Line Your Own Pockets

Michael: 00:00

All right, everyone. Welcome back to another episode of Line Your Own Pockets. Today, it's a topic that I'm bringing up again, and this is one that I saw floating around that I think is really interesting. And I wanted to dive into it with Dave because I really do think that this is going to have wide reaching impacts for the market. And it was an article published recently by the NASDAQ about tokenizing all of their securities.

Michael: 00:25

So across the board, every security that exists will be no longer a stock the way it used to be, but everything's going to be a token. So we're all going to be trading, I guess, a cryptocurrency in one style or another. So Dave, what about this? When I kind of pitched this to you, made it it made it interesting enough for you that you're like, okay, let's do this one next.

Dave: 00:49

Well, like the topic because it's something I don't know a ton about. Focus on what's going to bring me some P and L. That's my total focus. That's my angle here. How is this going to allow me to make a strategy to make more P and L?

Dave: 01:09

That's the question. Yeah, I mean, what exactly does tokenizing mean for the NASDAQ? How would it be different? Here, make it. Each day I make trades.

Dave: 01:23

I try to make money on the trades. How is it going to be different in my life?

Michael: 01:29

I think the main differences are going to be what it opens the gateway to. So tomorrow for us and for you in particular as a day trader, but for us in general, if the securities we were trading were no longer stocks and stock certificates in the way they've been for ages and became tokens, you probably wouldn't notice too much. But they're not doing this for fun, right? It's going to cost them billions of dollars to overhaul their system. So, well, the main reason they're doing this is because Robinhood has already proposed that they're going to do it.

Michael: 02:02

So they've woken up, but there's a huge amount of benefits here. So the first one I want to talk about right off the bat will just be settlement. And I know, and for you guys, it may not matter as much, but right now, for those who don't know, when you buy a security, it is technically T plus two down there. Is that what you're at now? Where it takes two days after you purchase a stock to actually own the stock.

Michael: 02:29

And in the meantime, it's in this kind of limbo state where it's going from the prior owner to the current owner and all this. That should be instantaneous now, T plus zero, or even again instantaneous, which is something that again could affect and could open the doors to a lot more people being able to trade on things like margin and and not needing pattern day trader rules and things like that. Because when you do a trade, it should settle kind of on your side instantly.

Dave: 03:01

So how would that affect, say, the pattern day trading rule? Hasn't affected me in a long time, but it affects a lot of people.

Michael: 03:10

Right.

Dave: 03:10

So how would clearing the trades more quickly help with that or reduce the risk for pattern day trading in general?

Michael: 03:20

Well, so kind of in the back end, a lot of what's happening is that even though your security's not settled, if you have a large account or a margin account, the broker is kind of just taking it on kind of faith and everything that it will settle. So I buy a security from you, and then I sell it before it actually reaches me. And then I go buy another security from somewhere else. The broker right now, they're looking at large accounts and are saying, okay, well, he's got enough money to settle it, right? And again, this is not so much for us, but there's a lot of people out there that may only have a few thousand dollars in their account.

Michael: 03:57

And for those people, the broker may not be as confident just letting that person kind of turn over their account over and over again, even if it wasn't kind of legally, right? That was part of the legal problem is that you couldn't trade with margin or frequently, unless you had a 25,000 account. But the ability to kind of have that settled instantly means the guy could buy a security and sell it two seconds later and have that settled instantly and then buy it again. So even without using margin or any sort of loan value, just be able to trade more actively, which is a huge step to getting more and more people, especially like young people involved in the marketplace, which I think is a huge positive.

Dave: 04:41

Yeah. I mean, the settlement thing has always seemed kind of crazy to me, right? Like as much technology as we have, as much processing power, all this compute, and we still have to wait several days for things to clear. I mean, that seems kind of silly. So here's the question.

Dave: 05:02

Do you think the real benefit here or the reason that the Nasdaq is doing this is just like a technological path forward to be be able to instantly settle. That's the real that's the main benefit from their perspective?

Michael: 05:19

Well, I think there's a lot. So I think their motivation, it's it's hilarious. So again, for those who don't know the history of the market is essentially the stock market is running on the same plumbing it has been for like seventy years, and there's just no one's been bothered to update. And then all of a sudden Robinhood comes along and says, we're tokenizing a whole bunch of stuff. And And Robinhood's doing, which could be another podcast episode, but Robinhood's allowing you to trade private securities.

Michael: 05:46

So like SpaceX, as an example, it's a company that a lot of people aren't a part of, but it's not publicly traded. Now, if I am a early investor in SpaceX, I don't have a way to sell my security without some sort of laborious kind of back end deal, finding someone that wants to buy it and blah, blah. Robinhood's plan is to tokenize that. So you can start to trade securities completely off exchange and peer to peer directly. So as soon as Robinhood did that, all of a sudden it was like a month or two months later, this letter hits the press about that NASDAQ is applying to the SEC.

