Money Stuff: The IPO Market Was Too Good

Yesterday the National Association of Manufacturers called on the vice president of the United States to invoke the provisions of the 25th Amendment, declare that the president "is unable to discharge the powers and duties of his office," and remove him from power. The National Association of Manufacturers! I suppose you could imagine a different, funnier world where the National Association of Manufacturers regularly called for the extraordinary removal of presidents because of disagreements over accelerated depreciation of capital assets, but in the actual world we live in this is not the normal sort of political activity that the National Association of Manufacturers engages in. It takes a lot to get the National Association of Manufacturers to endorse deposing a U.S. president. As it happens, what it took was for that president to send a violent mob to seize the U.S. Capitol in an effort to overturn the results of an election that he lost. As I mentioned yesterday, when Donald Trump was elected in 2016, I wrote that American constitutional principles do not work automatically, through the magic power embedded in some old parchment. "They only work if the human actors in the system choose to follow them and to demand that others follow them," I said. As I feared, that was the beginning of an extraordinary four-year experiment in which the U.S. president manifestly did not believe in any of those principles, in the Constitution or the rule of law or the separation of powers or the rights of citizens or democracy itself. This experiment was bad! My hope is that it ended yesterday, that enough other people in power finally decided to put the Constitution over the whims of Donald Trump, but really who knows. It seems like the sort of thing that is hard to come back from. It seems ridiculous, in times like these, to write a column about finance, but it is my job, and many of my readers enjoy having some respite from politics, and frankly so do I.[1] So I will continue this week's tour of stories that I missed over the past few months. IPO pops (1) I used to be a capital markets banker, and I spent a certain amount of time talking to clients about the timing of their securities offerings. It is not exactly rocket science. The basic idea is that you should try to sell stock when people want to buy stock, and not when they don't. If you are doing an initial public offering of your stock, you can never be sure that people will want to buy it, but you can make some informed guesses. If a bunch of other companies recently went public, and people were clamoring to buy them and the stocks all went up, then now is probably a good time for your company to go public. If instead recent IPOs all fell flat, and they priced at the lows and immediately crashed, then maybe you should wait a few weeks. "When the ducks are quacking, feed them" is the sort of folksy wisdom that capital markets bankers regularly dispense. By the end of 2020 the ducks were quacking so loudly that companies started to think, wait, what do these ducks know that we don't? And so a couple of companies delayed their IPOs because the IPO market was too good. From December: Roblox, a gaming company that had been preparing to go public this month, has decided to delay its initial public offering until next year, in a sign that the enthusiastic market for I.P.O.s by DoorDash and Airbnb this past week has made it difficult to price shares accurately. The company's co-founder and chief executive, David Baszucki, announced the decision in a memo to employees on Friday, saying that waiting provided "an opportunity to improve our specific process for employees, shareholders and future investors both big and small." And: Affirm Holdings Inc. is postponing its initial public offering, according to people familiar with the matter, the second company in as many days to pull back from the red-hot IPO market. The point-of-sale lender, which had been set to begin marketing its shares to investors this coming week ahead of a December listing, now won't go public until January at the earliest, the people said. While the reasons aren't entirely clear, people familiar with the matter cited the extreme first-day pops this past week in the shares of DoorDash Inc. and Airbnb Inc. and delays at the Securities and Exchange Commission amid a flood of listing requests. Usually you delay an IPO if the market is soft: If no one wants to buy stock, you shouldn't try to sell it. But what if the market is too hot? If you go public at $100 and your stock immediately jumps to $200, Bill Gurley will yell at you for leaving money on the table. Better to wait a few weeks and go public at $80 and have your stock jump to $90. You don't want people to want to buy your stock too much! I don't know. Back in my day, "leaving money on the table" was considered a small nice problem to have. You have sold some stock at a price that turned out to be too low, but on the other hand now you are a valuable public company with a rising stock price. Your new public shareholders are happy and supportive because their stock went up, your employees are rich because their stock went up, your early investors probably still own stock and it has gone up, if you need to raise more money you can do it easily, really having a hot successful IPO was mostly seen as a good thing for a company. But now the emotional situation may have reversed. Now if your stock doubles on the first day of trading, your employees and investors will be mad that you got fleeced by Wall Street and sold stock for less than it was worth. (Sure they didn't sell, and their stock is worth a lot now, but they got diluted.) Instead of feeling good about yourself because people wanted to buy your stock, you will feel bad because you sold it to them too cheaply.  