FIN 310 Class
Web Page, Fall '19
Instructor:
Maggie Foley
Jacksonville
University
Weekly SCHEDULE,
LINKS, FILES and Questions
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Week |
Coverage, HW, Supplements -
Required |
WSJ Papers for Discussion in class and
Videos |
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Intro. & Chapter
1 |
Daily earning announcement: http://www.zacks.com/earnings/earnings-calendar IPO schedule:
http://www.marketwatch.com/tools/ipo-calendar Chapter 1 Introduction Introduction to Capital
Markets - ION Open Courseware (Video)
|
Goldman Sachs says computerized trading may make
next 'flash crash' worse
·
Goldman Sachs is worried the increasing
dominance of computerized trading may cause more volatility during market
downturns. ·
The firm says high-frequency trading
machines may "withdraw liquidity" at the worst possible moment in
the next financial crisis. Goldman
Sachs is cautioning its clients that computerized trading may exacerbate the
volatility of the next big market sell-off. "One theory that has
been proposed for why market fragility could be higher today is that because HFTs
[high-frequency trading] supply liquidity without taking into account
fundamental information, they are forced to withdraw liquidity during periods
of market stress to avoid being adversely selected," Charles
Himmelberg, co-head of global markets research at Goldman, said in a report
Tuesday. "In our view, this at least raises the risk that as machines
have replaced people, and speed has replaced capital, the inability of the
market's liquidity providers to process complex information may lead to
surprisingly large drops in liquidity when the next crisis hits." Himmelberg
noted the higher level of computerized trading has not been truly
"stress tested" during the bull market since the financial crisis.
He said the increasing incidents of volatility in various markets such as the VIX spike
on Feb. 5, the 10-year Treasury bond on Oct. 15, 2014, and the British
pound on Oct. 6, 2016, may be precursors of a bigger one to come. "The
rising frequency of 'flash crashes' across many major markets may be an
important early warning sign that something is not quite right with the
current state of trading liquidity," he said. "These warning signs
plus the rapid growth of high-frequency trading (HFT) and its near-total
dominance in many of the largest and most widely traded markets prompt us to
more carefully consider the possibility (not necessarily the probability)
that the long expansion accompanied by relatively low market volatility may
have helped disguise an under-appreciated rise in 'market fragility.'" The strategist said computerized trading is generally not
backed by large levels of capital, which could drive the "collapse"
of liquidity if the machines suffer any big losses during a significant
market downturn. "Future flash crashes may not end well," he warned.
"The quality of trading liquidity for even the biggest, most
heavily-traded markets should not be taken for granted." — With reporting by CNBC's Michael Bloom. Bump in the Night:
FX Flash Crashes Put Regulators on Alert BY SAIKAT
CHATTERJEE and Trevor Hunnicutt LONDON/NEW YORK (Reuters) - The increasing frequency of flash
crashes in the $5.1 trillion-a-day foreign exchange market has regulators
scrambling for answers. Sudden, violent and often quickly reversed price moves are now
a regular occurrence in world currency markets -- often during the so-called
'witching hour', a period of thin trading between 5-6 pm in New York when
currency dealers there have powered off and colleagues in Tokyo have yet to
sign on. Two big crashes this year separately pummeled the yen and the
Swiss franc and, given the importance of currency pricing for trade,
investment flows and the global economy, policymakers are concerned a major
fracturing could threaten financial stability. "The question is, is this a new normal, or is it a canary
in the coalmine sort of thing?" said Fabio Natalucci, deputy director of
the Monetary and Capital Markets Department at the International Monetary
Fund (IMF). "We have seen the frequency of these events increase so
this may be pointing to a major liquidity stress event coming at some point
in the future." Natalucci said liquidity strains -- market lingo for an
insufficient number of buy and sell orders -- were evident days ahead of a
big crash and the IMF was creating a monitoring tool that might be able to
predict when the next one was coming. Reflecting official disquiet, flash crashes have been a
regular topic of discussion this year at the Federal Reserve Bank of New
York's FX market liaison committee, a forum for central bankers and market
players. Bankers and policymakers agree that an industry-wide switch to
machine-trading in FX markets is behind the frequency and severity of the
price moves, meaning that further crashes are likely. "Our pessimistic view is that this technology is going to
become an increasing part of the FX market and we need to step up our
monitoring," a G10 central bank official said, declining to be named
because he is not authorized to speak publicly. Regulators aren't pressing the panic button yet. Natalucci
said there was no evidence that flash crashes so far had raised funding costs
for firms or households and it made sense to study the problem before
"rushing into enacting any regulatory responses". Mini-crashes already occur roughly every two weeks in the FX
market according to a study by Pragma, a company which creates computer
trading models. In these incidences, a currency's price will shift
dramatically followed by a swift reversal, along with a sudden and
significant widening of the spread between prices quoted to buy and sell it.
The spread usually narrows after a few minutes. KILL SWITCHES Computer models known as algorithms, or algos, have largely
replaced humans in currency trading, helping banks to cut costs and boost the
speed at which deals are done. The models are designed to execute trades smoothly by breaking
down orders into small pieces and searching for platforms where liquidity is
plentiful. But problems arise when market conditions change, for
instance, when trading volumes suddenly collapse or volatility spikes as has
been the case during Britain's protracted attempt to extricate itself from
the European Union. At such times, algos are often programmed to shut down. Two senior central banking officials, speaking on condition of
anonymity, said such "kill switches" drained liquidity. And, because fragmented forex markets depend on algos for a
constant stream of price quotes -- by one estimate there are 70-odd trading
platforms -- a widespread shutdown causes volumes to nosedive, making the
price moves more dramatic. The first of this year's notable crashes came on January 3
when the yen spiked suddenly against the dollar after Tokyo markets closed.
It jumped 8% within the space of seven minutes against the Australian dollar
and 10% to the Turkish lira. The second was on February 11 when the Swiss franc gyrated
frantically, with an unexplained and brief jump against the euro and dollar. A Reserve Bank of Australia (RBA) report noted that several
flash episodes have been recorded during the witching hour. It was also
during this illiquid period on October 7, 2016 that sterling collapsed 9% in
early Asian trading, falling to around $1.14 from $1.26 within minutes. The RBA's analysis of all these flash crashes concluded
algorithmic trading strategies likely acted as "amplifiers". (GRAPHIC: Japan Yen Flash crash Jan 3 -
https://tmsnrt.rs/2WiSDWn) Human traders would be able to spot an opportunity from the
market turmoil -- buying a currency in free fall - which would help to defuse
it. But these days there are far less of them around. Upto 70% of all FX orders on platform EBS, one of two top
venues for currency trading, now originate from algorithms. In 2004, all
trading was undertaken by humans. With banks under constant pressure to cut costs and
post-financial-crisis rules making it ever more expensive to trade, there is
no sign of firms hiring extra staff or deploying existing employees onto a
graveyard shift. Instead, some try to avoid trading when they know volumes will
be light such as major holidays. Machines, meanwhile, are expected to become even more
dominant. Pragma has just launched an algorithm to trade non-deliverable
forwards, derivatives used to hedge exposure to illiquid currencies, especially
in emerging markets, according to Curtis Pfeiffer, chief business
officer at the firm. Trading in illiquid, emerging market currencies was previously
the mainstay of voice traders. "FX trading in banks is a tough business because spot
trading is so commoditized and revenues are squeezed," said John Marley,
a senior currency consultant at Smart Currency Business. "Moreover, banks have rolled back their proprietary
trading desks due to the extra capital required and lower risk
appetite." (GRAPHIC: G10 FX traders - https://tmsnrt.rs/2Elpkvq) TALKING POINTS Policymakers' ability to understand and affect currency moves
are hampered by the freewheeling nature of the FX market, which is
unregulated, private and decentralized. The 'FX Global Code' was developed by central banks and
private sector participants to promote a fair and open FX market but it is
not legally binding. In comparison to equity markets, where regulators have been
able to introduce measures to try and tame wild price swings, policymakers in
the FX space are still at the discussion stage. Flash crashes were on the agenda of two recent meetings of the
Foreign Exchange Committee, an industry group sponsored by the Federal
Reserve Bank of New York, and a gathering of the Global Foreign Exchange
Committee (GFXC) this month. "It’s important for us to use this forum to understand
flash events, their causes, and how the principles of the Global Code can be
applied to promote a fair and efficient FX market," Simon Potter,
executive vice president of the Federal Reserve Bank of New York and the
chair of the GFXC, told Reuters. Central banks could potentially intervene to smooth out
significant and prolonged gyrations in currency markets but that would be
controversial. "The primary mandate for most central banks is price
stability and the secondary mandate is financial stability," said
Nikolay Markov, senior economist at Pictet Asset Management. "As long as these intraday big moves do not impinge on
financial stability or drain interbank liquidity, central banks will monitor
these developments and are not supposed to react to intraday moves." It could also be costly -- Britain's failed defense of
sterling in 1992 cost it around 3.3 billion pounds according to Treasury
calculations -- and potentially futile. "I doubt that central banks can do much to prevent the
occurrences of these flash crashes as previous incidents have been a result
of a complete drying up of market liquidity, resulting in some big
moves," said Neil Mellor, senior FX strategist at BNY Mellon in New
York. "Unless those problems are addressed, we will continue to see such
price swings." (Editing by Sujata Rao and Carmel Crimmins) Copyright 2019 Thomson Reuters. |
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Chapter 2 |
Chapter
2 What is Money Part I What is Money? · There is no single
"correct" measure of the money supply: instead, there are several
measures, classified along a spectrum or continuum between narrow and broad monetary aggregates. • Narrow measures include only the
most liquid assets, the ones most easily used to spend (currency, checkable
deposits). Broader measures add less liquid types of assets (certificates of
deposit, etc.)
· M0:
In some countries, such as the United Kingdom, M0 includes bank reserves, so
M0 is referred to as the monetary base, or narrow money. · MB:
is referred to as the monetary base or total currency. This is the base
from which other forms of money (like checking deposits, listed below) are
created and is traditionally the most liquid measure of the money supply. · M1: Bank
reserves are not included in M1. (M1 and Components @ Fed St. Louise website)
· M2:
Represents M1 and "close substitutes" for M1. M2 is a broader
classification of money than M1. M2 is a key economic indicator used to
forecast inflation. (M2 and components @ Fed St. Louise website) · M3:
M2 plus large and long-term deposits. Since 2006, M3 is no longer published
by the US central bank. However, there are still estimates produced by
various private institutions. (M3 and components at Fed St. Louise website) ·
Let’s watch this money supply
video: Draw
Me The Economy: Money Supply (video)
For discussion: ·
What could happen if we
increase money supply? ·
What about reduce money supply? ·
What are the possible ways to
reduce money supply? ·
Among M0, M1, M2, M3, which
one is the correct measure of money? ·
Why M2 is >> M0? ·
Why does M2 increase much
faster than M1? Does it has any impact on you? For more information, please visit http://www.data360.org/report_slides.aspx?Print_Group_Id=168
Summary:
Money Supply M2 in the United States
increased to 14872.10 USD Billion in July from 14755.10 USD Billion in June
of 2019. oney Supply M2 in the United States averaged 4121.70 USD Billion
from 1959 until 2019, reaching an all time high of 14872.10 USD Billion in
July of 2019 and a record low of 286.60 USD Billion in January of 1959.
