Apple versus the world: The iPhone maker is bigger than almost any stock market in the world

Apple versus the world: The iPhone maker is bigger than almost any stock market in the world

Apple’s first physical retail store is located in the populous city of Mumbai.

Punit Paranjpe | Afp | Getty Images

Dimensional’s Matrix Book is an annual review of global returns that highlight the power of compound investing. It’s a fascinating document: you can look up the compounded growth rate of the S&P 500 for every year going back to 1926. 

Buried on page 74 is a chapter on “World Equity Market Capitalization,” listing the market capitalization of most of the world, country by country. No surprise, the U.S. is the global leader in stock market value. The $40 trillion in stock market wealth in the U.S. is almost 60% of the value of all the equities in the world. 

Global market capitalization, by country

(in trillions, with % of global share)

  • U.S.                         $40 trillion  (59%)
  • Japan                     $4.1t (6%)
  • United Kingdom   $2.6t (4%)
  • China                     $2.5t (4%)
  • Canada                  $2.1t (3%)
  • France                    $1.8t (3%)
  • Switzerland           $1.6t (2%)
  • India                       $1.4t (2%)
  • Australia                $1.4t (2%)
  • Germany                $1.3t (2%)

Source:  Dimensional Funds, 2023 Matrix Book

Here’s where it gets fun. My friend Ben Carlson pointed out that Apple’s current market capitalization of about $2.7 trillion this week exceeds the entire market capitalization of the United Kingdom, the third biggest stock market in the world. 

Apple vs. the world

(market capitalization)

  • Apple:                    $2.7 trillion
  • UK :                        $2.6t  (595 companies)
  • France:                  $1.8t  (235 companies)
  • India:                     $1.4t  (1,242 companies)
  • Germany:              $1.3t  (255 companies)

Source:  Dimensional Funds, 2023 Matrix Book 

Not only is Apple bigger than all 595 companies that list in the United Kingdom, it’s bigger than all the companies in France (235 companies), and India (1,242 companies). 

Apple is twice the size of Germany’s entire stock market, with 255 companies. 

In part, this reflects the extreme values that are being given to companies that are: 1) successful, and 2) growth-oriented.  

That orientation toward tech and growth can influence the character of a country’s market. 

Germany, for example, is by far the largest country in Europe by GDP, yet its stock market is smaller than the U.K, France and Italy.  In part this reflects the fact that there are fewer companies listed than the U.K., but also because Germany has more value-oriented companies.  As a result, its market multiple — the price investors pay for a dollar or a euro’s worth of profit — is considerably lower than that of the U.S. 

Regardless: Apple is bigger than the entire U.K. stock market? Twice as big as all of Germany? That is amazing. 

SEC's Gensler in congressional hot seat today over climate change and crypto

SEC’s Gensler in congressional hot seat today over climate change and crypto

The House Financial Services Committee will hold a hearing on oversight of the Securities and Exchange Commission this morning. Oversight hearings are normally a snoozefest but this one has the potential for fireworks. 

That’s because SEC Chair Gary Gensler has aroused the ire of many in corporate America over his 50+ list of new regulatory proposals the SEC is scheduled to vote on this year. 

The proposals run the gamut, from addressing climate change and board diversity to updating rules on best execution and payment for order flow (PFOF), securities lending,  short sale disclosures, shortening the settlement cycle for securities, cybersecurity, and more disclosure on private funds and the advisors around them. 

Too many rules, too little time to respond 

Wall Street’s principal complaint against Gensler: Too much, too fast.

“The barrage of rulemaking at the SEC is unprecedented and merits the close scrutiny of Congress,” Tom Quaadman, executive vice president at the U.S. Chamber of Commerce, said in an open letter to the House Financial Services Committee. “Chair Gensler has identified a range of 50-55 regulatory priorities since the start of his tenure, and has already proposed twice as many rules as his predecessor in just half the time.” 

The chair of that committee seems to share those concerns. 

“There’s a massive amount of change that this chair is trying to drive and it has a lot of expense in the markets and he’s given a limited amount of time for actually good comment,” House Financial Services Committee Chairman Patrick McHenry (R.-NC) said on CNBC Tuesday morning. “So we’re going to have shoddy rules that are very expensive on a market at a time where the rest of the world wants to take our capital markets. I don’t think it’s a smart agenda.”

This is more than just a complaint: If the SEC is not giving due merit to the concerns of those affected by the proposed rules it could get sued, which is exactly what U.S. Chamber of Commerce CEO Suzanne Clark said is the likely result. 

The chamber can work with Gensler and his team, Clark said on CNBC Monday. “We submit comments and have pleadings, we do everything that we can to get the appropriate amount of regulation and smart regulation accomplished,” she said. “If that doesn’t work, then we take them to court.” 

Challenging SEC authority on climate change

Few proposals have aroused more debate than Gensler’s plan to have public companies disclose risks they may face around climate change. The SEC has received 15,000 comments so far. 

In his prepared testimony, Gensler concedes, “The SEC has no role as to climate risk itself.  But we do have an important role with regard to ensuring for public companies’ full, fair, and truthful disclosure about material risks.” 

Gensler says that hundreds of companies already make climate risk disclosures and he is simply trying to build order out of chaos. 

But the proposed rule is facing considerable opposition from the business community, which argues that there is too much disclosure required, and from Republicans who claim that it’s a back-door means to push a climate change agenda. 

Opponents of climate change disclosure have a big weapon 

Opponents of increased regulation cite a potent court case that has emboldened them. 

Last year, in West Virginia v. EPA, the Supreme Court ruled that there are limits on a regulator’s powers. In that case, the Court relied on the “major questions doctrine,” which holds that Congress has not delegated issues of major significance to regulatory agencies. Any agency must be able to point to a clear statement from Congress authorizing its action. 

That case related to the Clean Air Act and the ability of the EPA to regulate carbon dioxide emissions. “The majority found that the EPA had exceeded its congressionally-delegated responsibility by pushing utilities to make system-wide moves away from coal-generated power and towards cleaner forms of electricity generation,” according to a summary of the case at JDSupra. 

