September 19, 2025 • 34 mins
Matt and Katie discuss ARK heartbeat (?) trades, IPO allocations, ETFs as widgets, quarterly earnings, barriers to going public, structured notes, installment index puts and Katie’s vacation plans.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. So you're on vacation
next week.
Speaker 2 (00:11):
I am. I'll be in the mountains of Colorado. Yeah,
you know, the snow isn't great this time of year,
but you know, love of the game.
Speaker 1 (00:23):
What are you going to do for money stuff?
Speaker 2 (00:24):
We should do something?
Speaker 1 (00:26):
Should we should have some mail bags.
Speaker 2 (00:29):
We should have some mail bags. I will log onto
zoom for an hour and we'll take questions from the audience. Okay,
not live, not live, but that would be fun maybe
one day.
Speaker 1 (00:42):
Right, So, if you want Katie to answer questions with
Colorado with me, send them to us now.
Speaker 2 (00:48):
We need them. Should we tell them where to send questions?
Speaker 1 (00:52):
I believe it's money pot at Bloomberg dot Net.
Speaker 2 (00:55):
That sounds right it, Yeah, just yell them into the
sky and it'll get to us.
Speaker 1 (01:01):
Definitely, don't have me on Twitter.
Speaker 2 (01:04):
Do you still go on Twitter?
Speaker 1 (01:06):
Not never, but I don't look at my notifications or
dms anymore. Yeah, I'm pretty much.
Speaker 2 (01:11):
It's kind of sad.
Speaker 1 (01:12):
It's really sad. This is like, you know, especially life.
Speaker 2 (01:17):
That's the thing, Like the pandemic, it scratched so many
social issues. I don't know. I still go on all
the time. But I don't tweet as much anymore.
Speaker 1 (01:26):
I don't. I'm not like performatively quitting. But I still
like tweet my columns when I remember too.
Speaker 2 (01:31):
But yeah, I used to tweet a cat, like my
Friday cat.
Speaker 1 (01:36):
I remember some of your Twitter sticks. I feel like
you had good Twitter.
Speaker 2 (01:39):
I did have good sticks. No, And like yesterday on
FED Day, usually I tweet time for the best day
of our lives. I haven't done that in a while.
I feel like, you know, no longer the best day everlast.
Speaker 3 (01:51):
No, Yesterday, Yeah, yesterday was the best day of your life.
Speaker 2 (01:56):
No, it was fine. I mean they cut they cut
twenty five base points, which is pretty cool. Would have
been awesome for the chaos factor if they either held
rates or cut fifty basis points.
Speaker 1 (02:07):
Yeah. Yeah, you want to just like, yeah, expectations.
Speaker 2 (02:09):
Want to burn the world down.
Speaker 1 (02:11):
Yeah yeah yeah.
Speaker 2 (02:13):
But I really just want to talk about.
Speaker 1 (02:15):
This is going to be that's the first thing, clanging, transition,
whatever is on paper in front of me.
Speaker 2 (02:23):
I really want to talk about the arc innovation, ETF
and whatever the heck is going on with these IPO trades.
Speaker 1 (02:30):
That was pretty good.
Speaker 2 (02:32):
It has been every day I wake.
Speaker 1 (02:34):
Up none of that. Hello, and welcome to The Money
Stuff Podcast, your weekly podcast where we talk about stuff
related to money. I'm Matt Levien and I wrte the
Money Stuff column for Bloomberg Opinion.
Speaker 2 (02:48):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 1 (02:54):
Katie, I gather that you're fascinated by r gtfs.
Speaker 2 (02:57):
I opened my eyes in the morning horizontal in debt,
and I just think about heartbeat trades. Yeah, but this
isn't strictly a heartbeat.
Speaker 1 (03:10):
I don't know exactly what the qualification.
Speaker 2 (03:12):
If you take a look at the chart of inflows
and outflows, it looks like a heartbeat, but I don't
think that there are taxes involved.
Speaker 1 (03:19):
It's not a tax heart beat, but is a different
kind of heartbeat. Yeah, right, So runs some ETFs. Kathy
would famous part of her ETF active manager and because
they're like active dfs, and because she's like a celebrity
tech investor, they get to invest in hot tech IPOs,
which hasn't been a thing for a long time, but
it's coming back, right, There's been some hot tech ips
(03:41):
so much have gone up a lot and so this
RTF gets to get small ish allocations in some hot
tech IPOs, and if you think those IPOs will go up,
you'll be like, oh, I'd like to invest in this
RKTF to get my tiny se life exposure to that.
(04:01):
But if you're really tidy minded about it, you're like, well,
I don't want all the other stuff in the CTF.
I just want this IPO exposure. I can't get the
IPO exposure myself because I am not on the list
of people who get allocated shares on these IPOs. But
I can get exposure to the ETF because anyone can
get exposure to the EDF. And then the further thought
(04:23):
you could have is I could hedge my exposure to
everything else on the ETF by, you know, for instance,
shorting all of the stocks that are currently in the ETF,
which it discloses, so that i'd be left with you know,
if you're long the ETF and short all of the
stocks in the ETF, you're left only with like the
possibility of it getting an IPO allocation and the IPO
going up. And so it seems like people are doing
(04:44):
some sort of trade like that, and the best way
to operationalize that trade is not to buy the ETF
and short the stocks. The best way to do it
is to borrow all of the stocks that are in
the ETF, deliver them to ARC, to the ETF to
create the ETF, get back shares of the ETF. Now
you have the ETF and you're effectively short the underlying
(05:05):
slides because you bar them and gave them to ARC.
And then when the IPEA happens, you reverse the trade.
You deliver back the shares, get back the underlying stuff,
You deliver the underlying stuff back to your share lender,
and you're left with only the popped IPO.
Speaker 2 (05:19):
Yeah. I guess what I don't understand about this is
how big of a gamble is it to do this
in the ARC Innovation ETF. Like, I wonder if the
person or whoever was behind this trade knew for sure
that they're getting allocated some of Klarna or some of Bullish.
Speaker 1 (05:36):
My impression is that in Bullish it was pretty telegraphed
that ARC was getting some of it. But I'm not sure.
These are trades that have been going on, and like
they went on with the ipea of Bullish a while back,
and then Klarina last week and Robin Wiggils at the
ft has been reporting about it. But like my impression
is that the main the flagship Arc Innovation ETF got
an allocation in Bullish and not in Klarina. R ETF
(06:00):
got an allegation in Klina like f. Yeah, so like
people did this. I mean, no one really knows, but
it looks like this trade, right, it looks like the
trade is you heart beat in you like borrow the
underlying shows you heart beat into the ETF, you take
your stuff out the next day to capture the IPO.
It looks like people did that with our innovation around
(06:21):
the Clarina IPO and there was no allegation, And so
I just like missed. It's not a huge risk yause
you know, you're long in short the same thing.
Speaker 2 (06:30):
Basically, I'm just wondering, like I wonder if we'll start
to see this pop up in other sort of shiny
active ETFs.
Speaker 1 (06:39):
Sure, I don't know how many shiny active ETFs there.
Speaker 2 (06:41):
There's not a ton, but there's definitely some that you
might think would get allocated.
Speaker 1 (06:46):
Yeah, Like in general, you know, index ones don't buy
IPOs because they're not in the index, and so you
don't see you know, the traditional ETFs, you don't see
this as a big thing. But like someone like Kathy
Wood who is an investor and yeah stive tech companies,
it does make sense that she would be interested in
buying an IPOs. And it does make sense that someone
would notice that and be like, I can create my
(07:08):
own IPR allocation by engineering the r ETFs.
Speaker 2 (07:13):
Yeah, because, for example, there's an ETF dedicated just to
buying IPO stocks, like recent IPO stocks.
Speaker 1 (07:21):
Which accomplishes nothing whatsoever. I know, the trade here is
the IPO pop.
Speaker 2 (07:26):
Yeah.
Speaker 1 (07:27):
Trade here is not Klarna, it's the IPO pop.
Speaker 2 (07:30):
Yeah, it's the one day Yeah. I don't think they're
getting allocated IPOs.
Speaker 1 (07:34):
Yeah. I mean, like maybe that's the next step. Right,
you're like, hey, guys, I buy all the IPOs, want
to allocate be an IPO. But then, you know, traditionally
the way you get allocated an IPI is like one,
you are a big investor who pays a lot of
commissions to a bank, and two you are a long
term investor who creates a good relationship with the management
of the company. So the company is like I want
(07:55):
those people to own seven percent of my stock, so
I'm going to allocate them in the IPO and then
like you have like a nice relationship where you are
a long term holder you on the stock. You have
a nice marked market gain because they sold you the
stock of the IPI price. Those are the people that
the banks and the companies want to allocate at the IPO.
