Union Pacific has a huge drive for constantly increasing efficiency. Their profits are up significantly year over year, but this fall they cut about 500 jobs from their headquarters in Omaha, around 6% of their Nebraska employees, and this isn't even the first time they've done it. To keep the big investors happy they are constantly searching for ways to cut costs.
On the other hand, this might also be a product of the industry. The railroad is necessarily growth constrained. It's unlikely that significantly more products will move to being transported by rail and there is very little room for new lines to be constructed.
At some point, the phrase "passive management > active management" will become verifiably false.
Is the argument that the vast majority of them could change their funds' charter to allow them to be actively involved with governance? If so, that would be really hard to achieve even if many of them worked at it.
Edit: three people have made the same "it's easier to get a controlling interest" argument. See my reply in the follow-up before making another redundant comment.
I'm not familiar with these non-intervention clauses, but in the 10/90 scenario haven't you made it much easier to seize control of the company? Now I only need 5%+1 of the shares to do as I wish?
If that was the case it would have been easy. Handful of people fighting for power.
But from what I can read the problem is exactly the opposite. As someone said below that Blackrock has been known to rubber stamp executive salary and maybe others follow suit. What is then stopping companies from going bigger and bigger on executive salary knowing that they will get rubber stamped from the funds?
What happens if there is a complex governance issue which requires vote and the index fund lack the motivation to ensure that they have weighed all the decisions correctly?
That's a funny contradiction of a sort - then the index fund becomes the agent it's supposed to be observing.
For one, Blackrock is not Berkshire Hathaway - and in reality, obviously Blackrock can't wake up tomorrow and decide to be. They're not built for that.
Another scary thing is that the market is being increasingly turned into a derivative, and the underlying asset becomes more volatile (certainly for many different reasons) as it becomes proportionally smaller .
[1] https://www.ft.com/content/4594f554-ba1a-11e7-9bfb-4a9c83ffa...
https://www.pionline.com/article/20170418/ONLINE/170419868/b...
The only large fund i know that regularly gets its hand dirty is the Norwegian sovereign wealth fund.
Which allows for them to do things like demand publicly traded recruit women to their boards. Which is a useful talent when you are focused on economic growth, and your holdings are focused on extreme paper-meritocracy that fails to result in actually addressing additional portions of a market because their talent pool can't perceive it.
https://newsroom.statestreet.com/press-release/corporate/sta...
oh no the potential.
I really doubt that he will ever come out and clearly say that they've become a bad investment.
But the insinuation is that going forward index funds might cause harm to public's interest. And law makers need to come up with laws to ensure that doesn't happen.
If the two companies are owned by the same guy, they have the incentive not to compete with each other since their owner cares about the sum of their profits. This is why one wouldn’t be allowed to acquire the other. But the effect is the same when a single index fund owns a large chunk of both companies. The companies are encouraged to compete not too fiercely with each other.
If I'm wrong, can you explain what I'm wrong about?
Is this statement correct? Your argument hinges on it, so it's important to get a definitive answer.
The most visible sign of Vanguard’s engaged ownership is our funds’ proxy voting at shareholder meetings. We have an experienced group of analysts on our Investment Stewardship team that evaluates proposals and casts our funds’ votes in accordance with our voting guidelines.
Fund holders do not vote on corporate issues of stocks held by vanguard.
And of course, the owner of stocks held by a mutual fund are the mutual fund. Is that not clear to most people?
Bogle noted that trading would dry up if the stock market comprised only indexers and there were no active investors setting prices on individual issues. Everyone would just buy or sell the market.
...
Shareholders of index funds could then suffer more than owners of actively managed funds, and they could take their losses harder due to the perceived security they feel precisely because they merely own the market and aren’t trying to beat it. That might make active investors feel a bit of schadenfreude for indexers who have been free-riding at their expense, but the feeling probably wouldn’t last. The greater price swings that could ensue in a heavily indexed, less-active market are likely to exacerbate losses for everyone.
https://www.marketwatch.com/story/john-bogle-has-a-warning-f...
It seems a good bet that this warning, like most pre-downturn warnings, will only become obvious during the next major downturn.
Network -- 1976
* Full public disclosure by index funds of their voting policies and public documentation of each engagement with corporate managers.
* Require index funds to retain an independent supervisory board with full responsibility for all decisions regarding corporate governance.
* Make it clear that directors of index funds and other large money managers have a fiduciary duty to vote solely in the interest of the funds’ shareholders.
That's easy to say, but deciding what the shareholders interest is can be incredibly difficult. On any difficult decision, like "should this merger be approved", index funds taking any position is the same as active management.
Does anyone know of any investment risk to index funds if everyone is now doing it?
This sounds like the most viable strategy to me. Just don't let index funds vote. I don't understand his objection at all. The index fund managers are not long term investors in these corporations. The people who own the index's shares are, and they are deferring their votes to the managers right now.
The problem is that (semi) manually trading securities is inherently expensive.
Funds solve that problem by massively reducing the number of transactions that are required: 1000 people investing in a fund investing in 1000 companies needs 2000 transactions instead of the 1000000 transactions needed when 1000 people invest in 1000 companies directly.