Since Congress has not passed major climate legislation for years, opponents of the SEC’s climate rule will likely sue the SEC and cite West Virginia v. EPA , again arguing that Congress has not granted specific authority for the SEC to act on climate change. 

That is exactly the line of attack the Chamber of Commerce suggested: “How has the Securities and Exchange Commission heeded the major questions doctrine — as advanced in West Virginia v. EPA — in its interpretation of its rulemaking authority?,”  Quaadman said in his letter. 

Gensler on crypto 

Crypto enthusiasts have been frustrated by Gensler’s refusal to approve a spot bitcoin ETF and by his stepped-up enforcement efforts against crypto exchanges and others in the community, which critics say is an attempt by the SEC to gain control over the industry. 

“The vast majority of crypto tokens are securities,” Gensler declared in his written testimony to the House Financial Services Committee. “Given that most crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC.” 

But without clear regulatory authority from Congress, there has been considerable pushback. 

“SEC Chair Gensler is long overdue to testify before the House Financial Services Committee,” Rep. French Hill (R.-Ark), Vice Chairman of the House Financial Services Committee, said in a statement released to CNBC. “I have deep reservations about the SEC’s approach to digital assets, including its ongoing turf battle with the CFTC and its efforts to front-run bipartisan efforts in Congress to pass payment stablecoin legislation.”

Wall Street lines up against SEC chair Gary Gensler on one of his most controversial proposals

Wall Street lines up against SEC chair Gary Gensler on one of his most controversial proposals

Today is the final day for the trading industry and investors to submit comments on one of Securities and Exchange Commission Chair Gary Gensler’s most controversial proposals: a partial overhaul of the U.S. trading system.

The package is so complex and potentially far-reaching that Gensler has broken them into four separate proposals. Two of them have sizeable industry support and are likely to be adopted. But two others are facing serious opposition and, at least one — the effort to replace payment for order flow by an auction process which came out of the GameStop meme stock controversy — may end in litigation to prevent it from seeing the light of day. 

Better prices for small investor trades? 

The most controversial of the proposals involves a change in the way some retail orders are executed.  Gensler has been critical of payment for order flow (PFOF), whereby some retail brokers (including Schwab, ETrade and Robinhood) route orders to electronic market makers known as wholesalers (including Citadel and Virtu), who pay the brokers for access to that order flow. These wholesalers may send the orders to exchanges, but often match the orders against their own internal order flow. 

The wholesalers profit from the difference between the buying and selling price. The fees brokers receive have allowed brokers to charge zero commission to their clients. 

However, Gensler has claimed that pension funds and other institutional investors are not able to interact with that retail order flow. He also claimed the brokers are putting their financial gain ahead of their requirement to provide the best prices to their clients. 

To increase competition, Gensler is floating the idea of setting up auctions in which trading firms would compete with each other to fill investors’ orders before they could be executed internally. 

“These everyday individual investors don’t have the full benefit of various market participants competing to execute their marketable orders at the best price possible,” Gensler said in a December statement. Gensler claims investors could save about $1.5 billion annually, compared with current practice. 

Auctions: the industry lines up against it

The auction proposal has generated a large volume of comment letters to the SEC. 

Many submission letters have been submitted by individual retail investors who support the proposal.  A substantial number were motivated by events around Gamestop, AMC and other “meme stocks’ in early 2021, and many believe that payment for order flow was a part of that problem. 

“These proposals are potentially crucial steps towards addressing the issues we saw in January 2021 and making the markets more fair for retail investors,” Better Markets, an independent nonprofit that promotes public interest in financial reform, said in a recent post on its website. 

Most of Wall Street, however, vehemently disagrees. 

The concern: the proposal is so complex, the costs so difficult to assess, that there is the potential for significant market disruption. 

“SIFMA’s members believe the order competition rule should be withdrawn,”  Kenneth Bentsen, President and CEO of the Securities Industry and Financial Markets Association (SIFMA), said in a statement to CNBC.  SIFMA is a trade group representing securities firms, banks and asset management companies. 

“The SEC failed to make a valid case for doing it, and it will not only be disruptive to the market, it will hurt the stakeholders the SEC purports to help,” Bentsen said. “In addition, the cost/benefit analysis done by the SEC is flawed. Several academic research studies show that this proposal, if enacted, would raise costs for retail investors. The U.S. equity markets are incredibly efficient and resilient and investors, especially retail investors, have the greatest ease of access, lowest cost of trading and best execution in history. There is intense competition in the marketplace both upstream and downstream, especially with regard to retail investors. This flawed proposal will do more harm than good, and it is based on data that does not reflect today’s market.” 

A letter jointly submitted by the NYSE, Citadel and Charles Schwab also recommended that the proposal be withdrawn entirely, as does another joint letter submitted by Cboe, State Street Global Advisors, T. Rowe Price, UBS and Virtu Financial. 

“We believe that the Commission should not move forward with its proposal to mandate equity auctions for marketable retail orders,” the joint Cboe letter said, suggesting instead that the SEC consider other approaches to enhance execution quality “that do not pose risks to competition, liquidity and efficient capital formation in our equity markets.” 

Nasdaq has also registered its opposition to the proposal, saying “the SEC risks too much by solely focusing on qualified auctions,” instead recommending that the SEC should define a minimum price improvement threshold that broker-dealers must meet in order to internalize retail order flow. 

SEC Commissioners Hester Peirce and Mark Uyeda, both Republicans, also filed statements opposing the proposal. 

“This latest effort to order competition threatens to create disorder in the capital markets, the functioning of which is so important to the rest of our economy,” Peirce wrote in a statement. 

“We have not done the work necessary to justify the extensive changes we are considering,” she said. 

Ready for a lawsuit? 

Some are already threatening litigation if the proposal goes through. 

“Ultimately, it’s going to end up, unfortunately, sadly, probably in litigation [if Gensler] decides to go down this road,” Virtu CEO Doug Cifu said in an interview at the Securities Traders Association of New York conference on March 27th at the NYSE. 

Cifu specifically cited the Administrative Procedures Act (APA), which governs the way government agencies may propose and establish regulations. 