Someone whose businesses I buy recent IPOs and then sell
(08:17):
them when they're no longer recent.
Speaker 2 (08:18):
It's not that good, yeah, And it's also a smaller
funds of millions.
Speaker 1 (08:24):
Right. Like when you're a bank and a company and
you're allocating the IPO, you're in many cases literally sitting
down with a list and going through it and being
like these guys are good to give it, you know,
and you don't want to have a thousand names on
that list and get to like, we're gonna give this
guy fifty shares, right, Yeah, you want to be efficient, right,
(08:45):
So if you have a big investor, you get them
a big, big slug of shares. So right, because Kathywood
is a celebrity because of the argannivation ATF is pretty
big because she is a long term supporter of like some.
Speaker 2 (08:56):
Of the company take her five year time for him,
Like she's a.
Speaker 1 (08:59):
Good institution and that to have in your stock, and
so it makes sense that she gets alecated ips. Yeah,
but it's not obvious that every IVTF but also would
have the same benefit.
Speaker 2 (09:07):
This isn't something that I've sawt comment on, but I
do wonder how Kathy would and the ARC team feel
about this trade.
Speaker 1 (09:16):
Oh yeah, like assuming this trade is what it seems like,
which is someone massively inflating the assets of.
Speaker 2 (09:24):
These ETFs by billions of dollars.
Speaker 1 (09:26):
Billions of dollars for like a week in order to
extract a large chunk of the IPO pop. Right, Like
the RCF trade was like on the order of like
you know, it's like a one ish billion dollar ETF
and someone pumped in on the order of like seven
hundred million dollars. I might be a little wrong about that, Billy.
It's like that kind of thing. It's like basically doubling
(09:48):
the size of the ETF. When you do that, you
now own half of the ETF and then you take
your money out, So you take out half of the ETF.
It also means you take out half of essentially the
IPO shows, right, So the person doing this or the
people doing this are extracting kind of half of that
IPO pop for themselves, meaning that the long term retail
(10:10):
investors who love Kathy Wood and are you know, invested
in the ETF don't get that half of the ip
but that just goes to someone who is just doing
this arbitrage. So they must feel bad about it. Yeah,
it's not good. It's not like what they want. Yeah,
they do extract like an extra two days of management vice.
Speaker 2 (10:27):
But can they stop it? Though?
Speaker 1 (10:29):
You know, when I read about it, I was like,
you call them up and you say, I'd like to
pump a billion dollars in and you say yes, because
that's life in the ETF business, like it is the
point of an ETF is like people can create and redeem.
There is like there are ways to I believe, you know,
most ttfs like have ways to limit, you know, creations
and redemptions.
Speaker 2 (10:47):
I don't know. I mean, you can't stop money flowing
in or out, but not every inflow or outflow has
to result in the creation or redemption.
Speaker 1 (10:56):
That's what an inflow is.
Speaker 2 (10:58):
No, but people always say that it does isn't necessarily
always created creation or redemption. They give enough. People are
letting each other out.
Speaker 1 (11:07):
Yeah, but like net inflows create creations.
Speaker 2 (11:10):
Yeah, net inflows.
Speaker 1 (11:11):
But I'm saying they can't sell people trading on the exchange.
But this is not a trade on the exchange. This
is a creation. Yeah, okay, it creates to make sense,
it's a creation. It does to make sense. Someone has
borrowed a big package of the underlying, delivered it to
the ETF and gotten out these shares, which is why
you see this heartbeat. Look where the assets of the
ETF increase.
Speaker 2 (11:30):
All yeah, okay, fair, okay, Then how would they limit that?
Speaker 1 (11:35):
One answer is like the person doing this is either
an authorized participant in the ETF, like someone who has
a relationship with ARC. Yeah, you can create and redeem shares,
or they're like some hedge fund working through an authorised participant,
because again you have to do a creation. So like
these assets are coming into the ETF from someone and
the ETF can say, hey, knock that off, yeah, or
(11:56):
you'll stop being an authorised participant. Right, Yeah, it's one
fairly STRAIGHTFORARDA. I assume most ttfs have some other way
to like limit creations to avoid getting too big or
you know.
Speaker 2 (12:07):
I don't know if they do.
Speaker 1 (12:08):
I don't know either.
Speaker 2 (12:09):
There was a recent example of this. You had this
one very popular small cap funds ticker CALF, which ended
up switching indexes because I think at one point, like
for its holdings, it held like more than twenty percent
of the outstanding shares.
Speaker 1 (12:25):
And you should be able to stop that.
Speaker 2 (12:27):
Yeah, but you can't, like you have to like switch
your strategy.
Speaker 1 (12:31):
Yeah, I don't know if they can stop it and
haven't yet.
Speaker 2 (12:33):
I don't know either. But you do touch on the
fact that this.
Speaker 1 (12:36):
Is the thing, like the rketfs are like a modern
rapper for like Cathy would running an investment fund. But like,
also ETFs are plumbing, right, And we've talked about like
portfolio trades in the bond market, Right, Like an ETF
is like a piece of plumbing that allows people to
do bond trades. Right. This is like a portfolio trade, right.
(12:56):
This is like it's a widget that you can take
down and be like, I'm going to distract the IPO
value out of this ETF, and so you can just
do it. And it just operates independently in the stock
market and has its own set of rules, and like
you know, Kathy would is actively managing it, but it's
like it's not purely her investment vehicle. It's also this
like you know, pre property.
Speaker 2 (13:17):
Of the market. Yeah, that's an interesting way to look
at it, that it's basically just a portfolio trade, but inequities.
Speaker 1 (13:24):
It's almost the reverse of a portfolio trade, right. A
portfolio trade is like you have a bunch of bonds
and you go to a market maker and you're like,
I want to sell this bunch of bonds and the
market maker is like, wow, you can probably squeeze most
of them into an ETF and I'll take the rest,
and you can sort of like squeeze your stuff into
these you have here. It's like, I'm going to extract
exactly one security from the ETF. And it's the reverse
(13:46):
of the.
Speaker 2 (13:46):
Portfolio Ty, I want the needle, forget about all the
hay and you can just do it. Yeah, I was
gonna say, you do touch on the fact that this
is a fun who done it? Like, who is doing this?
And it has to be a fairly small universe of
potential suspects.
Speaker 1 (14:02):
It seems to me that the most logical person to
do it would be one of the authorized participants who
can trade directly with the fund. Yeah, but maybe that's
like a little too confrontational and it's like someone trading
through an authorised participant.
Speaker 2 (14:13):
Yeah, let's see. I don't want to name names necessarily,
but I mean, you look at some of ARC's filings,
it looks like they're aps, or at least the busiest
aps are Hudson River, Jane Street, Avian Amro, Bank of America,
Bnpever two, et cetera.
Speaker 1 (14:29):
So right, the normal people.
Speaker 2 (14:32):
Anyway, if you're the one behind the ARC trade right
some money pod at Bloomberg dot net.
Speaker 1 (14:38):
I feel like at this point, like this has been
pretty widely rumbored and like praised, and if someone's going
to claim credit for that, they would have been like, yeah,
we did that. I feel like there's probably some reason
not to claim credit for it. Also, it's like imitatable, right,
like now anyone can do it, that's true. I don't
know how many opportunities there will be to do it.
Speaker 2 (14:56):
It seems like a lot of squeezing for not like
enough juice.
Speaker 3 (15:01):
But I don't know, you know, it's like a few
days of Stockboro cost Yeah, for potentially like low tens
of millions of dollars of games.
Speaker 1 (15:12):
It's like it's it's real. I will say though that like,
like if I had the guess, I would say that,
like this trade became exciting when there was that rash
of IPOs that like went up one hundred percent. Yeah,
and then like they actually did it and like bullish
IPOs did well and Clarina which did fine, and then
(15:33):
I think we talked about this, like the IPOs earlier
this year had the huge pops because no one had
seen an ipo in years, and now it's like, yeah,
you know, like stuff had went public this week and
went down right, So it's not as exciting a trade now.
I like, you're not expecting one hundred percent pop in
every APA.