But there really is no fundamental reason anymore why you shouldn't be able to just buy small numbers of shares from a thousand companies via electronic systems. A million transactions is not really a problem for modern IT, nor is managing 1000 positions in your account.
Yes, there are some more practical problems (the valuation of individual stocks being too high for small investors to buy even a single one, preventing front running on index changes, tax refunds, ...) - but I would think all of those should be possible to solve in a way that is both economically feasible and has the individual investor holding the actual stock to prevent those accumulations of power. And you still could have the possibility to delegate your voting rights to some organization you trust--but that could be decoupled from the investment "product" or account itself, plus you wouldn't be required to delegate the power for all your investments.
Or we could just make laws that mandate that funds must delegate voting rights to their investors, i.e., make it as if they were holding the stocks directly in that regard?
Set a cap of $1 trillion or $500 billion that any single firm can have under management. This probably only breaks up Vanguard and BlackRock. Not sure how this would cause havoc. Seems like we need to relearn the reason anti-trust laws we passed in the US and start using them again.
I do think Vanguard has been a great boon for American investors and would not like them punished for their success. Not sure how to square that fact with the need to break them up.
Founders pitch supervoting control as a way to make sure the company can realize its long term potential by protecting themselves from activist investors with a short term view.
So far, ownership of new IPOs hasn't been affected much due to their small market caps and subsequent miniscule weighting in indices. It will be interesting to see if increasing concentrated ownership by index funds may eventually play a factor and perhaps increase acceptance of supervoting.
Index funds may even want to differentiate themselves by having good research teams to advise me on what to decide and having convenience options where I get to set specific generic voting policies that they will then implement automatically for me.
Now, you will most likely be uninformed about most of the decisions that need to be made, which lead to your 2nd point about default options suggested by the index fund manager. But that just circles back to Bogle's points in the article. Also, with index fund costs at rock bottoms, good luck getting quality research into your voting options.
The alternative is active funds where you're already paying for exactly the same thing plus a bunch of compensation for underperformance to people who pretend to know what they're doing. Paying a research team is cheap in comparison and once funds are at <0.10% expense ratios making them cheaper isn't that big of a market advantage anyway. A good research team and interface would definitely make me pick a 0.10% fund over a 0.05% one for a life-long investment career. If I'm reading the numbers in the article correctly at the scale of Vanguard that's a cool billion dollars a year to provide research and systems.
The common sense of not putting new laws until clear evil has been observed should be applied here.
That is the conventional approach, I think Mr. Bogle is suggesting that we act to prevent such issues ahead of time for a change.
And the main barrier to entry he refers to is essentially the size of the established players. They have economies of scale that a new entrant would be hard-pressed to match. And the author is the man who essentially invented the index fund, and whose company, Vanguard, currently is the market leader in these products and has the most to gain from maintaining the status quo.
"Why? Partly because of two high barriers to entry: the huge scale enjoyed by the big indexers would be difficult to replicate by new entrants; and index fund prices (their expense ratios, or fees) have been driven to commodity-like levels, even to zero."
I can attest that is absolutely 100% true. This business structure is perfect when economies of scale come into play. And S&P is a master of this. It's extremely difficult for others to compete with us because, like everything else, there is a range of services/quality. S&P is at the top end - the Mercedes of index providers. People pay more, but they get the best service/products. The margins are extremely high for any business. But for an service that is considered to have been "commoditized" (and it has to a large extent), our margins are insane. All our competitors want to attack those margins but they have trouble because they aren't able to provide the quality, variety, or depth of service that we do. Which leaves them only able to charge much less and be on the lower end of pricing. Time and time again I've seen some clients leave to go with someone cheaper and become displeased and end up coming back. That's because they simply don't have the internal systems, data contracts, or expertise from having been doing this for as long as we have.
Another thing is that the business model in general is damn near unbeatable. The 500 and DJIA combined require very little work overall as they are just two out of thousands of products we have. But they account for hundreds of millions of dollars in revenue. That's sort of like having a hit movie or book. But the difference with this business model as opposed to most other areas of capitalism is that the revenue is recurring. No where else have I seen unpatented, non-copyrighted intellectual property retain its value like this. Usually there is a surge at the start and then it tapers off fast after release/purchase. That creates a cash cow which they use to build stronger infrastructure and stay at the top.
That being said, let me address the main concern of the article - the issue of ownership for the index funds (not the index providers). I might very well be missing something here, but the answer seems obvious to me. They should just update the law so that the shares owned by the fund providers aren't considered theirs but rather the end holders of the ETFs/funds that they are packaged into. In fact this is so obvious to me I don't understand how it's not already the law since that's the case for a lot of other things like this. If you have a Charles Schwab account and issue an order for a buy, they buy it for you by placing the order under their trading ID on the market. You are later updated to be a holder of record during the trade settlement process. Schwab is a service/pass-through agent. It's very similar for the fund providers. They just buy the shares to package/securitize in advance and then sell to someone. This is the creation/redemption aspect of ETF management. When the creation/redemption process goes on or ETF shares change hands, a process similar to becoming a holder of record through trade settlement should occur. Yes, that would result in you technically being listed as owner of a fractional amount of shares, but that's a hell of a lot better (and easier to deal with) than saying that the fund provider owns all the shares and you just trust them to vote properly for you.