Michael: 06:20

And that's the current process is they're going to the SEC and they're saying, We'd like to do that. So the settlement, I think, is one of it. The other one is a topic that we've covered before, but I think is probably the main reason for it, and that's for twenty fourseven stock market trading. If you have to do all of this back end piping about clearing and all of this nonsense, it becomes way more difficult to then do a twenty four hour trading market if everything is simply a token and the whole automation from person to person, that's all completely automated without any human touch. That's my theory is it opens up that ability to kind of have people trade twenty four hour markets and have people trade more.

Dave: 07:01

Yeah, I could see that. So this reminds me of a topic that I am familiar with and that I'm a big proponent of, and that's prediction markets. Is there any overlap here in what you're talking about with tokenizing and tell me what that is?

Michael: 07:20

Yeah. So that's kind of how prediction markets are working currently in in the way that you can. So I should we should always explain in case someone doesn't know the the thing that really made token or made prediction markets interesting, think, to the world is their ability to predict elections way better than any polls or anything. I'm talking with the Canadian election they nailed up here. And I think your guys US election, nailed where polls were kind of mixed, but it was down to like individual writings were, were being bet kind of perfectly well in advance.

Michael: 07:54

So right now you're essentially in, in a way you're trading a token where you can bet, you know, say there's a 60% chance that this candidate's going to win you right now, you could bet that. And then if it goes to 70% chance that candidate wins, you can flip that out and you know, you know, make that thing. So I think that's another huge thing. And again, I think it's spurred on by Robinhood where they are going to start incorporating prediction markets in their system. So I think part of this is that if everything is just a token, it makes it way easier to create and destroy new securities.

Michael: 08:29

So if you want to create a security and have that security stable, you don't have to go through the IPO process, which is something I think we'll, we can talk about soon. But you can just create a security in theory in moments with a few lines of code, and then you can destroy it later when it's no longer relevant.

Dave: 08:46

I see. Okay. So, like I said, I'm a big fan of prediction markets. I'm a big fan of their creator, who's a guy named an economist named Robin Hanson, or at least he had a lot to do with some of the early papers on it. I've made money in prediction markets.

Dave: 09:08

I dabble in them. I don't use them like I trade stocks, but it's very interesting. He also has a very interesting theory for a type of government, which is based on prediction markets, Futarky. Kind of a dumb name or a silly name, but it's a very interesting concept. I mean, the idea is you would float like if there's a policy proposal, you've put a prediction market out there for what the GDP of the country is going to be with this policy or without it, and let's follow what the prediction market says.

Dave: 09:52

Because exactly what you said, it's pretty clear that prediction markets are a lot more accurate certainly than the median commentator you see on TV, right? Way better than that. Or the median politician. We know that for sure. So it would be a very interesting style of government that I could get my head around and certainly appreciate.

Michael: 10:18

Yeah, and it all comes down to what there was that really, really old mathematical experiment where they were trying to guess the weight of a cow and they found that any individual person was really, really bad at it. But then when as soon as you averaged out all the bets, it was scary accurate and they brought this cow all over God's green earth. They kept and they just kept being the same thing where, you know, on net, if you just looked at any single one prediction, it was way off. But then the average of all the predictions ended up being correct. And that just kind of created the whole wisdom of crowd mentality.

Michael: 10:51

So I think that's going to be part of it, is right now, if you think about it, there are, you know, things like binary options or in the CME they trade what's called event contracts, where it's essentially the same thing. You can just make a simple bet is the market going to be higher or lower today and have different payout ratios with that. Right now, the way the NASDAQ works is they can only trade listed securities, which are things that like have actual physical piece of paper or DCT equivalent to it. As soon as you get to the stage or you get to the area in which they're allowed to trade anything that's a token, you can make securities exist and make them disappear much quicker, which leads me to kind of my next point with IPOs, right? There has been a dramatic dry up of IPOs, and that kind of hurts us as traders because it just limits our opportunity.

Michael: 11:46

The imagine, know, OpenAI, for example, if that was a listed stock, that would probably be the most actively traded company in the world right now. So the more securities that exist for us who are stock traders, the better off it would be, because as you're running systems that need certain technical criteria to be met, there'd be more of those. So if these are tokenized and all of a sudden a lot of the loopholes that are required in becoming public disappear, because OpenAI could just say, spin me up a token that's whatever of the value by company, more securities. I think that's a great thing as well.

Dave: 12:23

Yeah, I think so I'm also a big fan of betting, just betting with friends and like it's And in a way, that's sort of what you're talking about here. More securities, more things to essentially make bets on. And with bets, you get a lot of clarity, right? Like imagine how many I love doing this when I have a disagreement with somebody. One of the things I love to do is, Hey, let's figure out a way to make a bet on this.