Speaker 2 (15:48):
That's true. So maybe it was just a brief, sweet
moment in time. But it'll be fun to see if
this continues and if it's sprints. So you know how
(16:11):
I anchor a financial news TV show. Okay, well, surprise,
That's what I do when I leave this room. It's
called the Clothes. It's from three to five pm daily.
This isn't just a plug. I bring it up because
after the closing bell usually companies report their earnings and
because the US follows a quarterly earning schedule, that means
(16:35):
that there's almost always earnings to break on air, which
is exciting and I look forward to it. But maybe
now instead of doing that four times a year, I'll
only do it twice a year.
Speaker 1 (16:53):
Yeah, I'm like, now.
Speaker 2 (16:56):
I bring this up.
Speaker 1 (16:57):
Yeah, you bring it up because present Trump is just
randomly out there being like, yeah, hey, if the SEC
wants to, we could move to six month reporting for
companies instead of reporting every three months.
Speaker 2 (17:10):
I'm surprised he cares.
Speaker 1 (17:12):
You know, someone mentioned it to him, so it just
as Sabody cares cares.
Speaker 2 (17:17):
It seems like a off the beaten track issue for him.
Speaker 1 (17:21):
He tried it last time, he did back before the
unitary executive It is an odd thing to care about
in the scheme of things. Yeah, but it marginally increases
the power and reduces the oversight over corporate executives, right, Like,
if you only have to report every six months, then
you have more time to do stuff without anyone paying
(17:42):
attention to it. That's probably good for like the lifestyle
of corporate executives.
Speaker 2 (17:46):
Well, I was going to say I love this topic
because I can honestly see both sides of the argument,
one being Okay, the quarterly reporting schedule investors like transparency.
That's proven, we should have as much information as we
possibly can. But then on the other side, three months
is arbitrary, and I could be persuaded that it does
(18:10):
incentivize shorter term thinking on some level.
Speaker 1 (18:13):
Yeah, I think a lot about this, Like there's no
like necessary reason that reporting every three months should encourage
shorter term thinking. Like it's just like a mistake to
think that investors only care about next quarter's earnings, right,
and like the shorter the reporting cycle than like the
less long term they'll care about. Like that can't be true, right,
Like companies report every three months and they report guidance
(18:33):
and they report like, you know, their investments for the
long term, and like people understand that.
Speaker 2 (18:38):
I think you're being really generous.
Speaker 1 (18:40):
Like everyone loves to say that the US stock market
only rewards short term thinking, and like, you know who
really loves to say that is Elon Musk. Yeah, who's
like got a you know, trillion dollar company and did
for a long time before it made money, right, and
like even now its valuation is entirely based on like ooh,
robots in the future. Yeah, it's just like false to
think that the US stock market only cares about next
quarters earnings, right, Yeah, there's just like no reason to
(19:01):
think that. Now. Yeah, it is the case that, like
there is volatility around quarterly earnings, right, Like people do
look at quarterly earnings and use them as a data
point to extrapolate future earnings. And if you have bad
earnings this quarter, people are like, oh, maybe they're not
gonna have good earnings in the long run, right, and
so like there are like high frequency data points, but
(19:22):
it's not logically entailed that, like if you report every
three months, then people only pay attention to three month earnings, right,
And that's clearly the case that, Yeah, it does long
term bets get made.
Speaker 2 (19:32):
Yeah, it just does introduce volatility into the stock price.
And you could see a CEO who's you know, getting
beaten up on his earnings call maybe doing things to
minimize that.
Speaker 1 (19:45):
Yes, but it's or her I think about Cliff is
this point about volatility laundering, where you know, if you
have a private investment that doesn't get marked to market
every day, it is and sometimes less volatile than most
public stocks, but only in the sense that you don't
look every day, right, Yeah, Like it's not economically less volatile.
(20:08):
It's just like you see the price of one thing
every day and you don't see the price of the
other thing every day. Yeah, it's a little like that,
where like if you just stop reporting earnings, then you
have less earnings volatility, you have less news driven volatility,
but you're just masking like what is actually happening. And
the other thing is like, I'm not sure you get
less stock price volatility, right, because you have you still
(20:30):
have trading. Right. It's just like if definitive financial statements
and like you know, guidance get reported every six months
instead of every three months, then you have a six
month window where people are trading based on.
Speaker 2 (20:43):
Other stuff, right, body language, body language, TV appearance.
Speaker 1 (20:47):
To the appearances rumor. People talk a ton about alternative data, right,
like you like sophisticated hedge funds are constantly using information
other than quarterly financial statements to build their models of
like how a company is doing. Right, They're you know,
looking at credit card data or famously satellite pictures of
parking lots to see how many people are coming to
(21:09):
the stores. And if you get rid of some of
the quarterly financial reporting, then those pieces of data will
be relatively more valuable. They will still exist hedgehunes will
still trade on them, but like you won't, right, It'll
be there'll be a lot more information asymmetry because some
people will have information about how companies are doing and
(21:31):
other people won't. Yeah, and then the other kind of
trading that could happen in six months is insider trading, right,
because like, the more time you have between announcing news,
the more opportunity there is to reach from knowing the
news yourself.
Speaker 2 (21:44):
That'd be great for this podcast. Look, there would be
great for my TV show having fewer earnings reports but.
Speaker 1 (21:52):
And more insider trading. Yeah, it'd be fun to have
the insider traders on.
Speaker 2 (21:56):
I like to imagine that this goes through, that the
US moves to companies only needing to report every six months,
and think about what that would happen, because in Europe
they are mandated to only report every six months, but
many still file quarterly reports. Yeah, so I wonder if
the companies who report more frequently would get rewarded for
(22:17):
that from investors, Whether you would see companies like switch around,
and what the psychological effect would be from that. Like
if you were reporting on a quarterly basis and then
went to a six month basis, you know, would that
be taken as oh, shoot, there's bad news coming and
they're delaying it.
Speaker 1 (22:36):
Yeah. Like I think if you're a normal company, it's
a little hard to reduce the freakanci reporting, right, I
mean you think about who would report six months? Like
some of it is like you know, Trump brothers back
to crypto treasury companies right.
Speaker 2 (22:50):
Where it's like American bitcoin basically.
Speaker 1 (22:53):
I do you think Another part of the answer is
like part of the reason people talk about this is
some form of like it is to burdensome to be
a US public company these days, and that is part
of why big cool tech startups are staying private longer,
and you know, ordinary people can't invest in them in
their pro own kids and all that stuff, And so
it is possible that like if you went to like
(23:16):
Sam Alton and you're like, hey, would you take open
a public and he was like, I have to report
every quarter and you're like, no, good news, you only
have to report every six months. You may think, okay, fine,
I'll do it, right, Like, I think it's a pretty
marginal benefit. But there's probably some quite cool tech startup
that would feel, like, you know, by saving money on
reporting costs and also by just having less frequent reporting
(23:38):
and less frequent like shareholder interference, it would like change
the bargain of whether or not it's a good idea
to go public. Right, Yeah, so like some new public
companies would report on a six month schedule.
Speaker 2 (23:48):
Well to that point, Adina Friedman, who is the CEO
of NASAC, posted on LinkedIn basically that they supported the
reforms to reduce the burden on public companies because I'm
and you have heard that trotted out as a reason
for why companies are saying private.
Speaker 1 (24:04):
So that is hard for me to imagine that, like
the costs of like having your accountants to your reports
every three months is what's giving you know, yeah, tripe private.
But like I did, there's probably it's a margin that's
probably true true ish and I say stripe right, But
like in fact, like the problem is that it is
(24:26):
hard for smallish companies to go public. Yeah, and this
is perhaps a material cost savings.
Speaker 2 (24:33):
Yeah, we need more small caps.
Speaker 1 (24:34):
And the sort of thing where it's one thing for
a big existing public company to say okay, we're going
to six month reporting, But it's another thing for a
smallish company to come public saying we're only going to
report every six months and everyone's like, okay, that's fine.
Speaker 2 (24:48):
Yeah. I sort of stated it as a fact that
investors like information and want transparency. But I do think
there's this transparency barbelle that's developed for investors. Where you
think about et for example, and part of the reason
why ETFs have just killed mutual funds is because people
like to see the daily holdings. But then you think
about what's going on in private markets, and folks seem
(25:10):
perfectly happy to try and plow into that. So I
don't actually think that I can state it as a
fact that investors like as much information as possible.