The SEC must follow procedures outlined in the APA.  If not, it can get sued. 

One securities attorney with knowledge of the APA, who asked to remain anonymous, told me there were several dimensions to a potential lawsuit. 

“The strongest way to challenge an agency is to say that the agency is doing something outside of their statutory authority,” the attorney said, noting that he thought it unlikely such a challenge would succeed in this case. 

The attorney also noted there were two types of APA challenges. “The first is a procedural challenge.  You can say, I didn’t have adequate notice or the opportunity to comment. You might make that type of claim where the SEC is relying on data or information they’re not making public.” 

Much more common are claims that the rulemaking is arbitrary and capricious. “You could claim the SEC considered improper factors in its analysis, you could claim it didn’t consider other relevant factors, or it didn’t address reasonable alternatives.” 

Another argument which is almost certain to be made is an inadequate cost benefit analysis: the SEC must demonstrate that what it is trying to do is worth the cost, and any lawsuit will almost certainly claim the SEC did not adequately consider the cost of this proposal. 

The attorney declined to comment on the likelihood of a lawsuit. However, another attorney familiar with the submissions that have been made, who also asked to remain anonymous, noted that, “Some of these submissions look they are the opening round of a litigation process.” 

Are you ready for trading in sub-pennies? 

The minimum trading increment was set at a penny nearly 20 years ago.  A second proposal being considered could alter that. 

Under current regulations, exchanges such as the NYSE and Nasdaq cannot generally execute a trade at anything less than a penny increment (or a midpoint), however market wholesalers (dealers internalizing their orders) can trade in any sub-penny increment, including hundredths of a penny. Dark pools, which are off-exchange trading venues, can also execute in sub-penny increments. 

Gensler says this has created a trading advantage for these off-exchange market centers, so he is proposing to require one minimum trading size regardless of the venue. 

What size should the minimum increment be? Gensler is proposing making it smaller than a penny for many securities. 

Why start trading in sub-penny intervals? It’s been known for some time that many stocks are “tick-constrained”, that is, they almost always have a bid-offer spread that is one cent wide. This implies that if the tick size was smaller than a penny, investors might get better prices. 

How much smaller an increment?  It depends. Under the proposal, many securities would have a tick size of half a penny. Those that are “tick constrained” might have even smaller increments, such as a tenth of cent. 

How well is your broker executing your trades? 

A third proposal would require market participants to disclose more information on how well they are executing trades for their clients. 

Market participants known as “market centers” (exchanges, dark pools, and wholesalers) are required to submit monthly reports indicating how well they are executing client orders. Gensler has been critical of this rule, known as Rule 605, noting that the requirements have not been updated since it was adopted in 2000. He has said investors today need a better understanding of how well their trading orders are being executed. 

First, Gensler wants more disclosure to investors of how trades are executed, and he wants those reports to be in a format that everyday investors can read. 

Second, Gensler wants to expand the group that has to issue reports on execution quality to include large broker-dealers, in addition to market centers. 

“I think investors should have easy access to information that details just how good of a job their brokers are doing,” Gensler said in a statement on the proposed rule. 

Best execution: the SEC wants its own rules 

In addition to more information on how well firms are executing orders, Gensler is proposing a new rule, Regulation Best Execution, that would establish a national best execution standard to ensure broker-dealers send orders to the venue that will get the best price for buyers and sellers. 

There already are existing rules on best execution established by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization (SRO) that regulates broker-dealers. There’s also a separate rule for broker-dealers in municipal securities adopted in 2016 by the Municipal Securities Rulemaking Board (MSRB). 

But Gensler says the SEC needs a rule of its own. 

“I believe a best execution standard is too important, too central to the SEC’s mandate to protect investors, not to have on the books as Commission rule text,” he wrote in a comment letter when the proposal was first considered in December of last year.

What would an additional SEC rule mean? Gensler says it would “enhance investor protection by providing for additional enforcement capabilities, including the ability to bring remedial actions and impose sanctions for violations of the new rule.” 

In plain words: having its own set of rules means the SEC can sue potential violators. 

Where Wall Street stands on the proposals 

While Wall Street firms seem universally opposed to the auction proposal, that is not the case with some of the other plans. 

The proposal to allow trading in sub-pennies appears to have industry support, though there is disagreement on which stocks should trade at a half-penny spread or a tenth of a penny. The NYSE, Citadel and Charles Schwab comment letter was generally supportive of the concept of reducing the minimum quoting increment from a penny to anywhere from a half-penny to a tenth of a cent. 

The same comment letter also supported improving information on execution quality. 

However, the proposal for a Regulation Best Execution is drawing considerable opposition.  The  NYSE, Citadel, and Charles Schwab comment letter went so far as to recommend the proposals be entirely withdrawn, not rewritten, noting that both FINRA and MSRB’s already have best execution rules, and implied the SEC’s rules would be needlessly duplicative and confusing. The joint letter from Cboe, State Sreet, T. Rowe Price, UBS and Virtu also said it was unnecessary. 

What will happen? 

Now that the comment period has ended, the Commission will review the comments on all four proposals. That will likely take several months, or longer. From there, it has several options: 1) reopen the comment period, 2) tweak the proposals, and if they are substantial, send them out for additional comments, 3) drop one or more of the proposals, or 4) proceed to the final rulemaking stage. 

Theoretically, the SEC could vote on any or all of the four proposals in a shorter time period. However, while Gensler and the Democrats have a 3-2 majority on the Commission, the proposals (particularly the auction proposal) are so complex that that is unlikely. 

This is just the start 

This is just the start of many proposals in front of the SEC. There are 35 proposed rules still outstanding, including on climate change disclosure, human capital management, board diversity, cybersecurity risk governance, data privacy, share buybacks and others. 

If there is a single theme emerging from the SEC under Gary Gensler, it would be that he is seeking more disclosures on everything corporate America is doing. Gensler believes this would increase market transparency and, in some cases, make markets more competitive. 

And that is where the disagreements start: when does the ever higher cost of providing more transparency overwhelm the benefits? 

As for efforts to make markets more competitive, the core of the proposal around payment for order flow, “We think the markets are very competitive,” Kenneth Bentsen, CEO of SIFMA, told me.