Dave: 13:04

Betting really, I think another economist likes to say, Betting is a tax on bullshit. So a lot of times in the process of just coming up with a bet and clarifying what the bet actually is, turns out maybe there's not even a disagreement at all. But that clarity and coming to the point of figuring out what two willing participants are actually willing to put money on, that's very clarifying. And the more opportunities for that, I think the better for society in general. So yeah, I think Like the example you said, how much is OpenAI worth?

Dave: 13:48

We don't really know. And if we had a market where there was a price for it, that would be very illuminating. I mean, prices are information and the more you have of that, the more clarity you get.

Michael: 14:00

Well, and also think, you know, I know I've done a very small amount of kind of private investing, and I don't know if you do any at all, but one of the main hurdles of it is the illiquidity of your investment, right? So even something as simple as, you know, let's just say there's a corner barbecue joint that you really like, and they're trying to open up a second store and they want investments. Well, you may think it's a great investment and you want to buy into it, but then your immediate thought is, Okay, well, how am I getting my money back? You know, there's no liquidity on it, whatever. The if you can just tokenize, say, the value of that particular company, and I get tokens instead of, you know, an arbitrary share of this company, I can then end up trading that out very quickly, or I can hold it for as long as I want.

Michael: 14:49

It kind of gives me that feedback. And then also kind of partial sales, like there's some guy out there who's got shares of OpenAI, who's a billionaire on paper, and has no ability to touch that money. And if you were to go to try to take a loan or some sort of, you know, some sort of way to make himself any kind of money, he is completely blocked out of that entirely because he can't sell the company and he can't, you know, there's lockup periods and things like this. But like you mentioned, you don't even really know the true value. You know, it's not near zero, you know, it's not, you know, you have a couple million, you know, it's in the many billions, but what exactly that is, that's just kind of a debate you would have with your bank when you're taking it alone.

Michael: 15:34

So the ability for this person to say, okay, I'm a billionaire on paper, maybe I don't want a full exit from my position, I'm some low level employee who's gotten shares or whatever. I just want to, you know, take a little bit of money off the table. If there's these kind of prediction markets that exist, you could like even hedge yourself, even if you're not allowed to sell the securities your own, you could take a short on the other side and raise capital that way, or many different ways. And I think that kind of loosens up the rails of, you know, more private investments, which could be good for smaller kind of mom and pop type operations.

Dave: 16:08

Yeah, one of the very, so it reminds me, one of the very interesting things, applications potentially for prediction markets would be having internal prediction markets to a company where the employees could participate. So for example, a very good theoretical example would be there's a way to participate in the prediction market for, okay, if we fire the CEO or we don't fire the CEO, what would the outcome of the company be? Have people vote on that prediction market through betting have internal people do anonymously. That would be extremely illuminating, right? And I think you have a lot of resistance from various factions for prediction markets in general, because it does shine a light.

Dave: 17:05

You do get better predictions. So TV commentators, politicians really kind of don't like these ideas because that's exactly what they are good at is fostering bullshit. And anything that shines a light on that sort of messes up their game a bit.

Michael: 17:31

It's hilarious. That reminds me of and I know you don't follow these news events, but it was probably this time last year, Starbucks fired its CEO and overnight the stock gained like $2,500,000,000 of market cap. And I always I was just making jokes on Twitter. Just imagine being that guy and applying for your next job. So then second they kicked me out the door, together made $2,500,000,000 because, yeah, the company had just been so in the dumps of this guy's not doing anything for us that just him leaving.

Michael: 18:04

And I don't even think they had a replacement at the time, but him leaving was enough to give a lot of inspiration for, okay, potentially now, this could be a company that could do something after years and years of absolutely nothing.

Dave: 18:19

Yeah. And there's no way to have a real price on that without something, some big event like that happening. You could imagine an internal prediction market that would have predicted that. And the board could see that and use that in their decision making rather than have it be what's probably a very political process. There's another example of a prediction market that I saw recently that was quite interesting.

Dave: 18:52

We know Elon Musk. We're familiar with his compensation package that is apparently controversial. It's And in the it's a really big compensation that has been approved many times, but it's still in the courts about whether it's such a large number that it's I don't know. For some reason, there's a question about whether it should be approved or not. And there's a prediction market for what's the value of Tesla going to be if it's approved versus if it's not approved.

Michael: 19:29

And

Dave: 19:31

it's pretty overwhelming when you look at the history of the prediction market that the value of Tesla is going to be higher if this is approved. So it was a really interesting real world application for a prediction market for what should we do in this situation? What do the smartest people in the room think about this situation? And by smartest, mean the people who are willing to put money on the line. That's what I was saying before, betting is a tax on bullshit.