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|
United States Money |
Last |
Previous |
Highest |
Lowest |
Unit |
|
|
2.25 |
2.25 |
20.00 |
0.25 |
percent |
||
|
3260366.00 |
3274900.00 |
4075039.00 |
48362.00 |
USD Million |
||
|
3852.40 |
3831.70 |
3852.40 |
138.90 |
USD Billion |
||
|
2.14 |
2.14 |
10.63 |
0.22 |
percent |
||
|
14872.10 |
14755.10 |
14872.10 |
286.60 |
USD Billion |
||
|
3744394.00 |
3741539.00 |
4473864.00 |
672444.00 |
USD Million |
||
|
17491578.00 |
17523032.00 |
17523032.00 |
697581.70 |
USD Million |
||
|
128845.00 |
128338.00 |
153075.00 |
12128.00 |
USD Million |
||
|
2356.33 |
2346.38 |
2356.33 |
13.65 |
USD Billion |
||
|
-7710.00 |
-32785.00 |
118012.00 |
-77351.00 |
USD Million |
||
|
196.70 |
201.80 |
212.90 |
156.20 |
percent |
https://tradingeconomics.com/united-states/money-supply-m2
M2 of other countries
|
Country |
Last |
Previous |
Range |
||
|
2043886.20 |
Jun/19 |
1949229 |
2123331 : 712 |
ARS Million |
|
|
2882184.74 |
Jul/19 |
2878391 |
2882185 : 0.01 |
BRL Million |
|
|
1737081.00 |
Jul/19 |
1721566 |
1737081 : 25523 |
CAD Million |
|
|
193550.00 |
Aug/19 |
191941 |
193550 : 5840 |
CNY Billion |
|
|
12130349.00 |
Jul/19 |
12056341 |
12130349 : 1070365 |
EUR Million |
|
|
2279384.00 |
Jul/19 |
2256216 |
2279384 : 263286 |
EUR Million |
|
|
3111.10 |
Jul/19 |
3100 |
3111 : 34.4 |
EUR Billion |
|
|
36941.69 |
Aug/19 |
37154 |
37404 : 1127 |
INR Billion |
|
|
5937500.00 |
Jul/19 |
5918515 |
5937500 : 5156 |
IDR Billion |
|
|
1595700.00 |
Jun/19 |
1576757 |
1595700 : 132635 |
EUR Million |
|
|
1030974.80 |
Jul/19 |
1029615 |
1030975 : 8404 |
JPY Billion |
|
|
8967387851.00 |
Jul/19 |
8938303088 |
10147459591 :
15370409 |
MXN Thousand |
|
|
874900.00 |
Jul/19 |
871121 |
877560 : 102486 |
EUR Million |
|
|
47351.00 |
Jul/19 |
47348 |
47351 : 1090 |
RUB Billion |
|
|
1693334.00 |
Jul/19 |
1693532 |
1693532 : 169395 |
SAR Million |
|
|
620413.00 |
Jul/19 |
620328 |
622406 : 6182 |
SGD Million |
|
|
2965855.00 |
Jul/19 |
2905091 |
2965855 : 2887 |
ZAR Million |
|
|
2790153.00 |
Jun/19 |
2778413 |
2790153 : 591 |
KRW Billion |
|
|
1226327.00 |
Jul/19 |
1246563 |
1246563 : 294870 |
EUR Million |
|
|
1028773.00 |
Jul/19 |
1026714 |
1030195 : 198227 |
CHF Million |
|
|
2266821545.10 |
Aug/19 |
2178802052 |
2266821545 :
236620702 |
TRY Thousand |
|
|
2441750.00 |
Jul/19 |
2437574 |
2441750 : 167427 |
GBP Million |
|
|
14872.10 |
Jul/19 |
14755 |
14872 : 287 |
USD Billion |
Part II What is
Fractional Banking System?
Money Creation in a Fractional Reserve Banking System
In
a fractional reserve banking system, banks create money when they make loans.
Bank
reserves have a multiplier effect on the money supply.
Example: You deposited $1,000 in a local bank
|
Iteration # |
Deposited |
= |
Reserves |
+ |
Available to Lend |
Bank |
|
Lends to |
||||||
|
1. A |
1,000.00 |
= |
100 |
+ |
900 |
A |
|
2. B |
900 |
= |
90 |
+ |
810 |
B |
|
3. C |
810 |
= |
81 |
+ |
729 |
C |
|
4. D |
729 |
= |
72.9 |
+ |
656.1 |
D |
|
And the cycle continues… |
||||||
Summary:
|
Iteration # |
Deposited by |
Amount Held |
Amount |
Total Amount that |
Total Amount that |
Total Amount |
Total Amount that |
|
Customer |
in Reserve |
Currently |
“Can” be |
Has Been |
Held in Reserve |
Customers Believe |
|
|
|
from Deposit |
Available to |
Lent Out |
Lent Out |
|
They Have |
|
|
|
|
Lend Out |
|
|
|
|
|
|
|
|
from Deposit |
|
|
|
|
|
|
1 |
1,000.00 |
100 |
900 |
900 |
0 |
100 |
1,000.00 |
|
2 |
900 |
90 |
810 |
1,710.00 |
900 |
190 |
1,900.00 |
|
3 |
810 |
81 |
729 |
2,439.00 |
1,710.00 |
271 |
2,710.00 |
|
4 |
729 |
72.9 |
656.1 |
3,095.10 |
2,439.00 |
343.9 |
3,439.00 |
|
5 |
656.1 |
65.61 |
590.49 |
3,685.59 |
3,095.10 |
409.51 |
4,095.10 |
|
6 |
590.49 |
59.05 |
531.44 |
4,217.03 |
3,685.59 |
468.56 |
4,685.59 |
|
7 |
531.44 |
53.14 |
478.3 |
4,695.33 |
4,217.03 |
521.7 |
5,217.03 |
|
8 |
478.3 |
47.83 |
430.47 |
5,125.80 |
4,695.33 |
569.53 |
5,695.33 |
|
9 |
430.47 |
43.05 |
387.42 |
5,513.22 |
5,125.80 |
612.58 |
6,125.80 |
|
10 |
387.42 |
38.74 |
348.68 |
5,861.89 |
5,513.22 |
651.32 |
6,513.22 |
Part III: Crypto currency
ppt
1(FYI)
What is Bitcoin? (video)
What is bitcoin? By Khan Academy (video) (optional)
Bitcoin futures (BTC) https://www.cmegroup.com/trading/bitcoin-futures.html
·
Bitcoin futures (BTC) are
live at CME.
·
Now you can hedge Bitcoin
exposure or harness its performance with a futures product developed by the
leading and largest derivatives marketplace: CME Group, where the world comes
to manage risk.
How bitcoin futures
trading works (video)
Bitcoin basics : how
Bitcoin futures work (video) (optional)
Homework of
chapter 2 (due on 9/26)
1. Write down the definition of
M0, M1, M2 and M3.
2. From Fed St. Louis website,
find the charts of M1 money stock and M2 money stock.
http://research.stlouisfed.org/fred2/categories/24
Compare the two charts and discuss the differences
between the two charts.
3. Imagine that you
deposited $5,000 in Bank A. Imagine that the fractional banking system is
fully functioning. After five cycles, what is the amount that has been
deposited and what is the total amount that has been lent out?
4. What is
bitcoin? In your view, could bitcoin become a major global currency? Could
governments ban or destroy bitcoin?
5. What are bitcoin futures? How can you use BTC to
improve your portfolio’s performance?
Beyond
Bitcoin bubble – New York Times (FYI)
https://www.nytimes.com/2018/01/16/magazine/beyond-the-bitcoin-bubble.html
The sequence of words is meaningless: a random array strung
together by an algorithm let loose in an English dictionary. What makes them
valuable is that they’ve been generated exclusively for me, by a software
tool called MetaMask. In the lingo
of cryptography, they’re known as my seed phrase. They might read like an
incoherent stream of consciousness, but these words can be transformed into a
key that unlocks a digital bank account, or even an online identity. It just
takes a few more steps.
On the screen, I’m
instructed to keep my seed phrase secure: Write it down, or keep it in a
secure place on your computer. I scribble the 12 words onto a notepad, click
a button and my seed phrase is transformed into a string of 64 seemingly
patternless characters:
1b0be2162cedb2744d016943bb14e71de6af95a63af3790d6b41b1e719dc5c66
This is what’s called a “private key” in the world of cryptography:
a way of proving identity, in the same, limited way that real-world keys
attest to your identity when you unlock your front door. My seed phrase will
generate that exact sequence of characters every time, but there’s no known
way to reverse-engineer the original phrase from the key, which is why it is
so important to keep the seed phrase in a safe location.
That private key number is then run through two additional
transformations, creating a new string:
0x6c2ecd6388c550e8d99ada34a1cd55bedd052ad9
That string is my address on the Ethereum blockchain.
Ethereum belongs to the same
family as the cryptocurrency Bitcoin, whose value has increased more than
1,000 percent in just the past year. Ethereum has its own currencies, most
notably Ether, but the platform has a wider scope than just money. You can
think of my Ethereum address as having elements of a bank account, an email
address and a Social Security number. For now, it exists only on my computer
as an inert string of nonsense, but the second I try to perform any kind of
transaction — say, contributing to a crowdfunding campaign or voting in an
online referendum — that address is broadcast out to an improvised worldwide
network of computers that tries to verify the transaction. The results of that
verification are then broadcast to the wider network again, where more
machines enter into a kind of competition to perform complex mathematical
calculations, the winner of which gets to record that transaction in the
single, canonical record of every transaction ever made in the history of
Ethereum. Because those transactions
are registered in a sequence of “blocks” of data, that record is called the
blockchain.
The whole exchange takes no
more than a few minutes to complete. From my perspective, the experience
barely differs from the usual routines of online life. But on a technical
level, something miraculous is happening — something that would have been
unimaginable just a decade ago. I’ve
managed to complete a secure transaction without any of the traditional
institutions that we rely on to establish trust. No intermediary brokered
the deal; no social-media network captured the data from my transaction to
better target its advertising; no credit bureau tracked the activity to build
a portrait of my financial trustworthiness.
And the platform that makes all this possible? No one owns it. There are no
venture investors backing Ethereum Inc., because there is no Ethereum Inc. As
an organizational form, Ethereum is far closer to a democracy than a private corporation.
No imperial chief executive calls the shots. You earn the privilege of
helping to steer Ethereum’s ship of state by joining the community and doing
the work. Like Bitcoin and most other blockchain platforms, Ethereum is more
a swarm than a formal entity. Its borders are porous; its hierarchy is
deliberately flattened.
Oh, one other thing: Some
members of that swarm have already accumulated a paper net worth in the
billions from their labors, as the value of one “coin” of Ether rose from $8
on Jan. 1, 2017, to $843 exactly one year later.
You may be inclined to
dismiss these transformations. After all, Bitcoin and Ether’s runaway
valuation looks like a case study in irrational exuberance. And why should
you care about an arcane technical breakthrough that right now doesn’t feel
all that different from signing in to a website to make a credit card
payment?
‘The Bitcoin bubble may
ultimately turn out to be a distraction from the true significance of the
blockchain.’
But that dismissal would be
shortsighted. If there’s one thing we’ve learned from the recent history of
the internet, it’s that seemingly esoteric decisions about software
architecture can unleash profound global forces once the technology moves
into wider circulation. If the email standards adopted in the 1970s had
included public-private key cryptography as a default setting, we might have
avoided the cataclysmic email hacks that have afflicted everyone from Sony to
John Podesta, and millions of ordinary consumers might be spared routinized
identity theft. If Tim Berners-Lee, the inventor of the World Wide Web, had
included a protocol for mapping our social identity in his original specs, we
might not have Facebook.
