PFOF. Refresher on Payment for Order Flow.

• https://www.bloomberg.com/opinion/articles/2022-08-25/some-free-brokers-are-cheaper-than-others
• https://www.bloomberg.com/opinion/articles/2021-02-05/robinhood-gamestop-saga-pressures-payment-for-order-flow

• Prereq: Remember (loosely) a public exchange (eg NYSE) = specialist = receives all bids and asks and matches them, like an order book matching both sides. A market maker (eg Jane Street) = wholesaler = holds assets themselves to provide liquidity, posts both the bid prices and ask prices themselves, then manages (many) single-sided transactions against their inventory.
• Key piece: The randomness of the retail investor, expecting the trade decisions to be more on the uninformed side. Most positions traded directly with the exchange are (more than 50% coin flip) informed, and therefore the market maker acting as a middleman to fill bids and asks would (more often than not) LOSE money as the market moved. The trade was smart (usually large, and by institutional investors), and happened before the asset moved in the undesirable direction, so the wholesaler who intermediated the transaction lost money. Because of this, spreads between bid and ask on public exchanges are quite large.
• So brokers like robinhood will work directly with market makers like citsec. They give the buyer a lower price, give the seller a higher price, pocket a bit of the difference, and give a bit back to the broker for sending them the execution. As long as those 4 sum up to less than the spread on the public exchange, all 4 parties win (by cutting the exchange out).
• Assuming the public exchange bid/ask spread is 15 cents, and the wholesaler spread is 5 cents, the actual distribution of the remainder is about 80% price improvement for the retail buyer/seller, and 20% PFOF back to the broker. So the broker makes 2 cents (PFOF), the retail buyer and seller make about 4 cents each (compared to if their trade was executed on an exchange), and the wholesaler makes 5 cents (the spread).
• Obviously, the naive assumption is that WITH this flow, the market maker will front-run your trade, make money, and give some back to the broker. So those 2 parties benefit, and the retail investors (buyer+seller) have been shafted. This has been disproven many times empirically (every study on PFOF price improvement) as well as lawfully; the SEC polices this explicitly.
• This kickback to the broker is also what allows them to subsidize the fees, making transactions free. Another benefit to retail. Without PFOF, we’d have to pay commissions again.
• Fun fact: this study found citsec provides the best price improvement for the retail investor: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4189239. Tell that to reddit…
• Why don’t all orders go through wholesalers then? Institutional investors will always exist to make better-informed trades. These have to go somewhere. Exchanges bear the majority of this volume, and its associatively higher risk (for the exchange), so the spreads in that location correspondingly increase.