Speaker 1 (25:20):
Well, there's different kinds of investors, right, I mean, yeah,
active asset managers who are making investing decisions want to
make informed investing decisions, right, But no, right, I mean,
like if we talk all the time about like the
retail love for SpaceX and Stripe and open Ai, and
like those people aren't getting financial statements at any frequency, right,
(25:40):
that's just like sure, I trust you, right, So that
makes sense.
Speaker 2 (25:59):
We have seven minutes to talk about structured products and
what a boom?
Speaker 1 (26:05):
Yeah, I don't know. I love structured products.
Speaker 2 (26:08):
I know you do. Why do people who aren't you
love structured products? Like? Why are we seeing this boom?
Are we just bored? Is the S and P five
hundred not enough?
Speaker 1 (26:18):
The structure products are? Aren't import them, They're they're like storytelling.
Like the simplest structured product, the secure product that I
think it was, like the paradigm structured product. Is like,
if you give me one hundred dollars, I can take
ninety five dollars you ever take and buy a treasury
bill ninety six dollars, okay, and by a treasury bill right,
that will mature at one hundred dollars in a year. Right,
And then I have four dollars to do something weird with. Right.
(26:41):
And the simplest weird thing is I spend those four
dollars like that the money call option on the S
and P. Right. And so I say to you, if
you give me one hundred dollars, I'll give you back
some percentage of the return of the SMP or like
this is a return of the SMP up to some
cap or something in a year, but I'll always give
you one hundred dollars back. If the SMP crashes fifty percent,
(27:03):
you still get all your money back. Okay, So you
get SMP upside, right, And all I've done is I
bought a co option, I bought a Treasury bill, And
you're like, oh wow, stocks, they can never go down, right,
And so I write about this periodic that's the simplest
structure product that's not like the main structured product of
the current boom. But like that story of like you're
(27:23):
gonna give me money, I'm gonna park boasted in t
bills and I'm gonna use the rest to buy weird
options to give you like some weird payoff profile. You know,
there are people whose job is to sit in a
lab cooking up that sort of thing, and then there
are other people whose job is to like put a
nice story on that. So we're talking about this, like
Bloomberg big take about the boom instructured products, and they
talk you about like half of structured products in America
(27:45):
are auto callables. Yeah, an auto callable is an installment
put purchased by a bank from retail investors. Right, And
so you know, if you're a bank, Like you have
a lot of people who want to buy index puts
from you, and you're like, where will I get index puts?
And you go to the lab and you're like, I
would like to cook up an installment index put product
(28:06):
that I can buy from somebody. Maybe I could buy
it from like an insurance company or Berkshire Hathaway or something.
And then you're like, no, no, I can buy it
from retail investors. If instead of saying I'm going to
buy an installment index put from you, you say I'm
going to sell you a bond that pays you ten
percent interests amazing, And it pays you ten percent interest
every quarter unless the stock market goes up, in which
(28:27):
case I paid off early and then no problem. It's
auto called. Right. One of the catch is that if
the stock market goes down twenty percent, you lose all
the money. Right, that's just an installment put. Right. But
like instead of saying that, you say, this is a
note that pays a very high coupon gets called early
in certain circumstances, and it's the losses of the stock market.
(28:51):
Like that's like a great trade. It's like you're not
selling excitement you're selling. Look, you get ten percent a year.
You can't lose. The worst thing that happens probably is
you get paid off early.
Speaker 2 (29:01):
No problem, no problem.
Speaker 1 (29:03):
But then there are other products too that are like
the reverse, that are like we pay you if the
stock market goes down, right, because you put any set
of options into this thing, and so you have like
this unlimited range of like stories and payoff structures that
you can sell to retail investors. And this article quotes
a guy, like a financial advisor, saying that his client
said him, this sounds illegal, It sounds too good to
(29:24):
be true. Yeah, because you like you did, like, why
are we seeing a boom in it? There are two
kinds of structured products. They're selling options and buying options, right,
So like the autocoll is like the bank is buying
an option from the customer. The one that I started with,
the like you get the S and P, but you
can't go down. That's the bank is selling an option
(29:46):
to the customer. This thing I started with, that only
works if you can buy a treasury built for significantly
less than one hundred dollars, because then you have money
to buy options with. Yeah, So like in a very
low interest rate environment, it's hard to do really cool
structure products because you just don't have a lot.
Speaker 2 (30:02):
Of Like I find that exciting because we've now entered
theoretically a ray cutting cycle.
Speaker 1 (30:09):
Yeah, so there are search products the other way, right,
where like if rates are low, it's very exciting to
go to a customer and say I'll pay you eight
percent a year, And the way you get eight percent
of year is it's not interest, that's option premium, right,
So there are products for all environments.
Speaker 2 (30:26):
Yeah, I do think it's interesting. They also quote someone
in here saying that you know, structured products aren't fought,
they're sold. That can apply to a myriad of things,
but it also applies here.
Speaker 1 (30:38):
People say that about many, many, many things in finance,
but I think they most say it about searched notes,
and they.
Speaker 2 (30:44):
Mean it here. But what's interesting is that now you
have because no one.
Speaker 1 (30:48):
No retail investors like you know, what I would like
to do is sell installment puts to a bank.
Speaker 2 (30:52):
Well, now you have an auto callbs ETF It launched
in June. So there are theoretically investors out there who
are just buying this on their own, who aren't necessarily.
Speaker 1 (31:03):
Having it so advisor sold ETF.
Speaker 2 (31:05):
Yeah, but it now exists where you don't need to
have an advisor sell this to you.
Speaker 1 (31:11):
Look at the description of that and it's like, oh,
you got a ten percent yield.
Speaker 2 (31:15):
Yeah, that's true. Maybe you plug it into Investipedia and
figure out what an auto callable is yield. Yeah, I'm
sure there are plenty of folks who just sort by yield, right, right,
it's yield, don't worry about the rest of it.
Speaker 1 (31:32):
The other thing I think is in structure debts. It's
like I think of like the auto calables business as
banks buying crash insurance from retail so they can sell
crash insurance to other investors. But the overall structure debts
business is a is a bigger business. And the article
quotes the penn I heard saying everybody loves this business.
(31:53):
It prints money most of the time, and then usually
they find a way to lose money when the markets
are crashing. That's the banks. It is true that selling
structured notes is a way to make a lot of money,
like the edge on these trades is like one to
three percent, But somehow banks end up with positions in
these notes that sometimes blow up in crises, which is
(32:13):
not what's supposed to happen with the autocollable, which is
really supposed to be the bank's buying crisis insurance from
the retail customers. But again, there's lots of different profiles,
and some of them are more the bank selling crisis insurance.
Speaker 2 (32:24):
We would you say your favorite structured product is?
Speaker 1 (32:28):
I mean, they do like the autocollable just because.
Speaker 2 (32:31):
It's like, so do a lot of people, it seems like.
Speaker 1 (32:34):
But the other thing in the story is that, like
the banks are now off letting their structured note risk
to hedge funds because that's what banks do with everything. Now.
Speaker 2 (32:41):
Yeah, another theme we've talked about.
Speaker 1 (32:44):
Yeah, the bank has a relationship with the customer, but
like they're not going to take all this risk on
their own balance it, so they'll find some hedge fund
to take the structured note risk.
Speaker 2 (32:51):
Cool, all right. Unfortunately that's all the time we have.
Speaker 1 (32:57):
So we'll see you next week.
Speaker 2 (32:59):
Send questions please, Yeah they're not good enough, maybe I
just won't open. Yeah, we'll see be skiing.
Speaker 1 (33:10):
And that was the Money Stuff podcast.
Speaker 2 (33:12):
I'm Matt Levine and I'm Katie Greifeld.
Speaker 1 (33:14):
You can find my work by subscribing to The Money
Stuff newsletter on Bloomberg dot.
Speaker 2 (33:18):
Com, and you can find me on Bloomberg TV every
day on the close between three and five pm Eastern.
Speaker 1 (33:25):
We'd love to hear from you. You can send an
email Tough Money Pod at Bloomberg dot net, ask us
a question and we might answer it on the air.
Speaker 2 (33:33):
You can also subscribe to our show wherever you're listening
right now and leave us a review. It helps more
people find the show.
Speaker 1 (33:39):
The Money Stuff Podcast is produced by Ana ma Aserakis
and Moses on dom Our.
Speaker 2 (33:43):
Theme music was composed by Blake Maples.
Speaker 1 (33:46):
Amy Keen is our executive.
Speaker 2 (33:48):
Producer, and Sage Bawman is Bloomberg's head of Podcasts.
