Mark Cuban: What Business is Wall Street in?

http://blogmaverick.com/2011/08/08/what-business-is-wall-street-in-2/

by fraXis • 15 years ago

196 117 15 years ago

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

gamble6• 15 years ago

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

starpilot• 15 years ago

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

chopsueyar• 15 years ago

Remember your roots, Cuban!

http://www.nytimes.com/2000/03/05/magazine/the-idled-workaho...

Astrohacker2• 15 years ago

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

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

bwanab• 15 years ago

I'm assuming that he doesn't really mean "creating capital..." for exactly the reasons that you give. But, there was a day that Wall Street was in the business of capital formation - pulling together relatively small bits of capital from large numbers of investors to apply that capital to projects that would certainly be beyond the reach of normal (i.e. not government) investors. This is a valid business - one which sadly is a smaller and smaller part of what Wall Street does.

rorrr3• 15 years ago

> The only thing that can create capital is producing more than you consume and saving the difference

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

1) Buy wholesale, sell retail

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

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

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

5) Steal

Astrohacker2• 15 years ago

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

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

guelo• 15 years ago

Cuban is referring to when Wall Street aggregates investors' money and gives it to growing companies. Trying to grow by "producing more than you consume and saving the difference" is called reinvesting the cash flow, aka bootstrapping in the startup world. But sometimes companies see a growth opportunity that takes more capital than they can get through cash flow which is when they turn to investors. In Silicon Valley they turn to VCs, but Wall Street is the only place companies can turn to raise the really big money up to billions of dollars.

veyron• 15 years ago

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

gamble6• 15 years ago

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

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

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

cpeterso• 15 years ago

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

rorrr3• 15 years ago

Growth

yuhong2• 15 years ago

To be more precise, stock price growth. I think in most cases it is better to do dividends and move away from stock price based compensation.

mynegation• 15 years ago

Strictly speaking, investors buy a part of a company, buy contributing to it's equity. If company is expected to grow without putting on too much debt, its equity will grow too and a fixed part of it (if we forget about dilution for a moment) is expected to appreciate as well.

sliverstorm• 15 years ago

If a company is not paying dividends, it is (hopefully) reinvesting in itself and growing. Theoretically, all growing companies will reach one of the following points:

1) It will stop growing, and begin paying out dividends

2) It will be acquired

3) It will fold

So, ownership of stocks that do not pay dividends is speculative- eventually, it will either fold or net you money. This is not liquid, of course- stock trading is the liquidation of this speculation, if that makes sense, in the same way that you hold a bond in anticipation of future returns, but you could sell the bond for more immediate gains.

(As I understand it, the reason why a growing company will, in theory, eventually pay out dividends rather than just keeping wads of cash is because once the return of reinvestment tapers off, major shareholders will band together to force the company to pay out dividends)

adamjernst• 15 years ago

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

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

orangecat• 15 years ago

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

jswinghammer• 15 years ago

You're right to be suspicious of the whole system. As a stockholder you are basically last in line to get compensation from a bankruptcy proceeding. The bondholders will get paid well before you will.

Investing without a dividend is just speculation.

dman• 15 years ago

Tell that to people who have been buying Apple stock. Disclaimer - Ive never owned Apple stock at any point in time.

lotharbot2• 15 years ago

The simplified version:

Stock gives you a share of current and future profits (via dividends) as well as a share of the liquidation value of the company. If a company continues to acquire assets, this increases its liquidation value; some companies do this rather than paying dividends because it's more tax-efficient for investors.

One of Warren Buffett's investment strategies is to look for companies that are stable but whose stock is trading at below liquidation value.

T_S_9• 15 years ago

Simple solution. Penny a share transfer tax for all trades. Corresponding amounts on bonds and other instruments. Watch the amazing reduction in volume and volatility. Then watch the return to focus on value trading.

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

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

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

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

jrockway3• 15 years ago

Penny a share transfer tax for all trades.

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

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

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

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

Cushman2• 15 years ago

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

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

Volpe2• 15 years ago

Creative accounting?

How can something that is supposed to report 'reality' be 'creative'. It's analytical, and highly objective... where is the creativity?

jerf• 15 years ago

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

While I agree with the rest of your criticisms, this is off base. You have to consider the second-order effects; banks will not simply continue to trade at the exact same volume as before whatever (presumably somehow fixed-up) tax is imposed, then pass the costs on to hapless consumers who have no choice but to just fork over the cash. They will have to trade less. Which is the point; however good or bad it may be, at least the core idea is making some account of second-order effects. When you tax a thing, you get less of it.