• Some random research today along with some review of basics.
• Hidden Road (https://hiddenroad.com/) offers financial services: prime brokerage, trading, loans/financing options, clearing, fx, more. They do fiat but mostly crypto.
• Remember recourse loans. Say the lender collects ALL the collateral after the borrower defaults, but the collateral is now worth less than the loan value. Recourse means that the lender can go after the individual for the remainder. They’re personally liable to make up the remainder (wages, other accounts, home, whatever).
  • Nonrecourse just means that only the collateral is up for claim.
  • Recourse loans have lower rates. So lenders want recourse for risky individuals, whereas they’re fine with non-recourse for good borrowers bc they get more interest.
• Marc Rich: https://en.wikipedia.org/wiki/Marc_Rich. Alleged criminal, tax evasion, wire fraud, racketeering. Was a trader, pm, etc.
• SharesPost was a PE marketplace. They were acquired by Forge.
• SecondMarket was a PE marketplace as well. They were acquired by NASDAQ, becoming NASDAQ Private Markets (NPM). SharesPost was in the original deal, but ultimately it became just NASDAQ.
  • https://www.nasdaqprivatemarket.com/
• Bloomberg Wealth with David Rubenstein.
• Remember the simple differences of debt financing vs equity financing. Say your company needs money to grow. Debt = taking out a loan. Equity = standard investor round, giving stock for money.
• LIBOR = London Interbank Offered Rate. It is an interest rate which (international) banks use to lend to each other (which is what the FED uses to increase/decrease rates, since it trickles to the rest of the economy). It is the benchmark for interest rates globally.
  • Until being phased out in 2021 for the better SOFR = Secured Overnight Financing Rate.
  • SOFR is at 2.27% today. There have been step jumps corresponding to the fed hikes this year so far to manage inflation.
• Risk Weighted Assets = RWAs. Total assets, but proportional to risk. For example: a US treasury bond is less risky than a credit card.
• Basel III is an accord to prevent insolvency; regulations for stuff like reserve capital for banks internationally. Basel IV will come out in 2023.
  • Tier 1 Capital is the primary reserves, used for business activities and clients. Usually it’s cash and equity. It’s the most liquid. CET1 (Common Equity Tier 1) is the primary portion of Tier 1.
  • Tier 2 Capital is basically the misc bucket of last reserves. It could be many different types of instruments, but all less liquid and less reliable.
  • All of Tier 1+2 reserves must be >=10.5% of all RWAs.
• Remember equity/stock warrants are basically just options. Few differences:
  • They’re issued by the company. Not just traded on a secondary market.
  • Usually used for the company to raise money, not give away existing equity.
  • When a warrant is exercised, new stock is created (which dilutes the existing).
  • They’re longer term.
• NAV financing. Net Asset Value.
  • It’s when you borrow against your own portfolio, basically.
  • Say I run a decent-sized PE fund. Pledge that as collateral to take out a loan that I put back into the fund?
  • Can be used to distribute liquidity back to LPs right away, invest in new opportunities, etc.
• Arch Labs (https://archlabs.com/) is an admin/manager for PE. Helping with investments, connecting with the back office teams, assisting taxes, whatever.
• Remember that the ability to unstake eth will not be ready until a release after the merge. This is the Shanghai upgrade, and could be a year after 2.0. You can still unstake through all the liquid staking services like lido. They give you a synthetic that you can convert back to the main asset (effectively withdrawing).
• Tokenized stock revisit.
  • Remember you get all the benefits of blockchain/crypto/web3 with the backing of fiat assets: can trade 24/7, FEX, move around at will, without coordinating with other humans, fractionalize to whatever resolution you want, etc.
  • Caveat – different tickers on different exchanges (although could happen with fiat too).
  • You get tons of infrastructure for free: voting via DAOs instead of shareholder/board meetings, dividends via streaming protocols instead of fiat payment rails, more.
  • Existing marketplaces: FTX and Mirror.
  • Sounds like Templum (https://www.templuminc.com/) is looking to provide something like marketplace-as-a-service and they support tokenized stocks as well.
• Activated business cards for Mahlstedt LLC and submitted (1) membership authorizations to manage the accounts (2) substitute w-9 for business signature card. Since I’m platinum honors tier, there will be no monthly fees. Activated online banking and set up automatic payments.
• This round of student loan relief will cost govt ~300b.

• Acervus Securities is the name of Addepar’s marketplace: https://addepar.com/blog/introducing-marketplace (ASIM = investment manager)
• Celebrate failures to encourage speed; only at the beginning of the company. https://blog.southparkcommons.com/move-fast-or-die/
• I constantly yawn during the fast (sympathetic) portion of wim hof breathing. This is not uncommon.
  • I’m up to about 3-4 minutes for the exhale breath hold (parasympathetic) portion.
• Equityzen.
  • Create an SPV. Buy large blocks of PE and move into the SPV.
  • Issuers/companies are ok selling these blocks of shares because they know EZ. The model is known and friendly. The company can control the total equity. They’re ok with EZ on their cap table in X amount.
  • EZ then splits the SPV into units, selling to PE buyers on their secondary marketplace.
  • EZ has info asymmetry though; they control everything through their platform.
• If a lender/investor/fund holds an asset, it can usually be rehypothecated. Leverage again for the holder’s own purposes to get secondary yield. This is much harder to do with illiquid assets (like PE), making them (relatively) less attractive collateral classes.
• Adjusted butcherbox, basically making my regular orders everything that’s mass-efficient (~3lbs in each of my 6 slots, plus free 2lbs ground beef, yielding a total of 18lbs of meat for $170/mo or ~$10 per meal). Then go to member deals every month for the good stuff that’s not mealprep.
  • Regular 6: chicken breast 3lb, thigh 3lb, pork loin roast 3lb, butt, 3.5lbs, salmon 2lbs, cod 2lbs.
  • Overall this service actually isn’t cheaper; $10 for a pound of raw meat is not good. I’ll probably cancel soon.
• About 1 in 3 business owners in the US partner with BoA Business.
• Quid’s second fund totals $320M for PE shareholders to borrow against and was led by Oaktree, Davidson Kempner, and some northeast ivy league endowment. They’ve loaned against Palantir, Uber, Lyft, Unity.
• To retitle your home and transfer the deed over to the trust, it costs a few hundred.
• Joe Lonsdale, GP at 8VC: https://www.linkedin.com/in/jtlonsdale/. Was at addepar for a bit, was cofounder of palantir.
• Midjourney, stable diffusion, dall-e. Feed the AI engine a few words/phrases (prompts) and it outputs an image. Crazy tech nowadays. https://twitter.com/fabianstelzer/status/1561019187451011074