The true believers behind
blockchain platforms like Ethereum argue that a network of distributed trust
is one of those advances in software architecture that will prove, in the
long run, to have historic significance. That promise has helped fuel the
huge jump in cryptocurrency valuations. But in a way, the Bitcoin bubble may
ultimately turn out to be a distraction from the true significance of the
blockchain. The real promise of these
new technologies, many of their evangelists believe, lies not in displacing
our currencies but in replacing much of what we now think of as the internet,
while at the same time returning the online world to a more decentralized and
egalitarian system. If you believe the evangelists, the blockchain is the
future. But it is also a way of getting back to the internet’s roots.
Once the inspiration for utopian
dreams of infinite libraries and global connectivity, the internet has
seemingly become, over the past year, a universal scapegoat: the cause of
almost every social ill that confronts us. Russian trolls destroy the
democratic system with fake news on Facebook; hate speech flourishes on
Twitter and Reddit; the vast fortunes of the geek elite worsen income
equality. For many of us who participated in the early days of the web, the
last few years have felt almost postlapsarian. The web had promised a new
kind of egalitarian media, populated by small magazines, bloggers and
self-organizing encyclopedias; the information titans that dominated mass
culture in the 20th century would give way to a more decentralized system,
defined by collaborative networks, not hierarchies and broadcast channels.
The wider culture would come to mirror the peer-to-peer architecture of the
internet itself. The web in those days was hardly a utopia — there were
financial bubbles and spammers and a thousand other problems — but beneath
those flaws, we assumed, there was an underlying story of progress.
Last year marked the point
at which that narrative finally collapsed. The existence of internet skeptics
is nothing new, of course; the difference now is that the critical voices increasingly
belong to former enthusiasts. “We have to fix the internet,” Walter Isaacson,
Steve Jobs’s biographer, wrote in an essay published a few weeks after Donald
Trump was elected president. “After 40 years, it has begun to corrode, both
itself and us.” The former Google strategist James Williams told The
Guardian: “The dynamics of the attention economy are structurally set up to
undermine the human will.” In a blog post, Brad Burnham, a managing partner
at Union Square Ventures, a top New York venture-capital firm, bemoaned the
collateral damage from the quasi monopolies of the digital age: “Publishers
find themselves becoming commodity content suppliers in a sea of
undifferentiated content in the Facebook news feed. Websites see their
fortunes upended by small changes in Google’s search algorithms. And
manufacturers watch helplessly as sales dwindle when Amazon decides to source
products directly in China and redirect demand to their own products.” (Full
disclosure: Burnham’s firm invested in a company I started in 2006; we have
had no financial relationship since it sold in 2011.) Even Berners-Lee, the
inventor of the web itself, wrote a blog post voicing his concerns that the
advertising-based model of social media and search engines creates a climate
where “misinformation, or ‘fake news,’ which is surprising, shocking or
designed to appeal to our biases, can spread like wildfire.”
For most critics, the
solution to these immense structural issues has been to propose either a new
mindfulness about the dangers of these tools — turning off our smartphones,
keeping kids off social media — or the strong arm of regulation and
antitrust: making the tech giants subject to the same scrutiny as other
industries that are vital to the public interest, like the railroads or
telephone networks of an earlier age. Both those ideas are commendable: We
probably should develop a new set of habits governing how we interact with
social media, and it seems entirely sensible that companies as powerful as
Google and Facebook should face the same regulatory scrutiny as, say,
television networks. But those interventions are unlikely to fix the core
problems that the online world confronts. After all, it was not just the
antitrust division of the Department of Justice that challenged Microsoft’s
monopoly power in the 1990s; it was also the emergence of new software and
hardware — the web, open-source software and Apple products — that helped
undermine Microsoft’s dominant position.
The blockchain evangelists behind platforms like Ethereum
believe that a comparable array of advances in software, cryptography and
distributed systems has the ability to tackle today’s digital problems: the
corrosive incentives of online advertising; the quasi monopolies of Facebook,
Google and Amazon; Russian misinformation campaigns. If they succeed, their
creations may challenge the hegemony of the tech giants far more effectively
than any antitrust regulation. They even claim to offer an alternative to the
winner-take-all model of capitalism than has driven wealth inequality to
heights not seen since the age of the robber barons.
That remedy is not yet
visible in any product that would be intelligible to an ordinary tech
consumer. The only blockchain project that has crossed over into mainstream
recognition so far is Bitcoin, which is in the middle of a speculative bubble
that makes the 1990s internet I.P.O. frenzy look like a neighborhood garage
sale. And herein lies the cognitive dissonance that confronts anyone trying
to make sense of the blockchain: the potential power of this would-be
revolution is being actively undercut by the crowd it is attracting, a
veritable goon squad of charlatans, false prophets and mercenaries. Not for
the first time, technologists pursuing a vision of an open and decentralized
network have found themselves surrounded by a wave of opportunists looking to
make an overnight fortune. The question is whether, after the bubble has
burst, the very real promise of the blockchain can endure.
To some students of modern
technological history, the internet’s fall from grace follows an inevitable
historical script. As Tim Wu argued in his 2010 book, “The Master Switch,”
all the major information technologies of the 20th century adhered to a
similar developmental pattern, starting out as the playthings of hobbyists
and researchers motivated by curiosity and community, and ending up in the
hands of multinational corporations fixated on maximizing shareholder value.
Wu calls this pattern the Cycle, and on the surface at least, the internet
has followed the Cycle with convincing fidelity. The internet began as a
hodgepodge of government-funded academic research projects and side-hustle
hobbies. But 20 years after the web first crested into the popular
imagination, it has produced in Google, Facebook and Amazon — and indirectly,
Apple — what may well be the most powerful and valuable corporations in the
history of capitalism.
Blockchain advocates don’t
accept the inevitability of the Cycle. The roots of the internet were in fact
more radically open and decentralized than previous information technologies,
they argue, and had we managed to stay true to those roots, it could have
remained that way. The online world
would not be dominated by a handful of information-age titans; our news
platforms would be less vulnerable to manipulation and fraud; identity theft
would be far less common; advertising dollars would be distributed across a
wider range of media properties.
To understand why, it helps
to think of the internet as two fundamentally different kinds of systems
stacked on top of each other, like layers in an archaeological dig. One layer
is composed of the software protocols that were developed in the 1970s and
1980s and hit critical mass, at least in terms of audience, in the 1990s. (A
protocol is the software version of a lingua franca, a way that multiple
computers agree to communicate with one another. There are protocols that
govern the flow of the internet’s raw data, and protocols for sending email
messages, and protocols that define the addresses of web pages.) And then
above them, a second layer of web-based services — Facebook, Google, Amazon,
Twitter — that largely came to power in the following decade.
The first layer — call it
InternetOne — was founded on open protocols, which in turn were defined and
maintained by academic researchers and international-standards bodies, owned
by no one. In fact, that original openness continues to be all around us, in
ways we probably don’t appreciate enough. Email is still based on the open
protocols POP, SMTP and IMAP; websites are still served up using the open
protocol HTTP; bits are still circulated via the original open protocols of
the internet, TCP/IP. You don’t need to understand anything about how these
software conventions work on a technical level to enjoy their benefits. The
key characteristic they all share is that anyone can use them, free of
charge. You don’t need to pay a licensing fee to some corporation that owns
HTTP if you want to put up a web page; you don’t have to sell a part of your
identity to advertisers if you want to send an email using SMTP. Along with
Wikipedia, the open protocols of the internet constitute the most impressive
example of commons-based production in human history.
To see how enormous but also
invisible the benefits of such protocols have been, imagine that one of those
key standards had not been developed: for instance, the open standard we use
for defining our geographic location, GPS. Originally developed by the United
States military, the Global Positioning System was first made available for
civilian use during the Reagan administration. For about a decade, it was
largely used by the aviation industry, until individual consumers began to
use it in car navigation systems. And now we have smartphones that can pick
up a signal from GPS satellites orbiting above us, and we use that
extraordinary power to do everything from locating nearby restaurants to
playing Pokémon Go to coordinating disaster-relief efforts.
But what if the military had
kept GPS out of the public domain? Presumably, sometime in the 1990s, a
market signal would have gone out to the innovators of Silicon Valley and
other tech hubs, suggesting that consumers were interested in establishing
their exact geographic coordinates so that those locations could be projected
onto digital maps. There would have been a few years of furious competition
among rival companies, who would toss their own proprietary satellites into
orbit and advance their own unique protocols, but eventually the market would
have settled on one dominant model, given all the efficiencies that result
from a single, common way of verifying location. Call that imaginary firm
GeoBook. Initially, the embrace of GeoBook would have been a leap forward for
consumers and other companies trying to build location awareness into their
hardware and software. But slowly, a darker narrative would have emerged: a
single private corporation, tracking the movements of billions of people
around the planet, building an advertising behemoth based on our shifting
locations. Any start-up trying to build a geo-aware application would have
been vulnerable to the whims of mighty GeoBook. Appropriately angry polemics
would have been written denouncing the public menace of this Big Brother in
the sky.
But none of that happened,
for a simple reason. Geolocation, like the location of web pages and email
addresses and domain names, is a problem we solved with an open protocol. And
because it’s a problem we don’t have, we rarely think about how beautifully
GPS does work and how many different applications have been built on its
foundation.
The open, decentralized web
turns out to be alive and well on the InternetOne layer. But since we settled
on the World Wide Web in the mid-’90s, we’ve adopted very few new
open-standard protocols. The biggest problems that technologists tackled
after 1995 — many of which revolved around identity, community and payment
mechanisms — were left to the private sector to solve. This is what led, in
the early 2000s, to a powerful new layer of internet services, which we might
call InternetTwo.
For all their brilliance,
the inventors of the open protocols that shaped the internet failed to
include some key elements that would later prove critical to the future of
online culture. Perhaps most important, they did not create a secure open
standard that established human identity on the network. Units of information
could be defined — pages, links, messages — but people did not
have their own protocol: no way to define and share your real name, your
location, your interests or (perhaps most crucial) your relationships to
other people online.
This turns out to have been
a major oversight, because identity is the sort of problem that benefits from
one universally recognized solution. It’s what Vitalik Buterin, a founder of
Ethereum, describes as “base-layer” infrastructure: things like language,
roads and postal services, platforms where commerce and competition are
actually assisted by having an underlying layer in the public domain.
Offline, we don’t have an open market for physical passports or Social
Security numbers; we have a few reputable authorities — most of them backed
by the power of the state — that we use to confirm to others that we are who
we say we are. But online, the private sector swooped in to fill that vacuum,
and because identity had that characteristic of being a universal problem,
the market was heavily incentivized to settle on one common standard for defining
yourself and the people you know.
The self-reinforcing
feedback loops that economists call “increasing returns” or “network effects”
kicked in, and after a period of experimentation in which we dabbled in
social-media start-ups like Myspace and Friendster, the market settled on
what is essentially a proprietary standard for establishing who you are and
whom you know. That standard is Facebook. With more than two billion users,
Facebook is far larger than the entire internet at the peak of the dot-com bubble
in the late 1990s. And that user growth has made it the world’s
sixth-most-valuable corporation, just 14 years after it was founded. Facebook
is the ultimate embodiment of the chasm that divides InternetOne and
InternetTwo economies. No private company owned the protocols that defined
email or GPS or the open web. But one single corporation owns the data that
define social identity for two billion people today — and one single person,
Mark Zuckerberg, holds the majority of the voting power in that corporation.