Also gets rid of any issues of fractional voting; they can track fractional votes in the internal vote, and then just round the result in the actual vote.
The biggest problem is that generally index funds try to take a pretty passive approach to management decisions (although they do vote in some circumstances). If the index funds allow their investors to vote on everything, to some extent they stop being an index fund that passively tracks the market.
That doesn't really follow. Tracking the index and voting are two separate concerns.
That's part of the point of Bogle's objections (I think - I can't read the article, I can only read about it), that they're involved in management already, even though that's not part of their mission. Simply voting based on a proxy vote of the fund's shareholders is arguably more "passive" for the fund management than what they're doing now, if you're concerned about passiveness.
Although I'm not sure I get that - I don't quite see how the renter's would be especially more short sighted - it's not like the fund is obligated to hold the stocks any longer than anyone else.
This logic is backwards; index fund holders are more likely to hold their shares for a longer period of time, compared to day traders. The whole point of index fund investing is to avoid short holds.
Apparently still in beta, so the site doesn't tell you much, but worth keeping an eye on.
[0] https://say.com/
Which is to say the traditional more expensive managed funds that actually pay attention to the fundamentals of the companies they invest in should see a comeback. While this style of fund is more expensive (because a human can only examine a few companies in a year in enough detail to decide if they are worth investing in - as a full time job you can maybe do 50) by investing only in companies that will do better than average they can beat the market (or shorting if you want to play companies that will do far worse than average). So far the low costs of index funds have made them a better investment despite them not investing in strong companies, but we should see the day where a managed fund can beat the index funds just because the index funds are leaving the advantages of analysis on the table.
You can argue [meaning this might or might not be correct] that historically managed funds have done worse than index funds because there are so many managers that anytime there is a slight deal someone jumps on it before the deal is large enough to pay for the costs of finding it. However if you don't jump on it someone else will and they make something on the deal while you make nothing. Thus as index funds take over there will be more and more deals for the managers to find, and managers can wait until they are large enough to be worth the price.
It will be interesting to see when/where the line is crossed.
I think the main point is that index funds still rely on traditional market players to effectively allocate risk. And as index funds take up more of the market, they become less able to do that. Right?
In my view, index funds aren’t really passive at all, they are crowdsourcing the best ideas of active management. This is why many indices (like S&P 500) produce pretty good returns.
If you created an index held every US equity in equal proportions, regardless of price movement, that would be like what you’re talking.
If you compared the returns of the S&P 500 against this theoretical index (let’s make it an ETF and call it “DUMB”), you would find that the S&P 500 would have much better returns.
The takeaway from this is that many indices produce stellar returns and aren’t as “passive” as one might think. Think of factor indices or whatever.
Ultimately the problem domain of monitoring every publicly traded company and prognosticating their actions is huge, and the job is so messy that it will never be cheap. There should be an information theory paper on this somewhere.
The main investment risk to index funds growing is that, if everybody is a passive investor, then the passive investors are worse off as there are very few active investors who actually try and value companies appropriately.
On the other hand, if the market is littered with active investors, then the market is likely more efficient and 'correct', and so you're (probably) better off as a passive investor.
I'd rather see slower, predictable gains than bet my nest egg trying to go toe-to-toe with hyperefficient machines -- or hand it off to some Manhattan finance bro making that bet on my behalf.
Here's a pretty good article: https://www.aqr.com/Insights/Research/Alternative-Thinking/A...
Of course there is such a thing as price manipulation which active investors can try - if there are only a few and they work together this can work out. However the investors have incentive to cheat when working together as the cheater wins against his peers, thus this currently is confined to "penny stocks" (for example the company behind the stock doesn't exist anymore but they didn't properly delist their stock so technically it can be traded - you can buy such stocks for say a penny each and then hype them to suckers as the next big thing and sell for 10 cents each and make a killing - since the company doesn't exist no one else pays attention and the scam works.)
I didn't read past the paywall but one good thing if more and more people own index funds then they are participating in the success of those corporations represented in that index. Might tend to tone down some of the shrill agitation that everything "corporations" do is evil and greedy.
If index funds start to create systematic valuation errors, active strategies start to perform better and they start to outperform index funds. This is not the case, because index funds beat active fund management constantly over longer periods. (The article raises concerns of corporate governance and accumulation of power that is different issue).
Matt Levine https://www.bloomberg.com/opinion/articles/2016-08-24/are-in...
>there is an alternative view that the rise of passive investing will improve capital allocation, because bad active investors will be driven out but good ones will remain. The passive investors can't influence relative prices, since they just buy the market portfolio, meaning that the fewer but better active investors will continue to make the capital allocation decisions. On this view, lower returns to active management are a sign that prices are more efficient and capital allocation is getting better
This was only the case because 'long periods' include the periods in which free riders (indexes) were small relative to the active and activist shareholders.