(My specific opinion is that it isn't necessarily a net gain as written, it is after all just an HN comment, but that the general idea of carefully re-inserting some friction back into the market as a damping factor may be a useful line of inquiry. But it's not going to be easy.)

T_S_9• 15 years ago

My example tax is only a conversation starter. You would be right to say that the reality is a little more complex. But not much. I worked in the bond, fx, and commodities end of Wall Street for nearly 20 years and an average guy from my old department would know how to set, implement and administer such a tax for each product. It's not that hard. In fact a similar system existed for regulatory capital for a very long time.

The Communism comparison is really a red herring. The principles of the price system, the central feature of a free market, are under constant assault from informational asymmetries and externalities of all kinds. Before our era of jargon, they were simply called fraud and rumor mongering. HFT is 21st century micro-rumor mongering.

To protect the functioning of markets these are appropriate objects of regulation--even for a free marketeer like me. I merely suggest we modify the the regulation of an already regulated market.

Unfortunately the style of regulation we keep opting for punishes bad behavior of individuals--when it does anything at all--and ignores the systemic causes. This repeatedly plays into the hands of industry interests every time. The public interest requires more information, to reduce the tendency for fraud that our regulators have proven they cannot control.

throwaway11293• 15 years ago

Re "penny a share transfer tax", the UK already does this, it's called the "stamp tax." Unfortunately, they exempted a few large institutions from the tax, so everyone trades derivative instruments managed by these institutions who don't pay the tax. You only pay the tax if you're stupid.

T_S_9• 15 years ago

Great point. No exemptions. Otherwise no point to the tax.

d2• 15 years ago

I think the spirit of your idea of a per transaction tax on financial products is a good one. I would balance the increase in government revenue with a reduction in tax on capital gains held more than 5 years as Cuban suggests.

T_S_9• 15 years ago

Amendment accepted ;-)

dkarl5• 15 years ago

Trying to understand a company's finances from its internal books is foolhardy unless the company volunteers to train you up to the standards of its own accountants. Protecting investors from the idiosyncratic and often misleading nature of a company's internal books is the entire reason for GAAP's existence in the first place.

T_S_9• 15 years ago

Actually I am suggesting something more innovative (radical/extreme?) to companies. Toss away those GAAP crutches, and confess to the congregation all your transactions--realtime. Enter the kingdom of Real Transparency (TM).

I don't need your accountants, only your auditors. Imagine for a minute what that would do to the business of financial analysis. It would add real value, unlike today.

vaksel• 15 years ago

I'd also like a ban on shorting.

Noone should benefit from sabotaging a company. It's way too easy to drive the price of a stock down...the slightest rumor sends them into free fall.

Granted it wouldn't solve much. Wall Street could just as well drive the price of a stock down with a false rumor, then buy up the stock at a discount before it rebounded.

But at the very least, they wouldn't make twice as much on each transaction.

T_S_9• 15 years ago

Actually I disagree. Shorts one of the few cures for bubbles that we have and they are weakened greatly by institutional rules that favor promotion over rationality. But, and this is a big one, we would have to reveal trading positions daily to banish all speculation.

prostoalex• 15 years ago

Large short ratio is the first sign something is amiss. In an environment with imperfect information, someone knows more than the news on the company press releases page.

MrMan• 15 years ago

strongly disagree

damoncali6• 15 years ago

I think you're equating short selling with fraudulent market manipulation. Short selling has no soul - flipping the buy-then-sell to sell-then-buy ( that is, shorting ) merely allows the pessimists to place their bets along side the optimists, and the markets are better off for it. A great read on the subject:

http://leedsonfinance.com/2009/06/13/the-sec-is-at-it-again-...

benmccann2• 15 years ago

A penny per share tax would price small investors out of the market. If there were a penny per share tax then corporations would reverse split their shares so that a penny is nothing relative to the share price of their equity. I don't think you really want all stock to be as expensive as Berkshire Hathaway.

joezydeco• 15 years ago

How many shares do you think small investors buy at a time?

If I buy 30 shares of Broadcom @ 32.00 on ETrade (their commission is $9.99), my total price goes from 969.99 to 970.29. If BRCM reverses 30:1, I save $0.29?

I'd think large companies would rather see the price stay affordable. BRK.A/B is a totally different animal.

ori_b• 15 years ago

To curb high frequency trading, a dollar per transaction would also work. For large trades, this would be neglegible, but if you're doing tens of thousands of them a day, it would add up.

wisty• 15 years ago

In a similar spirit, allow automated trading to take place, but only if the code and underlying data sets is open sourced after 5 (or 10?) years.