Speaker 1 (33:51):
Thanks for listening to The Money Stuff Podcast. We'll be
back next week with more stuff.
Bloomberg Audio Studios, podcasts, radio news. So you're on vacation
next week.
Speaker 2 (00:11):
I am. I'll be in the mountains of Colorado. Yeah,
you know, the snow isn't great this time of year,
but you know, love of the game.
Speaker 1 (00:23):
What are you going to do for money stuff?
Speaker 2 (00:24):
We should do something?
Speaker 1 (00:26):
Should we should have some mail bags.
Speaker 2 (00:29):
We should have some mail bags. I will log onto
zoom for an hour and we'll take questions from the audience. Okay,
not live, not live, but that would be fun maybe
one day.
Speaker 1 (00:42):
Right, So, if you want Katie to answer questions with
Colorado with me, send them to us now.
Speaker 2 (00:48):
We need them. Should we tell them where to send questions?
Speaker 1 (00:52):
I believe it's money pot at Bloomberg dot Net.
Speaker 2 (00:55):
That sounds right it, Yeah, just yell them into the
sky and it'll get to us.
Speaker 1 (01:01):
Definitely, don't have me on Twitter.
Speaker 2 (01:04):
Do you still go on Twitter?
Speaker 1 (01:06):
Not never, but I don't look at my notifications or
dms anymore. Yeah, I'm pretty much.
Speaker 2 (01:11):
It's kind of sad.
Speaker 1 (01:12):
It's really sad. This is like, you know, especially life.
Speaker 2 (01:17):
That's the thing, Like the pandemic, it scratched so many
social issues. I don't know. I still go on all
the time. But I don't tweet as much anymore.
Speaker 1 (01:26):
I don't. I'm not like performatively quitting. But I still
like tweet my columns when I remember too.
Speaker 2 (01:31):
But yeah, I used to tweet a cat, like my
Friday cat.
Speaker 1 (01:36):
I remember some of your Twitter sticks. I feel like
you had good Twitter.
Speaker 2 (01:39):
I did have good sticks. No, And like yesterday on
FED Day, usually I tweet time for the best day
of our lives. I haven't done that in a while.
I feel like, you know, no longer the best day everlast.
Speaker 3 (01:51):
No, Yesterday, Yeah, yesterday was the best day of your life.
Speaker 2 (01:56):
No, it was fine. I mean they cut they cut
twenty five base points, which is pretty cool. Would have
been awesome for the chaos factor if they either held
rates or cut fifty basis points.
Speaker 1 (02:07):
Yeah. Yeah, you want to just like, yeah, expectations.
Speaker 2 (02:09):
Want to burn the world down.
Speaker 1 (02:11):
Yeah yeah yeah.
Speaker 2 (02:13):
But I really just want to talk about.
Speaker 1 (02:15):
This is going to be that's the first thing, clanging, transition,
whatever is on paper in front of me.
Speaker 2 (02:23):
I really want to talk about the arc innovation, ETF
and whatever the heck is going on with these IPO trades.
Speaker 1 (02:30):
That was pretty good.
Speaker 2 (02:32):
It has been every day I wake.
Speaker 1 (02:34):
Up none of that. Hello, and welcome to The Money
Stuff Podcast, your weekly podcast where we talk about stuff
related to money. I'm Matt Levien and I wrte the
Money Stuff column for Bloomberg Opinion.
Speaker 2 (02:48):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 1 (02:54):
Katie, I gather that you're fascinated by r gtfs.
Speaker 2 (02:57):
I opened my eyes in the morning horizontal in debt,
and I just think about heartbeat trades. Yeah, but this
isn't strictly a heartbeat.
Speaker 1 (03:10):
I don't know exactly what the qualification.
Speaker 2 (03:12):
If you take a look at the chart of inflows
and outflows, it looks like a heartbeat, but I don't
think that there are taxes involved.
Speaker 1 (03:19):
It's not a tax heart beat, but is a different
kind of heartbeat. Yeah, right, So runs some ETFs. Kathy
would famous part of her ETF active manager and because
they're like active dfs, and because she's like a celebrity
tech investor, they get to invest in hot tech IPOs,
which hasn't been a thing for a long time, but
it's coming back, right, There's been some hot tech ips
(03:41):
so much have gone up a lot and so this
RTF gets to get small ish allocations in some hot
tech IPOs, and if you think those IPOs will go up,
you'll be like, oh, I'd like to invest in this
RKTF to get my tiny se life exposure to that.
(04:01):
But if you're really tidy minded about it, you're like, well,
I don't want all the other stuff in the CTF.
I just want this IPO exposure. I can't get the
IPO exposure myself because I am not on the list
of people who get allocated shares on these IPOs. But
I can get exposure to the ETF because anyone can
get exposure to the EDF. And then the further thought
(04:23):
you could have is I could hedge my exposure to
everything else on the ETF by, you know, for instance,
shorting all of the stocks that are currently in the ETF,
which it discloses, so that i'd be left with you know,
if you're long the ETF and short all of the
stocks in the ETF, you're left only with like the
possibility of it getting an IPO allocation and the IPO
going up. And so it seems like people are doing
(04:44):
some sort of trade like that, and the best way
to operationalize that trade is not to buy the ETF
and short the stocks. The best way to do it
is to borrow all of the stocks that are in
the ETF, deliver them to ARC, to the ETF to
create the ETF, get back shares of the ETF. Now
you have the ETF and you're effectively short the underlying
(05:05):
slides because you bar them and gave them to ARC.
And then when the IPEA happens, you reverse the trade.
You deliver back the shares, get back the underlying stuff,
You deliver the underlying stuff back to your share lender,
and you're left with only the popped IPO.
Speaker 2 (05:19):
Yeah. I guess what I don't understand about this is
how big of a gamble is it to do this
in the ARC Innovation ETF. Like, I wonder if the
person or whoever was behind this trade knew for sure
that they're getting allocated some of Klarna or some of Bullish.
Speaker 1 (05:36):
My impression is that in Bullish it was pretty telegraphed
that ARC was getting some of it. But I'm not sure.
These are trades that have been going on, and like
they went on with the ipea of Bullish a while back,
and then Klarina last week and Robin Wiggils at the
ft has been reporting about it. But like my impression
is that the main the flagship Arc Innovation ETF got
an allocation in Bullish and not in Klarina. R ETF
(06:00):
got an allegation in Klina like f. Yeah, so like
people did this. I mean, no one really knows, but
it looks like this trade, right, it looks like the
trade is you heart beat in you like borrow the
underlying shows you heart beat into the ETF, you take
your stuff out the next day to capture the IPO.
It looks like people did that with our innovation around
(06:21):
the Clarina IPO and there was no allegation, And so
I just like missed. It's not a huge risk yause
you know, you're long in short the same thing.
Speaker 2 (06:30):
Basically, I'm just wondering, like I wonder if we'll start
to see this pop up in other sort of shiny
active ETFs.
Speaker 1 (06:39):
Sure, I don't know how many shiny active ETFs there.
Speaker 2 (06:41):
There's not a ton, but there's definitely some that you
might think would get allocated.
Speaker 1 (06:46):
Yeah, Like in general, you know, index ones don't buy
IPOs because they're not in the index, and so you
don't see you know, the traditional ETFs, you don't see
this as a big thing. But like someone like Kathy
Wood who is an investor and yeah stive tech companies,
it does make sense that she would be interested in
buying an IPOs. And it does make sense that someone
would notice that and be like, I can create my
(07:08):
own IPR allocation by engineering the r ETFs.
Speaker 2 (07:13):
Yeah, because, for example, there's an ETF dedicated just to
buying IPO stocks, like recent IPO stocks.
Speaker 1 (07:21):
Which accomplishes nothing whatsoever. I know, the trade here is
the IPO pop.
Speaker 2 (07:26):
Yeah.
Speaker 1 (07:27):
Trade here is not Klarna, it's the IPO pop.
Speaker 2 (07:30):
Yeah, it's the one day Yeah. I don't think they're
getting allocated IPOs.
Speaker 1 (07:34):
Yeah. I mean, like maybe that's the next step. Right,
you're like, hey, guys, I buy all the IPOs, want
to allocate be an IPO. But then, you know, traditionally
the way you get allocated an IPI is like one,
you are a big investor who pays a lot of
commissions to a bank, and two you are a long
term investor who creates a good relationship with the management
of the company. So the company is like I want
(07:55):
those people to own seven percent of my stock, so
I'm going to allocate them in the IPO and then
like you have like a nice relationship where you are
a long term holder you on the stock. You have
a nice marked market gain because they sold you the
stock of the IPI price. Those are the people that
the banks and the companies want to allocate at the IPO.
