Sean Park Portrait
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Articles tagged 'brokers'

FX 2.0

Over 30 years ago, an ambitious and smart young man decided there was a fantastic market opportunity to provide convenient, (relatively) better value physical foreign exchange services to travelers. Bretton Woods had recently collapsed ushering in floating exchange rates and the age of global trans-continental travel was gaining momentum. Leaving a fledgling career in investment banking at the age of 24 to become an entrepreneur, Lloyd Dorfman opened his first Bureau de Change in Holborn and founded Travelex in 1976. In 2005, Apax Partners bought 63% valuing the firm at almost £1.7 billion. Since then they have continued to prosper and grow, buying Ruesch in 2007 and expanding their presence in the corporate FX services market. In their last published accounts (for 2007), Travelex posted an EBITDA of £107 million on revenues of £540 million. It’s a great story and I’m sure a case study on successful entrepreneurship in business schools around the world.

Despite their success – indeed inspired by their success – we think there is an exceptional opportunity to build a new breed of FX broker – a business that from it’s inception is built upon a foundation of 21st century technology. A business that not only embraces transparency but is predicated upon it. A business that leverages the cost advantages afforded by having a modern web-based infrastructure to profitably offer better value – both prices and service – to its customers. A business that recognizes the underlying similarity of retail and institutional business but is cognizant of the subtle but important differences in what these customers need. And that is why we are so pleased to be founding investors in FX Capital Group who we believe will bring a fresh approach to an enormous and growing market in foreign exchange payments. FX 2.0 if you like.

FX Capital Group

Using the same infrastructural backbone, FXCG will offer foreign exchange and international payments via two complimentary channels: FX Capital Group for corporates, trust and equity brokers and RabbitFX for individuals. They launched privately last fall and are now in public beta, trading by phone and email with most of the account opening process automated. Later this year, they will be rolling out a fully automated (account opening, trading) web-based platform supported by an expert and experienced sales/account management team. From the start, they offer a couple of compelling advantages:

  • Excellent and – importantly – fully transparent pricing; typically their prices are up to 4% better than high street banks and up to 2% better than specialist FX brokers. When you trade, you see exactly where they have traded on the wholesale market and a detailed breakdown of the markup. And if you are a potential customer that wants to ‘kick the tires’ and see just how much you would have saved on your past FX purchases by trading with FXCG, if you know the rate, the date and better yet the approximate time you dealt in the past, FXCG will give you an audit report highlighting the difference between the price you traded at and what you would have got with them.
  • They offer 40 currency pairs, more than any other broker, meaning for the vast majority of customers that you can do all your business in one place.
  • Minimum trading size of just £100, facilitating trading for almost any need, without discriminating against modest size transactions.


As if this wasn’t enough, the company has a number of other exciting product and service offerings in the pipeline already and indeed the capital they have raised will allow them to accelerate their build out having refined and developed the business plan over the past 18 months. Of course, the traditional point of view might ask why not wait a few months until all the main platforms and services are ready to go live, but we support the founders in the belief that the best way to build a business that is relevant to your customers is to start doing business and build-in strong feedback loops with your early adopters to help guide development and investment priorities. Indeed this is par for the course for many technology startups, and is an approach we used to great effect (despite a lot of initial resistance) in Digital Markets at DrKW, where as it happens Nigel Verdon – the founder and CEO of FX Capital Group – worked with me as COO of that business.

Not only do we think the business opportunity is vast, and have first hand experience of the founders’ ability to deliver, we are also a customer. We are in the process of opening up our corporate account and personally I have been a guinea pig for Nigel and his team for over a year now. Previously I did my FX business with my bank and then exasperated by the ridiculous mark-ups and complete lack of commercial sense, I moved my business to HIFX. While the pricing was better (in a one-eyed-man-is-king kind of way), and the service was friendly and competent, it was still a pain in the ass to trade with them. Obviously, although admittedly I’ve almost certainly benefited from an enhanced personal touch from RabbitFX as an alpha customer, the experience has been excellent and refreshing. Let’s just say I no longer cringe when I need to make an FX payment. And it will only get easier. I can highly recommend them – if you are the early adopter type sign up now. If you like to wait for the initial bugs to get worked out of the OS, sign-up later this year when they launch their fully automated platform.

