Axios Markets

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December 02, 2021

😎Good morning, fellow nerds.

To celebrate Chicago Songwriters Month, Axios Chicago c0-author Monica Eng wrote and recorded this song.

  • Tell me how I can compete with this display of excellence? Should I write you poetry about Markets? I'm stuck.

⏰Today's newsletter is 1,238 words, 5 minutes.

1 big thing: A case for quitting payment for order flow

Illustration of a cowboy riding the wall street bull statue.

Illustration: Megan Robinson/Axios

SEC chair Gary Gensler is looking at the controversial practice of payment for order flow, or PFOF, writes Axios' Felix Salmon.

  • Fresh data from retail brokerage Public, shared first with Axios, adds weight to the case that it should be stopped.

Why it matters: PFOF, a formerly obscure market-structure backwater, got a bad reputation during the meme-stock craziness earlier this year. Now the regulator is considering whether it makes sense or should be outlawed on the grounds that it represents a conflict of interest for brokers.

Threat level: At risk is about $4 billion per year in PFOF flows from high-frequency traders to brokerages, as well as about $14 billion more in profits for the HFTs, per Larry Tabb, Bloomberg's head of market structure research.

The big picture: Brokerages are obliged to deliver "best execution" for their clients. When Public moved away from the PFOF model in February and started trading directly on exchanges, it was unclear whether it would manage to significantly improve the prices its customers received.

  • Public COO Stephen Sikes tells Axios that "we’ve found we can deliver better pricing."

By the numbers: Public's preferred measure of execution quality is something called EFQ —measured on a scale from 0 to 100. Lower is better: At 100, all trades get filled at the quoted bid-offer spread, which is also known as NBBO. At 0, all trades get filled at the midpoint between the bid and the offer.

  • Public's EFQ is now 33, which compares to about 45 for Robinhood, per its SEC filings. Public estimates that its EFQ when it used the PFOF system was between 40 and 60.
  • Over the next year or so, says Sikes, the EFQ for Public should come down to very close to 0, as more investors, exchanges and alternative trading systems compete to trade directly with Public's clients at the market midpoint.

How it works: Retail investors are coveted as stock-trading counterparties, because they are unlikely to have better information than the institutions on the other side of the trade.

  • There is therefore no shortage of investors who would love to be able to trade with retail at the midpoint of NBBO. Two exchanges — NYSE and IEX — have opened retail windows designed for exactly that kind of trading.
  • As the execution quality of on-exchange trading continues to improve, it becomes much harder for other brokerages to claim that their PFOF system represents "best execution."

The bottom line: If PFOF gets banned, zero-commission brokerages aren't going to go away. But the brokers' incentive to encourage as much trading as possible might be reduced.

Go deeper.

2. Catch up quick

📉Stocks were rattled yesterday — with all three major exchanges closing lower — thanks to news that the first known U.S. case of the Omicron variant was detected in California and new COVID-19 infections have nearly doubled in South Africa. (WSJ)

The House Financial Services Committee and chair Maxine Waters (D-Calif.) has called on CEOs from six major crypto companies to testify at a hearing on Dec. 8. The heads of Circle, FTX, Bitfury, Paxos, Stellar Development Foundation and Coinbase are all set to appear. (Coindesk)

3. A credit feast 💳

Data: New York Fed SCE Credit Access Survey; Chart: Jacque Schrag/Axios
Data: New York Fed SCE Credit Access Survey; Chart: Jacque Schrag/Axios

Americans want access to more credit than they have since the pandemic began. Demand for borrowing is increasing, albeit alongside consumer jitters about being able to shoulder unexpected bills.

What’s happening: Requests for credit card applications and credit limit increases are leading the demand rebound, according to the latest credit access survey from the Federal Reserve Bank of New York.

  • Credit card application rates reached 26.5% in October 2021, up 10.8 percentage points from the low point hit last October.
  • Mortgage application rates have also exceeded 2019 and 2020 levels, though the appetite for refinancing has subsided a bit in the second half of this year.

Yes, but: Lenders may not generate more profit from the trend because while people might borrow more they are also paying off balances at a faster rate, the Wall Street Journal reported.

What we're watching: Households say that with the exception of mortgage refis they are likely to apply for even more credit over the next 12 months (think mortgages, credit cards, card limit increases and auto loans), the survey found.

  • The strengthening appetite coincides with respondents, on average, having a lower expectation for being able to cover a $2,000 emergency expense — while at the same time expecting to have to do so.

4. Grab's mega-SPAC attack 💰

Illustration of a small business woman in front of a huge glowing phone displaying the Grab app logo.

Illustration: Aïda Amer/Axios

Grab today hopes to become the king of SPACs (special purpose acquisition companies), no matter how uneasy have been the heads to wear that crown, Axios Pro Rata author Dan Primack writes.

Driving the news: Grab, a Singapore-based "super app" maker, today will list on the Nasdaq, via a reverse merger with a SPAC formed by Altimeter Capital. The deal gives Grab a pro forma equity value of $39.6 billion, the richest price ever afforded in such a transaction.

  • Grab, which launched in 2011 as a ride-hail service before expanding into everything from delivery to financial services, raised over $11 billion of private funding, including at a $15 billion valuation in late 2020.

The big picture: Many big SPACs mergers have struggled in 2021.

  • Grab holds the top spot just ahead of the pending acquisition of MSP Recovery by Lionheart Acquisition Corporation II, which is trading below $10 per share.
  • United Wholesale Mortgages, which was the largest-ever SPAC deal when first struck, is valued below its $16.1 billion merger price.
  • UMW supplanted MultiPlan, whose post-merger travails we detailed last month.
  • And then there was Bill Ackman raising the largest-ever SPAC, but then failing to buy a stake in Universal Music and getting sued for his trouble.
  • The shining exception is Lucid, the electric car company whose market cap closed yesterday in excess of $84 billion.

The bull case: Grab is the sort of high-growth tech company that makes public markets swoon. Plus, super-apps are super sticky in places like Southeast Asia, in part because slower mobile broadband speeds discourage people from downloading multiple apps.

  • This SPAC also has key structural differences from others, in that sponsor Altimeter has locked up its shares for three years.
  • "We wanted to align our lockup with the length of projections the company was putting forth," says Altimeter partner Chris Conforti. "I hope that becomes a standard in the industry, and helps dampen some of the more unscrupulous parts of SPACs, where it's about getting quick cash."

The bear case: It's the broader mega-SPAC track record and the North American unfamiliarity with super apps. Plus, Grab is diving into a public pool roiled by Omicron.

5. Manufacturing signals supply chain breather

Data: Institute for Supply Management; Chart: Axios Visuals
Data: Institute for Supply Management; Chart: Axios Visuals

Manufacturing activity continued to tick up last month as pockets of the supply chain showed signs of relief, according to a new survey from the Institute for Supply Management, Axios' Hope King writes.

Why it matters: Despite facing nearly two years of supply chain and consumer demand anomalies, manufacturers continued to increase their output for the 18th month in a row.

  • And even with no near-term relief to these conditions in sight, manufacturers also continued to feel optimistic about the future.

By the numbers: The manufacturing PMI (Purchasing Managers’ Index) expanded by 0.3 percentage points from October to 61.1%.

  • Hiring picked up for the third straight month. While supply delivery continued to slow, the slowdown was smaller than in the previous month.

What we're watching: To get around future delays and shortages, some suppliers stocked up on pre-production inventories, according to a separate manufacturing report from IHS Markit