Big changes in the S&P 500 Friday highlight the power of index providers

Big changes in the S&P 500 Friday highlight the power of index providers

The index gurus are at it again. Some of the best-known stocks are getting reclassified on Friday, and that means a lot of money is going to move around. 

Ever wonder why Walmart is classified as a consumer staples stock in the S&P 500, but similar retailers such as Target, Dollar General and Dollar Tree are classified as consumer discretionary stocks?  A lot of other people have wondered as well. 

Friday, that will change. 

Target, Dollar General and Dollar Tree will move from the consumer discretionary corner of the stock market, and join Walmart as consumer staples companies. 

Consumer staples will get bigger; consumer discretionary will get a little smaller. 

Ever wonder why Visa, Mastercard and Paypal, which seem like they’re financials, are actually listed as Technology stocks instead? 

Other people have wondered that as well. 

On Friday, that too will change. 

Visa, Mastercard and Paypal, along with a few other names, will be moved into the financials sector. 

As a result, technology will be a little smaller, financials a little bigger. 

The triumph of indexing: where a stock is placed matters 

Thirty years ago this would all have been of interest to academics, but almost no one else. 

That was before the triumph of indexing and exchange-traded funds. 

Today, there is $6 trillion directly indexed to just the S&P 500, the largest of all the indexes in the amount of money tied to it. There is trillions more that is indirectly indexed. That is, many funds use the S&P as a bogey and try to match their returns without paying a licensing fee to Standard & Poor’s. 

Regardless: $6 trillion is a lot of money.  It’s about 18% of the entire market capitalization of the S&P 500. 

And that’s just the S&P 500. There are thousands of indexes that slice and dice the stock and bond market in endless ways. 

Exchange-Traded Funds (ETFs), which began 30 years ago, enable investors to buy these indexes in a low-cost, tax-advantaged wrapper that can be traded on an intraday basis. The ETF business in the U.S. alone is about $7 trillion, most of it in passive (indexed) funds. 

The people who issue those ETFs (BlackRock, Vanguard, State Street, Schwab and a handful of others), for the most part, do not own the indexes that are behind the ETFs.  They license those indexes from index providers.  The largest are Standard & Poor’s, MSCI, and FTSE Russell (which is owned by the London Stock Exchange Group). 

And the people who manage what goes in, and comes out of those indexes have now become very influential. 

How the stock classification system works 

Ever wonder why we use odd phrases like “consumer discretionary” and “communication services” to describe different parts of the stock market? 

You can thank S&P and MSCI. 

In 1999, in an effort to standardize how stocks are classified, MSCI and Standard & Poor’s set up an industry benchmark called the Global Industry Classification Standard (GICS).

All major public companies are broken down into one of 11 sectors, 24 industry groups, 69 industries and 158 sub-industries. The weighting in the most important index, the S&P 500, is determined by market capitalization. 

Here’s the current weighting of sectors in the S&P 500:

Sectors in the S&P 500

  • Technology                     27%
  • Health Care                    14%
  • Financials                        12%
  • Consumer Discretionary 11%
  • Industrials                         9%
  • Communication Services   8%
  • Consumer Staples               7%
  • Energy                                  5%
  • Utilities                                 3%
  • REITs                                     3%
  • Materials                              2%

Source: FactSet

Every year in March, S&P and MSCI announce changes in the classification system. This year, the changes set in motion last year take place on March 17th. 

Among the notable shifts this year, an entire sub-industry of technology, called “data & processing & outsourced services,” and including Mastercard, Visa, and Paypal, moves to financials and will now be called “transaction and service processing services.” 

Separately, S&P and MSCI are recognizing that Target, Dollar General, and Dollar Tree all sell similar merchandise to WalMart, so they’re all going under the same consumer staples umbrella.

What’s it mean for investors?

If you’re an investor in a broadly diversified total market index fund like the S&P 500, the changes will make little difference to you. 

The changes will be more significant if you trade sectors, which is an increasingly popular strategy. Just look at all the money that moved around in bank stocks this week, much of which went through the SPDR S&P Bank ETF (KBE) or SPDR S&P Regional Banking ETF (KRE). 

Moving Target, Dollar General and Dollar Tree to consumer staples from consumer discretionary will increase the weighting (and alter the future performance) of consumer staples, and lower the weighting (and alter the future performance) of consumer discretionary. 

Likewise with financials and technology: Mastercard, Visa, and Paypal will go into financials, which will increase the weighting (and change the future performance) of financials, and decrease the weighting of technology. 

The net effect: technology’s weight in the S&P will drop from roughly 27.7% to 24.5%, while the weighting of financials will expand from 11.5% to 14.2%. 

“The key is making sure these indices are relevant,” Dan Draper, CEO of S&P Dow Jones Indices, at S&P Global, said in a recent interview on CNBC’s ETF Edge.  “Are they reflecting changes in consumer demand or the changes in the marketplace structure?” 

Here’s something else it reflects: the people who decide what goes in these indexes have become very influential. They are not fund managers, they are index providers, but don’t let that fool you: in a world where people buy funds that are tied to indexes, the people who determine what go into those indexes have become very powerful indeed.

Live Nation shows why concert tickets aren't going down anytime soon

Live Nation shows why concert tickets aren’t going down anytime soon

I was recently at an ETF conference in Miami Beach, and one night a few of us noticed that Bruce Springsteen was playing up the road in Hollywood.

We kicked around the idea of going, until someone said that ticket prices were likely $1,000 and up for the sold-out event.

We went out to dinner instead. 

If you’re an old-school rock concertgoer like me, and you’re chagrined at prices for Bruce Springsteen and even Beyonce and Taylor Swift tickets well north of $1,000, you’re not going to see any relief any time soon. 

Ticket seller Live Nation on Thursday reported astonishing numbers: fourth quarter revenues at $4.29 billion were up about 60%, well north of the $3.6 billion expected. Full-year revenues were up 44%.

You’d think people would balk at the ticket prices? No way. Attendance in 2022 was up 24%. Upwards of 121 million fans went to 43,600 events.

