Mark Cuban: What Business is Wall Street in?

Simple solution. Penny a share transfer tax for all trades. Corresponding amounts on bonds and other instruments. Watch the amazing reduction in volume and volatility. Then watch the return to focus on value trading.<p>Like that idea? Next, open up public companies books. Not in the formal but phony SEC/GAAP way. No, I mean realtime journal entries. I will do the accounting myself. You can too. Link the trading tax to how often the company updates its numbers. Want more liquidity for your stock? Give more information.<p>Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available.<p>Now all those things would make finance productive again by putting the focus back on capital allocation and moving it away from trading, speculation and lies. Make regulators focus on enforcing real transparency, since they don't know how to regulate behavior. This takes away the upside from the regulator/industry revolving door. It would be a great world for analysts and investors.<p>In olden days (1980) all this would have been technically infeasible. Now we have the computing power to handle it.

<i>It is getting increasingly difficult to just invest in companies you believe in.</i><p>This is a key point, and he doesn't justify it at all. Are value investors negatively affected by someone making a penny when the value investor makes a $1000 trade? Or are they positively affected by liquidity? He is either unaware that it's a controversy with plenty of history, or he prefers to gloss over it. He seems bothered by the fact that there's a lot going on besides simple value investing, as if any other activity <i>must</i> be detrimental to the operation of the market. He seems to be implying that the other activities on Wall Street are preventing stock values from reflecting investors' rational estimates of the value of the underlying businesses. <i>Seems</i> to be, I can't be entirely sure. If that's his point, he needs to muster some evidence, because plenty of people claim the opposite.<p><i>Individual investors and the funds that just invest in stocks and bonds are not going to crash the market.</i><p>Individual investors are very much among those who panic and sell when the market goes down, or who establish stop-loss orders with their brokers that cause market losses to irrationally cascade. Plenty of individual investors are eager to turn into gold bugs at the faintest whiff of a downturn. If amateur investors or stock analysts are better at value investing than "traders", they should eat the traders' lunch when the market panics. If it's the other way around, then the traders aren't the ones crashing the market.

Here's my response from the HN discussion a year ago [0]:<p>-----<p>If Mark Cuban thinks the market is now all about exotic derivatives rather than buying stock in companies you believe in, he's listening to the wrong people. Commission-based brokers talk about exotic derivatives; Warren Buffet still talks about buy-and-hold.<p>The biggest wins and losses in day trading will come from exotic derivatives simply by their nature: they're highly leveraged bets. Those firms that create the vehicles to make those bets aren't "hackers", they're "Vegas". You ask for a bet against the housing market or for cattle, they set up a structure to let you make that bet, and you play the odds -- and you might beat the other betters in the market over the short term, but it's the house (taking its percentage off the top) that always wins long term. Mark Cuban is right to be uncomfortable playing that game.<p>Meanwhile, people like Warren Buffet continue to look for healthy companies that are underpriced and buy into them for the long term. Day-to-day the market might be driven by short-term bets, but over the course of 3 decades it's still driven by the fundamental health of companies. If anything, those who care about <i>"the performance of specific companies and their returns"</i> benefit from the fact that occasionally, as a result of day traders' bets, healthy companies' stocks get sold at bargain prices.<p>If you try to play Vegas' game, you'll probably get burned. But if you stand back, watch the game, and buy when their game creates a bargain price on good long-term stocks, you stand to get very solid returns. -----<p>[0] <a href="http://news.ycombinator.com/item?id=1332422" rel="nofollow">http://news.ycombinator.com/item?id=1332422</a>

Being a private investor, I agree a lot with what Cuban is saying.<p>Strangely enough Australia, which Cuban suggests he's been investing in, has a few investor friendly (or trader unfriendly) regulations built in.<p>1. Hold a stock for over a year and capital gains tax is halved.<p>2. Tax (franking) credits are given out when dividends are paid. This stops double-taxing and encourages companies to pay dividends and investors to demand them.<p>3. You must hold a stock for 45 days to take advantage of the franking credits if you accumulate more than $5k worth.