Still I don't understand why the reaction was to delay the IPOs? There's always a risk that the market will turn. Since those IPOs were delayed there have been worrying Covid-19 mutations and, um, a violent insurrection attempting to overturn the results of a U.S. presidential election though, to be fair, the stock market is up. The right move is not to wait, but just to jack up the price. Never mind the market, you have maximum leverage with your bankers after a bunch of IPOs doubled on the first day. They come to you and say "the most you can do is $100" and you say "we know you are lying, price it at $180," and what can they say? IPO pops (2) Actually I have in the past given companies exactly that simple advice on how to avoid the IPO pop, which is to do a regular IPO but make the price higher. Like, do exactly what you'd do otherwise, and at the end your bankers will come to you and say "we think we can price this at $25, which is a great deal for you, congratulations," and you say "fine, $30," and then things get pretty awkward for a while but you probably end up pricing your IPO at $30 and leaving less money on the table. Like I said, (1) I used to be a capital markets banker and (2) it is not rocket science. If you're mad that all the IPO prices are too low, just make yours higher! If you think that your banks will try to get you to undercharge for your shares, charge more than they tell you to! In practice—I wrote—the way to do this is to have a lot of visibility into the order book. Usually the way IPOs work is that the banks talk to all the big investors, and write down the quantities of shares the investors would buy at various prices, and then aggregate that into a sort of subjective view of the clearing price, and apply their long experience and gut instinct to the order book, and then tell the company to price the shares a bit lower than the apparent market-clearing price. But it's your IPO, and if you just tell the banks "here, you wrote down how many shares people would want and at what prices, just give us the list," they'll probably do it. You could look at the list—it's called the order book—and see what price would allow you to sell all your shares, and then you could pick that price. "Instead of having them come to you and say 'the order book looks good at $28' or whatever, just have them give you the order book so you can see it," I wrote.  The extreme version of this is to have a binding auction for your shares and sell them at the market-clearing price to whoever puts in the highest bids, but you don't have to do that. You could look at the order book and make sure you can allocate shares to all the mutual funds that you like and not to all the activist funds that you hate, etc., even if it means taking a slightly lower price. You can have all the subjective quality-of-the-order-book conversations that your bankers will want to have with you, but also you can charge more. I was pleased to see that by the end of 2020 companies were doing this. In December John Detrixhe wrote about "hybrid IPOs," which seem to have been pioneered by Unity Software Inc.'s September offering: Some experts think Unity's offering—a hybrid of an auction and a more traditional IPO—is a sign of things to come. A hybrid auction uses an auction process to gauge demand for the offering. Then the company itself, rather than the investment bank, uses the data to decide which investors will get shares. … Food delivery service DoorDash and Airbnb, the property-sharing company, both went public in December using hybrid auctions. More details: Prospective institutional investors will be asked how many shares they wish to buy, and at what price, by an online system managed by Goldman Sachs, according to a notice sent out to explain the new process. Investors can place multiple bids at difference prices. Unity will select a price for the offering after the bids are entered, allocating a portion of the shares to all investors who indicated interest above that price level, according to the notice, which was viewed by the Financial Times. The company will have discretion to choose how the offering is split between different investors and may choose to use an auction-like process that proportionally assigns shares, said people briefed on Unity's thinking. ... The process is meant to create a more transparent method for gauging investor demand compared to traditional IPOs, the people said. It also