Dave: 20:07

When you start putting money on the line, all of a sudden you think through carefully about what the implications are rather than just commentating.

Michael: 20:17

Well, so the whole prediction market talk brings out another thing that I was thinking that this could unlock, which is almost right now exclusively for the the crypto crowd. But it's something that I'm really interested in potentially building systems in the crypto style of things is that you have real time short float data information. If if the entire float of the company is tokenized, and they give visibility into it in a blockchain, the same way you do in in actual blockchain trading, in in crypto trading, you have you know exactly to the minute when people are short, which also tells you to the price where people are short. And this is why every now and then you'll be scrolling Twitter and you'll after a big move in crypto, and you'll see and and, you know, recently was a perfect example with the flash crash. There was like $16,000,000,000 of of margin, of of liquidation, you know, wiped out of particular, of the crypto market.

Michael: 21:24

So you could see things, for example, as opposed to having this really ridiculous two week plus delay, and only reporting every two weeks of when a security is short and where a security is short. If everything is tokenized and therefore when you're making new securities, which is kind of essentially what shorting is, you would have, that reporting would happen in theory, could happen instantaneously. So I'm thinking more in kind of the day trading space when it comes to some of these really explosive winners. If you could see, you know, the stock that's up 300% that day, that all of a sudden, as it's moving higher, the short float is continuing to tick up. That could be its own unique and brand new never existed in the market before, but really useful data point of, right, how hard are these guys getting hit and where their price are and where do we think they're gonna liquidate?

Michael: 22:18

And that kind of data, again, just was held behind this leg. And right now I just wanna reiterate again, we're talking about the NASDAQ, but if this passes, you better believe every other secure, every other exchange on Earth is going to adopt this stuff really, really quickly or just be completely left behind. So we're saying NASDAQ now, but just think if this gets approved, the NYSE is gonna have to do the same thing. The AMX is gonna have to do the same thing. So I'm really excited for that real time short float data, I think would be wild.

Dave: 22:49

Yeah, that sounds, I would like that. I mean, any sort of quicker access to data, any sort of, I mean, the big problem you have now in the markets, I think, is like you said, if you don't have twenty four hour markets, then there's these cliffs that happen. There's periods of time where no trading can take place. So anything that clears the way for uninterrupted trading, more opportunities to trade, I think is a good thing for everyone. So here's the question for you, Michael, though.

Dave: 23:30

Yeah. What do you think is gonna happen to the cost of trading commissions? The just the various costs associated with that? I would assume it would go way down, I would would think.

Michael: 23:42

Well, so they're they're planning for now to keep the DCT in intact and bring them along with them. Again, for those who don't know, those are the guys who do the settlement and kind of the back end of the market. And part of your fees when you place a trade is these little small, there's smaller fees than usually commissions, but they're exchange fees. And part of it is to kind of fuel these organizations and whatever. But you got to imagine that that's going to be very quickly done away with.

Michael: 24:13

So yeah, I would imagine it's, I don't think it's going to be like a huge impact, but for us to trade frequently over time, I think it would definitely be a dramatic impact. So faster trading, faster data, and faster with the faster settlements and everything, and then cheaper because you don't need a lot of the same back end you know, bureaucracy that you had before. And anytime you cut out needless bureaucracy, should lower price. So if anything, it's going to be great for the NASDAQ as a whole, as a company. So that's going to be great, you know, lower fees as well.

Michael: 24:53

And then some people are also talking about potential peer to peer trading. So the idea is that if I am, if I have a tokenized version of Apple, and when the DTC is out of it, there is no reason why I couldn't send from kind of my wallet or my side of things when it comes to the tokenized version directly to you. So then we're kind of pulling, you know, the NASDAQ would still have some involvement because they're the creator of the securities and then kind of the overseers of everything. But you can now trade things off exchange and peer to peer. So that is something that I was also interested in to talk to you about where I could see other exchanges also incorporating the same thing.

Michael: 25:41

And we know there's exchanges that are tokenized that are opening up a lot of them in Texas with this Boats Exchange and a couple of these others. So that is going to be a different thing where we've kind of never had that before, the ability to completely peer to peer trade securities, tip your driver in a fractional share of Apple or something like that as opposed to money. So now it's not only, you know, they're saying completely fungible, which just means, you know, any security can trade for any other security. So completely fungible with the option of, again, you just holding your stock or your security yourself as opposed to having to keep it at a broker in exchange somewhere.

Dave: 26:22

Yeah. Well, that was my next question I was going to ask you. So I do occasionally, I'll have some I'll I'll do some consulting with brokerage firms who are looking for my take on a certain style of trading or, like I just did one recently about locate costs. A pretty well known broker is getting ready to add locate functionality and they wanted insight on that. So I'm very curious, what do you think Like if you are a broker, what do you think about this?