Debt: Borrowing Against Assets

Very basic review.

Approach	Details	Net after 1yr
You earn $1m in a year in w2 salary.	You pay standard income tax on it. Effective tax rate is about 50%.	+$500k
You earn $1m in a year as RSUs/grants.	You pay tax on that as income (when it vests), so ~same as case 1.	+$500k
You earn $1m in a year as options.	You pay to exercise the options, and you pay AMT. Totally depends on strike price, purse size, many factors – but assume the company is appreciating, and you’re willing to eat the basis for future gains. Assume a pretty similar net expense as cases 1 and 2.	+$500k
You take out a $1m 1yr loan against your assets (assumes, of course, you have ~3x collateral).	Say 10% interest. You pay 0 tax on it. Then you pay the principal+interest back.	-$100k

But note too in the loan case: you take out the loan not to sit there, but to use. So you only have illiquid PE and have something expensive to handle, and your next tender offer is 2 years away. So you basically get to advance your paycheck of the stock sale, at a 10% hit. The sale of asset X is usually a gain, so you’re taxed on that exit, but let’s ignore that too (maybe it’s cash).

You don’t “pay yourself with debt” – instead:

1. Debt can be used as necessary when the rest of your portfolio is temporarily illiquid and you need liquidity.
2. Debt can be used at will when your investment strategies can outperform interest rates.

Obviously, credit cards are used for these exact two purposes. Short-term loans. #1 as (basically) a paycheck-forwarding system. And #2 because interest is 0 if you pay it off every month. So any strategy (rewards programs, cashback) outperforms interest (if you pay it off).

Mortgages qualify for this as well. #1 because houses are usually SO expensive that you are not liquid enough in the first place. You’re forced to borrow. But even in the cases of wealth, #2 is applicable because the borrow rate is cheaper than the longterm investment market (most people can beat 3% over time).

Leverage is probably the most common case, outside of standards like cards/houses. This is purely #2. You can beat the borrow rate, so you magnify your position to increase returns. Used to grow quickly (personal portfolio, business, whatever) by adding risk.

• Merge exposure just through ETH; checked LDO and AAVE, which trend the same (and proportionally-ish).
• Changed a few credit due dates to 1st to keep everything in sync.
• Kiwi and Virgin Atlantic never got back to me about the cancelled+unrefunded flight. $607 on June 7, BCN-JFK (remember the replacement was Iberia June 25 $821). Since the merchants never responded, I disputed through Chase. They gave a $607 credit back. If Kiwi doesn’t reply in the next few weeks (Sept sometime?), it finalizes.
• Booked Florence hotel to start the oktoberfest eurotrip.
• Addepar meeting.