When was the last time they did that anyway? Or tried? For a while, Wall Street has been more interested in predictability or volatility than in actual risk. They flat-out don't care whether an investment will tank, so long as they can predict (or sometimes even control) the timing. Or use some minute technological advantage to reap the rewards before someone else does. The very nature of hedge funds is to be good at measuring potential arbitrage rewards, not actual risk. Copycat behavior only exacerbates a problem that already existed.
In theory it might only be one! If there's only one active investor, and they find stocks that the index funds have not priced correctly, then the active investor can pounce, make some money, and move the stock toward a more accurate price. The more they do this, the more money they will make, and the more resources they will have for finding and taking advantage of mis-priced stocks.
The real trick is telling what an "accurate" price is, so that you can evaluate whether the market is working properly. Since the purpose of the market is to find the accurate price, asking whether the price it finds is accurate seems like begging the question.
Is the stock market pricing risk accurately now? Was it pricing risk more accurately 40 years ago, before the growth of index funds? There have been plenty of bull and bear markets during that time... and some nasty unexpected shocks.
Really, you don't. If you want to track a market cap weighted index, you only need to trade when the index composition changes, which isn't that often.
But also, that's not exactly something that couldn't be automated, is it? That could be a service offered by banks: automatically keeping your portfolio matched to a particular index.
The point isn't that you should be doing the work of a fund yourself, the point is that you should directly own the stocks. For one because that means you have the voting rights, but also because that would make you less dependent on any particular company. If you are invested in some company's S&P500 ETF, the only way to switch to a different company managing your S&P500 investment is by selling the old one and buying the new one, which causes transaction costs and can have massive tax consequences. If it was just your bank managing the stocks held by you, you could just transfer them to a different bank and have them take over the management.
(And also, it would allow minimally "active" investing even within a passive framework: If your bank is managing your portfolio for you, it would be much easier to, say, exclude a particular stock. It would technically be trivial to implement "S&P500, but without Facebook", say.)
> Moreover, most people probably don’t have the capital. You can’t buy a fraction of a stock, and since the S&P is market cap weighted you would need a lot of stock in order to do anything like the S&P 500
That is one of those things that I meant by "practical problems". If you think about it, that isn't really a fundamental problem. There is no fundamental reason why stock ownership has to be organized as "shares" that represent a fixed, relatively large, share of the company. We could in principle move to a model where you can hold more or less arbitrarily small pieces of a company, including arbitrarily small pieces of voting rights. Why shouldn't it be possible to just buy 0.00000000687 pieces of Berkshire Hathaway A for a cent or so, to have legal ownership of that piece, and to have the voting rights for that piece? None of that is exactly difficult to do with computers.
There were practical reasons why doing things the way we do them made sense, back when shares were physical pieces of paper that you moved around physically. But it really doesn't make a whole lot of sense anymore given our current technology.
The S&P500 had 500 stocks. Do you want to vote ~1.5 times a day?
That reinvents funds ... without the problem of accumulating all the power in a few hands, which was exactly my point?
> The S&P500 had 500 stocks. Do you want to vote ~1.5 times a day?
No, and why would I have to? For one, many index funds don't vote on many stocks either. But more importantly, the point is to unbundle voting rights from the portfolio management aspect. Just as that doesn't mean that you have to manually track an index, it doesn't mean you have to manually vote either, does it? You can just delegate it to some group that you think represents your interests, and you could do so selectively. If some group wants to get some particular company to change something and you support that, you could just delegate the voting rights for that one company to that group.
I worked for Vanguard and worked with the people who run the index funds, it's just a little harder than it looks.
Which is a dumb idea, of course, as that just leaves the control over your capital to your adversaries. Passive investing works because goals are aligned: The only way to influence an index fund on the investing side of things into doing something stupid is by doing something stupid yourself. If you want to make an S&P500 index fund buy some penny stock, you have to buy it yourself first in massive quantities paying massive prices for it to drive up the market cap. Voting does not work that way.
I suppose it's possible to construct a law that says companies can conduct their voting as they have been, but they must also allow/accept late "votes" from fund managers but the requirement is that those late votes must conform to the same proportions.
[1] for example, you would need a $270,000 investment before you own a full share of SRCL.
Could you clarify this for me? I.e. who buys from you, and what is it they buy?
I suspect you could legally create a fund with the constituents of the S&P 500 without paying them, but you wouldn’t be able to advertise that fact easily.
An easy way to think of this is the retail example where you pay an investment advisor. You pay them to manage your money but they place all the trades through some broker. S&P is the investment advisor and the fund manager is the broker.
Would it be that hard to generate an index that had similiar exposure as an S&P index? Maybe not, but S&P is good at what they do and they have a lot of brand recognition.
Normally markets remain efficient because they provide an incentive for people to actively research & surface all available information on a company's future prospects. If most people aren't doing this, then a.) the market price will be slower to react to bad information about the company and b.) people who do actively react will make larger profits, as they can trade on their information before the majority of the market takes it into account.