gives Unity more power to decide on its pricing and investor base compared to the usual process. Yeah I mean it's a regular IPO but the company gets to look at the order book and pick the price. This is a good idea! This is easy! Companies should do this! In the event Unity had a 31% first-day pop, DoorDash 86% and Airbnb 113%, oops, oh well. The lessons here are that IPO pricing is not as easy as it looks, and that the first-day pop is not exactly proof that an IPO was underpriced. In August, Alex Rampell and Scott Kupor of Andreessen Horowitz wrote a good post on IPO pops, arguing that they are mostly an artifact not of mispricing but of marginal demand. When a company prices an IPO, it allocates shares mostly to investors who it hopes will be good long-term shareholders. The next day, the stock opens for trading, and most of those shareholders don't sell (because they are long-term holders). Gamblers, arbitrageurs, retail traders and anyone else who wants stock will have to buy it from the minority of IPO investors who want to sell. If a company goes public by selling 15% of its stock, and then 15% of the buyers in the IPO "flip" their stock the next day (realistic numbers), then only 2.25% of the company's stock is available to buy. The post-IPO price—the price after the pop—thus reflects scarcity, the lack of shares available to buy, more than it reflects the valuation of the company.[2] Now, I have given companies some other advice on how to disrupt the IPO. For instance a lot of companies find it annoying that, in a traditional IPO, their employees and early investors have to sign lockup agreements prohibiting them from selling any stock in the first six months after the IPO. I pointed out: You could just not do that! The lockup is not a legal requirement; it's just a thing that banks ask companies for, because it makes it easier to sell the stock. (Buyers will be more excited to buy if they know no new supply is coming.) But you could say no, why not, it's your IPO.  And in fact:[3] Unity allowed employees to sell shares on day one, a departure from the usual lockup that prevents employees from selling shares for the first 180 days. "The people who build this company are amazing and I rely on them and I wanted them to participate on the same level playing field as a banker or investor," Riccitiello said. "I've never understood why this wasn't possible." I mean, I can give you the explanation: It's the one I wrote above, about how a normal IPO has a lot of scarcity value, which keeps the price up. This makes IPOs more attractive to investors. This is a fine explanation as far as it goes, but it doesn't end the discussion. It is totally possible to do an IPO without a lockup! Just let the employees sell shares on day one! It's fine! It was fine. Or some companies find the traditional IPO "greenshoe" annoying: Typically companies grant their banks an option to buy 15% more shares after an IPO, which helps the banks stabilize the stock price, but companies don't love greenshoes because they create some uncertainty (will you sell 100 shares, or 115?) and weird economic incentives for the banks. I have pointed out that you can just not have a greenshoe. And DoorDash's IPO did not have a greenshoe. It was fine.  I want to take a step back here. There are a bunch of things that you are supposed to do, traditionally, to get an IPO done. You are supposed to have a greenshoe. You are supposed to have strict lockups. You are supposed to have reasonably shareholder-friendly governance and professional, responsible management. Most notably, you are supposed to price your IPO at a valuation that feels reasonable and in line with existing public peers, with a bit of a discount so that people who buy the stock in the IPO can expect to make a bit of money. It is, in theory, hard to get people to invest in an IPO; they are buying stock in a new, unproven company that has not traded before and has uncertain prospects. You get them to invest by giving them attractive pricing, lockups, terms, governance, everything. Everything combines to make it as easy as possible to get a deal done, because in the abstract it is hard to get a deal done. That theory was once true but is now—perhaps temporarily—not. Partly this is a matter of supply and demand: There is a lot of money looking to invest in IPOs, and not enough companies looking for money, so the companies have an upper hand. Partly it is a matter of a change in the corporate life cycle: In the olden days, companies went public relatively early, so IPOs really were mostly for small unproven companies; now, lots of IPOs are for enormous multibillion-dollar tech unicorns with household-name brands, so the classical logic—"you are asking investors to take a huge risk on an unproven newcomer like Airbnb so they need a discount"—doesn't quite apply. And so—as we have often discussed—governance provisions in IPOs are bad now: Founders can have dual-class stock that gives them perpetual control, and insulates them from shareholder oversight, because shareholders just can't afford to be very demanding. But the same thing is true of everything about