And they’re not stopping. Ticket sales so far in 2023 are over 50 million, up 20%. 

Top priority

“Our research consistently tells us that concerts are a top priority for discretionary spending, and one of the last experiences fans will cut back on,” Live Nation said in a press release. 

Here’s something interesting: In both ticket sales and prices, the majority of the growth came from international markets. Live Nation said this reinforced “the global nature of untapped fan demand and the opportunities we have for growth.” 

Regarding the high ticket prices, Live Nation addressed the problem directly: 

“We believe that greater transparency on the entire ticketing ecosystem will improve the industry, and we have been engaging with policymakers to advocate for reforms. The biggest challenge facing the industry is chaos at the onsale, where fans cannot get the tickets at the price the artist sets, yet they see pages of secondary sites with tickets 5 times face value because of scalpers.” 

Live Nation made several suggestions to combat this, including that artists should decide resale rules. “Selling speculative tickets should be illegal so scalpers cannot use deceptive tactics to trick fans into spending more or buying tickets the seller does not actually have,” Beverly Hills, Calif.-based Live Nation said. 

Good luck with that. Here’s the main problem: for certain acts, there are far more people who want to go than there are tickets available. Scalpers presumably sell the tickets to willing buyers, and if there are not willing buyers at a certain price, then the price will come down.

In a normal market, prices rise to meet an equilibrium between buyers and sellers.

Banning markets

That’s called capitalism. You can try to ban it, but should we? 

Why do people understand that we pay different prices for coffee, or shirts, or gasoline, depending on quality or demand, but when it comes to music everyone in the country thinks it is their God-given right to take their daughters to see Taylor Swift and pay $35 a ticket and nothing more? 

You can try to sell a Taylor Swift ticket for $35, but if someone is willing to stand outside the stadium (like I used to do in the 1970s) and say, “Anyone got an extra ticket?” and when the holder of those $35 tickets says, “I have tickets. How much will you give me?” And the buyer says, “I’ll give you $500 for those two $35 tickets,” is there really a reason to stop that transaction, assuming there are willing sellers and willing buyers? 

Does the fact that there is now an electronic marketplace and a broker who stands between the transaction — we are not physically standing outside the stadiums anymore looking for tickets — change the nature of that transaction? The evil scalpers are selling the tickets to someone. If there’s no one willing to buy, the prices go down. 

Should we stop that kind of transaction, when we obviously allow it for every other transaction? There are coffee brokers. And gasoline brokers. And don’t even get me started about stock brokers. Why are ticket brokers suddenly the Darth Vaders of the brokerage world? 

The solution is to either 1) allow the marketplace to function based on supply and demand, or 2) demand that Taylor Swift and the others put on 10 times as many shows to satisfy demand, or 3) dramatically reduce the size of the fan base so most of the former fans could care less about going.

Which is why we went out for dinner that night in Miami, instead of going to hear Bruce.  

Growth of index investing is no threat to market efficiency, study says

Growth of index investing is no threat to market efficiency, study says

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, February 17, 2023.

Brendan McDermid | Reuters

Is the growth of passive investing a threat to the stability of the stock market? A new study says you shouldn’t worry.

There have been several very successful investing trends in the last 30 years. Two examples: the 401(k), and Exchange Traded Funds.

These are all important trends for investors. But even among those successes, the triumph of indexing, or investing in indexes such as the S&P 500, has to rank at or near the top.

“With more than $7 trillion tracking the S&P 500 alone, we estimate that index funds now encompass between a quarter and a third of the capitalization of the U.S. equity market,” Craig Lazzara, managing director at S&P Dow Jones Indices, said in a new study on the impact of passive investing on the market.

More assets, more enemies

No surprise, the largest group of detractors of passive investing is usually active managers.

They have argued that index ownership concentrates into a small handful of firms (BlackRock, Vanguard, State Street, etc.) that can have outsized influence on the markets. Some have argued that because stocks are indexed by market capitalization, passive indexing will push money into the largest firms, regardless of whether the companies are performing well.

Supporters of passive investing dismiss these claims. Tech stocks, for example, were far and away the largest stocks in the S&P 500 at the start of 2022, and indexing did not prevent them from getting clobbered last year.

Active traders still control prices

One argument, however, has attracted some academic interest: that indexing could become so big that there will not be enough “active” trading of stocks and that the markets will therefore become “inefficient.”

If there is any truth to that, where would a peak occur? Are there any signs that we are reaching “peak indexing”?

Lazzara makes an important distinction between passive assets under management and passive trading. While passive assets under management are growing, passive trading is growing very slowly and is only a tiny fraction of overall trading.

In fact, passive managers don’t do much trading. Lazzara demonstrated that, assuming passive managers own a third of all the market’s assets, active managers still do 91% of the trading.

Lazzara’s conclusion: “The valuation of index constituents is ultimately decided by active managers (and some factor indices) whose trades are motivated by their own research.”

Will passive make markets ‘inefficient’?

But what about the other part of the question: could passive investing become so big that it will overwhelm active trading and make the markets “inefficient”?

Remember, Lazzara concluded that active managers still do 91% of the trading. For the share of active manager trades to drop below 50%, Lazzara estimates that passive investors would have to own 83% of all the market’s assets.

That would mean passive managers would have to go from owning roughly 30% of market assets now to 83%.

“And even at that level, there’s no a priori reason to assume that market efficiency would be impaired,” Lazzara said.

In plain English: we are a long way from passive investors controlling trading, if such a level exists.

Still, assuming that if active management becomes less than 50% of trading, the markets may become “inefficient” is just a guess.

Is there a better way to gauge ‘inefficient’?

Lazzara says there is: “Presumably one of the indicia of market inefficiency would be a sufficiently large number of mispriced stocks, so that the value of successful active management would increase.”

In other words, active managers would presumably notice the huge misprice in stocks, would start buying and selling, and then active managers would start outperforming on a consistent basis.

Don’t count on that happening any time soon. S&P’s has been examining the performance of active managers for 25 years through their semi-annual SPIVA study. The results are overwhelming: 90% of all large-cap fund managers underperform their benchmarks over a 10-year period.