• Irish markets.
  • ISE = Irish Stock Exchange. Euronext Dublin and Euronext Growth. ASM = Atlantic Securities Market.
• Cayman Islands.
  • Leading offshore jurisdiction to form mutual+private+hedge funds.
  • CSX = Cayman Islands Stock Exchange. 
  • Regulated by CIMA = Cayman Islands Monetary Authority.
  • No corporate tax on money earned outside of the cayman islands.
  • Lots of multinational corporations have their subsidiaries based there as a tax haven.
  • Sidenote – residents of the cayman islands have no income tax, no property tax, no cap gains, more.
  • Their govt gets most money from duty fees on imports. Offshore corps also pay an annual licensing fee.
• Economic Interest vs Ownership Interest (Equity Interest).
  • A standard loan is perfected when the lender has a security interest on the pledged collateral (eg a certificated stock).
  • When the vehicle is an LLC, it’s more complicated. Might not be certificated, might have a conflicting operating agreement, etc. In these cases, a UCC-1 is most commonly filed to perfect the interest. 
  • The explicit difference: an ownership interest is when you have a lien on the equity itself. You may claim the shares. They’re yours to possess. An economic interest is a profit share: you get the dividends, revenue, interest, distributions, yield, whatever is produced from the equity but not ownership of the equity itself. It’s like being an investor in the LLC instead of being the owner.
  • An economic interest can be converted to an equity interest (think: the lender gets full ownership of the shares at IPO).
• Investment Company Act of 1940.
  • Response to 1929 stock market crash. Updated by dodd-frank in 2010.
  • Primarily defines the SEC regulation of mutual funds.
  • Practically: Defines what sorts of disclosures and filings that investment companies must publish, protecting the public and ensuring proper enterprise.
  • Policies, penalties, rules around shorting, lots of contents. Short summary: you don’t want to qualify as a mutual fund.
• Bridge loan, remember: existing investors extend a bit more runway before the next round.
• Connected accounts for Mahlstedt LLC.
• >10 calls for the startup, lots of productive work today.
• Eth merge.
  • Sept 15. PoW -> PoS. Reduce power reqs by about 2 orders of magnitude.
  • Merging the existing chain with the beacon chain for golive. PoW nodes will still run, with increasing transaction times to organically sunset that network.
  • TPS from ~15 to thousands.
  • Eth value itself projected to increase on success, of course. Lots of ESG-focused minds will approve. Easiest way to gain exposure is just increase eth holdings.
  • Other ways to piggyback:
    • Since staking is now possible, liquid staking protocols will see a lot more activity. Lido, for example – LDO should rise.
    • Borrow rates will increase substantially. So depositors in lending pools will see increased interest yield. Supply these. Or just hold something like AAVE for general lending sentiment.
  • There are lots of trash articles out there. This one is pretty good: https://newsletter.banklesshq.com/p/ethereum-merge-investing-strategy-eth

• Research in irish markets, cayman funds, economic interests (not ownership interests), mutual funds and the investment company act of 1940, more.
• (obvious, but explicit) Hard assets are tangible assets with value. Property, cars, etc. Hard lending (or hard money lending) is typically short-term, secured by hard assets, and lending by private (not bank). Most commonly used by property flippers, pledging one property as collateral to buy another.
• (again, obvious) Market makers profit from the spread. Your order book is not just lists of user bids and asks, matched 1:1; you as the market maker are half of every match. You set the bid and ask prices (algorithmically, market-influenced), then match yours with users’ complements. That’s how you profit from the spread.
  • There’s obviously risk there in the asset losing value. The market maker is holding the whole inventory, assuming the risk, justifying the fee for profit.
  • They may provide the original stock inventory, but obviously as more people join the platform (with more stock, cash, eg), the depth of the market/liquidity grows.
  • You may forward to other markets, PFOF, auction…many different structures. NYSE is a specialist, a type of market maker.
  • A broker is different. It’s upstream. It is authorized to buy/sell securities for a user, but is not primarily responsible for creating the depth/liquidity. That’s the market maker.
• Stochastic modeling.
  • Just like the monte carlos of SpaceX for landing. Numerically simulate all permutations of all random inputs to determine the actual probability of outcomes.
  • Can be used to calibrate an investment size. Can be used to structure a loan. Maybe difference applications in finance.
• Mahlstedt LLC.
  • The checking account (+debitcard) was approved. The credit line (~25k) was as well. Will arrive soon. Got into online banking. Many other business services I can add later.
  • Linked everything, added to trackers, planned out early cashflow+rewards, more.