Dave: 26:52

Do you like it? Do you not like it?

Michael: 26:55

I would like the speed of things, but the ability to have everything not tracked by me anymore, which is the excuse that they use currently for the slowness of short float data, right? Because right now, short float data, again, those who don't know, is just every broker kind of reports in what their shorts are, and then that gets kind of put into a pot and they say, this is the short float. It's also why it's wildly inconsistent. Like you can go to different websites is because, you know, depending what is the float, is it the free float? Is it the total?

Michael: 27:26

Like again, it's just a nightmare. So cleaning all that up would be great. But if I could more easily, because of course you can do it now with in kind transfers, if I could more easily transfer my holdings around, it seems like there'd be some people who would, you know, say dollar cost average in the S and P 500, and then keep that internally and not keep that at their broker. So that is going to limit some sources of income when it comes to how much money they make from, you know, just holding securities and the money they make from cash swaps and things like that. So I would imagine they're not gonna be super happy, but I don't think you're putting the genie back in this bottle.

Michael: 28:08

This is something that, again, I worked at a crypto firm in 2017, right? Where we were a crypto miner and trader and all this kind of stuff. And everyone was promising this then. So this was a natural thing that was going to happen at some point, just with everything. It took way longer than the thought.

Michael: 28:25

So I don't think they're ready for it, but I don't think they're going to have a say in the matter. I think they're going to have to kind of put up and deal with it.

Dave: 28:31

Yeah, that's interesting. So yeah, I guess Tom will tell. We could come up with our own prediction market about some outcome here and have people predict it. So what do you think is going to happen to margin rates for borrowing, you know, on margin at a brokerage? How does this affect that, do you think?

Michael: 28:53

I think, well, for a margin account, you're still going to need a broker. So I don't think that that's going to affect it too much, right? If you were doing any your trading, it'd have to be security for security. And part of that is the Genius Act that was signed in The States, beautiful name for it by the way, but it was to basically have stable coins. Right now you can hold just like we're talking about with this, with securities, you don't need a bank anymore, right?

Michael: 29:20

You could use a USDC or USDT and you could hold the cash yourself in your own wallet and be completely bankless if you want. And in 90% of scenarios be absolutely fine. So the peer to peer stuff that I'm talking about again, if this is allowed, would be, right, someone holds a stable coin or a, you know, USD equivalent, or even some sort of crypto, And we come up with a deal where I say, okay, I'm going to trade you some Netflix in exchange for some USDC or Netflix in exchange for another share of a security or whatever it is. My, I'll ask you, I probably won't know, but my interesting thing is what happens then from a tax point of view? So let's say I'm buying a house, right?

Michael: 30:07

And I own a million dollars worth of S and P 500. If I could just transfer the S and P 500 tokens to that guy in exchange for the house, is that a taxable event? Whereas if I sell my securities to raise the money to then buy the house, I first have to get taxed on it. So I'm wondering if I would bet this is gonna go through, but if it is blocked, I would imagine that the whole tax side of things would be real big complication to it, because now you could do large transactions amongst people without having to first sell a security to raise cash to then transfer to someone else. You could just transfer the thing back and forth.

Dave: 30:50

Well, could you could you just ask for your stock certificates now and me hand them to you?

Michael: 30:58

You could, I guess. It's nothing. It'd be harder, right? It'd be more of a pain, but you can. And I guess if you ever request a stock certificate, I think by law they still have to give it to you.

Michael: 31:08

So yeah.

Dave: 31:11

Think Yeah, a lot of the tax laws and such just stand in the way of this. Well, you're probably right. If this doesn't end up passing, it's probably going to be because of some rules that are already in place that we put in place years ago for some reason. I think I saw a really good article recently about it was talking about metrics and metrics in systems, technology systems for monitoring stuff. He said, You should always have an expiration on the metric where you go back and revisit, Hey, is this doing exactly what we designed it to do?

Dave: 31:50

Is there some other way we could do it to make it better? We should have the same thing for some of these arcane rules, like cabin expiration where we go back and revisit it and maybe even automatically sunset if we can't come up with any justification. So that's sort of the default is they come and go, which I think would be valuable.

Michael: 32:14

That would make sense. Now let's go to the real elf in the room and the thing that I think is hugely important. Again, we've already went over this in another podcast, but this is just more, they said specifically in the article I have in front of me that one of the main reasons they're doing this for is they want twenty four hour trading on the weekends by 2026, which there's no shot they're going do because they've got like two months left as of recording this. Now do they mean by the 2026 or whatever it ends up being? But now we've gone from the last time we talked about twenty four hour trading, there was a handful of securities.