We talk a lot about the new technology ecosystem that allows startups across a variety of industries to build and run their companies more cheaply and efficiently – cloud computing, SaaS, mash-ups, widgets, etc. And indeed it is fantastic and transformational. But typically (although not always) this focus tends to ignore the non-tech / non-UI/UX, mundane aspects of running a business: finance, accounting, and – especially for European companies – foreign exchange! With this in mind, I would encourage the young vibrant startups and companies to have a look at FX Capital Group for managing your foreign exchange payments – not only are they the best value, I think you’ll find a company with a similar ethos and culture, open to suggestions, admitting when they could do better and working hard to make you happy. Further for any businesses that have foreign exchange at the heart of their value chain – travel related businesses are an obvious example – think about offering your customers an integrated one-stop shop for their FX needs via a white label implementation of FXCG’s platform.

Travelex succeeded because it was innovative, opportunistic and agile and they competed against on the one hand large and lethargic banks and on the other hand a fragmented sea of small, local private operators. We think FX Capital Group can build on this example and drive the next phase of innovation and growth in this enormous and important market. Hat tip to Lloyd for the inspiration!

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More on markets for tickets.

Maybe it’s just confirmation bias, but I seem to be noticing a lot more news and commentary on secondary markets for tickets to live events.

The Sports Economist draws attention to an editorial over at ESPN:

TMQ’s Gregg Easterbrook, after a sensationalized introduction, asks an interesting question:

On Monday, sellers on StubHub were asking from $750 up to a rather comical $164,710 for tickets to the Ohio State-LSU game (the latter price is for a prime luxury-box seat). The season finale Giants-Patriots NFL game might be historic; on Monday, sellers on StubHub were offering tickets for $200 up to $26,000, depending on seat location or box quality. Once the NFL playoff pairings are known, scalper Web sites will come to life for those contests, too. The asking price is not always the selling price, of course. But bowl committees and NFL teams must be saying to themselves — if these seats really are worth hundreds or even thousands of dollars on the free market, we should be the ones pocketing that scratch. How long will it be until professional teams cut out the middle person and simply auction off tickets for whatever the market will bear?Any day now, the NFL is expected to announce a deal to affiliate all its teams with one online reseller, probably Ticketmaster or StubHub, formally acknowledging reselling as legitimate and bringing the NFL an expected annual fee in the $20 million range. This might be just the first step in converting sports-ticket selling into StubHub World.

If one thinks of tickets like shares of stock, it is unlikely that franchises will initially place 100% of each season’s seats by an electronic auction mechanism. But what percentage will be “placed,” and what percentage will be auctioned?

I think rich people in particular are willing to pay to sit in the same spot (“their” seats in some sense) near others that they recognize. The latter component may be modest, but it might also account for the some of the interest in prosecuting scalpers in the old days. Legal reselling increasingly puts that component at risk. This is a stretch, but one way of interpreting laws against scalping is that clubs didn’t mind you selling tickets to your friends, just any old high bidder.

Meanwhile, Fortune recently did a profile piece on Live Nation‘s CEO Michael Rapino:

But Rapino isn’t satisfied with dominating the concert business. He is mounting an audacious attack on the record labels and seeking to poach their most important assets – their stars – by turning Live Nation (Charts) into a one-stop operation that handles their every musical need. His offer: We already operate your tours. Why not let us make your albums, sell your merchandise, run your website, and produce your videos and a range of other products you haven’t yet thought of? This is the age of the empowering Internet, after all. Artists are in charge. Who needs a record label?

Depending on whom you believe, Rapino’s strategy will either reinvent the ailing music industry and turn Live Nation into a powerhouse – or cripple his company. Certainly it’s brash talk for a concert promoter whose toddler-aged company has never put out a single record. But artists have been listening closely since Rapino landed a giant catch. In October he struck a first-of-its-kind deal with Madonna, who bolted her longtime label Warner Bros. and signed a ten-year contract estimated at $120 million to let Live Nation handle every part of her business except publishing.