“The SPIVA reports show that over the past 20 years active managers are not doing better (as might be the case if markets were becoming less efficient) but if anything are doing worse than the market,” Princeton Professor Burton Malkiel told me. Malkiel has been a proponent of index investing for decades and is author of “A Random Walk Down Wall Street.”

Is this because active managers are stupid? Hardly. In fact, active managers have never been better. It’s just that the vast majority do not have any informational advantages over each other.

Passive investing has had the effect of culling that “herd” of active management even more, Lazzara told me.

“Money moves from the least capable active managers to passive investing,” Lazzara said. “That makes the remaining active managers better.”

More detail on what exactly caused NYSE's trading glitch on Tuesday

More detail on what exactly caused NYSE’s trading glitch on Tuesday

A trader works on the floor of the New York Stock Exchange. 

Peter Kramer | CNBC

NYSE President Lynn Martin and other exchange officials confirmed to CNBC that the root cause of the Big Board’s trading glitch at the Tuesday open was due to a manual error involving the Exchange’s Disaster Recovery configuration. 

After the 9/11 disaster, the NYSE was obligated to maintain a primary trading site (at the NYSE) and a back-up site (which is in Chicago). 

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On Monday evening, routine maintenance was being performed on the software for the Chicago back-up site. 

On Tuesday morning, the back-up system (Chicago) was mistakenly still running when the primary system (NYSE) came online. 

Because the back-up was still running, when the primary site started up some stocks behaved as if trading had already started.  

As a result, Designated Market Makers (DMMs) who would normally publish an opening auction print for each stock were prevented from doing so because the system operated as if an opening had already occurred.  This caused significant price dislocations and trading halts. 

Martin said the NYSE was looking into implementing stronger testing protocols. 

NYSE says Tuesday's trading glitch due to 'manual error'

NYSE says Tuesday’s trading glitch due to ‘manual error’

The bell at the NYSE

Source: NYSE

The day after a major trading glitch at the New York Stock Exchange open, the NYSE has issued a statement on what happened: “The root cause was determined to be a manual error involving the Exchange’s Disaster Recovery configuration at system start of day.”

That’s all they are saying. In plain words, it appears they tested a “disaster recovery configuration” that did not involve using the floor, and it did not reset.

That fits the facts as we know them.

Traders noted that both Designated Market Makers (DMMs) and floor brokers appear to have been frozen out of the order book that is used to build the opening print. No opening print was provided in dozens of big-name companies. “It was almost like trading opened without the participation of the floor,” one observer who asked to remain anonymous told me.

What we know is that dozens of stocks opened at prices well above or below their prior day closing prices. Most were halted shortly after the open under rules designed to damp down excessive volatility, and most reopened five to 10 minutes after the open at prices much closer to Monday’s closing prices. Many orders to buy and sell stocks did not make it into the order book that determines the opening price, and the opening auction print did not happen in those affected stocks.

The announcement by the NYSE late Tuesday that some trades that occurred right at the open would be busted, but others would not, added to the confusion. Many are trying to figure out how much money they may have lost yesterday.

NYSE's Tuesday trading glitch explained — Why some of the trades may be busted

NYSE’s Tuesday trading glitch explained — Why some of the trades may be busted

A trader works on the floor of the New York Stock Exchange. 

Peter Kramer | CNBC

The New York Stock Exchange experienced technical issues at the open Tuesday.  Dozens of stocks opened at prices well above or below their prior day closing prices. Most were halted shortly after the open under rules designed to damp down excessive volatility, and most reopened five to 10 minutes after the open at prices much closer to yesterday’s closing prices.

Stocks affected included big names like Altria, Mastercard, McDonalds, Uber, Wells Fargo, Verizon, Rio Tino, Shell, AT&T, Lilly, Mosaic, Wells Fargo, Nike, Nucor, Transocean, Prudential,3M, Newmont Mining, Southern, United Pacific, Sony, United Parcel Service, Altria, Valero Energy, Occidental Petroleum, Royal Dutch Shell, MetLife, Visa, Walmart, and Exxon Mobil.

The Big Board, owned and operated by the Intercontinental Exchange, later issued a statement saying “All NYSE systems are currently operational.”

Just prior to 11:00 a.m. ET, the NYSE issued a second statement: “The exchange continues to investigate issues with today’s opening auction. In a subset of symbols, opening auctions did not occur. The exchange is working to clarify the list of symbols. Impacted member firms may consider filing for Clearly Erroneous or Rule 18 Claims.”

“Clearly Erroneous” means the NYSE would determine that the initial prices in the stocks affected were not valid trades and the NYSE would determine that a later price would be the “correct” opening price. 

What happened?

Every day, stocks open at the NYSE at or near 9:30 a.m. ET.  There is only a single opening price, which is determined by thousands of orders to buy and sell individual stocks. These orders are aggregated into a single “book” for each stock that gauges overall supply and demand.  A single price is then quoted at the open and all orders are aggregated into a single opening “auction print.”

For whatever reason, it appears that many orders to buy and sell stocks did not make it into the order book that determines the opening price, and that the opening auction print did not happen in those stocks affected.

The effect was that many stocks opened on very low volume and due to a supply-demand imbalance opened at prices far away from their closing price Monday.

To give two examples:  Mosaic closed Monday at $48.35, but opened at $40.29, a drop of about 16%.  It was halted almost immediately, but reopened at 9:43 a.m. at $48.00.

Walmart closed Monday at $142.64 but opened at $159.88, a jump of 12%. It, too, was almost immediately halted and reopened at 9:40 a.m. ET at $141.51.

What will the NYSE do?

The NYSE has already hinted it may bust all the initial trades of companies affected when it said, “Impacted member firms may consider filing for Clearly Erroneous or Rule 18 Claims.”

This is the most likely path because many investors who, for example, put in a market order to sell Mosaic at the open this morning were clearly burned (it opened down 16%) and would likely threaten lawsuits if not made whole, since the price drop had nothing to do with the company or external events.

Most likely, the “correct” opening price will be the price when the stocks reopened.

So what happened?