Michael: 32:51

I think Steve Cohen started one and Elon Musk has a partnership and another one, and they're all growing up in Texas. And they're using tokenization as opposed to securities as well to mimic trading because you're not generally trading the security itself. You're trading, it's like a CFD or contract for different. It's something that mirrors the price of the security through market making. But now you're going cut out the middleman, and they're saying that they want to do this again for the, like we talked about the speed of technology and everything, so that they can implement twenty four hour trading.

Michael: 33:25

They're saying in the next few months, but let's say they're a year off from that. That means traders have one year max to get ready for what I think is the largest change in the market since decimization, because, you know, it's going to start with 24 or five essentially. So 24, you know, close on Friday, open up again on Sunday, kind of like futures go, but very quickly is going to be twenty four hour trading. So what do we think? You know, is any updated thoughts or anything from that?

Michael: 34:00

Because again, now it's not a fringe exchange. Now it is the largest exchange in the world that's saying, we want everyone to trade all the time, nonstop, forever.

Dave: 34:10

Yeah, It's hard for me to imagine that the concept of a market open and a market close doesn't stay very, very important. I mean, those are really the high liquidity events where

Michael: 34:28

Why are they the high liquidity

Dave: 34:30

events? Because institutions, big players, use those auctions to move a lot of stock. That's the whole point of them. I mean, that's how mutual funds buy and sell. That's how huge players buy and sell.

Dave: 34:51

They're not going to be trading in the middle of the night. Maybe But there'll be less of it.

Michael: 34:58

But let's go. Let's talk about why the auctions exist. Right. And the auctions generally exist because you had this period of time where markets closed and while markets closed, news events occurred. So they would have an opening auction.

Michael: 35:11

And for those who don't know, there used to be a dude in a funny jacket who stood on a pit, and all it gets surrounded by all the brokers. And he said, okay, we're opening, wouldn't have been Apple at the time, XYZ railroad company. And the guy would someone would just shout out a bid. Say, I'll open it at this price. And some guy would shout out an offer, then they'd shout back and forth until they had a this is the price that that security is going to open for the day.

Michael: 35:35

It's why I remember when I started trading, you'd get Nasdaq securities would open right away, but sometimes you'd have little legs on NYSE securities that still had market makers to to open. Still do. But if there is no close, then there, you know, I could see a world in which not next year, but I could see a world in a few years where there's no longer an opening auction, because there's only an opening auction because there's a close, and then they have to do the opening auction for it. So if it's continuous, is there ever an auction to be had?

Dave: 36:10

Like I said, I've thought about it. I know how important those auctions are now. I use them a lot and really big players use them all the time. I couldn't live without them. It's an auction.

Dave: 36:26

It's a very unique event. It's very different than what we're talking about here. So, maybe they'll be less important. Certainly they'll be less important just sort of by definition. There'll be more opportunities for trading, but it's hard for me to imagine them going away.

Dave: 36:41

That wouldn't make any sense. There'd have to be some really fundamental things. Hey, maybe you're right. Maybe we should come up with a prediction market about when this will occur and we can bet on it.

Michael: 36:52

Because yeah, my bet is going to be around five years because how I think this is

Dave: 36:57

going So to it's five years. What's going to happen in five years? Let's clarify. Clarify. A bet here, I think.

Michael: 37:03

All right. So I'd say no open and closing auction other than let's say it's still $24.05. Right? Then I'd say, Okay, well, Sunday night, you're probably going to have one like you do now with the futures. Then on Mondays, you're gonna have some because how I think things are gonna work is you're gonna have these now happen around events.

Michael: 37:25

So we have natural halt rules in the market currently, right? Right now we do this weird thing where we come out with the most important events in the market when there's no halt rules present. So think about Nvidia earnings, right? They don't report earnings in the middle of the day because they know the second they do the stock would halt just right? Because it would move so much, it would halt.

Michael: 37:45

And then you have these opening auctions when it opens up. So I would say this is going to cause just like we always do. This is going to cause a whole bunch of panic. There's going to be some weird overnight flash crash that's 100% going to occur because we're doing this kind of stuff, let alone the 5x leveraged ETFs, which is probably another podcast for another time. But what I would say is probably going to happen is companies are going to learn around events to either preemptively halt their stock, which is something if you didn't know a company that for the listeners, if you didn't know a company can do that anytime.

Michael: 38:21

Right? Tim Cook can pick up the phone, say and to the Nasdaq and say, halt my stock. I'm going to renounce something crazy. So I think there might be periods of time in which it stops trading, but I think it'll be more on a security by security basis. And then there'll be opening auctions kind of after that.

Michael: 38:39

I think it'll be less to do with the way it's happening now, which is a lot of index rebalancing is why things are halting and un halting. Again, there's no rebalance if if things are just happening kind of 20 fourseven here.