There's an equilibrium level of disequilibrium - as more people pursue passive investing, returns to active investors rise, until some of those passive investors realize they can make large profits as active investors, restore market efficiency, and destroy the profit potential of active investing. I'm not sure exactly where we are in that cycle, but there's some evidence that stock prices have become less volatile overall except for major news-related panics, which would be expected if a large proportion of people are passively investing.
Index funds have two main benefits:
* Lower cost,
* Never miss a new trend. At any moment only handful of stocks are responsible for disproportionate growth and index funds catch them all.
The fund has to manage holdings around fund purchases and redemptions, and when the index changes.
> The index fund managers are not long term investors in these corporations. The people who own the index's shares are, and they are deferring their votes to the managers right now.
I have noticed when I vote the shares of the few shares I own that I'm almost always voting with the board of directors. When I've seen a proposal the directors have recommended a No vote on it is always some activist who has their own interests in mind at the expense of me. Sometimes the directors recommend things I disagree with, but those are generally minor details where either way is not harmful to my interests.
The only exception would be some kind of action that is specifically discriminatory towards your shares over theirs, which is typically not legal. If it were to occur, that is the only situation where I would want Vanguard to be voting on my behalf.
You're right though that not voting is equivalent and much easier than trying to replicate votes.
Nope. Their interest is to vote in such a way that it maximizes the value of their portfolio. If that doesn't match your portfolio, then your interests are not aligned.
> The only exception would be some kind of action that is specifically discriminatory towards your shares over theirs, which is typically not legal.
There is nothing discriminatory about voting for selling a division of company A to company B, say, and it is certainly not illegal. But it might well still be in the interest of the owners of company B who also happen to hold the only voting 10% of company A, and to the detriment of the owners of the other 90% of company A.
How does this monopoly(?) on the 500 work? Aren’t I able to go out tomorrow and buy the different input securities of an index, and market that as “jkulubya’s awesome fund wink wink”? (Easier said than done)
One wrinkle I see with this scheme is that I probably have to publish my own index value because yours is your ip.
The reason this same legal principal applies to index products is because it's surprisingly difficult to even match an index's composition and weighting even with the methodology document in hand. So the odds of you creating your own strategy and that just so happens to be damn near identical to another index is essentially impossible. So just like the entertainment businesses, they look at it on a case by case basis and examine whether or not the "spirit" of the strategy has been violated or it's creative elements have been stolen. It's done case by case because it can get pretty nuanced and subjective just like music, books, and films.
> Tracking the index and voting are two separate concerns
I do not believe this is really true. The entire point of exercising shareholder rights by voting is to improve the performance of the company. A shareholder's decisions might be right (improved stock value) or wrong (reduced stock value), but you can't argue that it's passive involvement in the company. Changes in a company's stock price will necessarily cause changes in the index that the index fund tracks.
Now, let's consider the point of an index fund with a passive investment strategy: the goal is to remove the need to make decisions in how a company operates and leave that to the better-informed investors and marketplace as a whole. Index funds in the ideal world simply want to ride along with what decisions the marketplace is making in the companies that the index tracks.
This is an important tension that really cannot be resolved if index funds are to be considered passive and also vote.
In practice, the votes made my index funds tend to be (thus far) ones that are on less controversial issues like best practices for management, etc. You don't see Vanguard pushing for mergers or spinoffs like Carl Icahn would try to do. However, in principle all shareholder votes exist on some continuum of activist investing.
I guess that's basically the most "passive" option, but it would have some weird results. I believe - and I'm well informed but not an expert when it comes to this - we'd find that at a lot of companies, if you take away the large institutional investors, the portion that remains includes a large number of activist shareholders of various stripes. Those activists would necessarily be strengthened in some ways by the majority of shareholders sitting out every vote.
There's an utterly pretentious Rush lyric that comes to mind, about choosing not to decide still being a choice, or something.
edit: I see that Bogle kind of hit the same point: Limit the voting power of corporate shares held by index managers. But such a step would, in substance, transfer voting rights from corporate stock owners, who care about the long-term, to corporate stock renters, who do not... an absurd outcome.
This, in practice, is very difficult even with everything public, though, due to a variety of differences such as data differences between vendors, "expert judgment" for unforeseen circumstances, and the mere fact that sometimes methodologies can be confusing, complex, or have vague language. Most indices, unlike the 500, are pretty hard on rules. The 500 is a rare index that is purely discretionary. They do give guidance on general guidelines, though.
Right there's your hard cap. Make trains too expensive relative to trucks, and, suddenly, everything goes most of the way by truck.
Unmanned trucks crossing long distances of rural America sounds like a recipe for hijacking loads.
The logistics of stopping and looting a truck involves too many parties, and ensuring that each party is following enough security protocols to not be identified via face, vehicle, or gait will ensure that only a few small sophisticated heists will ever be successful.
Logistics is complex; you'll also need to factor many things into the optimization: * both fixed and marginal costs of each mode (e.g. maintaining track, monitoring safety, wear and tear on vehicles, varying fuel costs) * constraints (due to technology, personnel, regulations, etc) * fluctuations in demand and shipping objectives * lots more
If you want to focus on only one slice of the problem... Sure, for the exact same route (meaning that a particular track has already been built), one would expect that trains are more efficient. The data shows that; e.g. https://en.wikipedia.org/wiki/Energy_efficiency_in_transport...