For what it is worth I think they’ll make money on the Madonna deal, even without attributing a value (which is certainly non-zero) to the marketing/business development angle of this innovative and high profile deal.

For more of my thoughts on how I see these markets developing over time, I refer you to a few earlier posts:

Now, I just need to figure out how best to get involved… 😉

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This just in: Google pre-IPO shareholders owed upwards of $35 billion

Mountainview, CA – Having sold almost 20 million shares in 2004 at $85, and then another 14 million shares at $295 in 2005 (not too mention various block sales over the years), and with shares now trading at over $700 this represents almost $19 billion of lost value. In addition, since the IPO there have been roughly $3.4 trillion of transactions in Google shares on the secondary markets. Obviously it is unacceptable that not a penny of this is returned to the founders and employees of Google. While acknowledging the benefits that the secondary share market offers to investors and companies alike, and admitting (belatedly) that ‘it does not make sense to criminalize Nasdaq’, to redress this shocking state of affairs, the founders’ agents have suggested that they would be willing to authorize it against agreeing to a levy on all transactions. Set at 1% for example this would amount to returning approximately $35 billion to the Google entrepreneurs and their backers. “And this is just one company! Think of all the other entrepreneurs and venture capitalists that have heretofore been exploited by the maverick and rapacious stock market operators,” said Jim Smith of the recently formed Re-sale Rights Committee of the Santa Clara County Chamber of Commerce.

OK, so I made the preceding article up. But, it makes sense right? After all it’s only fair. At least that’s the view of the (always-ahead-of-the-curve) entertainment industry as reported this week in Variety (thanks to Dom for the pointer):

“The secondary ticketing market offers benefits to music fans and the live music industry alike. It does not make sense to criminalize it,” said Resale Rights Society chairman-elect Marc Marot, manager of Yusuf Islam and Paul Oakenfold, and former chief executive of Island Records. “But there are real issues of consumer protection here, and it is unacceptable that not a penny of the estimated £200 million ($413 million) in transactions generated by the resale of concert tickets in the U.K. is returned to the investors in the live music industry. Where this trade is fair to consumers, we propose to authorize it by agreeing to a levy on all transactions.

“The online ticketing exchanges have consistently claimed that they wish to work with artists and the live music industry. This society presents them with that opportunity.”

I won’t go into it again in detail (see here and here) but it strikes me that instead of vainly trying to preserve an outdated business model by desperately looking to slap taxes and rents on anything that moves, artists and their agents should be looking to embrace the long proven and manifest advantages of robust, liquid and transparent markets to reduce their risks and refine their pricing. Every syndicate manager knows that having good secondary prices makes their job 100 times easier and – while certainly not the only factor – forms the foundation of the primary market pricing algorithm. And as the traditional securities markets become ever more sophisticated in their use of automation for primary distribution, perhaps the resulting marginalized and surplus syndicate managers should consider plying their skills in the market for live event tickets. The right way to help artists garner the true market value of their talents is to well, let the market work!

And lest anyone in the securities industry feel too smug about how much more enlightened they have always been, remember how Stanley Ross was enemy number one for many in the square mile when he pioneered gray markets 30 odd years ago, and as little as 5 years ago (still today in the US & in Equity markets) electronic bookbuilding platforms were not exactly met with a warm embrace…to use one of Pip Coburn’s favorite quotes on change (Machiavelli):

“… nothing is more difficult than to introduce a new order. Because the innovator has for enemies all those who have done well under the old conditions and lukewarm defenders in those who may do well under the new…”

Ticket & Markets, Part 2 (Copy, paste…embrace the inevitability)

In Part 1, I contended that:

…efficient organized markets in tickets for events have not been allowed to develop despite the fact that: (a) the existing market structure is horribly inefficient to the detriment of both buyers and sellers and (b) a vastly more efficient, tried and tested, robust market structure which could very easily be applied to ticket markets already exists and furthermore, especially given modern web technology would be easily adaptable to ticket markets.

As I also noted, I’ve been thinking about this for some time, but was catalyzed to comment by reading two articles. The first (behind the FT’s ridiculous paywall, yet another industry to be deconstructed and rebuilt!) was an editorial by Joe Cohen on secondary ticket markets sparked by the massively over-subscribed Led Zepplin reunion concert. The second was a post by John Wilson also on the subject of secondary ticket markets.