If you see the rise of the
centralized web as an inevitable turn of the Cycle, and the open-protocol
idealism of the early web as a kind of adolescent false consciousness, then
there’s less reason to fret about all the ways we’ve abandoned the vision of
InternetOne. Either we’re living in a fallen state today and there’s no way
to get back to Eden, or Eden itself was a kind of fantasy that was always
going to be corrupted by concentrated power. In either case, there’s no point
in trying to restore the architecture of InternetOne; our only hope is to use
the power of the state to rein in these corporate giants, through regulation
and antitrust action. It’s a variation of the old Audre Lorde maxim: “The
master’s tools will never dismantle the master’s house.” You can’t fix the
problems technology has created for us by throwing more technological
solutions at it. You need forces outside the domain of software and servers
to break up cartels with this much power.
But the thing about the
master’s house, in this analogy, is that it’s a duplex. The upper floor has
indeed been built with tools that cannot be used to dismantle it. But the
open protocols beneath them still have the potential to build something
better.
One
of the most persuasive advocates of an open-protocol revival is Juan
Benet, a Mexican-born programmer now living on a suburban side street in Palo
Alto, Calif., in a three-bedroom rental that he shares with his girlfriend
and another programmer, plus a rotating cast of guests, some of whom belong
to Benet’s organization, Protocol Labs. On a warm day in September, Benet
greeted me at his door wearing a black Protocol Labs hoodie. The interior of
the space brought to mind the incubator/frat house of HBO’s “Silicon Valley,”
its living room commandeered by an array of black computer monitors. In the
entrance hallway, the words “Welcome to Rivendell” were scrawled out on a
whiteboard, a nod to the Elven city from “Lord of the Rings.” “We call this
house Rivendell,” Benet said sheepishly. “It’s not a very good Rivendell. It
doesn’t have enough books, or waterfalls, or elves.”
Benet, who is 29, considers
himself a child of the first peer-to-peer revolution that briefly flourished
in the late 1990s and early 2000s, driven in large part by networks like BitTorrent
that distributed media files, often illegally. That initial flowering was in
many ways a logical outgrowth of the internet’s decentralized, open-protocol
roots. The web had shown that you could publish documents reliably in a
commons-based network. Services like BitTorrent or Skype took that logic to
the next level, allowing ordinary users to add new functionality to the
internet: creating a distributed library of (largely pirated) media, as with
BitTorrent, or helping people make phone calls over the internet, as with
Skype.
‘We’re not trying to replace
the U.S. government. It’s not meant to be a real currency; it’s meant to be a
pseudo-currency inside this world.’
Sitting in the living
room/office at Rivendell, Benet told me that he thinks of the early 2000s,
with the ascent of Skype and BitTorrent, as “the ‘summer’ of peer-to-peer” —
its salad days. “But then peer-to-peer hit a wall, because people started to
prefer centralized architectures,” he said. “And partly because the
peer-to-peer business models were piracy-driven.” A graduate of Stanford’s
computer-science program, Benet talks in a manner reminiscent of Elon Musk:
As he speaks, his eyes dart across an empty space above your head, almost as
though he’s reading an invisible teleprompter to find the words. He is
passionate about the technology Protocol Labs is developing, but also keen to
put it in a wider context. For Benet, the shift from distributed systems to
more centralized approaches set in motion changes that few could have predicted.
“The rules of the game, the rules that govern all of this technology, matter
a lot,” he said. “The structure of what we build now will paint a very
different picture of the way things will be five or 10 years in the future.”
He continued: “It was clear to me then that peer-to-peer was this
extraordinary thing. What was not clear to me then was how at risk it is. It
was not clear to me that you had to take up the baton, that it’s now your
turn to protect it.”
Protocol Labs is Benet’s
attempt to take up that baton, and its first project is a radical overhaul of
the internet’s file system, including the basic scheme we use to address the
location of pages on the web. Benet calls his system IPFS, short for
InterPlanetary File System. The current protocol — HTTP — pulls down web
pages from a single location at a time and has no built-in mechanism for
archiving the online pages. IPFS allows users to download a page
simultaneously from multiple locations and includes what programmers call
“historic versioning,” so that past iterations do not vanish from the
historical record. To support the protocol, Benet is also creating a system
called Filecoin that will allow users to effectively rent out unused
hard-drive space. (Think of it as a sort of Airbnb for data.) “Right now
there are tons of hard drives around the planet that are doing nothing, or
close to nothing, to the point where their owners are just losing money,”
Benet said. “So you can bring online a massive amount of supply, which will
bring down the costs of storage.” But as its name suggests, Protocol Labs has
an ambition that extends beyond these projects; Benet’s larger mission is to
support many new open-source protocols in the years to come.
Why did the internet follow
the path from open to closed? One part of the explanation lies in sins of
omission: By the time a new generation of coders began to tackle the problems
that InternetOne left unsolved, there were near-limitless sources of capital
to invest in those efforts, so long as the coders kept their systems closed.
The secret to the success of the open protocols of InternetOne is that they
were developed in an age when most people didn’t care about online networks,
so they were able to stealthily reach critical mass without having to contend
with wealthy conglomerates and venture capitalists. By the mid-2000s, though,
a promising new start-up like Facebook could attract millions of dollars in
financing even before it became a household brand. And that private-sector
money ensured that the company’s key software would remain closed, in order
to capture as much value as possible for shareholders.
And yet — as the venture
capitalist Chris Dixon points out — there was another factor, too, one that
was more technical than financial in nature. “Let’s say you’re trying to
build an open Twitter,” Dixon explained while sitting in a conference room at
the New York offices of Andreessen Horowitz, where he is a general partner.
“I’m @cdixon at Twitter. Where do you store that? You need a database.” A
closed architecture like Facebook’s or Twitter’s puts all the information
about its users — their handles, their likes and photos, the map of
connections they have to other individuals on the network — into a private
database that is maintained by the company. Whenever you look at your
Facebook newsfeed, you are granted access to some infinitesimally small
section of that database, seeing only the information that is relevant to
you.
Running Facebook’s database
is an unimaginably complex operation, relying on hundreds of thousands of
servers scattered around the world, overseen by some of the most brilliant
engineers on the planet. From Facebook’s point of view, they’re providing a
valuable service to humanity: creating a common social graph for almost
everyone on earth. The fact that they have to sell ads to pay the bills for
that service — and the fact that the scale of their network gives them
staggering power over the minds of two billion people around the world — is
an unfortunate, but inevitable, price to pay for a shared social graph. And
that trade-off did in fact make sense in the mid-2000s; creating a single
database capable of tracking the interactions of hundreds of millions of
people — much less two billion — was the kind of problem that could be
tackled only by a single organization. But as Benet and his fellow blockchain
evangelists are eager to prove, that might not be true anymore.
So how can you get
meaningful adoption of base-layer protocols in an age when the big tech
companies have already attracted billions of users and collectively sit on
hundreds of billions of dollars in cash? If you happen to believe that the
internet, in its current incarnation, is causing significant and growing harm
to society, then this seemingly esoteric problem — the difficulty of getting
people to adopt new open-source technology standards — turns out to have
momentous consequences. If we can’t figure out a way to introduce new, rival
base-layer infrastructure, then we’re stuck with the internet we have today.
The best we can hope for is government interventions to scale back the power
of Facebook or Google, or some kind of consumer revolt that encourages that
marketplace to shift to less hegemonic online services, the digital
equivalent of forswearing big agriculture for local farmers’ markets. Neither
approach would upend the underlying dynamics of Internet Two.
Chapter 3 Financial Instruments, Financial
Markets, and Financial Institutions
Part I: Examples and characteristics of financial
instruments
Discussion: You have some extra bucks. What will you do with the
money?
With extra bucks è Find a proper financial instruments è find a financial institution è trade in the market
How does the Money Market
work? (video)
Part II: Order types
Order
types (market, limit, stop), video
Understanding order types by wall street survivor
For discussion:
1. Why
did the other seller reduce the asking price after she posted her selling
order?
2. Why
did she hide her purchasing orders of 20,000 shares?
Understanding
Stock Orders that you can try
1. Market order: A market order instructs your
broker to buy or sell the stock immediately at the prevailing price, whatever
that may be.
2. Limit order: Limit orders instruct your
broker to buy or sell a stock at a particular price. The purchase or sale
will not happen unless you get your price.
(www.investorpedia.com)
For example, our example portfolio purchased shares of Wal-Mart for $70.35 per share. Now we plan to sell our WMT
shares after they realize a $10, or roughly 20%, increase. However, rather
than constantly checking the market several times in a single day, with the
intent of entering a market sell order once WMT reaches at least $80.35 per
share, we can submit a simple limit sell order to do that for us.
Click on Sell for the Transaction type and enter
100 for the Quantity. For the order price, you need to select the button
corresponding to Limit and then enter 80.35 as the limit price - this will
ensure your order to sell WMT shares will not occur unless you can get at
least $80.35 per share for your position of WMT shares. We keep the order's
Term set at "Good Till Cancelled", which means the order will stay
active and be processed once WMT shares reach or exceed your limit price.
(*Note: We could have set Term to be "Day Order", which means the
order would expire at the end of the current trading day if the order does
not execute).
As you can see, the use of
limit sell orders is very useful if you wish to sell a stock at a specific
target price, but are unwilling or unable to regularly check intraday or
daily closing prices of the stock. Also, an added advantage of using limit
sell orders is that they remove the emotional component of making trading
decisions. Too often, investors will be tempted to hold on to a winning stock
even once it becomes overpriced. Submitting a limit sell order immediately
after you buy the stock is a good time to avoid any emotional complications,
allowing you to better maintain your strategy and realize superior long-term
returns.
Similarly, limit buy orders
are equally useful. You can enter a limit buy order with a certain limit
price, which allows you to buy a set number of shares only if the stock's
market price equal to, or lower than, the maximum limit price you entered. In
our example portfolio we purchased WMT for $70.35/share with a market buy
order. But perhaps we thought WMT was a bit overpriced at the time, so we
could have used a limit buy order to purchase 100 shares only if WMT fell to
$65.00/share or less. That way, we only buy at a price we believe is fair. If
WMT does not fall to $65, the order will not be processed.
3. Stop loss order: A stop loss order gives your
broker a price trigger that protects you from a big drop in a stock.
(www.investorpedia.com)
Essentially, a stop order is
"dormant" until a stock's price falls to the specified "stop
price". In other words, a stop order is an instruction to your brokerage
to buy (or sell) a specified number of shares of a company when the
prevailing market price is equal or higher than (or, in the case of a sell
stop order, equal or lower than) the specified price that you submitted. In
our example portfolio, we purchased shares of Google Inc (Nasdaq: GOOG)
for $463.18 per share. Many investors use a sell stop order to limit their
losses, meaning that they'll automatically sell if a stock goes down a
certain percentage.
Entering a stop order is an
efficient and cost-effective means of limiting losses by avoiding the agony
of regularly checking your stock and deciding whether to hold or sell it. For
instance, if a so-called growth stock has headed south, an investor may
choose to hold, hoping the share price might rebound, but if it doesn't,
losses can quickly mount.
4.