IPOs. You can get rid of lockups and greenshoes, and you can push harder on pricing, because the demand for IPOs is so strong. It's so strong that even after you do all of those things you'll still get huge IPO pops. Those pops don't necessarily mean that companies are getting ripped off. They just mean that there's still plenty of room for companies to ask investors for even more. Robinhood (1) Here is a simple model of Robinhood Financial LLC, the app that lets bored people trade stock for free on their phones. Any time you trade stock, you have to pay two intermediaries who do the trade for you: Your broker, who takes your order and goes to buy (or sell) the stock; and A dealer, who owns the stock and sells it to you (or who buys it from you). Robinhood, like Charles Schwab and E*Trade and TD Ameritrade, is a broker; it is in the business of providing a website and an app and account services and margin loans and so forth. When you tell your broker to buy a share of stock, your broker will send that order to a dealer, who is in the business of buying stock from customers for its own account, and selling stock to customers from its own inventory. These days the dealers are often electronic trading firms like Citadel Securities, G1X, Virtu, Two Sigma or Wolverine Securities.  Traditionally the way the broker got paid, for doing the website and the app and routing your orders and so forth, was by commission: It would charge you 25 cents a share in the olden days, or later $10 a trade; as recently as October 2019 the normal rate was about $5 per trade. Brokers have other sources of income, with net interest margin on cash deposits being the big one these days, and commissions have become less important over time; now the market commission rate, for retail investors, is zero. But for most of the history of brokerages—again, until late 2019—you paid your broker a commission on every trade that you did. In the olden days commissions were fixed by regulation, but in modern times they are set by market competition, and this competition kept driving them lower until they went to zero. The way dealers get paid is in "spread": They buy stock from customers for a slightly lower price than the price at which they sell stock to customers. A stock that is worth $10 might have a $9.98 bid and a $10.02 offer; the dealer buys at the bid, sells at the offer, and makes about 4 cents per share for its trouble. To oversimplify slightly: The spread is set by market competition: Dealers compete to have the highest bid and lowest offer, so they can do more trades. (The competitive spread is called the "national best bid and offer.") The spread is set by competition on public stock exchanges, where dealers compete to do trades with big hedge funds, mutual funds and other high-speed electronic traders. Dealers would much prefer to trade stock with bored retail investors, and would happily give those investors a discount on the spread, for reasons we have discussed before.[4] And so the discount brokerages have struck deals with the electronic stock dealers in which (1) the brokers send their customers' orders directly to the dealers, (2) the dealers give the brokers' customers a discount on the spread, and (3) the dealers also pay the brokers for doing this. The discount that the customers get is called "price improvement." The payments are called "payment for order flow." As a basic economic matter those two things are interchangeable. The dealer is willing to pay some money to trade with retail orders. It can pay the money to the retail customers in price improvement, or to the broker in payment for order flow. It shouldn't care much if it does all price improvement or all payment for order flow or some mix in between. From the broker's perspective, there is an obvious advantage to getting more payment for order flow and less price improvement: The broker gets to keep the payment for order flow, but the customer gets the price improvement. But there are constraints on this. For one thing, the discount brokerage business is competitive, and the broker can only sort of "keep" the payment for order flow: Effectively it goes to pay for the broker's operations and reduce commissions. For another thing, the U.S. Securities and Exchange Commission requires brokers to seek "best execution" of customer orders. This is a somewhat amorphous requirement, but basically if brokers' customers are getting a better price than the national best bid and offer—if they are getting a discount on the spread—then that is more likely to be best execution than if they aren't. So you need to have some price improvement. And that too becomes competitive, or at least comparable: If every other broker has more price improvement, and you have less, then perhaps your execution is not best. The custom seems to be "that large retail broker-dealers that receive payment for order flow typically receive four times as much price improvement for customers than they do payment for order flow for themselves—an 80/20 split of the value between price improvement and payment for order flow."