Basically they both point to the fact that secondary markets for tickets exist (despite laws and restrictions against them; these only serve to make them work badly…) and that this is a contributing factor to unnecessarily disfunctional primary markets:

(Joe Cohen on the sale of Led Zepplin tickets, FT Sep 21, 2007)
The circus that has ensued would dent anyone’s confidence in promoters. A crashed website, a ballot with a window of less than a week to enter and no guarantee of a ticket at the end of it. Add to this, of course, the blood-spitting opposition of such promoters to reselling your ticket if you turn out to be unable to attend. “Be patient,” was the concert spokesperson’s answer to the debacle. Be realistic, is my response, and look to the US for a healthier way of ticket allocation.

(John Wilson on getting tickets to the Police concert)
Where to get tickets at this late stage? Well, at this point I did some digging around and was astonished by the results.

– Ticketmaster still had tickets at £90 face value plus booking fee of over £10.
– Seatwave and Viagago, as well as similar ticket trading exchanges had an abundance of tickets. These were trading at an average price of £112 on top of which had to be added Seatwave charge on the buyer of £15 or so. This was for tickets and not hospitality packages
– ebay also had lots of ticket on buy it now and auction. All were evidently looking for a premium.
– Gumtree also had an abundance of tickets, but these were mostly at a discount to face value eg £90 tickets for £45

Why such a wide variety of prices for a relatively homogeneous item? Moreover, if there were still tickets in the primary market (Ticketmaster), why would anyone pay a premium in the secondary market?

Well, there are several factors to consider
– I bothered to search; some people don’t bother to scan the many “trading venues”
– trust; I trust that Ticketmaster has the genuine article. Seatwave & Co have refund policies (assuming you believe that they can honour them) and assurance re delivery. ebay has a ratings system. Gumtree is dealing in the wild west with persons unknown as is the case with other websites advertising tickets.
– time to “expiry”. As the event approach, people become more desperate to sell which can quickly drive down prices if there is an abundance of tickets evident. But even if scarce, you still want rid of them in time. Some people “blink” sooner than others.
– booking fees can add a considerable premium onto the price, so some tickets advertised above “face value” simply reflect attempts to recoup booking fees.

Much to the ticket industry’s annoyance, there is clearly an active secondary market, but despite their lobbying efforts, the UK Govt is loathe to outlaw such markets, questioning why live entertainment should receive special concessions and how is the consumer harmed by the current situation.

As I pointed out in Part 1, and is implicitly underlined by these two gentleman, a healthy – transparent, liquid, well-regulated – secondary market adds enormous value to the price discovery and distribution process of any (transferable) good or service. So why is their so much resistance to free and fair secondary markets in tickets? Well, last year at the futures industry’s annual Burgenstock conference I was speaking on a panel – discussing the future potential of markets in sports risk – and the conversation gravitated towards the question of why so many people seemed to have such a hard time seeing the potential for new types of markets and, worse, why they should not stand actively in the way of these developing. A gentleman in the audience reminded everyone (I for one had not been previously aware of this historical gem) that in the early 20th century – and then especially from the period starting with the “Great Crash” and lasting until the early 1960s, secondary markets in equities were seen by much disdain by many in the establishment and were at best tolerated and at worse actively argued against. In this context, the NYSE was seen as a second-class citizen in the financial firmament and traders and speculators in shares were considered an untouchable caste by the brahmin bankers. The moral of the story: that resistance to change and the dispersal of power engendered by transparency and access to information have been resisted by the “gatekeepers” since the beginning of time. (Just ask Martin Luther!) Equally, this resistance has always proved futile and those that embraced transparency and change, usually not only survived but prospered in the new paradigm. (The mystery is why the strategy of active immobilism continues to find disciples given its horrendous historical track record of inevitable failure…I’ll leave that one to the sociologists amongst you!) Perez would frame this situation as a disconnection of the techno-economic paradigm (what is possible) from the socio-institutional paradigm (what people in power can stomach.)