Short selling:
(www.investorpedia.com)
As you can see, short selling
follows the conventional investing principle of “buying low” and “selling
high” but with one critical difference – the sequence of the buy and sell
transactions. While the buy transaction precedes the sell transaction
in conventional “long only” investing, in short selling, the sell transaction
precedes the buy transaction.
When you short sell, you
create a short position or a shortfall. A short position represents a binding
obligation that must be closed or covered at some point. This “short
covering” obligation gives rise to one of the biggest risks of short
selling, as discussed later in this tutorial.
Short selling is also known as
"shorting," "selling short" or "going short."
To be short a security or asset implies that one is bearish on it and expects
the price to decline. Short selling has also spawned some of the most
colorful terms in the investment lexicon.
Short selling can be used for
speculation or hedging. Speculators use short selling to capitalize on a
potential decline in a specific security or the broad market. Hedgers use the
strategy to protect gains or mitigate losses in a security or portfolio. Note
that institutional investors and savvy individuals frequently engage in short
selling strategies simultaneously for both speculation and hedging. Hedge
funds are among the most active short sellers, and often use short positions
in select stocks or sectors to hedge their long positions in other stocks.
Short sellers are often
portrayed as cynical, hardened individuals who are bent on making profits by
driving the companies that are their “short” targets to failure and
bankruptcy. The reality, however, is that short sellers facilitate smooth
functioning of the markets by providing liquidity, and also act as a
restraining influence on investors who may be prone to chase overhyped
stocks, especially during periods of irrational exuberance.
Short selling is viewed by
many investors as an inordinately dangerous strategy, since the long-term
trend of the equity market is generally upward and there is theoretically no
upper limit to how high a stock can rise. But under the right circumstances,
short selling can be a viable and profitable investment strategy for
experienced traders and investors who have an adequate degree of risk
tolerance and are familiar with the risks involved in shorting.
Example:
Let's say XYZ's
current ask price is 53. You place an order to buy at a limit price of 50. If
the price of the security falls to 50, your order may be executed. If you had
placed a limit order to buy at 53 or above, your order would have been
"marketable" and executed right away.
In Class Exercise part I
Multiple Choices
1. A
trading order that immediately purchases stock at the prevailing price is
called a:
a. stop-loss
order
b. limit order.
c. market order.
(DEFINITION
of 'Stop-Loss Order': An order placed with a broker to
sell a security when it reaches a certain price. A stop-loss order is designed
to limit an investor’s loss on a position in a security. Although most
investors associate a stop-loss order only with a long position, it can also
be used for a short position,
in which case the security would be bought if it trades above a
defined price. A stop-loss order takes the emotion out of trading decisions
and can be especially handy when one is on vacation or cannot watch his/her
position. Also known as a “stop order” or “stop-market order.”) video: http://www.investopedia.com/terms/s/stop-lossorder.asp )
2. A trading order
that immediately purchases stock or is completely cancelled is called a:
a. stop-loss order.
b. fill-or-kill
limit order.
c. market order.
d. open order.
(DEFINITION of
'Fill Or Kill - FOK': A type of time-in-force designation used in securities trading
that instructs a brokerage to execute a transaction immediately and
completely or not at all. This type of order is most likely to be used by
active traders and
is usually for a large quantity of stock. The order must be filled in
its entirety or canceled (killed). The purpose of a fill or kill order is to
ensure that a position is entered at a desired price.)
(Definition of ‘Open Order’: A
type of order to buy or sell a security that remains in effect until it is
either canceled by the customer, until it is executed or until it expires.
Open orders commonly occur when investors place restrictions on their buy and
sell transactions. A lack of liquidity in the market or for a particular
security can also cause an order to remain open. )
3. A trading
order that is canceled unless executed within a designated time period is
called a
a. stop-loss order.
b. limit order.
c. market order.
d. fill or kill order.
4. Limit
orders:
a. specify a certain price at which a market
order takes effect.
b. specify a particular price to be met or
bettered.
c. are executed at the best price available.
d. are orders entered for a particular day.
5. A
market order is an instruction to:
a) immediately buy a security at the current bid
price.
b) buy if the market price at least reaches
the specified price target.
c) sell at or above a specified price target.
d) none of these.
Part III: IPO, SEO, Primary Market and Secondary Market
What is an IPO | by Wall
Street Survivor (video)
What is an IPO? | CNBC
Explains (video)
A lesson from Facebook --
avoid IPOs - MoneyWeek Investment Tutorials
For class discussion:
1. What is IPO? SEO? Who are the
major participants?
2. Why do firms hire investment banks for IPO and SEO? Can they do
the IPO and SEO by themselves?
2. What is the primary market? What
is the secondary market? Who are the major participants in these markets?
3. Shall a company go public? What is your opinion?
IPO Calendar
This Week (http://www.marketwatch.com/tools/ipo-calendar)
This Week
• 3 Total
|
Company Name |
Proposed Symbol |
Exchange |
Price Range |
Shares |
Week Of |
|
DDOG |
Nasdaq |
$24.00 - $26.00 |
24,000,000 |
9/16/2019 |
|
|
XGN |
Nasdaq |
$14.00 - $16.00 |
3,333,334 |
9/16/2019 |
|
|
PING |
NYSE |
$14.00 - $16.00 |
12,500,000 |
9/16/2019 |
Next Week
• 3 Total
|
Company Name |
Proposed Symbol |
Exchange |
Price Range |
Shares |
Week Of |
|
EDR |
NYSE |
$30.00 - $32.00 |
19,354,839 |
9/23/2019 |
|
|
OPRT |
Nasdaq |
$15.00 - $17.00 |
6,250,000 |
9/23/2019 |
|
|
PTON |
Nasdaq |
$26.00 - $29.00 |
40,000,000 |
9/23/2019 |
In Class Exercise part II
Multiple Choices
1. The
market for equities is predominantly a:
a. primary market.
b. market dominated by individual investors.
c. secondary market.
d. market dominated by foreign investors.
2. Primary
markets:
a. involve the organized trading of outstanding
securities on exchanges.
b. involve the organized trading of outstanding
securities in the over-the-counter market.
c. involve the organized trading of outstanding
securities on exchanges and over-the-counter markets.
d. are where new issues (IPOs) are sold by
corporations to raise new capital.
SEC
develops fund-like plan to give retail investors access to pre-IPO shares
By
SEC in early stages of discussions to allow pre-IPO
purchasing (video)
The
Securities and Exchange Commission is looking to clear a path for small
investors to access the burgeoning market for private company stocks. The
effort could involve new rulemaking that would allow for the creation of a
hedge fund-like instrument that invests in pre-IPO shares structured for the
average retail investor, the Fox Business Network has learned.
The SEC
initiative is still in the discussion stages and its timing of any implementation
is unclear. But the talks follow recent remarks made by SEC Chairman Jay
Clayton, who said small investors should have access to buying pre-IPO shares
– a market that is open only to large institutional investors and accredited
individual investors who either have a net worth of $1 million or make
$200,000 annually.
The
market for buying and selling pre-IPO shares is indeed booming, which is why
Clayton and SEC commissioners have taken up the matter. They are trying to
determine if a vehicle could be created to open such securities to small
investors. Last year, companies in the private market raised roughly $3
trillion while public companies raised $1.8 trillion.
Market
participants point out the gains are often greater in the trading of pre-IPOs
shares than some recent prominent initial public offerings, such as
ride-share provider Uber, which has floundered in its public debut after
racking up huge gains when Uber private shares traded in the pre-IPO market.
"The
SEC is seriously considering approving a new investment vehicle for private
shares," John Coffee, a Columbia law school professor who specializes in
financial issues, said.
“The
mechanics are unclear but the SEC can either ask Congress for legislation or
adopt a rule that exempts its new vehicle from the Investment Company Act of
1940,” Coffee added.
An SEC
spokesman declined comment.
The SEC’s
talks center on passing a rule that would create a new investment vehicle
that mirrors a hedge fund. But unlike hedge funds, it would be open to
non-accredited investors, according to people with knowledge of the
discussions. Small investors would gain access to the private market by going
through this fund-like vehicle, which would be comprised of a diversified
portfolio of pre-IPO companies in order to reduce investment risk.
But not
all market participants believe the effort is a good idea. The SEC would
demand additional disclosures from the companies themselves, thus making the
companies less likely to issue private shares, much less public shares. The
reason many companies are opting to remain in the private market for years is
the less stringent disclosure requirement mandated by the SEC because
investors are considered more sophisticated than so-called mom-and-pop retail
purchasers of stock.
“Part of
why private companies can enjoy accelerated growth is that they are free from
the regulatory burden public companies face. In addition, they are more
efficient because their management teams are not beholden to quarterly
earnings and compensated based on a public share price,” said Omeed Malik,
the founder and CEO of Farvahar Partners, a broker-dealer specializing in the
private stock market.
“Allowing
Main Street to invest in privately traded companies sounds nice but the road
to hell is paved with good intentions,” Malik said in an interview on FBN’s
Cavuto Coast to Coast. “Allowing retailer investors to participate in private
placement is a noble sentiment … but there are significant ramifications,” he
said in a subsequent interview.
Because the
private markets have fewer regulations than public markets, some analysts
fear retail investors could be putting themselves at greater risk without
fully understanding the volatility of pre-IPO companies. While there may be
opportunities in private markets, investors are not insulated from losses
just because they get in on a company’s stock earlier.
Clayton
has made serving the needs of small investors a centerpiece of his agenda as
SEC chairman, and people close to the commission say he’s intent on opening
the private market to small investors as part of that effort.
In a
Sept. 9 speech at the Economic Club of New York meeting, Clayton said,
“Twenty-five years ago, the public markets dominated the private markets in
virtually every measure. Today, in many
measures, the private markets outpace the public markets, including in
aggregate size.”
For discussion:
1. Do you support this idea that the
pre-IPO shares should be available to all investors. Is that possible?
Homework ( DUE with first midterm
exam)
Check three stocks listed above in
the IPO table.
Follow these stocks and report their
performances one month after the IPO.
Summarize your findings.
(……continuing from the above)
The first hint of a meaningful
challenge to the closed-protocol era arrived in 2008, not long after
Zuckerberg opened the first international headquarters for his growing
company. A mysterious programmer (or group of programmers) going by the name
Satoshi Nakamoto circulated a paper on a cryptography mailing list. The paper
was called “Bitcoin: A Peer-to-Peer Electronic Cash System,” and in it,
Nakamoto outlined an ingenious system for a digital currency that did not
require a centralized trusted authority to verify transactions. At the time,
Facebook and Bitcoin seemed to belong to entirely different spheres — one was
a booming venture-backed social-media start-up that let you share birthday
greetings and connect with old friends, while the other was a byzantine
scheme for cryptographic currency from an obscure email list. But 10 years
later, the ideas that Nakamoto unleashed with that paper now pose the most
significant challenge to the hegemony of InternetTwo giants like Facebook.
The paradox about Bitcoin is that it may well turn out to be a
genuinely revolutionary breakthrough and at the same time a colossal failure
as a currency. As I write, Bitcoin has increased in value by nearly 100,000
percent over the past five years, making a fortune for its early investors
but also branding it as a spectacularly unstable payment mechanism. The
process for creating new Bitcoins has also turned out to be a staggering
energy drain.
History is replete with
stories of new technologies whose initial applications end up having little
to do with their eventual use. All the focus on Bitcoin as a payment system
may similarly prove to be a distraction, a technological red herring. Nakamoto pitched Bitcoin as a
“peer-to-peer electronic-cash system” in the initial manifesto, but at its
heart, the innovation he (or she or they) was proposing had a more general
structure, with two key features.