Someone whose businesses I buy recent IPOs and then sell
(08:17):
them when they're no longer recent.
Speaker 2 (08:18):
It's not that good, yeah, And it's also a smaller
funds of millions.
Speaker 1 (08:24):
Right. Like when you're a bank and a company and
you're allocating the IPO, you're in many cases literally sitting
down with a list and going through it and being
like these guys are good to give it, you know,
and you don't want to have a thousand names on
that list and get to like, we're gonna give this
guy fifty shares, right, Yeah, you want to be efficient, right,
(08:45):
So if you have a big investor, you get them
a big, big slug of shares. So right, because Kathywood
is a celebrity because of the argannivation ATF is pretty
big because she is a long term supporter of like some.
Speaker 2 (08:56):
Of the company take her five year time for him,
Like she's a.
Speaker 1 (08:59):
Good institution and that to have in your stock, and
so it makes sense that she gets alecated ips. Yeah,
but it's not obvious that every IVTF but also would
have the same benefit.
Speaker 2 (09:07):
This isn't something that I've sawt comment on, but I
do wonder how Kathy would and the ARC team feel
about this trade.
Speaker 1 (09:16):
Oh yeah, like assuming this trade is what it seems like,
which is someone massively inflating the assets of.
Speaker 2 (09:24):
These ETFs by billions of dollars.
Speaker 1 (09:26):
Billions of dollars for like a week in order to
extract a large chunk of the IPO pop. Right, Like
the RCF trade was like on the order of like
you know, it's like a one ish billion dollar ETF
and someone pumped in on the order of like seven
hundred million dollars. I might be a little wrong about that, Billy.
It's like that kind of thing. It's like basically doubling
(09:48):
the size of the ETF. When you do that, you
now own half of the ETF and then you take
your money out, So you take out half of the ETF.
It also means you take out half of essentially the
IPO shows, right, So the person doing this or the
people doing this are extracting kind of half of that
IPO pop for themselves, meaning that the long term retail
(10:10):
investors who love Kathy Wood and are you know, invested
in the ETF don't get that half of the ip
but that just goes to someone who is just doing
this arbitrage. So they must feel bad about it. Yeah,
it's not good. It's not like what they want. Yeah,
they do extract like an extra two days of management vice.
Speaker 2 (10:27):
But can they stop it? Though?
Speaker 1 (10:29):
You know, when I read about it, I was like,
you call them up and you say, I'd like to
pump a billion dollars in and you say yes, because
that's life in the ETF business, like it is the
point of an ETF is like people can create and redeem.
There is like there are ways to I believe, you know,
most ttfs like have ways to limit, you know, creations
and redemptions.
Speaker 2 (10:47):
I don't know. I mean, you can't stop money flowing
in or out, but not every inflow or outflow has
to result in the creation or redemption.
Speaker 1 (10:56):
That's what an inflow is.
Speaker 2 (10:58):
No, but people always say that it does isn't necessarily
always created creation or redemption. They give enough. People are
letting each other out.
Speaker 1 (11:07):
Yeah, but like net inflows create creations.
Speaker 2 (11:10):
Yeah, net inflows.
Speaker 1 (11:11):
But I'm saying they can't sell people trading on the exchange.
But this is not a trade on the exchange. This
is a creation. Yeah, okay, it creates to make sense,
it's a creation. It does to make sense. Someone has
borrowed a big package of the underlying, delivered it to
the ETF and gotten out these shares, which is why
you see this heartbeat. Look where the assets of the
ETF increase.
Speaker 2 (11:30):
All yeah, okay, fair, okay, Then how would they limit that?
Speaker 1 (11:35):
One answer is like the person doing this is either
an authorized participant in the ETF, like someone who has
a relationship with ARC. Yeah, you can create and redeem shares,
or they're like some hedge fund working through an authorised participant,
because again you have to do a creation. So like
these assets are coming into the ETF from someone and
the ETF can say, hey, knock that off, yeah, or
(11:56):
you'll stop being an authorised participant. Right, Yeah, it's one
fairly STRAIGHTFORARDA. I assume most ttfs have some other way
to like limit creations to avoid getting too big or
you know.
Speaker 2 (12:07):
I don't know if they do.
Speaker 1 (12:08):
I don't know either.
Speaker 2 (12:09):
There was a recent example of this. You had this
one very popular small cap funds ticker CALF, which ended
up switching indexes because I think at one point, like
for its holdings, it held like more than twenty percent
of the outstanding shares.
Speaker 1 (12:25):
And you should be able to stop that.
Speaker 2 (12:27):
Yeah, but you can't, like you have to like switch
your strategy.
Speaker 1 (12:31):
Yeah, I don't know if they can stop it and
haven't yet.
Speaker 2 (12:33):
I don't know either. But you do touch on the
fact that this.
Speaker 1 (12:36):
Is the thing, like the rketfs are like a modern
rapper for like Cathy would running an investment fund. But like,
also ETFs are plumbing, right, And we've talked about like
portfolio trades in the bond market, Right, Like an ETF
is like a piece of plumbing that allows people to
do bond trades. Right. This is like a portfolio trade, right.
(12:56):
This is like it's a widget that you can take
down and be like, I'm going to distract the IPO
value out of this ETF, and so you can just
do it. And it just operates independently in the stock
market and has its own set of rules, and like
you know, Kathy would is actively managing it, but it's
like it's not purely her investment vehicle. It's also this
like you know, pre property.
Speaker 2 (13:17):
Of the market. Yeah, that's an interesting way to look
at it, that it's basically just a portfolio trade, but inequities.
Speaker 1 (13:24):
It's almost the reverse of a portfolio trade, right. A
portfolio trade is like you have a bunch of bonds
and you go to a market maker and you're like,
I want to sell this bunch of bonds and the
market maker is like, wow, you can probably squeeze most
of them into an ETF and I'll take the rest,
and you can sort of like squeeze your stuff into
these you have here. It's like, I'm going to extract
exactly one security from the ETF. And it's the reverse
(13:46):
of the.
Speaker 2 (13:46):
Portfolio Ty, I want the needle, forget about all the
hay and you can just do it. Yeah, I was
gonna say, you do touch on the fact that this
is a fun who done it? Like, who is doing this?
And it has to be a fairly small universe of
potential suspects.
Speaker 1 (14:02):
It seems to me that the most logical person to
do it would be one of the authorized participants who
can trade directly with the fund. Yeah, but maybe that's
like a little too confrontational and it's like someone trading
through an authorised participant.
Speaker 2 (14:13):
Yeah, let's see. I don't want to name names necessarily,
but I mean, you look at some of ARC's filings,
it looks like they're aps, or at least the busiest
aps are Hudson River, Jane Street, Avian Amro, Bank of America,
Bnpever two, et cetera.
Speaker 1 (14:29):
So right, the normal people.
Speaker 2 (14:32):
Anyway, if you're the one behind the ARC trade right
some money pod at Bloomberg dot net.
Speaker 1 (14:38):
I feel like at this point, like this has been
pretty widely rumbored and like praised, and if someone's going
to claim credit for that, they would have been like, yeah,
we did that. I feel like there's probably some reason
not to claim credit for it. Also, it's like imitatable, right,
like now anyone can do it, that's true. I don't
know how many opportunities there will be to do it.
Speaker 2 (14:56):
It seems like a lot of squeezing for not like
enough juice.
Speaker 3 (15:01):
But I don't know, you know, it's like a few
days of Stockboro cost Yeah, for potentially like low tens
of millions of dollars of games.
Speaker 1 (15:12):
It's like it's it's real. I will say though that like,
like if I had the guess, I would say that,
like this trade became exciting when there was that rash
of IPOs that like went up one hundred percent. Yeah,
and then like they actually did it and like bullish
IPOs did well and Clarina which did fine, and then
(15:33):
I think we talked about this, like the IPOs earlier
this year had the huge pops because no one had
seen an ipo in years, and now it's like, yeah,
you know, like stuff had went public this week and
went down right, So it's not as exciting a trade now.
I like, you're not expecting one hundred percent pop in
every APA.
Speaker 2 (15:48):
That's true. So maybe it was just a brief, sweet
moment in time. But it'll be fun to see if
this continues and if it's sprints. So you know how
(16:11):
I anchor a financial news TV show. Okay, well, surprise,
That's what I do when I leave this room. It's
called the Clothes. It's from three to five pm daily.