But I’m an optimist. So whereas I know the road will be bumpy and resistance will not melt away with a whimper, I’m convinced that the market for tickets – both primary and secondary – will undergo a transformation that take months and years, not decades. The foundation of my conviction is that the market model (and many if not all the mechanisms and processes) exists already (in the shape of the capital markets, see Part 1) and needs only minor adaptations to serve the needs of all the participants (‘wholesale’ and ‘retail’) in the markets for tickets for entertainment events. And indeed, the entrepreneurs and innovators are moving forward at this very moment: a number of ticket brokers and/or exchanges exist such as StubHub, viagogo, seatwave and of course eBay (amongst many others); major primary resellers like Ticketmaster; and aggregators such as Tickex (who in a highly fragmented market such as tickets have a great business model in my opinion.)

I’m in no way anything close to being an expert on these firms and their business models, however my impression is that in general they have focussed on the fulfillment process (super important of course) rather than the risk management process. Of course you need both, but in my opinion, the potential (financial) opportunity arising from intelligently revolutionizing the risk management (underwriting and distribution) process is even greater than the exciting rewards available for these companies that are optimizing the matching and fulfillment process. This is certainly an opportunity I will have my eye on going forward. (Indeed, I look forward to learning more about John’s portfolio company he alludes to at the end of his post linked to above.) Rather than delve deep into the myriad opportunities that exist to transpose the capital markets paradigm on to ticket markets, let me leave you with a fragment of a possible future:

The year is 2021 and Oasis has announced they will be doing a reunion concert at Wembley Stadium to celebrate the first year-on-year drop in CO2 emissions in the history of the modern world. The $7 billion Live Entertainment Fund – a leading hedge fund focused on underwriting and investing in live sporting and entertainment events – has underwritten the entire ticket offering at a price of £20 million and will work with a number of ticket distributors to syndicate and distribute the tickets over a week, one month prior to the concert, using the online bookbuilding capabilities of Tickex Group. The fund would not comment, but analysts expect the proceeds from the sale to exceed £25mn, which will likely give LEF a return on equity of more than 30% for their 6 month investment (depending on the cost of various insurance and weather hedges: the tickets are expected to include the now standard 50% rebate for rain for outdoor concerts and sporting events.) Since its inception in 2010, the flagship LEF Music Fund has returned an average of 43% annually.

(Oh and by the way I had my pension fund invest £50,000 in LEF in 2011…making it a lot easier for me to afford to bid for a box for my friends and family to go see Oasis at Wembley!)

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Tickets & Markets, Part 1 (On the shoulders of investment banks…)

Why is it that the market for (event) tickets is so dysfunctional? It’s not the first time I’ve written on this subject, and I had promised to revisit it… Over the last couple months a number of (notionally unconnected) events has catalyzed me in to making good that promise. As way of introduction, let me elaborate on my question: efficient organized markets in tickets for events have not been allowed to develop despite the fact that: (a) the existing market structure is horribly inefficient to the detriment of both buyers and sellers and (b) a vastly more efficient, tried and tested, robust market structure which could very easily be applied to ticket markets already exists and furthermore, especially given modern web technology would be easily adaptable to ticket markets.

Let me take each of these points in turn.

For any event, there are a number of roles that need to be fulfilled: the end product (the entertainer(s), sports teams, etc.), the producers (those who contract the end product and organize the production), the venue (real physical property but also broadcasters), the risk takers (those who underwrite the cost of the production and take the financial risk), the distributors and brokers (those who sell the tickets) and the audience (those that purchase the rights to see the event.) For some events these roles are fulfilled independently, for others the roles are sometimes combined (for example a promoter might both produce and underwrite an event) and most often, especially with respect to distribution, there are multiple participants for the same event. If you were to illustrate this process in a flow chart it would look something like this:

Ticket Sales Flow Chart

And this is typically how tickets are sold and distributed for the first time, in other words the primary market. And strangely enough it looks amazingly similar to how securities (bonds, shares) are sold and distributed in financial markets:

Securities Underwriting Flow Chart

Trillions of pounds (euros, dollars, etc.) of securities have been (mostly) successfully underwriten and distributed over the years using this basic arrangement (or a variety of variations thereon); and the key reasons this framework has developed to help issuers sell securities to investors are basically twofold: (1) to arrive at a price that best achieves the goals of all parties and (2) to optimally allocate risk during the sales process to those best able and willing to accept and manage it.