Dave: 38:52

Okay, so maybe the bet should be Let's see. Probably some sort of volume measurement of opening and closing auctions decrease? Like you would say in five years, they're going to have decreased dramatically

Michael: 39:12

They to the point of being no longer spike at the beginning, because I think it's going to be smooth.

Dave: 39:18

Well, opening print and the closing print now. You could look at those prints and see the amount of volume in them. We could measure that over time. And you would say in five years, it's going to have reduced by some amount. We can agree on this amount

Michael: 39:37

Alright.

Dave: 39:38

For for the purposes of the bet. Mhmm. And I think which the my sense is the number you're gonna come up with. I'm gonna take the bet on the opposite side, so it's it's not gonna decrease by that amount.

Michael: 39:49

I'll think of the number and then for the bet, what we're betting is we'll meet up when when it's done, and I'll take you out to a really nice restaurant.

Dave: 39:58

And Okay.

Michael: 39:58

Whoever pays, we'll do like a, I don't know, a Stallion steakhouse or sushi joint or something like that. And

Dave: 40:04

Yeah. Let's let's come up with it. I'm ready to I'm ready to I'm ready to make that bet. Let's do it.

Michael: 40:10

Because I yeah. And and so the reason so the reason I say the biggest since decimalization, you know, I keep going back to the audience. It might not be as old as us, so I keep kind of the history is that before the market traded in pennies, it traded in in first it was halves and then quarters and then eighths and then sixteenths of a tick. Then when it made that leap from sixteenths to pennies, there was a lot of people who their whole job, their whole life was making a spread. You know, if you bought something on the bid and you sold on the ask, just say when it was trading quarters, you made a quarter point.

Michael: 40:48

So if you could do that a handful of times every single day, and you just netted a quarter point, that was a a great living, right? You could make a couple thousand dollars a day doing absolutely nothing but making a spread. When those spreads narrowed to now, you know, you can get mid mid spread fills. So, know, you're trading point zero five It's getting ridiculous. It completely changed the game.

Michael: 41:10

I know entire firms that went under. Actually, Bernie Madoff. The reason Bernie Madoff started to scam is because he used to trade this kind of market making style. It's how he did so well. When that got dissolved, he just instead of saying my edge is gone, I'm gonna pack up and take my millions of dollars and go home, he, you know, scam people and and the rest is history.

Michael: 41:31

So the I think a lot of the same thing may occur with people who are used to trading opening ranges on on things. And I'm specifically thinking about the penny stock movers du jour, right? You can look up any penny stock mover each day. And more and more as my kind of career has gone on, it's gone from like an eight, you would see the large spike to at, you know, now it's around four sometimes you see a large spike. And now that's just going to be clustered around events.

Michael: 42:04

And the problem I think that's going to arise from that is that there's no human being that's going to be able to monitor all of these and be able to be out with all of them. So this is my pitch to the people out here there that are listening that are not systematic trading or not trading with robots is I don't think you will physically be able to do it in a couple years from now. I think you will have to be a systematic trader. You will have to get the systems to trade for you within a couple years, or you're gonna be looking at your calendar and you're gonna be like, okay, this company reports at this time, and that company reports at this time, and then this one has an FDA approval at three in the morning, and then, and there's just not gonna be a way that you're going to be able to be there for all of the events that you wanna trade. So you're either gonna have to pick and choose some, or, you know, it's come on board.

Michael: 42:58

Right? Start to start to trade a little bit more systematically.

Dave: 43:02

Yeah. Well, I think I mean, I think a big inflection point in traders' careers is when they start automating their trades. I mean, that it's very clear to me that that's when people start doing really well. But the other thing that you have to do is come up with a way to adapt. And that's sort of what we're talking about here.

Dave: 43:24

There's no guarantees in this space. There's no guarantees that your strategy is going to continue working. No guarantees that the market's going to continue operating exactly like it does today. It's constantly changing, so you have to have a process for adapting or you're not going to be able to make it. That's the hardest part of this, of trading is you literally have to reinvent yourself every so often.

Dave: 43:52

So that's the hard part. And that's what that's really what we're talking about here. You may have to reinvent it yourself in ways that you have not imagined.

Michael: 44:01

So yeah, and I, you know, and I think that's a that's a perfect way to summarize that is that we just spent I'm just looking forty five minutes kind of spitballing what this change could mean. But there was never a time where any of us said this isn't going to do anything Like we know that there is a large change with these twenty four hour markets and tokenization and and all of this. We know that it it is it is not only coming, it is happening currently. The we may be at odd sometimes or may not know what that outcome of the change is going to be. But we do know there's going to be a change and that that will change everything, right?