[5] And, again, until late 2019, another custom was that large retail brokers charged $5 per trade in commissions. I have to say that this was kind of a weird set of customs? "We'll buy stock for you, you'll pay us $5 to do it, we'll get a discount on the stock and we'll pass on 80% of the discount to you." It is just a little messy, a lot of moving parts, feels like it could be simplified. And then Robinhood came along and simplified it. In addition to a cool app that made trading fun, Robinhood came up with a slightly different and much more intuitively appealing economic model: "We'll buy stock for you, you won't pay us to do it, we'll get a discount on the stock and we'll pass on 20% of the discount to you." This was more appealing because: Paying $0 of commissions is obviously better than paying $5, but Getting more price improvement is not obviously better than getting less, because price improvement is sort of opaque and the per-share numbers are kind of small and stock prices move around all the time anyway so it's not obvious to a customer exactly how much money she saved with more price improvement. You can tell this model was more appealing because (1) Robinhood rapidly became enormously popular, adding users much faster than other traditional retail discount brokers who charged $5 commissions, and (2) the other big retail brokers went to $0 commissions in late 2019. Free trading really sold much better than $5 trading!  Nonetheless Robinhood got in trouble for it. In December, the U.S. Securities and Exchange Commission fined Robinhood $65 million for doing bad stuff in its payment-for-order-flow practice from 2015 through 2018.   There were, in the SEC's telling, two problems with Robinhood's model. One is just: They lied about it. I wrote above that Robinhood's proposition—free trades but less price improvement—is more appealing to customers than $5 trades with more price improvement, but Robinhood didn't actually offer that proposition. Instead they offered free trades and pretended that they provided the same execution quality—meaning, really, the same price improvement—as all the other brokers. During that 2015 to 2018 period, they did not. This was a lie. Bad work. The SEC order points out that, for quite a while, Robinhood simply pretended that it never got any payment for order flow: Although payment for order flow remained the company's largest revenue source throughout this period, Robinhood did not include payment for order flow as a revenue source in its answer to the "How Robinhood Makes Money" FAQ on its website. The company failed to update the FAQ to include payment for order flow despite the fact that, in 2016 and 2017, the company did update the FAQ to include two other, smaller revenue sources: subscription-based memberships and interest on securities lending.  And when it did start disclosing payment for order flow, "the new FAQ page stated that Robinhood's 'execution quality and speed matches or beats what's found at other major brokerages,'" which turned out not to be true: By March 2019, Robinhood had conducted a more extensive internal analysis, which showed that its execution quality and price improvement metrics were substantially worse than other retail broker-dealers in many respects, including the percentage of orders that received price improvement and the amount of price improvement, measured on a per order, per share, and per dollar traded basis.  So that's not great. From the outside, I kind of feel like Robinhood's actual, honest proposition was kind of good and they could have made the case for it, but they apparently did not have that confidence and decided to lie about it instead.[6] The other problem, according to the SEC, was that Robinhood did not give its customers "best execution": Because they got less price improvement than other brokers' customers, they were worse off. This is a weirder objection. From the SEC order: However, Robinhood's Best Execution Committee did not take appropriate steps to assess whether, in light of this information, Robinhood was complying with its duty to seek best execution of customer orders. Robinhood's failure from October 2016 through June 2019 to conduct adequate regular and rigorous reviews that involved benchmarking its execution quality against competitor broker-dealers to determine whether it was obtaining the best terms reasonably available for customer orders, violated the firm's duty of best execution. … Between October 2016 and June 2019, certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time.  