The NYSE has not provided an explanation.  However, in the past these types of outages have been associated with software or security upgrades that caused snafus in the system.

On July 8, 2015, trading was halted for nearly four hours after the NYSE experienced what it called  an “internal technical issue.”   The NYSE later said, “The root cause was determined to be a configuration issue.”

In a separate event, faulty software brought down Knight Trading in August, 2012, in an incident which sent enormous amounts of erroneous orders onto the trading floor.  The incident forced to Knight to sell out to a group of trading firms.

“Nine times out of ten, these problems happen because of a software change in the system,” one market participant who asked to remain anonymous, told me.

Burton Malkiel on why his classic investment book, 'A Random Walk Down Wall Street,' is relevant 50 years later

Burton Malkiel on why his classic investment book, ‘A Random Walk Down Wall Street,’ is relevant 50 years later

This week, Princeton professor Burton Malkiel has published the updated, 50th anniversary edition of A Random Walk Down Wall Street: the Best Investment Guide that Money Can Buy.  More than any other book, it popularized the idea of indexing as an investment strategy and why you can’t beat the market. Malkiel was a close friend of Vanguard founder Jack Bogle and spent 28 years on the board of Vanguard. 

Malkiel will be on CNBC’s “The Exchange” today at 1:30 PM ET. Below are excerpts from a series of email interviews.  They have been lightly edited for style and clarity. 

You recommended index funds 50 years ago even before index funds existed. Do you still believe that and what is the evidence?

I believe even more strongly than ever that index investing is an optimal strategy and that index funds should constitute the core of everyone’s portfolio. Standard & Poor’s publishes annual reports showing how actively managed funds compare with index funds. Each year about two-thirds of active managers underperform an index fund. And the one third who outperform in one year tend not to be the same as the one-third who outperform in the next. When you measure performance over a decade or more, 90 percent of active managers are outperformed by a broad-based index fund. On average, active managers underperform the market by about one percent per year. 

You famously said stocks tend to follow a “Random Walk.”  What is a Random Walk? 

Random Walk means that the history of past stock market prices cannot be used to predict the future. Sometimes there is some momentum in the market, but momentum strategies do not work reliably, and prices change randomly. Sometimes value stocks and small-cap stocks outperform, but they can underperform for years. So-called “factor funds” have underperformed the market over the past 15 years. 

Despite the evidence, it seems most people don’t want to believe the evidence. Why can’t we accept that stocks follow a Random Walk?

People fool themselves when they see apparent patterns because streaks are more memorable than randomness. Even sports figures fool themselves into believing that the streak exists and that they have a “hot hand.” For example, behavioral psychologists have examined the basketball free throw records of college and pro players who believe that if they make a number of free throws in a row, they are more likely to have success in the next shot. The evidence is quite the opposite. A 50% free throw shooter has a 50% chance of success on the next shot no matter how many previous shots went in. 

You are a big backer of the Efficient Market Hypothesis (EMH), which says that asset prices reflect all available information. But you have pointed out this does not mean that prices are always accurate. Define EMH, what it says, and what it does not say.

Efficient markets do not imply that prices are always correct. Even if everyone valued stocks as the present value of future cash flows, the future can only be estimated. So prices are often “wrong.” EMH says that no one knows for sure if they are too high or too low. EMH admits that bubbles can exist but no one knows for sure how much they inflate before popping. Alan Greenspan suggested that the market was “irrationally exuberant” in 1996.  The bubble popped in 2000. Meme stocks like Gamestop sold at bubble levels but hedge fund Melvin Capital went bankrupt shorting them. The market may not be perfectly efficient and it may make egregious errors.  BUT IT IS EXTREMELY HARD TO BEAT. 

Exchange Traded Funds (ETFs), most of which are tied to index funds, are continuing to rake in money.  How do you feel about ETFs? 

I like ETFs if they are broad-based index funds. I do not favor the very specialized ones that really represent active management. I believe that the leveraged ones (such as three times the up or down movement of the market) are really gambling contracts, not investment products. 

Last time we spoke you said the next revolution after index funds is in investment advice. Most advisers charge 1% or more. When it’s done online it is 0.25%.  Are there any signs that the “advice revolution” is happening?

I think a revolution in investment advising services is underway, just as indexing itself was a revolution.  Investment advisors charge between 1 and 3 percent per year to manage portfolios for individuals. Software companies can do it effectively for 25 basis points for those who accept fully electronic management and 50 basis points for a hybrid model where you can also talk to a human being from time to time. I work with Wealthfront (a fully electronic) and Rebalance (a hybrid) investment manager. The electronic or computer managers can also provide direct indexing where the fund can efficiently harvest tax losses while maintaining a pre-tax exposure to the broad market. 

A couple years ago you wrote an op-ed in the Wall Street Journal very critical of ESG (Environmental, Social and Governance) funds, saying they were a “self-defeating strategy.” Since then, they have come under even more scrutiny. Do you still feel that way?  Why?

ESG funds promise that you can do good for society with your investments and do well financially at the same time. But there is no agreement over what is a “good” investment. Is a natural gas company good because it is the cleanest burning carbon and the bridge we will need for decades on the road to a carbon-free world? Or is it bad because it is a pollutant? Is a munitions maker good because it is providing Ukraine with defensive weapons or bad because its products kill people? Are Meta and Visa good because they are not major polluters, or are they bad because they can cause extreme anguish for teenagers and because they charge exorbitant interest rates to poor people? ESG funds also have high fees and they have been underperforming standard index funds. 

You have always preached of the benefits of a diversified portfolio.  What should a diversified portfolio look like?

Portfolios should be broadly diversified but will be different for people in different circumstances.Young people should dollar cost average by investing regularly and almost exclusively in equity index funds (60/40 stocks to bond for young people, is not appropriate). An investor in his/her 70s and 80s taking required minimum distributions needs a larger proportion of limited duration fixed income. 

The S&P was down almost 20% last year. In years when it has been down 20%, it typically bounces back the following year. What can we expect for stocks in 2023?