First, Bitcoin offered a kind of proof that you could create a
secure database — the blockchain — scattered across hundreds or thousands of
computers, with no single authority controlling and verifying the
authenticity of the data.
Second, Nakamoto designed Bitcoin so that the work of
maintaining that distributed ledger was itself rewarded with small,
increasingly scarce Bitcoin payments. If you dedicated half your
computer’s processing cycles to helping the Bitcoin network get its math
right — and thus fend off the hackers and scam artists — you received a small
sliver of the currency. Nakamoto designed the system so that Bitcoins would
grow increasingly difficult to earn over time, ensuring a certain amount of
scarcity in the system. If you helped Bitcoin keep that database secure in
the early days, you would earn more Bitcoin than later arrivals. This process
has come to be called “mining.”
For our purposes, forget
everything else about the Bitcoin frenzy, and just keep these two things in
mind: What Nakamoto ushered into the
world was a way of agreeing on the contents of a database without anyone
being “in charge” of the database, and a way of compensating people for
helping make that database more valuable, without those people being on an
official payroll or owning shares in a corporate entity. Together, those two
ideas solved the distributed-database problem and the funding problem.
Suddenly there was a way of supporting open protocols that wasn’t available
during the infancy of Facebook and Twitter.
These two features have now
been replicated in dozens of new systems inspired by Bitcoin. One of those
systems is Ethereum, proposed in a white paper by Vitalik Buterin when he was
just 19. Ethereum does have its
currencies, but at its heart Ethereum was designed less to facilitate
electronic payments than to allow people to run applications on top of the
Ethereum blockchain. There are currently hundreds of Ethereum apps in
development, ranging from prediction markets to Facebook clones to
crowdfunding services. Almost all of them are in pre-alpha stage, not ready
for consumer adoption. Despite the embryonic state of the applications, the
Ether currency has seen its own miniature version of the Bitcoin bubble, most
likely making Buterin an immense fortune.
These currencies can be used
in clever ways. Juan Benet’s Filecoin
system will rely on Ethereum technology and reward users and developers who
adopt its IPFS protocol or help maintain the shared database it requires.
Protocol Labs is creating its own
cryptocurrency, also called Filecoin, and has plans to sell some of those
coins on the open market in the coming months. (In the summer of 2017,
the company raised $135 million in the first 60 minutes of what Benet calls a
“presale” of the tokens to accredited investors.) Many cryptocurrencies are first made available to the public through
a process known as an initial coin offering, or I.C.O.
The I.C.O. abbreviation is a
deliberate echo of the initial public offering that so defined the first
internet bubble in the 1990s. But there is a crucial difference between the
two. Speculators can buy in during an
I.C.O., but they are not buying an ownership stake in a private company and
its proprietary software, the way they might in a traditional I.P.O.
Afterward, the coins will continue to be created in exchange for labor — in
the case of Filecoin, by anyone who helps maintain the Filecoin network.
Developers who help refine the software can earn the coins, as can ordinary
users who lend out spare hard-drive space to expand the network’s storage
capacity. The Filecoin is a way of signaling that someone, somewhere, has
added value to the network.
Advocates like Chris Dixon have started referring to the
compensation side of the equation in terms of “tokens,” not coins, to
emphasize that the technology here isn’t necessarily aiming to disrupt
existing currency systems. “I like the metaphor of a token because it
makes it very clear that it’s like an arcade,” he says. “You go to the
arcade, and in the arcade you can use these tokens. But we’re not trying to
replace the U.S. government. It’s not meant to be a real currency; it’s meant
to be a pseudo-currency inside this world.” Dan Finlay, a creator of
MetaMask, echoes Dixon’s argument. “To me, what’s interesting about this is
that we get to program new value systems,” he says. “They don’t have to
resemble money.”
Pseudo or not, the idea of
an I.C.O. has already inspired a host of shady offerings, some of them
endorsed by celebrities who would seem to be unlikely blockchain enthusiasts,
like DJ Khaled, Paris Hilton and Floyd Mayweather. In a blog post published
in October 2017, Fred Wilson, a founder of Union Square Ventures and an early
advocate of the blockchain revolution, thundered against the spread of
I.C.O.s. “I hate it,” Wilson wrote, adding that most I.C.O.s “are scams. And
the celebrities and others who promote them on their social-media channels in
an effort to enrich themselves are behaving badly and possibly violating
securities laws.” Arguably the most striking thing about the surge of
interest in I.C.O.s — and in existing currencies like Bitcoin or Ether — is
how much financial speculation has already gravitated to platforms that have
effectively zero adoption among ordinary consumers. At least during the
internet bubble of late 1990s, ordinary people were buying books on Amazon or
reading newspapers online; there was clear evidence that the web was going to
become a mainstream platform. Today, the hype cycles are so accelerated that
billions of dollars are chasing a technology that almost no one outside the
cryptocommunity understands, much less uses.
Let’s say, for the
sake of argument, that the hype is warranted, and blockchain platforms like
Ethereum become a fundamental part of our digital infrastructure. How would a
distributed ledger and a token economy somehow challenge one of the tech
giants? One of Fred Wilson’s partners at Union Square Ventures, Brad Burnham,
suggests a scenario revolving around another tech giant that has run afoul of
regulators and public opinion in the last year: Uber. “Uber is basically just
a coordination platform between drivers and passengers,” Burnham says. “Yes,
it was really innovative, and there were a bunch of things in the beginning
about reducing the anxiety of whether the driver was coming or not, and the
map — and a whole bunch of things that you should give them a lot of credit
for.” But when a new service like Uber starts to take off, there’s a strong
incentive for the marketplace to consolidate around a single leader. The fact
that more passengers are starting to use the Uber app attracts more drivers
to the service, which in turn attracts more passengers. People have their
credit cards stored with Uber; they have the app installed already; there are
far more Uber drivers on the road. And so the switching costs of trying out
some other rival service eventually become prohibitive, even if the chief
executive seems to be a jerk or if consumers would, in the abstract, prefer a
competitive marketplace with a dozen Ubers. “At some point, the innovation
around the coordination becomes less and less innovative,” Burnham says.
The blockchain world
proposes something different. Imagine some group like Protocol Labs decides
there’s a case to be made for adding another “basic layer” to the stack. Just
as GPS gave us a way of discovering and sharing our location, this new
protocol would define a simple request: I am here and would like to go there.
A distributed ledger might record all its users’ past trips, credit cards,
favorite locations — all the metadata that services like Uber or Amazon use
to encourage lock-in. Call it, for the sake of argument, the Transit
protocol. The standards for sending a Transit request out onto the internet
would be entirely open; anyone who wanted to build an app to respond to that
request would be free to do so. Cities could build Transit apps that allowed
taxi drivers to field requests. But so could bike-share collectives, or
rickshaw drivers. Developers could create shared marketplace apps where all
the potential vehicles using Transit could vie for your business. When you
walked out on the sidewalk and tried to get a ride, you wouldn’t have to
place your allegiance with a single provider before hailing. You would simply
announce that you were standing at 67th and Madison and needed to get to
Union Square. And then you’d get a flurry of competing offers. You could even
theoretically get an offer from the M.T.A., which could build a service to
remind Transit users that it might be much cheaper and faster just to jump on
the 6 train.
How would Transit reach
critical mass when Uber and Lyft already dominate the ride-sharing market?
This is where the tokens come in. Early adopters of Transit would be rewarded
with Transit tokens, which could themselves be used to purchase Transit
services or be traded on exchanges for traditional currency. As in the
Bitcoin model, tokens would be doled out less generously as Transit grew more
popular. In the early days, a developer who built an iPhone app that uses
Transit might see a windfall of tokens; Uber drivers who started using
Transit as a second option for finding passengers could collect tokens as a
reward for embracing the system; adventurous consumers would be rewarded with
tokens for using Transit in its early days, when there are fewer drivers
available compared with the existing proprietary networks like Uber or Lyft.
As Transit began to take
off, it would attract speculators, who would put a monetary price on the
token and drive even more interest in the protocol by inflating its value,
which in turn would attract more developers, drivers and customers. If the
whole system ends up working as its advocates believe, the result is a more
competitive but at the same time more equitable marketplace. Instead of all
the economic value being captured by the shareholders of one or two large
corporations that dominate the market, the economic value is distributed
across a much wider group: the early developers of Transit, the app creators
who make the protocol work in a consumer-friendly form, the early-adopter
drivers and passengers, the first wave of speculators. Token economies
introduce a strange new set of elements that do not fit the traditional
models: instead of creating value by owning something, as in the shareholder
equity model, people create value by improving the underlying protocol,
either by helping to maintain the ledger (as in Bitcoin mining), or by
writing apps atop it, or simply by using the service. The lines between
founders, investors and customers are far blurrier than in traditional
corporate models; all the incentives are explicitly designed to steer away
from winner-take-all outcomes. And yet at the same time, the whole system
depends on an initial speculative phase in which outsiders are betting on the
token to rise in value.
“You think about the ’90s
internet bubble and all the great infrastructure we got out of that,” Dixon
says. “You’re basically taking that effect and shrinking it down to the size
of an application.”
‘Bitcoin is now a nine-year-old multibillion-dollar bug bounty, and no
one’s hacked it. It feels like pretty good proof.’
Even decentralized cryptomovements have their key nodes. For Ethereum, one of those nodes
is the Brooklyn headquarters of an organization called ConsenSys, founded by
Joseph Lubin, an early Ethereum pioneer. In November, Amanda Gutterman, the
26-year-old chief marketing officer for ConsenSys, gave me a tour of the
space. In our first few minutes together, she offered the obligatory cup of
coffee, only to discover that the drip-coffee machine in the kitchen was bone
dry. “How can we fix the internet if we can’t even make coffee?” she said
with a laugh.
Planted in industrial
Bushwick, a stone’s throw from the pizza mecca Roberta’s, “headquarters”
seemed an unlikely word. The front door was festooned with graffiti and
stickers; inside, the stairwells of the space appeared to have been last
renovated during the Coolidge administration. Just about three years old, the
ConsenSys network now includes more than 550 employees in 28 countries, and
the operation has never raised a d0ime of venture capital. As an
organization, ConsenSys does not quite fit any of the usual categories: It is
technically a corporation, but it has elements that also resemble nonprofits
and workers’ collectives. The shared goal of ConsenSys members is
strengthening and expanding the Ethereum blockchain. They support developers
creating new apps and tools for the platform, one of which is MetaMask, the
software that generated my Ethereum address. But they also offer
consulting-style services for companies, nonprofits or governments looking
for ways to integrate Ethereum’s smart contracts into their own systems.
The true test of the blockchain will revolve — like so many of
the online crises of the past few years — around the problem of identity. Today your
digital identity is scattered across dozens, or even hundreds, of different
sites: Amazon has your credit-card information and your purchase history;
Facebook knows your friends and family; Equifax maintains your credit
history. When you use any of those services, you are effectively asking for
permission to borrow some of that information about yourself in order perform
a task: ordering a Christmas present for your uncle, checking Instagram to
see pictures from the office party last night. But all these different
fragments of your identity don’t belong to you; they belong to Facebook and
Amazon and Google, who are free to sell bits of that information about you to
advertisers without consulting you. You, of course, are free to delete those
accounts if you choose, and if you stop checking Facebook, Zuckerberg and the
Facebook shareholders will stop making money by renting out your attention to
their true customers. But your Facebook or Google identity isn’t portable. If
you want to join another promising social network that is maybe a little less
infected with Russian bots, you can’t extract your social network from
Twitter and deposit it in the new service. You have to build the network
again from scratch (and persuade all your friends to do the same).