This isn't just a plug. I bring it up because
after the closing bell usually companies report their earnings and
because the US follows a quarterly earning schedule, that means
(16:35):
that there's almost always earnings to break on air, which
is exciting and I look forward to it. But maybe
now instead of doing that four times a year, I'll
only do it twice a year.
Speaker 1 (16:53):
Yeah, I'm like, now.
Speaker 2 (16:56):
I bring this up.
Speaker 1 (16:57):
Yeah, you bring it up because present Trump is just
randomly out there being like, yeah, hey, if the SEC
wants to, we could move to six month reporting for
companies instead of reporting every three months.
Speaker 2 (17:10):
I'm surprised he cares.
Speaker 1 (17:12):
You know, someone mentioned it to him, so it just
as Sabody cares cares.
Speaker 2 (17:17):
It seems like a off the beaten track issue for him.
Speaker 1 (17:21):
He tried it last time, he did back before the
unitary executive It is an odd thing to care about
in the scheme of things. Yeah, but it marginally increases
the power and reduces the oversight over corporate executives, right, Like,
if you only have to report every six months, then
you have more time to do stuff without anyone paying
(17:42):
attention to it. That's probably good for like the lifestyle
of corporate executives.
Speaker 2 (17:46):
Well, I was going to say I love this topic
because I can honestly see both sides of the argument,
one being Okay, the quarterly reporting schedule investors like transparency.
That's proven, we should have as much information as we
possibly can. But then on the other side, three months
is arbitrary, and I could be persuaded that it does
(18:10):
incentivize shorter term thinking on some level.
Speaker 1 (18:13):
Yeah, I think a lot about this, Like there's no
like necessary reason that reporting every three months should encourage
shorter term thinking. Like it's just like a mistake to
think that investors only care about next quarter's earnings, right,
and like the shorter the reporting cycle than like the
less long term they'll care about. Like that can't be true, right,
Like companies report every three months and they report guidance
(18:33):
and they report like, you know, their investments for the
long term, and like people understand that.
Speaker 2 (18:38):
I think you're being really generous.
Speaker 1 (18:40):
Like everyone loves to say that the US stock market
only rewards short term thinking, and like, you know who
really loves to say that is Elon Musk. Yeah, who's
like got a you know, trillion dollar company and did
for a long time before it made money, right, and
like even now its valuation is entirely based on like ooh,
robots in the future. Yeah, it's just like false to
think that the US stock market only cares about next
quarters earnings, right, Yeah, there's just like no reason to
(19:01):
think that. Now. Yeah, it is the case that, like
there is volatility around quarterly earnings, right, Like people do
look at quarterly earnings and use them as a data
point to extrapolate future earnings. And if you have bad
earnings this quarter, people are like, oh, maybe they're not
gonna have good earnings in the long run, right, and
so like there are like high frequency data points, but
(19:22):
it's not logically entailed that, like if you report every
three months, then people only pay attention to three month earnings, right,
And that's clearly the case that, Yeah, it does long
term bets get made.
Speaker 2 (19:32):
Yeah, it just does introduce volatility into the stock price.
And you could see a CEO who's you know, getting
beaten up on his earnings call maybe doing things to
minimize that.
Speaker 1 (19:45):
Yes, but it's or her I think about Cliff is
this point about volatility laundering, where you know, if you
have a private investment that doesn't get marked to market
every day, it is and sometimes less volatile than most
public stocks, but only in the sense that you don't
look every day, right, Yeah, Like it's not economically less volatile.
(20:08):
It's just like you see the price of one thing
every day and you don't see the price of the
other thing every day. Yeah, it's a little like that,
where like if you just stop reporting earnings, then you
have less earnings volatility, you have less news driven volatility,
but you're just masking like what is actually happening. And
the other thing is like, I'm not sure you get
less stock price volatility, right, because you have you still
(20:30):
have trading. Right. It's just like if definitive financial statements
and like you know, guidance get reported every six months
instead of every three months, then you have a six
month window where people are trading based on.
Speaker 2 (20:43):
Other stuff, right, body language, body language, TV appearance.
Speaker 1 (20:47):
To the appearances rumor. People talk a ton about alternative data, right,
like you like sophisticated hedge funds are constantly using information
other than quarterly financial statements to build their models of
like how a company is doing. Right, They're you know,
looking at credit card data or famously satellite pictures of
parking lots to see how many people are coming to
(21:09):
the stores. And if you get rid of some of
the quarterly financial reporting, then those pieces of data will
be relatively more valuable. They will still exist hedgehunes will
still trade on them, but like you won't, right, It'll
be there'll be a lot more information asymmetry because some
people will have information about how companies are doing and
(21:31):
other people won't. Yeah, and then the other kind of
trading that could happen in six months is insider trading, right,
because like, the more time you have between announcing news,
the more opportunity there is to reach from knowing the
news yourself.
Speaker 2 (21:44):
That'd be great for this podcast. Look, there would be
great for my TV show having fewer earnings reports but.
Speaker 1 (21:52):
And more insider trading. Yeah, it'd be fun to have
the insider traders on.
Speaker 2 (21:56):
I like to imagine that this goes through, that the
US moves to companies only needing to report every six months,
and think about what that would happen, because in Europe
they are mandated to only report every six months, but
many still file quarterly reports. Yeah, so I wonder if
the companies who report more frequently would get rewarded for
(22:17):
that from investors, Whether you would see companies like switch around,
and what the psychological effect would be from that. Like
if you were reporting on a quarterly basis and then
went to a six month basis, you know, would that
be taken as oh, shoot, there's bad news coming and
they're delaying it.
Speaker 1 (22:36):
Yeah. Like I think if you're a normal company, it's
a little hard to reduce the freakanci reporting, right, I
mean you think about who would report six months? Like
some of it is like you know, Trump brothers back
to crypto treasury companies right.
Speaker 2 (22:50):
Where it's like American bitcoin basically.
Speaker 1 (22:53):
I do you think Another part of the answer is
like part of the reason people talk about this is
some form of like it is to burdensome to be
a US public company these days, and that is part
of why big cool tech startups are staying private longer,
and you know, ordinary people can't invest in them in
their pro own kids and all that stuff, And so
it is possible that like if you went to like
(23:16):
Sam Alton and you're like, hey, would you take open
a public and he was like, I have to report
every quarter and you're like, no, good news, you only
have to report every six months. You may think, okay, fine,
I'll do it, right, Like, I think it's a pretty
marginal benefit. But there's probably some quite cool tech startup
that would feel, like, you know, by saving money on
reporting costs and also by just having less frequent reporting
(23:38):
and less frequent like shareholder interference, it would like change
the bargain of whether or not it's a good idea
to go public. Right, Yeah, so like some new public
companies would report on a six month schedule.
Speaker 2 (23:48):
Well to that point, Adina Friedman, who is the CEO
of NASAC, posted on LinkedIn basically that they supported the
reforms to reduce the burden on public companies because I'm
and you have heard that trotted out as a reason
for why companies are saying private.
Speaker 1 (24:04):
So that is hard for me to imagine that, like
the costs of like having your accountants to your reports
every three months is what's giving you know, yeah, tripe private.
But like I did, there's probably it's a margin that's
probably true true ish and I say stripe right, But
like in fact, like the problem is that it is
(24:26):
hard for smallish companies to go public. Yeah, and this
is perhaps a material cost savings.
Speaker 2 (24:33):
Yeah, we need more small caps.
Speaker 1 (24:34):
And the sort of thing where it's one thing for
a big existing public company to say okay, we're going
to six month reporting, But it's another thing for a
smallish company to come public saying we're only going to
report every six months and everyone's like, okay, that's fine.
Speaker 2 (24:48):
Yeah. I sort of stated it as a fact that
investors like information and want transparency. But I do think
there's this transparency barbelle that's developed for investors. Where you
think about et for example, and part of the reason
why ETFs have just killed mutual funds is because people
like to see the daily holdings. But then you think
about what's going on in private markets, and folks seem
(25:10):
perfectly happy to try and plow into that. So I
don't actually think that I can state it as a
fact that investors like as much information as possible.
Speaker 1 (25:20):
Well, there's different kinds of investors, right, I mean, yeah,
active asset managers who are making investing decisions want to
make informed investing decisions, right, But no, right, I mean,
like if we talk all the time about like the
retail love for SpaceX and Stripe and open Ai, and
like those people aren't getting financial statements at any frequency, right,
(25:40):
that's just like sure, I trust you, right, So that
makes sense.