"...no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years."<p>Wow. That would change Wall Street in a hurry. I don't know the full macro economic effect this would have on our system but I know the effect it would have on my personal investment.<p>"And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system."<p>This is obvious to anyone... except lawmakers unfortunately.<p>Damn. I think of Mark Cuban as a one hit wonder from the golden ages who freaks out at basketball games but this article was pretty damn intriguing.

I think he is right but the biggest issue is that Wall Street has become solely a place for 'transfer of wealth'. They do not care about value or know what it is, i.e. people like Warren Buffet stepping in recognizing value and investing when the price does not match the value.<p>But I think the biggest problem is the market is so huge and the more money you feed it the more irrational it gets, doesn't matter wether algorithms or humans are doing the trading.<p>Irrational trading creates bubbles and they gamble value away until the bubble burst. And even after the bubble burst its just a reset to the market.<p>I do not know where it is headed but I think one day countries will realize that they were better off with out mr.market because when the value companies build are traded away and in turn the middle class/country suffers, wall street walks away with the money, i.e. the house always wins in the end.

<i>It is getting increasingly difficult to just invest in companies you believe in.</i><p>Uh, I think it goes:<p>Buy stocks when it's cheap in comparison to your valuation metric and hold. Collect dividends, or if the stock becomes too overvalued, sell for profit. Start from beginning.<p>What did I miss?

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

&#62; To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.<p>Just because the day to day work of traders on Wall Street has been abstracted away from it's original intention doesn't mean that it doesn't continue to serve that function. When working in any large system, your focus can be absorbed by whatever smaller task you are working on, and you can loose sight of what your piece of the puzzle does. When working on a software team of many hundreds of developers, it's easily possible that the code you are working on is not at all specific to the problem you're solving. That doesn't mean that your work isn't helping to solve the problem.<p>The financial system is very complex, and I won't pretend to have the expertise or knowledge to explicitly explain the service that high frequency traders, for example, are providing. The way Wall Street currently operates might not be the most efficient system for allocating capital. But I don't think that you can immediately write off modern trading on the basis that it doesn't directly deal with the original purpose of Wall Street.

Remember your roots, Cuban!<p><a href="http://www.nytimes.com/2000/03/05/magazine/the-idled-workaholic.html" rel="nofollow">http://www.nytimes.com/2000/03/05/magazine/the-idled-workaho...</a>

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

The exchanges operate for the benefit of the listed companies. NASDAQ and NYSE can compete on features and trading rules. Leaving aside the problem of company officers trying to screw the stockholders (I'm not a fan of stock classes that give different voting rights), companies will list wherever the rules give the highest value to their current shareholders. And the highest value to the shareholders is provided by the market with the parasitic HFTs.<p>I don't understand. I though Mark Cuban was a fairly sophisticated investor, but he seems to be marveling that Australia taxes short term capital as ordinary income and LTCG at a lower rate, which is of course exactly what the US does.

It's odd to me that he thinks Wall Street was ever in the business of "creating capital for business". The only thing that can create capital is producing more than you consume and saving the difference. Now I have nothing against trading, speculating, or whatever else most people on Wall Street do. However, I think fractional reserve banking, which creates new money, is an extremely destructive practice equivalent to counterfeiting. Presumably it's fractional reserve banking that he thinks "creates capital". I recently gave a highly upvoted description of why fractional reserve banks are a scam here: <a href="http://news.ycombinator.com/item?id=2844528" rel="nofollow">http://news.ycombinator.com/item?id=2844528</a><p>It's a myth that banks create capital by employing fractional reserves. All they do is take purchasing power from some people, give it to themselves, and then charge a toll (interest) to the people they loan it to. It's unethical and it should be illegal. Unfortunately this isn't going to change until people stop believing the myth that printing new money is the same as creating capital.

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

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

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

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

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

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

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