Note what that last paragraph says: Certain Robinhood customers would have been better off paying $5 per trade and getting more of a discount on their stock, for a total of $34.1 million. Implicitly other Robinhood customers were better off paying $0 per trade and getting less of a discount on their stock, though the SEC does not bother to say how much money they saved. This breaks down roughly by size: If other brokers get 3 cents per share more price improvement than Robinhood does, then if you are buying one share you should do it with Robinhood (save $5, lose $0.03), but if you are buying 1,000 shares you should use another broker (pay $5, save $30). In fact the breakeven seems to have been about 100 shares: For most orders of more than 100 shares, the analysis concluded that Robinhood customers would be better off trading at another broker-dealer because the additional price improvement that such orders would receive at other broker-dealers would likely exceed the approximately $5 per-order commission costs that those broker-dealers were then charging. The analysis further determined that the larger the order, the more significant the price improvement losses for Robinhood customers—for orders over 500 shares, the average Robinhood customer order lost over $15 in price improvement compared to Robinhood's competitors, with that comparative loss rising to more than $23 per order for orders over 2,000 shares.  If you were buying 2,000 shares at a time, using Robinhood cost you money. If you were buying fewer than 100 shares at a time, using Robinhood saved you money. Robinhood's appeal was largely to new investors with small accounts, many of whom were buying one share at a time rather than 100, or 2,000.[7] Those investors saved money. Robinhood could perfectly plausibly have said "we have a new economic model where you don't pay commissions but we give you a little bit less of a discount on the stock, which saves you money if you mostly do small trades, as most of you do." That would have been a good pitch! Like, steal from the rich (charge people more for large stock trades) and give to the poor (charge people less for doing small stock trades), that sort of thing. I often think that Robinhood's main problem is not really believing in their own model: The thing they were offering always made sense on its own terms, and they would have avoided a lot of trouble if they had pitched it on those terms rather than pretending it was something it wasn't. Robinhood (2) Or not. It's possible that free frictionless trading is bad. If you pay $5 per trade, then you will trade some finite number of times. Perhaps each time you rationally think that you have at least $5 of expected gain from your trade, or perhaps more realistically each time you think that a trade will provide at least $5 of entertainment value. If trading is free then you can just sit on your couch all day playing an addictive iPhone game, only the game is Robinhood, and you are risking real money on each trade. In a pandemic, where stocks are volatile and other sources of fun are limited, free trading will lead to a lot of gambling. The day before the SEC sued Robinhood over payment for order flow, the Massachusetts Securities Division sued Robinhood for, basically, making it too easy to trade: Specifically, Robinhood has: targeted young individuals with little or no investment experience; lacked adequate infrastructure and, as a result, experienced repeated outages and disruptions on its trading platform; used gamification strategies to manipulate customers into continuous interaction and constant engagement with its application; encouraged inexperienced investors to execute trades frequently; and failed to follow its own written supervisory procedures when approving customers for options trading. I tend to think this is a stronger moral objection to Robinhood than "ooh their payment for order flow splits are slightly different from Schwab's," but one could reasonably disagree. At Bloomberg Opinion, Aaron Brown argued that "Robinhood's price cutting, user friendliness, high-quality and entertaining educational materials, and appeal to non-traditional investors touched off a massively beneficial revolution in retail trading services." There is, I think, a vague sense among many financial regulators that most people should own index funds and avoid active trading, and while I personally sympathize with that view, it seems unlikely that it's the law. "This retail brokerage broke the law because it encouraged people to trade stocks" is an odd legal complaint. One thing you might want to know is: Is this mostly financially good for Robinhood investors, or bad? Does Robinhood mostly make it fun and exciting to build wealth by investing, or does it mostly make it fun and exciting to lose wealth by dumb gambling? I don't really know the answer, and there are mixed signals out there. Here's a paper from October, by Brad Barber, Xing Huang, Terrance Odean and Christopher Schwarz, finding that popular Robinhood stocks underperform: Consistent with attention-induced trading models' predictions, we link episodes of intense buying by retail investors at the brokerage Robinhood to future negative returns. Average five-day abnormal returns are -3% (-6%) for the top stocks purchased each day (more extreme herding) by Robinhood users. We find that herding episodes are related to the simplified display of information on the Robinhood app and to established proxies for investor attention.  