Price discovery is at the heart of this process, and is driven by the goals of the issuer which almost always include getting the highest price but often qualified by meeting certain other – sometimes competing – objectives such as ensuring a certain distribution profile – perhaps encouraging new investors, or repeat investors, or certain types of investors; or seeking to engender a certain trading performance in the aftermarket – usually a gentle rise but sometimes a more explosive rise to attract publicity for instance; etc. In investment banks charged with underwriting securities, the job of advising the issuer on what price will best achieve their objectives falls to the syndication desk and the syndicate managers who are responsible for collecting, analyzing and synthesizing all the relevant information that goes into determining the optimal price. This includes such things as: investor demand or indications of interest, the size of the proposed offering, potential competing offerings concurrently in the market, general market conditions and prevailing secondary market prices for similar securities.

Let’s take this last point; I think you will find that if you as any banker or syndicate manager what they consider to be the most important factor when looking to start the price discovery process for a new security it will be the prevailing secondary market prices of similar issues. If their exist many true comparables, the market will hone in very quickly on the clearing price for the new issue; when the security being issued is relatively unique (no other issuers or securities in the market with comparable financial metrics and/or in a similar business for example), the early indicative pricing will most likely need to be tested with investors through an iterative feedback process, which in its most structured form is called ‘bookbuilding’. In this process, the underwriting syndicate solicits ‘indications of interest’ from investors, where they are asked how much they would be willing to buy and at what price. (In some instance, particularly in the bond markets, they might also be asked to give feedback on other parameters such as maturity and the size of the issue.) By building up a picture of demand, the underwriters can optimise the match between what investors are looking for and what the issuer wants to achieve.

Starting in 2001, just after I had joined DrKW, we invested heavily in building an online system to manage this process which until then had been managed (if it was at all) by the industry via manual collection and consolidation (in a spreadsheet) of email, (Bloomberg) electronic messages and yes – I’m not making this up – post-it notes brought to the syndicate desk by sales people. Indeed the term bookbuilding comes from the 19th/early 20th century practice of underwriters writing orders by hand into leather-bound ledger books that recorded the distribution of the new securities. So in over 100 years, the industry had only managed to replace the (aesthetically pleasing) leather books with Excel. Despite much resistance – and the fact that DrKW was a relatively modest player in the debt new issues market – within a few years, online bookbuilding became the norm in Europe. In my opinion this was a result of the higher level of competition amongst underwriters in Europe which gives issuers more leverage in the process and the incredible gains in efficiency and transparency enabled by online bookbuilding were quickly understood and appreciated by issuers. Of course anytime you introduce transparency to a process, those embedded in the system, at the heart of the process lose power, and the skills needed to succeed evolve. Historically the syndicate manager was alone in ‘knowing what was going on’ and was ‘indispensable’ and there were many banks and syndicate managers who were loathe to see this paradigm pass. Of course, the advent of e-bookbuilding opened up whole new avenues and possibilities for underwriters and their customers but not seeing the possibilities of change is not unique to investment banking… Interestingly – and perhaps this has evolved since I left the market a year ago – the US debt markets have not adopted these modern methods (and this despite their European businesses being amongst the largest players in European new issue markets, so they can’t say they aren’t familiar with the technologies and the possibilities), due in my opinion to the smaller number (of larger) players on Wall Street. (I didn’t say oligopoly!)

Typically in a bookbuilt issue, all the investors are sold the securities at the same price (a modified dutch auction process) and all distributors are engaged contractually (by their underwriting agreement) to adhere to this price during the primary selling period. In the fixed income markets this innovation (yes until 20 or so years ago this did not exist) is called a ‘fixed-price reoffer’. This gives buyers the incentive to show their best price, knowing that if the securities are sold more cheaply, they will not be paying over the odds. In so doing, the likelihood of achieving the highest clearing price (meeting all the issuers other objectives) is highest.