Speaker 2 (25:59):
We have seven minutes to talk about structured products and
what a boom?
Speaker 1 (26:05):
Yeah, I don't know. I love structured products.
Speaker 2 (26:08):
I know you do. Why do people who aren't you
love structured products? Like? Why are we seeing this boom?
Are we just bored? Is the S and P five
hundred not enough?
Speaker 1 (26:18):
The structure products are? Aren't import them, They're they're like storytelling.
Like the simplest structured product, the secure product that I
think it was, like the paradigm structured product. Is like,
if you give me one hundred dollars, I can take
ninety five dollars you ever take and buy a treasury
bill ninety six dollars, okay, and by a treasury bill right,
that will mature at one hundred dollars in a year. Right,
And then I have four dollars to do something weird with. Right.
(26:41):
And the simplest weird thing is I spend those four
dollars like that the money call option on the S
and P. Right. And so I say to you, if
you give me one hundred dollars, I'll give you back
some percentage of the return of the SMP or like
this is a return of the SMP up to some
cap or something in a year, but I'll always give
you one hundred dollars back. If the SMP crashes fifty percent,
(27:03):
you still get all your money back. Okay, So you
get SMP upside, right, And all I've done is I
bought a co option, I bought a Treasury bill, And
you're like, oh wow, stocks, they can never go down, right,
And so I write about this periodic that's the simplest
structure product that's not like the main structured product of
the current boom. But like that story of like you're
(27:23):
gonna give me money, I'm gonna park boasted in t
bills and I'm gonna use the rest to buy weird
options to give you like some weird payoff profile. You know,
there are people whose job is to sit in a
lab cooking up that sort of thing, and then there
are other people whose job is to like put a
nice story on that. So we're talking about this, like
Bloomberg big take about the boom instructured products, and they
talk you about like half of structured products in America
(27:45):
are auto callables. Yeah, an auto callable is an installment
put purchased by a bank from retail investors. Right, And
so you know, if you're a bank, Like you have
a lot of people who want to buy index puts
from you, and you're like, where will I get index puts?
And you go to the lab and you're like, I
would like to cook up an installment index put product
(28:06):
that I can buy from somebody. Maybe I could buy
it from like an insurance company or Berkshire Hathaway or something.
And then you're like, no, no, I can buy it
from retail investors. If instead of saying I'm going to
buy an installment index put from you, you say I'm
going to sell you a bond that pays you ten
percent interests amazing, And it pays you ten percent interest
every quarter unless the stock market goes up, in which
(28:27):
case I paid off early and then no problem. It's
auto called. Right. One of the catch is that if
the stock market goes down twenty percent, you lose all
the money. Right, that's just an installment put. Right. But
like instead of saying that, you say, this is a
note that pays a very high coupon gets called early
in certain circumstances, and it's the losses of the stock market.
(28:51):
Like that's like a great trade. It's like you're not
selling excitement you're selling. Look, you get ten percent a year.
You can't lose. The worst thing that happens probably is
you get paid off early.
Speaker 2 (29:01):
No problem, no problem.
Speaker 1 (29:03):
But then there are other products too that are like
the reverse, that are like we pay you if the
stock market goes down, right, because you put any set
of options into this thing, and so you have like
this unlimited range of like stories and payoff structures that
you can sell to retail investors. And this article quotes
a guy, like a financial advisor, saying that his client
said him, this sounds illegal, It sounds too good to
(29:24):
be true. Yeah, because you like you did, like, why
are we seeing a boom in it? There are two
kinds of structured products. They're selling options and buying options, right,
So like the autocoll is like the bank is buying
an option from the customer. The one that I started with,
the like you get the S and P, but you
can't go down. That's the bank is selling an option
(29:46):
to the customer. This thing I started with, that only
works if you can buy a treasury built for significantly
less than one hundred dollars, because then you have money
to buy options with. Yeah, So like in a very
low interest rate environment, it's hard to do really cool
structure products because you just don't have a lot.
Speaker 2 (30:02):
Of Like I find that exciting because we've now entered
theoretically a ray cutting cycle.
Speaker 1 (30:09):
Yeah, so there are search products the other way, right,
where like if rates are low, it's very exciting to
go to a customer and say I'll pay you eight
percent a year, And the way you get eight percent
of year is it's not interest, that's option premium, right,
So there are products for all environments.
Speaker 2 (30:26):
Yeah, I do think it's interesting. They also quote someone
in here saying that you know, structured products aren't fought,
they're sold. That can apply to a myriad of things,
but it also applies here.
Speaker 1 (30:38):
People say that about many, many, many things in finance,
but I think they most say it about searched notes,
and they.
Speaker 2 (30:44):
Mean it here. But what's interesting is that now you
have because no one.
Speaker 1 (30:48):
No retail investors like you know, what I would like
to do is sell installment puts to a bank.
Speaker 2 (30:52):
Well, now you have an auto callbs ETF It launched
in June. So there are theoretically investors out there who
are just buying this on their own, who aren't necessarily.
Speaker 1 (31:03):
Having it so advisor sold ETF.
Speaker 2 (31:05):
Yeah, but it now exists where you don't need to
have an advisor sell this to you.
Speaker 1 (31:11):
Look at the description of that and it's like, oh,
you got a ten percent yield.
Speaker 2 (31:15):
Yeah, that's true. Maybe you plug it into Investipedia and
figure out what an auto callable is yield. Yeah, I'm
sure there are plenty of folks who just sort by yield, right, right,
it's yield, don't worry about the rest of it.
Speaker 1 (31:32):
The other thing I think is in structure debts. It's
like I think of like the auto calables business as
banks buying crash insurance from retail so they can sell
crash insurance to other investors. But the overall structure debts
business is a is a bigger business. And the article
quotes the penn I heard saying everybody loves this business.
(31:53):
It prints money most of the time, and then usually
they find a way to lose money when the markets
are crashing. That's the banks. It is true that selling
structured notes is a way to make a lot of money,
like the edge on these trades is like one to
three percent, But somehow banks end up with positions in
these notes that sometimes blow up in crises, which is
(32:13):
not what's supposed to happen with the autocollable, which is
really supposed to be the bank's buying crisis insurance from
the retail customers. But again, there's lots of different profiles,
and some of them are more the bank selling crisis insurance.
Speaker 2 (32:24):
We would you say your favorite structured product is?
Speaker 1 (32:28):
I mean, they do like the autocollable just because.
Speaker 2 (32:31):
It's like, so do a lot of people, it seems like.
Speaker 1 (32:34):
But the other thing in the story is that, like
the banks are now off letting their structured note risk
to hedge funds because that's what banks do with everything. Now.
Speaker 2 (32:41):
Yeah, another theme we've talked about.
Speaker 1 (32:44):
Yeah, the bank has a relationship with the customer, but
like they're not going to take all this risk on
their own balance it, so they'll find some hedge fund
to take the structured note risk.
Speaker 2 (32:51):
Cool, all right. Unfortunately that's all the time we have.
Speaker 1 (32:57):
So we'll see you next week.
Speaker 2 (32:59):
Send questions please, Yeah they're not good enough, maybe I
just won't open. Yeah, we'll see be skiing.
Speaker 1 (33:10):
And that was the Money Stuff podcast.
Speaker 2 (33:12):
I'm Matt Levine and I'm Katie Greifeld.
Speaker 1 (33:14):
You can find my work by subscribing to The Money
Stuff newsletter on Bloomberg dot.
Speaker 2 (33:18):
Com, and you can find me on Bloomberg TV every
day on the close between three and five pm Eastern.
Speaker 1 (33:25):
We'd love to hear from you. You can send an
email Tough Money Pod at Bloomberg dot net, ask us
a question and we might answer it on the air.
Speaker 2 (33:33):
You can also subscribe to our show wherever you're listening
right now and leave us a review. It helps more
people find the show.
Speaker 1 (33:39):
The Money Stuff Podcast is produced by Ana ma Aserakis
and Moses on dom Our.
Speaker 2 (33:43):
Theme music was composed by Blake Maples.
Speaker 1 (33:46):
Amy Keen is our executive.
Speaker 2 (33:48):
Producer, and Sage Bawman is Bloomberg's head of Podcasts.
Speaker 1 (33:51):
Thanks for listening to The Money Stuff Podcast. We'll be
back next week with more stuff.
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