The blockchain evangelists
think this entire approach is backward. You
should own your digital identity — which could include everything from your
date of birth to your friend networks to your purchasing history — and you
should be free to lend parts of that identity out to services as you see fit.
Given that identity was not baked into the original internet protocols, and
given the difficulty of managing a distributed database in the days before
Bitcoin, this form of “self-sovereign” identity — as the parlance has it —
was a practical impossibility. Now it is an attainable goal. A number of
blockchain-based services are trying to tackle this problem, including a new
identity system called uPort that has been spun out of ConsenSys and another
one called Blockstack that is currently based on the Bitcoin platform.
(Tim Berners-Lee is leading the development of a comparable system, called
Solid, that would also give users control over their own data.) These rival
protocols all have slightly different frameworks, but they all share a
general vision of how identity should work on a truly decentralized internet.
What would prevent a new
blockchain-based identity standard from following Tim Wu’s Cycle, the same
one that brought Facebook to such a dominant position? Perhaps nothing. But
imagine how that sequence would play out in practice. Someone creates a new
protocol to define your social network via Ethereum. It might be as simple as
a list of other Ethereum addresses; in other words, Here are the
public addresses of people I like and trust. That way of defining
your social network might well take off and ultimately supplant the closed
systems that define your network on Facebook. Perhaps someday, every single
person on the planet might use that standard to map their social connections,
just as every single person on the internet uses TCP/IP to share data. But
even if this new form of identity became ubiquitous, it wouldn’t present the
same opportunities for abuse and manipulation that you find in the closed
systems that have become de facto standards. I might allow a Facebook-style
service to use my social map to filter news or gossip or music for me, based
on the activity of my friends, but if that service annoyed me, I’d be free to
sample other alternatives without the switching costs. An open identity
standard would give ordinary people the opportunity to sell their attention
to the highest bidder, or choose to keep it out of the marketplace
altogether.
Gutterman suggests that the
same kind of system could be applied to even more critical forms of identity,
like health care data. Instead of storing, say, your genome on servers
belonging to a private corporation, the information would instead be stored
inside a personal data archive. “There may be many corporate entities that I
don’t want seeing that data, but maybe I’d like to donate that data to a
medical study,” she says. “I could use my blockchain-based self-sovereign ID
to [allow] one group to use it and not another. Or I could sell it over here
and give it away over there.”
The token architecture would
give a blockchain-based identity standard an additional edge over closed
standards like Facebook’s. As many critics have observed, ordinary users on
social-media platforms create almost all the content without compensation,
while the companies capture all the economic value from that content through
advertising sales. A token-based social network would at least give early
adopters a piece of the action, rewarding them for their labors in making the
new platform appealing. “If someone can really figure out a version of
Facebook that lets users own a piece of the network and get paid,” Dixon
says, “that could be pretty compelling.”
Would that information be
more secure in a distributed blockchain than behind the elaborate firewalls
of giant corporations like Google or Facebook? In this one respect, the
Bitcoin story is actually instructive: It may never be stable enough to
function as a currency, but it does offer convincing proof of just how secure
a distributed ledger can be. “Look at the market cap of Bitcoin or Ethereum:
$80 billion, $25 billion, whatever,” Dixon says. “That means if you
successfully attack that system, you could walk away with more than a billion
dollars. You know what a ‘bug bounty’ is? Someone says, ‘If you hack my
system, I’ll give you a million dollars.’ So Bitcoin is now a nine-year-old
multibillion-dollar bug bounty, and no one’s hacked it. It feels like pretty
good proof.”
Additional security would come from the decentralized nature
of these new identity protocols. In the identity system proposed by Blockstack,
the actual information about your identity — your social connections, your
purchasing history — could be stored anywhere online. The blockchain would
simply provide cryptographically secure keys to unlock that information and
share it with other trusted providers. A system with a centralized
repository with data for hundreds of millions of users — what security
experts call “honey pots” — is far more appealing to hackers. Which would you
rather do: steal a hundred million credit histories by hacking into a hundred
million separate personal computers and sniffing around until you found
the right data on each machine? Or just hack into one honey pot at Equifax
and walk away with the same amount of data in a matter of hours? As Gutterman
puts it, “It’s the difference between robbing a house versus robbing the
entire village.”
So much of the
blockchain’s architecture is shaped by predictions about how that
architecture might be abused once it finds a wider audience. That is part of
its charm and its power. The blockchain channels the energy of speculative
bubbles by allowing tokens to be shared widely among true supporters of the
platform. It safeguards against any individual or small group gaining control
of the entire database. Its cryptography is designed to protect against
surveillance states or identity thieves. In this, the blockchain displays a
familial resemblance to political constitutions: Its rules are designed with
one eye on how those rules might be exploited down the line.
Much has been made of the
anarcho-libertarian streak in Bitcoin and other nonfiat currencies; the
community is rife with words and phrases (“self-sovereign”) that sound as if
they could be slogans for some militia compound in Montana. And yet in its
potential to break up large concentrations of power and explore
less-proprietary models of ownership, the blockchain idea offers a
tantalizing possibility for those who would like to distribute wealth more
equitably and break up the cartels of the digital age.
The blockchain worldview can
also sound libertarian in the sense that it proposes nonstate solutions to
capitalist excesses like information monopolies. But to believe in the blockchain is not necessarily to oppose
regulation, if that regulation is designed with complementary aims. Brad
Burnham, for instance, suggests that regulators should insist that everyone
have “a right to a private data store,” where all the various facets of their
online identity would be maintained. But governments wouldn’t be required to
design those identity protocols. They would be developed on the blockchain,
open source. Ideologically speaking, that private data store would be a true
team effort: built as an intellectual commons, funded by token speculators,
supported by the regulatory state.
Like the original internet
itself, the blockchain is an idea with radical — almost communitarian —
possibilities that at the same time has attracted some of the most frivolous
and regressive appetites of capitalism. We spent our first years online in a
world defined by open protocols and intellectual commons; we spent the second
phase in a world increasingly dominated by closed architectures and
proprietary databases. We have learned enough from this history to support
the hypothesis that open works better than closed, at least where base-layer
issues are concerned. But we don’t have an easy route back to the
open-protocol era. Some messianic next-generation internet protocol is not
likely to emerge out of Department of Defense research, the way the
first-generation internet did nearly 50 years ago.
Yes, the blockchain may seem like the very worst of
speculative capitalism right now, and yes, it is demonically challenging to
understand. But the beautiful thing about open protocols is that they can be
steered in surprising new directions by the people who discover and champion
them in their infancy. Right now, the only real hope for a revival of
the open-protocol ethos lies in the blockchain. Whether it eventually lives
up to its egalitarian promise will in large part depend on the people who
embrace the platform, who take up the baton, as Juan Benet puts it, from
those early online pioneers. If you think the internet is not working in its
current incarnation, you can’t change the system through think-pieces and
F.C.C. regulations alone. You need new code.
Chapter 4: Future value, Present Value, and
Interest Rate
Example1: A 5 year, 5% coupon bond, currently provides
an annual return of 3%. Calculate the price of the bond.
Example 2: Your cousin is entering medical school
next fall and asks you for financial help. He needs $65,000 each year for the
first two years. After that, he is in residency for two years and will be
able to pay you back $10,000 each year. Then he graduates and becomes a fully
qualified doctor, and will be able to pay you $40,000 each year. He promises
to pay you $40,000 for 5 years after he graduates. Are you taking a financial
loss or gain by helping him out? Assume that the interest rate is 5% and that
there is no risk.
Example 3: You are awarded $500,000 in a lawsuit,
payable immediately. The defendant makes a counteroffer of $50,000 per year
for the first three years, starting at the end of the first year, followed by
$60,000 per year for the next 10 years. Should you accept the offer if the
discount rate is 12%? How about if the discount rate is 8%?
Example 4: John is 30 years old at the beginning of
the new millennium and is thinking about getting an MBA. John is currently
making $40,000 per year and expects the same for the remainder of his working
years (until age 65). I f he goes to a business school, he gives up his
income for two years and, in addition, pays $20,000 per year for tuition. In
return, John expects an increase in his salary after his MBA is completed.
Suppose that the post-graduation salary increases at a 5% per year and that
the discount rate is 8%. What is miminum expected starting salary
after graduation that makes going to a business school a positive-NPV
investment for John? For simplicity, assume that all cash flows occur at the
end of each year
Homework
(just write down the PV equations – Due with the first mid term exam):
1. The Thailand Co. is considering the purchase of
some new equipment. The quote consists of a quarterly payment of $4,740 for
10 years at 6.5 percent interest. What is the purchase price of the
equipment? ($138,617.88)
2. The condominium at the beach that you want to
buy costs $249,500. You plan to make a cash down payment of 20 percent and
finance the balance over 10 years at 6.75 percent. What will be the amount of
your monthly mortgage payment? ($2,291.89)
3. Today, you are purchasing a 15-year, 8 percent
annuity at a cost of $70,000. The annuity will pay annual payments. What is
the amount of each payment? ($8,178.07)
4. Shannon wants to have $10,000 in an investment
account three years from now. The account will pay 0.4 percent interest per
month. If Shannon saves money every month, starting one month from now, how
much will she have to save each month? ($258.81)
5. Trevor's Tires is offering a set of 4 premium
tires on sale for $450. The credit terms are 24 months at $20 per month. What
is the interest rate on this offer? (6.27 percent)
6. Top Quality Investments will pay you $2,000 a
year for 25 years in exchange for $19,000 today. What interest rate are you
earning on this annuity? (9.42 percent)
7. You have just won the lottery! You can receive
$10,000 a year for 8 years or $57,000 as a lump sum payment today. What is
the interest rate on the annuity? (8.22 percent)
Summary of math and excel equations
Math
Equations
FV = PV *(1+r)^n
PV = FV / ((1+r)^n)
N = ln(FV/PV) / ln(1+r)
Rate = (FV/PV)1/n -1
Annuity: N
= ln(FV/C*r+1)/(ln(1+r))
Or N = ln(1/(1-(PV/C)*r)))/
(ln(1+r))
EAR = (1+APR/m)^m-1
APR = (1+EAR)^(1/m)*m
NPV NFV calculator:
First mid-term study
guide (10/3 First Mid
Term, Close book close notes)
1. What are the six parts of the financial
markets
2. What are the five core principals of finance
3. Do you think that student loans will become a trigger for the next financial crisis? Please provide your explanation.
4. What is high frequency trading? pros and cons? What can SEC do to make high frequency trading less a threat to the financial market stability?
5. What is flash crash? Why do investors so worried about the occurrence of flash crash? How can high frequency trading trigger flash crash?
6. Why does flash crash occur more frequently in FX market than in the stock market?
7.
What is M0? M1? M2?
M3?
8.
What could happen if
we increase money supply?
9. Why are M1 much greater than M0 and M2 much greater than
M1?
10. “In a fractional
reserve banking system, banks create money when they make loans. Bank
reserves have a multiplier effect on the money supply.” Are the above
sentences right or wrong? Please explain.