Thinking about the methodological continuum of issuing securites, if ‘bookbuilding is at one end of this spectrum, at the other extreme we find the ‘auction’ and in the middle the ‘bought deal’. Of course there are many different ways to conduct an auction (the most commonly used in securities markets is the ‘dutch auction’ and variations thereon) but in the context of this continuum I would simply describe an auction as a distribution mechanism where price is the only selection criterea (for buyers) and where the seller shoulders all the pricing risk. This is usually an optimal distribution strategy for an issuer who regularly accesses the market, has securities that are easily priced by the market (due to extensive secondary trading history in similar securities) and has no additional (to achieving the best clearing price) distribution goals. Nobel prizes in economics have been won discussing the different kinds of auctions and optimizing outcomes, so I’ll leave it to you to dive into the literature if you want to learn more. The bought deal on the other hand has the underwriter shoulder all the pricing risk; this is simply where the bank(s) ‘buy’ the deal from the issuer and then subsequently sell it on to investors. The advantage to the issuer is that they have certainty of pricing, but as in an auction give up control of the ultimate distribution of their securities. This form of issuance is generally used by frequent issuers with a well established (and unlikely to change) investor base.

Price Risk Chart

One last element worth highlighting – to round out this whirlwind primer of how securities are priced and distributed in international capital markets – is the ‘grey market’. This is a (contigent) market in the new security traded on a “when and if issued” basis (between parties who are outside the underwriting arrangements.) Grey markets tend to appear and/or trade actively if investors and dealers believe that the likely issuance price is wrong (either too high or too low). When Stanley Ross first introduced the idea of grey markets in when-issued securities 30 years ago, he was met with massive resistance from the underwriting community: after having ruled the roost – “like it or lump it” – for so long, I guess the syndicate managers of the day didn’t like being told, very publicly, that their pricing was wrong. Of course there are times when good reasons exist for a discrepancy between the issue price and the grey market, and smart syndicate managers today know when the divergence is justified and when it signals a flaw in their pricing and distribution strategy. And so grey market trading has become just one more tool in the new issue market’s price discovery toolbox.

To wrap up Part 1, I suggest you draw two conclusions: (1) the international capital markets over the last 30 years or so have developed a very sophisticated and robust methodology and process for pricing and distributing new securites, and (2) many (if not most) of the innovations that led to this state of affairs were vigorously resisted by the existing establishment at the time of their introduction (and this continues today). It is worth noting however that the power of good ideas and the forces of competition allowed these innovations to ultimately prevail. (Moral of the story: you can either ride the wave or stand in front of it and get dashed against the rocks…)

In Part 2, I’ll try to illustrate how I think all this is relevant for markets in tickets for any kind of event.

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Il buono, il brutto, il cattivo

…or: Why is setting markets free so threatening for so many?

Il brutto

In general I’m not prone to getting too emotional about many things – a (British) colleague once attributed this to my Prairie upbringing, which he equated with quiet pragmatic determination. Don’t get me wrong, passionate yes, but emotional no. However, I must admit to getting completely wound up when I see markets that are shackled and controlled for no obvious purpose (other than to perpetuate the power of a select group of annointed insiders although of course this is never articulated and often (implausibly) vehemently denied.) My angst is made even worse when the restrictions are framed in a ‘this-is-for-your-own/the-public’s-good’ and we know best… What a load of rubbish!

There are (sadly) a million examples of this in the naked city, yes Virginia even in supposed enlightened bastions of freedom, markets and democracy. The catalyst for this particular rant – and perhaps setting the scene for future vignettes of the same kind – was an article in the Economist discussing the extraordinary measures the organisers of the Glastonbury festival went through to kill the secondary market in tickets:

Ticket touting is nothing new, as any West End theatre-goer will attest. But promoters argue that the internet has transformed the business from a few men in grubby coats outside a venue into a fully fledged industry. Sporting bodies and the music industry have been urging an official crackdown on touts for several years.

Defenders paint touting as merely the market’s way of correcting artificially low ticket prices. The deals are between willing buyers and sellers. And touts do not always make a profit. Attendance at Royal Ascot, an annual high-society parade with some horse-racing attached, plummeted when it was moved from Berkshire to York in 2005. Glum touts were offering tickets to curious locals at a fifth of their face value.