If you need manual intervention (i.e. gut estimates) to feed into the automated trade, it must be logged, and will be made publicly available at the same time as the code. There will also be a lag of 1 second.

As a carrot, servers with logged code can be co-located with the exchange, for a small fee. As a stick, anything outside the exchange gets the 1 second lag.

pathik• 15 years ago

It's called the Tobin tax. One of the best ways to stop significantly reduce HFT.

Benjo• 15 years ago

This or a hundred other solutions. There's no political will to do it, because designing more efficient systems does not get you reelected.

nomurrcy• 15 years ago

Another idea (sans - or in addition to a tax) to improve the signal / noise ratio of the markets: mandate that all B/Os put out there have a TTL of 5 seconds or until they are hit.

So if you Bid at X, you can't pull that bid 10 microseconds later. You can't quote stuff / probe with orders you never expect to get hit. You can't create the appearance of 'market depth' where none exists at all.

T_S_9• 15 years ago

Exactly. You are feeding false information into the system. Limiting the trading to epochs and holding orders levels the playing field.

nvarsj• 15 years ago

You have to be really careful with such taxes. Take for instance India: the Indian government places a tax on the exercise of any option. This doesn't stop HFT at all - it simply makes it more favorable to trade out of a position before exercise. My guess is it mostly hurts the business owner/investor trying to hedge risk.

Likewise, a fee on a stock trade would probably have little effect on banks like GS, etc. I imagine it would instead discourage trading through public exchanges and widen spreads - all things that are bad for the little guy.

dkarl5• 15 years ago

It is getting increasingly difficult to just invest in companies you believe in.

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

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

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

yummyfajitas2• 15 years ago

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

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

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

MikeCapone2• 15 years ago

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

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

three143• 15 years ago

An alternative read is that he thinks that non-value investing is swamping value investing, and that prices have little correlation with underlying value. It's sort of like trying to figure out how much gold is worth, if all you know is how much gold is actually used by jewelry and industry - you'll get killed in the real market.

snagage• 15 years ago

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

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

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

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

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

westicle• 15 years ago

Great summary of the tax advantages available for buy and hold investors in Australia.

How would these concepts integrate with the US tax treatment of stock trading? As far as I know there is no imputation of dividends under USA tax law - capital gains tax concessions might be of some benefit to value investors.

I suspect they wouldn't alleviate Cuban's concerns over the impact of HFT and exploiting market movements. A flat tax on trades seems like a more effective way to reduce the prevalence of those practices (for better or worse).

cturner• 15 years ago

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

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

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

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

lotharbot2• 15 years ago

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

-----

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

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

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

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

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

gamble6• 15 years ago

Warren Buffet isn't the average value investor. He rarely buys stock on the open market. The average investor doesn't have his ability to buy control of the company, or to direct profits from a declining cash cow into another company with more growth potential. I suspect Buffet would agree with Cuban on the danger of buying common stock based purely on technical analysis.

rfurmani• 15 years ago

Actually, Buffet has time and again said that if he had only 0.5-1.0 million to manage he could consistently get 50% a year. His greater capital does give him special access to management, but also greatly restricts where he can invest. I'm part of a fund that does automatic value investing based on an analysis of the fundamentals of the universe of stocks, and you can do quite well for yourself. Here Graham's "the intelligent investor" is still the bible

Tichy2• 15 years ago

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

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

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

lionhearted• 15 years ago

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

People have short memories.

Seriously, that's the answer.

count• 15 years ago

It's not 'new money'. For every bet you make and lose, someone is winning (the money has to go somewhere!).

levigross• 15 years ago

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

Be-The-Water• 15 years ago

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

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

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

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

jasonzemos• 15 years ago

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

throwaway11293• 15 years ago

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

Jarred• 15 years ago

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

ryanisinallofus• 15 years ago

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

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

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

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

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

angstrom• 15 years ago

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

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

msg• 15 years ago

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

troyastorino• 15 years ago

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

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

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

kevinpet• 15 years ago

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

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

astrec• 15 years ago

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

ulf• 15 years ago

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

Wall Street just followed that model.

yason• 15 years ago

It is getting increasingly difficult to just invest in companies you believe in.

Uh, I think it goes:

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

What did I miss?

javanix• 15 years ago

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

dkarl5• 15 years ago

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

known• 15 years ago

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

Mark Cuban: What Business is Wall Street in?

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