11. Imagine that
you deposited $10,000 in Bank A. Imagine that the fractional banking system
is fully functioning. After five cycles, what is the amount that has been
deposited by the five customers? How much money has been lent out by the five
banks? Please fill up the blanks in the following table.
|
Iteration # |
Deposited |
= |
Reserves |
+ |
Available to Lend |
Bank |
|
Lends to |
||||||
|
1 customer |
10,000.00 |
= |
A |
|||
|
2 customer |
= |
B |
||||
|
3 customer |
= |
C |
||||
|
4 customer |
= |
D |
||||
|
5 customer |
E |
|||||
|
Summary |
||||||
|
Total deposited: |
----------- |
Total
lend out |
------------ |
|||
|
And the cycle
continues… |
||||||
12. What is bitcoin?
In your view, could bitcoin become a major global currency? Could governments
ban or destroy bitcoin?
13. What are
bitcoin futures? How can you use bitcoin futures to improve your portfolio’s
performance?
14. Bitcoin is used
more often by speculators to make quick and easy money, rather than an
investment for a long horizon. What is your opinion to bitcoin in terms of
the purposes of investing in bitcoin?
15. As an investor, besides market order, what other types of orders can use choose from? Show definitions and examples.
For
example, Wal-Mart stock is currently traded at 118$/share. You think it is
overpriced and want to buy it at a lower price, such as $110/share.
Which
order type shall you choose? Please explain with details.
Assume
that you could buy Wal-Mart stock at $110/share and want to hedge against
falling stock prices in the future. Which order type shall you choose? Please
explain with details.
16. What is short selling? Do you think that short Apple stock is a good idea? Why or why not?
17. What is IPO? SEO?
18. Please compare a firm going public vs. a firm going private. https://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore/#5c98b47b2a9b. Why is Dell going back and forth between a public firm and a private one? https://www.cnet.com/news/dell-goes-public-after-five-years-as-private-company-report/
19. Compare primary market vs. secondary market.
20. Time value of money question, similar to homework questions. Just show math equations. No need of excel or a calculator.
Chapter 6 Bond Market
1. Cash flow of bonds
For example: a 3 year bond
10% coupon rate, draw its cash flow.
Introduction
to bond investing (video)
How
Bonds Work (video)
2. Risk of Bonds
Class discussion: Is bond
market risky?
Bond
risk (video)
Bond
risk – credit risk (video)
Bond
risk – interest rate risk (video)
Bond
risk – how to reduce your risk (video)
3. Choices of investment in bonds
FINRA – Bond market
information
http://finra-markets.morningstar.com/BondCenter/Default.jsp
Treasury Bond Auction and
Market information
http://www.treasurydirect.gov/
Treasury Bond
Corporate Bond
Municipal Bond
International Bond
Bond Mutual Fund
TIPs
Class discussion Topic I: As a college student, which type of
bonds shall you buy? Why?
Class
discussion Topics II
You can invest in junk
bonds. Shall you? Or shall you not?
What is a high yield bond (Video)
Definition: A high yield bond
– also known as a junk bond – is a debt security issued by companies or
private equity concerns, where the debt has lower than investment grade
ratings. It is a major component – along with leveraged loans – of the
leveraged finance market.(www.highyieldbond.com)
Everything You
Need to Know About Junk Bonds (video)
Updated Aug 17, 2019
For many investors, the term "junk bond" evokes thoughts of investment scams and high-flying financiers of the 1980s, such as Ivan Boesky and Michael Milken, who were known as "junk-bond kings." But don't let the term fool you—if you own a bond fund, these worthless-sounding investments may have already found their way into your portfolio. Here's what you need to know about junk bonds.
Junk Bonds
From a technical viewpoint, a junk bond is exactly the same as a regular bond. Junk bonds are an IOU from a corporation or organization that states the amount it will pay you back (principal), the date it will pay you back (maturity date), and the interest (coupon) it will pay you on the borrowed money.
Junk bonds differ because of their issuers' credit quality. All bonds are characterized according to this credit quality and therefore fall into one of two bond categories:
Investment
Grade – These bonds are issued by low- to medium-risk lenders.
A bond rating on investment-grade debt usually ranges from AAA to BBB.
Investment-grade bonds might not offer huge returns, but the risk of the
borrower defaulting on interest payments is much smaller.
- Junk Bonds – These are the bonds that pay high yield to bondholders because the borrowers don't have any other option. Their credit ratings are less than pristine, making it difficult for them to acquire capital at an inexpensive cost. Junk bonds are typically rated 'BB' or lower by Standard & Poor's and 'Ba' or lower by Moody’s.
- Think of a bond rating as the report card for a company's credit rating. Blue-chip firms that provide a safer investment have a high rating, while risky companies have a low rating. The chart below illustrates the different bond-rating scales from the two major rating agencies, Moody's and Standard & Poor's:
Although junk bonds pay
high yields, they also carry a higher-than-average risk that the company
will default on the bond. Historically, average yields on junk bonds have
been 4% to 6% above those for comparable U.S. Treasuries.
Junk bonds can be broken down into two other
categories:
- Fallen Angels – This
is a bond that was once investment grade but has since been reduced to
junk-bond status because of the issuing company's poor credit quality.
- Rising Stars – The opposite of a fallen angel, this is a bond with a rating that has been increased because of the issuing company's improving credit quality. A rising star may still be a junk bond, but it's on its way to being investment quality.
Who Buys Junk Bonds?
You need
to know a few things before you run out and tell your broker to buy
all the junk bonds he can find. The obvious caveat is that junk bonds are
high risk. With this bond type, you risk the chance that you will never get
your money back. Secondly, investing in junk bonds requires a high degree of
analytical skills, particularly knowledge of specialized credit. Short and
sweet, investing directly in junk is mainly for rich and motivated
individuals. This market is overwhelmingly dominated by institutional
investors.
This isn't
to say that junk-bond investing is strictly for the wealthy. For many
individual investors, using a high-yield bond fund makes a lot of
sense. Not only do these funds allow you to take advantage of professionals
who spend their entire day researching junk bonds, but these funds also lower
your risk by diversifying your investments across different asset types. One
important note: know how long you can commit your cash before you decide to
buy a junk fund. Many junk bond funds do not allow investors to cash out for
one to two years.
Also,
there comes a point in time when the rewards of junk bonds don't justify the
risks. Any individual investor can determine this by looking at
the yield spread between junk bonds and U.S. Treasuries. As we already
mentioned, the yield on junk is historically 4% to 6% above Treasuries. If
you notice the yield spread shrinking below 4%, then it probably isn't the
best time to invest in junk bonds. Another thing to look for is the default
rate on junk bonds. An easy way to track this is by checking the Moody's
website.
The final
warning is that junk bonds are not much different than equities in that they
follow boom and bust cycles. In the early 1990s, many bond funds earned
upwards of 30% annual returns, but a flood of defaults can cause these funds
to produce stunning negative returns.
The Bottom Line
Despite
their name, junk bonds can be valuable investments for informed investors,
but their potential high returns come with the potential for high risk.
Home Work
chapter 6 (due with the second mid term exam):
1. Draw cash
flow graph of a bond with 5 years left to maturity 5%
coupon rate.
2. Find
Wal-Mart bond in FINRA website. Pick one of the three bonds and answer the
following questions. ( http://finra-markets.morningstar.com/BondCenter/Default.jsp,
and search for Wal-Mart bond)
a. How to
calculate the price?
b. Why
Wal-Mart bond yield is lower than Microsoft’s?
c. What
does “callable” mean?
d. Who are
the three major rating agencies?
e. What is
the rating of War-Mart bond? Is it better than MSFT’s
or are they the same?
3. Explain
why Wal-Mart bond is more risky than the Treasury bond with the same condition.
4. As a bond
investor, do you plan to invest in junk bond? Why or why not?
5. Fed reduced interest rate. Do you think
that it is safer to invest in junk bond when interest rates are low? Or just
the opposite? Why or why not?
6. What is the take away of the following
article? Why does it happen?
Rising
defaults in high-yield bonds puts this year on track for postcrisis record,
warns Goldman Sachs 8/18/2019
Defaults
reach above 5%, from 1.3% bottom in November 2018
By JOYWILTERMUTH
Defaults on bonds issued by debt-laden U.S.
companies with speculative-grade ratings are on pace to reach a new high this
year for the post 2008 crisis era, according to Goldman Sachs analysts.
The bank has tracked more
than $36 billion of defaulted so-called “junk bonds” already in 2019, and there are likely to be more,
particularly in the energy sector, to eclipse the prior post crisis default
record of $43 billion in 2016, wrote Goldman analysts led by Lotfi Karoui in
a Thursday note to clients.
“Thus far, defaults have been highly concentrated among energy
issuers, a trend that reflects structural as opposed to cyclical challenges,” the Goldman analysts wrote. “The
lingering weakness in oil prices coupled with weak growth sentiment may push
issuers in other structurally-challenged sectors toward defaults.”
Oil field servicing company Weatherford International Ltd WFTIQ, -8.67%,
which filed for bankruptcy with $7.4 billion of high-yield debt, is the year’s second-largest default, after the massive default of
California’s Pacific Gas and Electric Company PCG, +5.80% on
$18.3 billion of debt in January, according to Moody’s
Investors Service.
In the case of Weatherford,
Moody’s said it expects to see bond recoveries of
35%-65% on roughly $5.85 billion of debt that the company hopes to slash through
its restructuring.
PG&E was considered an investment-grade credit, until it filed for bankruptcy following devastating
California wildfires in 2017 and 20180 left it facing billions in potential
liabilities.
This chart shows the dollar amount of defaulted U.S. high-yield bonds thus
far in 2019, which is approaching levels not seen since 2016, after Brent
crude oil prices plunged below $35 per barrel and put significant
pressure on the financial conditions of oil companies and exporters.
Goldman Sachs
Moody’s said this week
in a separate report that junk-bonds issued by companies in July came with
the worst protections yet for investors.
Check out: Junk bonds are getting worse and investors are starting
to take notice
At present, the three-month
trailing high-yield bond default rate is above 5% on an annualized basis, a
sharp jump from its 1.3% bottom in November 2018, according to Goldman
analysts.
By comparison, the default
rate traveled north of 14% for U.S. high-yield bonds in the aftermath of the
2007-2008 global financial crisis, according to Moody’s,
which said in July that its baseline forecast was for defaults to stay below
4% through July 2020.
Goldman analysts also don’t see defaults moving meaningfully higher from current
levels, absent a “full-blown recession,” which the bank’s U.S. economics
team doesn’t anticipate occurring in the near term.
Recession and trade war jitters rattled U.S. stocks this week,
although the major benchmarks managed to close higher on Friday, with the Dow
Jones Industrial Average DJIA, -0.36% adding
300 points, and the S&P 500 index SPX, -0.45% gaining
41 points and the Nasdaq Composite Index COMP, -0.33%
increasing by 308 points.
Investors have plenty of high-risk and so-called grey swan events to watch for, as the
third quarter draws closer.
In high-yield, a big focus
will be corporate earnings through year-end. Companies can end up in default
when earnings slump, making it harder for borrowers to keep up on debt
payments.
And with energy making up
14% of the closely-tracked Bloomberg Barclays U.S. high-yield bond Index,
Oxford Economics is keeping a close eye on the fortunes of energy companies.
“Our main source of worry is the fact that the improvement in
U.S. fundamentals since 2017 can be entirely attributed to the energy sector,” wrote Michiel Tukker, Oxford Economics’
global strategist in a note Friday.