Indeed, the existence of a secondary market implies that demand outstrips supply. Why don’t promoters simply charge a market-clearing price for the tickets instead of bashing middlemen who do?

Actually the Economist gets it slightly wrong: the existence of a secondary market implies that the clearing price is not the price at which the sellers have offered the tickets – ie that demand at the sale price outstrips supply. But the question as to why promoters don’t seek out this (clearing) price remains. In fact there are two reasons – one good and one bad – but neither are ever put forward by these promoters to defend or explain their pricing policy, perhaps because neither would lend itself to support prohibition of secondary markets, so they resort to the Ugly argument:

Because that would be “unfair”, they say, leaving “genuine fans” squeezed out of popular events by dilettantes with fat wallets.

The Good
Their pricing policy is predicated on maximizing returns over the medium to long term and reducing uncertainty (volatility) in their cash-flows (thus lowering their future cost-of-capital.) So yes they might ‘leave money on the table’ on an given single event but they create positive marketing spin that feeds into future events and/or ancilliary products. They also attract a more broad and heterogeneous customer base, creating a more robust, sustainable market for their products over time. (Even in the context of the same customer: think of the 20 year old student who can afford to queue for 5 hours but can only afford £20, who 20 years later can’t afford to queue for 5 hours but will pay £200 to see the same act.)

The Bad
By not using price as the rationing method, the intermediary acquires real power by being able to allocate the oversubscribed product subjectively. (And creates a black economy in the process where the face value of the goods bear no resemblance to their real value. Think Zimbabwean dollars…) Unfortunately all too often I suspect the driver (for seeking market control) is for this reason alone.

The article goes on:

Economists (and cynics) offer another explanation. Stefan Szymanski, at London’s Imperial College, points out that it is in promoters’ interests to underprice their products. “You get a much better PR payoff if your event is oversubscribed,” he says. “And since demand is hard to predict, the rational thing to do is to underprice aggressively.” Canny firms recoup their losses on the door by selling overpriced merchandise and refreshments to the captive audience inside. [The Good]

Though ministers have made sympathetic noises to the anti-tout lobby [why???], they have stopped short of banning the practice. Only football tickets are off limits, and that was designed to squelch hooliganism by segregating rival supporters, not to promote social justice. [An example perhaps of the only good reason for intervening in otherwise transparent and functioning markets – ie to protect security; for instance I would not go so as far as to argue for a free market in arms, however the burden of proof (that control is a matter of security) should be robust…)]

So entertainers are looking at other options. The Concert Promoters Association wants to attach a set of conditions to all tickets, preventing resale at a profit. It plans to send them to the Office of Fair Trading for approval. But it seems unlikely that Britain’s competition regulator will rubber-stamp such a price-fixing agreement. [I bloody well would hope not!]

If promoters can’t beat the touts, they may join them, auctioning some tickets off to the highest bidder. “If we can’t get the secondary market outlawed, we’ll take control of it,” says Rob Ballantine, the CPA’s spokesman. That may not put the men in the grey mackintoshes out of business, but it could cramp their style. [Framing the problem in the context of ‘control’ says it all…it’s all about power, not the punter.]

Ok, ok but why get so wound up? It’s just about tickets to sporting events and rock concerts. Well no. This is rather a very good (ie easy to understand) parable of far too many markets for goods and services. And like weeds in a lake, unchecked this behavior risks cutting off the lifeblood of our market economies. The great irony is that in the guise of ‘protecting the common man’ from the ‘brutality’ of the markets, these controllers actually exacerbate and entrench the potential inequality engendered by market forces. This is about individuals or individual groups preferring personal power and wealth at the expense of optimal institutional and economic outcomes. And this behavior is prevalent in far far too many markets for goods and services, including – perhaps especially – in the markets for distributing financial securities. Maybe I should write a book: ‘Memoirs of a Syndicate Manager…’ Anyone (who is honest with themselves) involved in the IPO or debt new issues markets will of course recognize The Good, The Bad & The Ugly.

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