroup's SEC filings? That is what I meant, not that shareholders had a biblical understanding of Phibro. Only that it's head was being paid big coin." - Roger

"Medallion isn't ultra high frequency, Ilya. And yes, I've heard of it." - Roger

"This is why Mark founded and helped build a business worth $1 billion. He is smart, brutal and unforgiving. The 15 points can be grouped into a few truisms: 1. It's all about the customer - live with them, learn from them 2. Sell, sell, sell - all the time 3. Free is dumb - build a culture of paying for value 4. Money is a means to an end - get what you need and don't waste time getting cute 5. Competition is everywhere - execute well and make your own success Sage advice from an entrepreneurial rock star. Thanks for sharing." - Roger

"Just because they are called "stat arb" doesn't mean they are doing ultra high frequency stat arb. Much of the assets being run by these complexes have longer signal horizons and are better labeled "systematic trading" strategies, that rely on models but aren't market-making in nature. They don't possess the same risk/return profiles or capacity limitations of the ultra high frequency traders, which is why their returns are generally lower (Renaissance excluded - Simons is a freak of nature that simply can't be explained) and their asset levels much higher. At scale, a systematic strategy (even intra-day signals, but not millisecond-measured signals) can do a meaningful percentage of NYSE volume. At DB Advisors there were days when we did 4% of volume, but we ran far more assets under systematic strategies than true ultra high frequency strategies." - Roger

"Stratus. Managed futures have great liquidity profiles and are a great add to a portfolio as an offset for tail risk. But they are, by their nature, high vol and low Sharpe Ratio, which further highlights the limitations of the metric." - Roger

"then it wouldn't be a nightmare and i would be sleeping..." - Roger

"this is a really insightful post, howard. needless to say, i've made my own mistakes fighting the tape. i am rational but wrong; there is little solace in that. i think you're perspectives are right on. thanks for sharing." - Roger

"Mark, it's great that you took the time to write this. Failing sucks, no doubt, but the lessons learned are truly priceless. You've learned many good ones, to be sure. Sorry about the pain and frustration that comes along with hitting the wall; I've been there. Here is my take on my own failed venture from a year ago: http://www.informationarbitrage.com/2008...... Keep swinging. Roger" - Roger

"I think you make a very fair point. Question is, if this is the VCs motivation, are they not better simply doing a block trade to a strategic or an institution instead of hoping there is sufficient demand in a private market? That said, who knows. I am simply cynical due to lack of disclosure and the optimal method by which a large position is monetized. In many cases it is better to sell a large position to a single buyer rather than trying to parcel it out because of signaling." - Roger

"Yes, a ton of capital has been raised for secondaries, but remember the value prop here. Fred Wilson liquidity for his portfolio holdings at an attractive price, not some knock-down, bargain basement price. He wants an alternative to an IPO. Sure, he'll take a haircut, but he won't let himself be scalped. Most of the secondary money is going into busted LP positions in venture capital, private equity and hedge funds. These guys, the Lexingtons, the Coller Capitals, etc. are not interested in Facebook, Twitter, Etsy and Indeed. They want KKR at 40 cents and Fortress's side pocket holdings at 20 cents. It's a totally different game and target asset class, IMHO." - Roger

"Tom, that is a really excellent point. Thanks for commenting." - Roger

"Eric, first of all, the market is only open to accredited investors and QIBs as noted in the post. Clearly the retail public market has no such high net worth/income/asset requirements. Also, the amount of disclosure required and information available would sharply trail the public markets. As current construed, there is also no "market making" function contemplated in these private markets, meaning that it is each seller to each buyer. From a VC perspective, this means either finding a large single buyer (which is really a block trade as mentioned in the post), or finding lots of little investors to take up the position. With a position of size, this would be an arduous, time-consuming task without a market maker. A market maker can buy the position and perform the distribution function in lieu of the VC. This is the way the public, not the private, markets work." - Roger

"Dave, but did he outperform during this time frame? Answer: massively." - Roger