Michael: 44:38

Whether it's a, you know, a huge impact, 100% impact, or whether it's a 20% impact, things are going to trade differently before and they are now. And I would also encourage you that even if they don't change super dramatically, you know, it's kind of my argument, like the argument I make to Dave all the time. If you're not trading overnight currently, you've got all your money sitting in cash, not doing anything. It's gonna be the same thing when the markets become twenty four hours, three sixty five. Say you have a very automated and amazing opening range break strategy, and that continues to work even after all these changes take place.

Michael: 45:14

Well, that's great. And right, I'm happy for you. But now you're now you're not just leaving the other, you know, six hours because you're only trading that first half hour. You're not leaving that other six hours with not a bot monitoring to see if there's an event to trade. Now you're leaving the other twenty three and a half hours where you could be doing something with your money and you're not doing it.

Michael: 45:36

So, even if what you're doing now isn't destroyed, there is a lot of opportunity that's being created that maybe you're not exploring the way you should.

Dave: 45:46

Yeah, that's there'll definitely be changes with this and new opportunities for sure. I would yeah, I would would wonder whether it would how it would affect swing trading. I mean, because a big part of swing trading, I think, is I I would argue is the fact that there's no trading in between the days.

Michael: 46:07

Well, I I think I think and I was actually have this written down in my notepad to make this joke, but I think this will be the only thing that will solve the debate between us about swing trading versus day trading, because I don't think either terms will exist anymore. It's kind of like if you talk to a forex trader or a crypto trader, they have no concept of if you're someone who only is traded crypto, you have no concept of what's a day trader, what's a swing trader. They don't ask that. What they ask is what's your time frame? So what they mean is generally it's, you know, technical analysts and discretionary ones.

Michael: 46:42

They mean what time frame do you set your chart up at in order to make your analysis off of? Some people say, oh, I'm a fifteen minute guy or someone say I'm a four hour guy or something like that. But they don't have a concept of I'm a day trader, I'm a swing trader, because if you bought a breakout on this cryptocurrency and it's just trending higher, they're not just going to they don't have this arbitrary 04:00 period where they have to sell their security in order to go. They'll just go away on their phone and just watch it, you know, periodically or or have some sort of alert in place or something like that. So I agree that I think this is going to completely destroy the day trading, swing trading, whatever.

Michael: 47:21

I think I'm probably going to be doing more short term trading, and then you're probably going to be doing some more long term because what it may do is as opposed to now where we kind of test everything for day trading and say, okay, what happens if I hold this to the close? It will just, you won't be able to do that anymore. So it'll have to be either a number of bars you test or more likely a some type of trailing stop because you've you've eliminated that time aspect and you can just if if I yeah. I know you would not be opposed if there's plenty of liquidity if you short a stock, and it's at $10, and it's gonna take three days to grind its way back to $3. But if it never gives you a signal to to get out, and just hold it until then, right?

Michael: 48:04

You just there's I think there's that potential of way more money in the end. Again, these lines are going get blurred and then completely destroyed.

Dave: 48:10

Yeah, I think it de risks holding overnight for sure. So I think that's a good thing. Mean, that's part of the reason. I don't know. That's some portion of the reason that I don't hold overnight typically.

Dave: 48:25

But yeah, I think this is a great topic. I love you bringing this up and, I'm down on my keyboard or looking at my charts or thinking about my strategies a lot. It's good to bring me up from my layer to talk about something like this. This is great.

Michael: 48:45

Well, yeah, it's it's like anything you spend 90% of your time working on what's in front of you, but you should spend, you know, 10% of your time looking at what's at what's coming because think shit's changing dramatically between this and, like, AI and and everything. So I was really interested to see it. I had a couple of friends send it to me, and and what do you think? And, yeah, it just kinda got me got me thinking about it. But I am sure there'll be more conversations about this to come as it's kind of unfolding in front of us.

Michael: 49:15

So wherever you're, you know, listening to this and whatever, make sure you stay tuned because, yeah, I I I had to check the time to see if we were going too long because I was just having so much fun talking about it.

Dave: 49:26

Yeah. Well, let's if anybody has any opinions on our bet that we just discussed and that we're gonna clarify and nail down, that'd be a good discussion topic. Let us know what you think.

Michael: 49:38

Yeah. And also, you know, let us know. Is there anything that we didn't discuss that you think both tokenization and and the results from it? One of them being twenty four hour trading that we didn't think about because I'm spending a fair amount of time thinking about this. And I think you could there's way more that I haven't even thought about yet that that is going to impact and is going to change that, you know, right now, like options expiring, for example, happens at a random time.

Michael: 50:07

Maybe it won't be, maybe we'll be continuous. All kinds of cool stuff to talk about, but we won't draw on about it anymore. We'll wait to do this again once something else has changed. But as always, I'm Michael Noss.

Dave: 50:20

And I'm Dave May. See you next week on Line Your Own Pockets.