But here is a Businessweek article from November finding that they outperform: In a year of extreme volatility, the stocks newbie traders love most have soared 56%, beating the usually bulletproof S&P 500 by 45 percentage points and nearly doubling the return on hedge-fund favorites, going by Goldman Sachs data. Thanks to bets on cruise operators and airlines and electric cars, screen shots of six-figure brokerage accounts inundate Twitter, the lockdown's accessory of choice. I suppose a simple model is that Robinhood stocks are riskier than the market, meaning that in a rising market (like we've mostly seen since the start of the pandemic) Robinhood traders will outperform, even if that performance is not really sustainable. Still! If you gamify investing at the start of a bull market, and then de-gamify it before the end, that might on balance be a good service. My "boredom market hypothesis" says that investors will actively trade stock to the extent that (1) it's fun and (2) there's nothing else fun going on. If the pandemic ends, people return to their other fun activities, and they lose interest in Robinhood, then they'll have bought a lot of stocks when that was a good idea and stopped when it became a bad idea. Could be worse! How is Bill Gross doing? Another wild story from my time away is that Bill Gross's neighbor sued him for playing the theme from "Gilligan's Island" too loud during a dispute about "unsightly netting" over an outdoor sculpture, as one does. Gross very much lost in court and has to stop doing that, but he turned his grievance into an Investment Outlook. Gross used to publish idiosyncratic but influential Investment Outlook memos at Pacific Investment Management Co., where he was the world's leading bond manager; they would start with weird personal anecdotes and then segue awkwardly into a macro thesis. When he moved to Janus Henderson Group Plc he continued the outlooks, with a similar mix of personal oversharing and macro analysis. He retired from Janus in 2019, but he's still doing them, under his own name. The mix does seem to be shifting? Tuesday's Investment Outlook has one paragraph about Gross's new automatic toilet seat ("when sitting, the seat didn't feel as warm on my bum as advertised"), two paragraphs about the "Gilligan's Island" theme song dispute, five paragraphs about the stock market and one closing paragraph about the "Gilligan's Island" theme song dispute again, but this time as a metaphor for the stock market. As he moves further into retirement his monthly updates will eventually just be eight paragraphs of grievance about his neighbors and kids, and then at the end "also buy gold." Things happen Alibaba, Tencent Shares Drop as U.S. Weighs Investment Ban. It's Time to Replace the Public Corporation. Heelwork to music. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Given my well-known proclivities, people keep asking me if a violent attempted coup is securities fraud. This is mostly a joke, and I get it, but I would not be *entirely* surprised if someone sues Twitter Inc. or Facebook Inc. alleging securities fraud for their role in amplifying Trump's incitement. [2] I have had capital markets bankers tell me that companies that have done direct listings would have had higher valuations if they had done regular IPOs: More shares are available to trade after a direct listing, so the price is lower. [3] Here's the official description of Unity's lockup, which seems to limit day-one employee sales to 15% of their total shares. DoorDash's lockup has a partial early expiry if price conditions are met.  [4] For instance, here and here. Essentially, if you do market-making trades on public exchanges, you have a high risk of adverse selection: If you bid $9.98 for a stock, you are likely to buy that stock from someone who knows that it's worth less than $9.98. Intuitively, you might buy it from a huge mutual fund who is selling a lot of stock and will continue pushing the price down, or you might buy it from a clever hedge fund who has valuable information that the stock will collapse, or you might buy it from a predatory high-speed trading firm that knows the price is collapsing before you do. If you trade with small retail investors you have much less risk of this: Their orders tend to be random, so you can safely buy at the bid and sell at the offer without worrying that your counterparties know more than you do. The bid/ask spread largely compensates the dealer for the risk of adverse selection, and if you can reduce that risk you can reduce the spread. [5] That quote is from the SEC order against Robinhood, which attributes it to "at least one principal trading firm." That is, the SEC is citing hearsay from a high-frequency trading firm to decide what "best execution" is, rather than, like, deciding for itself. [6] Apparently Michael Lewis's 2014 book "Flash Boys," which made payment for order flow too controversial to mention, is what spurred Robinhood to lie about this.  [7] This is complicated by the fact that Robinhood users often trade penny stocks, and 2,000 shares of a penny stock could be a pretty small trade. (Though you'd be unlikely to lose $23 of price improvement there.) Follow Us Get the newsletter You received this message because you are subscribed to Bloomberg's Money Stuff newsletter. Unsubscribe | Bloomberg.com | Contact Us Bloomberg L.P. 731 Lexington, New York, NY, 10022