I do not make short-term stock market predictions. No one can do this correctly with any consistency. But cyclically-adjusted price-earnings multiples (CAPEs) give the best forecasts for long-run equity returns.  Today CAPEs are well above average. This suggests that returns over the next decade are likely to be below the 9%-10% long-run historical stock market returns. Investors then need to be modest in their expectations and consider that returns could be only half the historical average.

Two classic books on long-term investing are out in new editions

Two classic books on long-term investing are out in new editions

Burton Malkiel, a Princeton University economics professor, in New York, Jan. 26, 2010.

Julie Glassberg | The New York Times

Want to learn how to be a better investor in 2023?  Two classic books on long-term investing are out in new editions. If your New Year’s resolution is to learn more about the stock and bond markets, you cannot do better than to read these books. 

Here’s why every investor should read them. 

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This week, Princeton professor Burton Malkiel has published the 50th Anniversary Edition of A Random Walk Down Wall Street: the Best Investment Guide that Money Can Buy. It’s hard to underestimate the impact this book has had on the investment community. It was first published in 1973, and by the time I met Burton Malkiel in the late 1990s it had been in print for 25 years and was already an investment classic. More than any other book, it popularized the idea of indexing as an investment strategy and why you can’t beat the market. Malkiel was a close friend of Jack Bogle and spent 28 years on the board of Vanguard. This is all-new updated edition. 

In December, the Wharton School’s Jeremy Siegel published a new (6th) edition of his classic, Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. First published in 1994, Siegel examined stock and bond returns going back 200 years and concluded that, on average, stocks produced inflation-adjusted returns of 6.5%-7% a year, far outperforming bonds. This was a pivotal study that helped convince many that a simple buy and hold strategy was the best long-term investment. 

Two other investment classics round out my list of “must-reads” for long term investors. 

Common Sense on Mutual Funds by Jack Bogle (10th Anniversary Edition, 2009). Meeting Jack Bogle in the mid-1990s changed my life. It was a time of superstar investors like Bill Miller at Legg Mason. Bogle convinced me that: 1) for most investors low-cost index funds were the way to go, 2) the outperformance of the small (very small) group of active managers who did outperform was negated by the high fees they —charged, and 3) once you got the mix of assets right for your risk tolerance, the key was to stick with the plan and not freak out when markets dropped. More than anyone — including Warren Buffett — Bogle changed how an entire generation looks at investing. 

Winning the Loser’s Game by Charles Ellis (8th edition, 2021). Ellis founded Greenwich Associates, an international consultancy where he advised large institutional investors, in 1972 and, like Burton Malkiel, was on the board of Vanguard for many years. In 1975, he published an essay, “The Loser’s Game,” in a financial journal, in which he laid down his central thesis: “The investment management business (it should be a profession but is not) is built upon a simple and basic belief: Professional money managers can beat the market. That premise appears to be false.” In 1985 he expanded the article into a book, now called Winning the Loser’s Game: Timeless Strategies for Successful Investing. This book came to distill much of the wisdom that Malkiel, Bogle and Siegel had separately published on beating the markets, the efficient market hypothesis, market timing and asset allocation. 

Like Malkiel, Ellis urged investors to diversify into low-cost index fund investing, which was a radical idea because there were no low-cost index funds at the time! 

The market eventually caught up with Malkiel, Siegel, Ellis and Bogle. Not only did Jack Bogle launch the first successful index mutual fund (based on the S&P 500) in 1975 but, 18 years later, the first Exchange Traded Fund (ETF), also based on the S&P 500, was launched. Investors now had not just an index fund, they had a low-cost, tax-efficient wrapper they could buy it in. 

Since then, “The Index Revolution”, as Charley Ellis called it, has only grown. ETFs are now a nearly $7 trillion business, and closing in on the shrinking mutual fund business. For investors confused by the constant noise and the need to “do something,” these books provide a calming antidote. 

Note:  Burton Malkiel will appear on CNBC’s “The Exchange” this Friday at 1:30 PM ET.

SEC pushes ahead with slate of proposals to boost corporate reporting, disclosure requirements

SEC pushes ahead with slate of proposals to boost corporate reporting, disclosure requirements

A flag outside the U.S. Securities and Exchange Commission headquarters in Washington, D.C., U.S., on Wednesday, Feb. 23, 2022.

Al Drago | Bloomberg | Getty Images

While Washington is consumed with the elections next week, the Securities and Exchange Commission is continuing to consider numerous rulemaking proposals that could significantly increase the reporting and disclosure requirements of corporate America.

The SEC is considering two proposals Wednesday. One would adopt additional rules around how companies report proxy votes. Among other measures, the proposal could require funds to categorize the votes so they are easier to find and provide the vote outcome in a machine readable format.

A second would address the redemption of mutual fund shares and address the liquidity needs for funds when there are significant redemptions.

These are fairly technical proposals. However, SEC Chair Gary Gensler has more than two dozen other proposals that are in final rule stage, meaning the agency is still considering public comments, but they could be voted on and adopted sometime in the near future. These include pay vs. performance, climate change disclosure, cybersecurity risk governance, proxy voting advice, share repurchase disclosures, money market fund reforms, short sale disclosure reforms, and the loan or borrowing of securities.

These proposals are moving slowly from the “proposed” stage to the “adopted” stage; all or part of his agenda could be adopted in 2023.

If there is a single theme emerging from the SEC under Gary Gensler, it would be that he is seeking many new rules that would provide increased disclosures for everything from climate risks to private equity. Gensler has said this would increase market transparency.

Republicans disagree. There is likely to be vociferous pushback on more controversial proposals such as climate disclosure.

The elections next week are unlikely to change that. While the Republicans could harass the SEC by calling for more hearings next year, or could also refuse to authorize the higher SEC budget Gensler has pushed for, he has a 3-2 majority and will continue to maintain that edge into 2023.

However, Republicans could turn to the courts. It’s key to remember that last June, in West Virginia v. Environmental Protection Agency, the Supreme Court ruled that the “major questions doctrine” limited the scope of powers that Congress granted to the Environmental Protection Agency under the Clean Air Act. The Supreme Court said that Congress must provide clear direction to the EPA, not just a broad delegation of power, to regulate greenhouse gas emissions.