Not always. If you provide a value proposition that a cheaper offering does not, say speed, you can increase volume.
Highway transportation will not likely get much faster, but high speed freight via rail seems like it might have some room to grow.
That is surprising, since shipping by water is dramatically cheaper than any other form of surface shipping, even factoring the extra distance to sail down to the Panama Canal. What's the point of adding the land leg?
That being said - you're incorrect about about competition between active investors and HFT. That's a common misconception. HFT primarily occupies a marketing making role, which means they try to play both sides of the spread very quickly for a very, very small profit on each trade. There are elements of valuation here, but what's really much more important is very small holding times and low latency turnaround. The ideal goal of an HFT operation is a trading strategy which earns a profit 51% of the time and trades very frequently.
In contrast, active investors - whether quantitative, fundamental or some mix thereof - care more about being correct on fewer bets, which have more money behind them and which are held for longer periods of time (hours, days, weeks or months). These funds are not competing with HFT: HFT only competes with HFT. This is because HFT activity and active investing activity are completely alien to one another. HFT has a material impact on the profit margins (slippage), volume and liquidity available to active investors, but strictly speaking they don't actually compete (except in the narrow sense that you "compete" with a car salesman to buy a car for a better price).
HFT is a relatively tiny portion of the financial industry which gets outsized attention. It's generally more accurate to think of HFT firms as financial utility providers rather than investing firms.
If you're a day trader trying to flip stocks by holding them for a couple of seconds at a time HFT is why you're bankrupt.
But it's also not true that HFT folks create markets. To create a market you need to sit on shares and offer them for sale. HFT leeches off of existing markets. It's true they offer share for sale, but only ones they bought a few nanoseconds earlier for the original price.
Day traders flipping stocks every few seconds won't lose money because of HFT firms, they'll lose money because of trading fees. Trading every few seconds is a wildly unrealistic strategy for most people to pursue on their own. On an average, per-trade basis the fees associated with buying and selling are several orders of magnitude higher than the profit margins of any HFT strategy. The only way your fees will even come close to the profit margins of an HFT are if your volume is such that you've become a market maker yourself. This is a very basic and fundamental tension that precludes HFT from being a competitive force to other traders engaging in speculation and investing.
Your final paragraph strikes me as ideologically bent, particularly with your use of the word "leech." It's an uncontroversial fact that HFT firms facilitate market making. HFT firms do sit on shares and offer them for sale. Most often they do this quickly, but occasionally they have holding times with longer horizons. What's more important than the turnaround time is the low latency with which they execute orders. Definitionally, HFT is engaging in market making because when someone wants to purchase a share, an HFT is ready to sell it to them. Likewise when someone wants to sell a share, an HFT is ready to buy it from them. This is quite literally, "making a market."
In point of fact, your hypothetical day trader would not be capable of buying shares every few seconds if it weren't for HFT (inadvisable though it may be). How do you propose they'd achieve the same kind of liquidity otherwise? By calling a broker? There are far fewer market makers than there are active investors. Passive investing activity with index funds also dwarfs the scale of HFTs. The straightforward conclusion that follows is that fewer, faster parties must exist to make markets for the many, comparatively slower investors.
This is an extremely well-studied subject; when you peel back the pomp and PR about HFT as an industry, you'll encounter an incontrovertible reality. There is no way to service modern trading activity happening every second without the HFT activity that happens every microsecond. By calling that latter activity "leeching", you read more like someone delivering an opinion rather than a cogent, well-informed and substantive criticism.
I'd point out, however, that your competition is usually not "HFT algos on servers located as physically close as possible," unless you are, yourself, a HFT trader. Even if you're buying a security for a few cents more because an HFT firm has corrected the price, if you're holding for weeks, months, or years... what's the difference? There's room for both of you to succeed, as long as your investment philosophies and holding periods differ that significantly.
If you want slow, predictable gains then invest in highly rated bonds. Handing investment decisions off to some Manhattan finance bro is unlikely to improve your long-term risk-adjusted returns.
That's usually not true at all. HFT makes up a huge portion of market volume, but for almost all investors is basically negligible to their return, despite what Michael Lewis might scare you into believing. HFT firms make a comparatively small profit in the universe of Wall Street, so they aren't eating your returns.
That's not to say actively managing your money is not difficult. You're mostly competing against sophisticated investors and firms with a far greater capital and knowledge base than you. It's just that in general, the majority of capital being bet against you is not from High Frequency Trading
Wall St is known for encouraging short-term thinking.
Are there a large number of activist investors who want certain companies to trim fat? Yes. I wouldn't always say that trimming fat is always synonymous with short term thinking. For all the companies that are underinvesting in the future, there are 5 whose management has given them mission creep to invest in areas that incinerate capital. Especially in the current interest rate environment.
It takes real gumption for the upper management to say "screw what the greedy bastards on Wall Street think, we're doing just fine." Especially when their yearly bonuses are tied to what those guys on Wall Street think.
Never thought the index composition could be a cash cow in itself. Im intrigued at how the IP is protected, in legal terms (i.e. what exactly is copyrighted or patented or trademarked or trade secrets), if you are able to comment on that aspect?
Anything deeper would require an actual lawyer to weigh in.
For example, online help is free but if you need to talk to a human being support, give us $10 a call or something. And while an average consumer might not be affected, people who are actually affected end up a nightmarish situation.
Race to the bottom or not, competition works.
Yes, that is exactly what happened, dasil003
https://newsroom.statestreet.com/press-release/corporate/sta...
State Street has 2.7 Trillion AUM
nothing exists in a vacuum
Based on the calculator here:
https://www.wilhelmsen.com/tollcalculators/panama-toll-calcu...
It costs $1,196,397.54 for the largest possible ship to go though.
That's for 13,000 TEUs though (so 6500 standard containers) That's $184 per container. Now think about how much a container holds, and per item for sale it becomes pretty cheap.
> sometimes products are unloaded on one coast, transported by rail, then loaded on a ship on the other coast.
Not sure how Kansas is relevant...
I think any definition of competition must be relative to the sphere of economic activity. So, when it comes to transportation in general, rail and trucks do compete -- by this I mean they offer services with varying prices and characteristics.
Just because rail and trucking have different sweet spots at a particular point in time does not mean that they don't compete. Both (a) think about how and why customers choose them over the other, (b) seek opportunities (for investment or growth) that lead to a competitive edge, and (c) therefore, influence each other.
China -> US is around 2 weeks, US -> EU is around 1 week.
So depending on where it was coming from, might make sense?
I dunno enough about the routes.
Just because they're stuck holding the bag on trades that end up being cancelled sometimes and have to wait for them to unload doesn't means they're making markets. If a market doesn't already exist the HFT firm is not going to create it.
They absolutely do increase the volume figures on markets, and that can be interpreted as making markets, but it's not an accurate representation of the big picture.
This is also incorrect. HFT firms routinely hold positions for days and weeks. It would be inefficient and strange to literally deplete all positions and begin fresh anew each day. Executing orders with extremely low latency is not equivalent to be perfectly symmetric in buy and sell orders.
I encourage you to learn more about the topic you're talking about, because what you're saying is substantially at odds with how the industry actually works. At this point I'm curious how you would define market making, because it's very ironic for me (and anyone else reading) to hear you say these things and talk about what is or is not "an accurate representation of the big picture."
Raw hourly cost may not even be the primary point under the manpower line of reasoning. It is certainly important, but not necessarily the key issue.
While it's already dubious to hire a driver for an autonomous truck, it's even sillier to pretend that the driver is useful when you're having the truck do the work while the driver sleeps. Extending road time by 3x means running the truck 24 hours a day, and keeping a person awake that long will not improve safety.
In theory an index fund should never own that much of a company, because that means it would own >50% of all publicly traded companies. The whole point is to spread the risk evenly so you can realize the average returns without having to put any thought into it. It shouldn't mean it's buying $100k shares of GE and also $100k shares of Mom&Pop Pickle Fork Inc.
Naively (ignoring other dynamics of index funds), sure, compared to 100% investors actively engaged in governance. But I suspect investment in index funds replaces largely hands-off direct investment and so, market wide, has virtually no average effect on that (though it may shift the effect among firms compared to those investors doing so directly.)
Another, parked overnight with a load of electronics at the southern boarder. He woke up and discovered the trailer had been broken in to. Yet it didn't seem anything was missing. Maybe something "extra" had been placed on the trailer before it crossed in from Mexico?
In our company we're reminded when we'll travel through high theft areas.
If we're pulling a trailer designated as "high value," wherever we are, we're not allowed to pick it up unless we have the fuel and legal hours to go at least 200 miles before we stop.
My vague point is that every security move in history and to come can be defeated, if it's worth it to someone. And it's always with it, to someone.
[BTW, it "feels" unlikely that a judge or jury would convict based on gait analysis.]
But it does seem plausible that gait analysis could lead to a suspect, who could be convicted (or more likely, plead out) on additional evidence discovered during an investigation.
Has someone actually worked out that tons of sensors will cost far less than people-driven trucks? As it is, fuel is the big cost, followed by driver salary [1]. L5 autonomous driving is not going to come cheap, that gear is going to price as close to 3X driver salary as they can get away with, on the assumption they can run close to around the clock. Whose margin is getting compressed for the additional sensor gear?
This doesn't even touch upon that as soon as L5 is available and if 24x7 L5 operations approved, you suddenly just increased industry transport capacity 3X, leading to a sudden oversupply in certain segments and scenarios, while still requiring a certain baseline to handle peak load demands. That chaos will cause a lot of margin compression, and lots of rosy profit projections from L5 autonomous driving without drivers will turn into a race for finding more customer demand.
I can see some modest sensor gear, but nothing fancy, and not a lot of them. Perhaps high resolution visual and night vision cameras coupled with lots of street camera access, with lots of back-end software processing will deter most theft attempts?
We might ironically get to L5, only to stick lower-paid security guards on a random number of trucks.
[1] https://www.thetruckersreport.com/infographics/cost-of-truck...
Also once automated, the trucks can engage in all sorts of hyper-miling shenanigans since they don't have to worry much about traffic during a significant part of their 24/7 operation, especially on more remote roads. That's additional fuel savings.
Today it doesn't make sense, but in 10-15 years when a full self-driving solution costs maybe $1k? It's a no brainer, especially for long haul trucking.
I'd guess that putting a security guard on a truck will be an exceptional occurrence, probably only used when the truck is hauling an especially valuable cargo or going through a known trouble spot.
I once spoke with a highly-paid driver (used to be a programmer, using the gigs in truck driving to decompress because our industry generally has worse work-life balance than truck driving...chew on that for a bit) about the US logistics industry.
The driver was in high demand because they consistently tested drug-free, carried various kinds of specialized certs, was always on-schedule or always in communication about problems, and fixed many problems on their own. As I remember the explanation, there is some kind of trucking industry-wide database that contains every driver's trucking records, and it shows every ping of their record to everyone. Might have the details wrong, but the gist was every single time a competing trucking company pinged their record, they got a raise to stay without even asking. So they were in a good position to watch from the best of what the trucking industry could offer. Their contention after observing from inside the industry for a number of years is that the bulk of the US logistics industry is the train companies' to lose.
Placing enough sensors along the tracks and looking outward to the sides of tracks to detect conditions requiring trains to slow down way ahead of time, but otherwise clearing trains to run at much higher speeds than they are allowed to now, would go a long ways to fixing many of the train industry's delivery speed. Upgrade the tracks themselves and the rolling stock to boost the speed even more to match trucking's coast-to-coast delivery time, and there isn't much incentive to use trucks for those corridors rail serves.
... I just don't see how you economically protect a vehicle (vs cargo value).
And more sensors simply mean more things to steal. The minimum law enforcement response time along your entire route is the real issue, and there's no way you decrease that short of drastically increasing police staffing.
The only real rebuttal would therefore be negative uses of centralized private ownership
Jitter is toxic to both, and road had a huge amount.
Rail networks are at least in control of most of their own variables!
Plus, these are thieves we are talking about. Pointing a gun at a human driver and telling them to pull over so they can rob the truck is something that could easily happen today but is extremely rare. The minimum police response time is something that's hard to measure. It might be many minutes 90% of the time, but if you do 10 or 20 of these heists eventually you're going to get unlucky and the cop will happen to be sitting at a speed trap right there are you're busting into the truck.
This is the fundamental problem with crime. You will get away with it most of the time, but when you don't you're fucked. It's a lousy career choice because the upsides are modest relatively speaking, and the downsides are huge. If you're going to be a criminal the trick is to steal enough to retire on and then immediately retire. Knocking over one random truck is not going to do it.
Unload truck at your leisure.
That's not even getting into ways to make an automated system stop by putting up an emergency / stop sign in the middle of the road.
The risk to stealing is directly proportional to the chance of getting caught, which broadly correlates into something unexpected happening, which is drastically diminished by not having a human driver.
So, how does a single, or even a 2 driver truck prevent this TODAY? The only reason I can think is conspiracy felony murder of 1 or 2 people w/ clubs, guns, cell phones has a higher risk than conspiracy felony larceny?
You've concocted a great hollywood heist scene; but if you're Fast and the Furious driving through South America, it's The Rock and the Swat team hanging out in cargo hold you have to worry about; not whether the truck has an autonomous driver or not.
I'm just saying that the worry about theft is probably overblown. It's almost certainly going to be rare enough that a regular insurance policy will be sufficient protection. People can be hired for exceptional cargo, but that's true today too.
If not, you'd be surprised how bare it is. Especially if automation kills the truck stops.
We'll see. The means are trivial for any enterprising farmer, and I think the moral calculus drastically changes once you remove risk to a human driver from the equation.
See my last paragraph.
Defending an unmanned vehicle is the walls vs guards argument: it's far harder to build an impassible, unguarded wall than it is to build a difficult, guarded one.
When it comes to shooting out an engine block, you're already past difficult. If you're blasting the doors, you're already past difficult.
But most of all, a truck driver is not a guard. Very few guards are guards of things that are insured. Driver, staff, and security guards (even banks) instructions typically include "protect yourself, but if something comes between your safety and the load safety, choose your safety".
To keep up with the Fast and the Furious movie relation; the first movie was about the FBI trying to prevent robberies BEFORE truck drivers took action after the FBI had instructed the truck drivers to not be heros.
>> See my last paragraph.
> The risk to stealing is directly proportional to the chance of getting caught, which broadly correlates into something unexpected happening, which is drastically diminished by not having a human driver.
You're missing the forest for the trees. A human witness is a deterrent because our court system says they are.
"Sir / Madame, could you pick the person you believe robbed your vehicle out of this lineup?"
Shooting out the engine of a vehicle traveling at a constant 55-85 mph down a straight interstate is a turkey shoot if you have the proper caliber.
I thought this was HN? The technical and creative requirements for this theft barely rise to "a bored Tuesday at the dorms."