One model of capital markets is that volatility is bad and stable policy is good. Investors are more likely to commit capital to socially productive projects if they expect a reasonably predictable reward. Investing is a way to participate in long-term economic growth, and steady growth helps investors to plan for the future and entrepreneurs to raise capital.

Another model of capital markets is that people like gambling, so introducing some extra volatility makes markets more fun and exciting and gives people what they want. How much should you save for retirement? Should you borrow money to build a new factory? Boring! Boring! Don’t ask those questions! Ask more fun questions like “should I YOLO all my money on GameStop call options?” On this model, economic policymakers should lurch drastically from one policy to another, because that will make things more exciting for their audience. It will also get the policymakers more attention, and attention is the most valuable thing in the world.

I am not sure that the second model is particularly orthodox — it shares some characteristics with my and Richard Thaler’s “Boredom Markets Hypothesis” — but doesn’t it feel relevant these days? The current economic policy of the United States is apparently to cause maximum chaos by announcing drastic changes in the global economic order in the morning and then walking them back at lunchtime. Is this good for corporate executives trying to plan their capital expenditures? Is it good for parents trying to save for college? No, of course not. But is it fun for gamblers? I mean? I guess? Here’s a Wall Street Journal article about them:

The market is experiencing one of its most volatile stretches in years. …

But a small group of younger traders are going on offense. Instead of retreating to safety, they are making even bigger, riskier bets: snapping up short-term options, piling in on just one or two stocks and wagering that, in a chaotic market, the swings that can bring steep losses will deliver them with even bigger wins. …

“The kids these days say, ‘No risk, no ‘rari,’” said Patrick Wieland, a content creator and day trader who has in recent weeks poured thousands of dollars into ProShares UltraPro QQQ. (“Rari” is slang for Ferrari.) Shares of the fund, a triple-leveraged ETF that aims to generate three times the daily performance of the Nasdaq-100 index, notched double-digit gains during a historic rally on April 9, but are still down more than 20% this month. …

Some investors admit that their recent moves amount to an outright gamble. Kiel Elliott, a Los Angeles-based executive at an entertainment studio, spent roughly $40,000 scooping up GameStop call options in early April. Calls, which offer the right to buy a stock at a set price, typically represent a bet that a stock will gain.

Elliott calls himself a “degenerate gambler” and says the market’s twists and turns have made for the perfect trading environment. GameStop shares have gained 25% this month.

“I’m probably losing years off my life,” said Elliott, 42. “I’m enjoying the ride right now. I need to remind myself I could lose it all tomorrow.”

This is not my personal cup of tea — I would prefer steady growth in my retirement savings! — but I think it is worth recognizing that a lot of the modern economy is made up of entertainment. People do seem to enjoy literal sports gambling. “Sports are sports, and entertainment is sports, and politics is sports, and crypto is sports, and stocks are sports,” I wrote, not that long ago. Perhaps making the stock market more entertaining, for some definition of “entertaining,” is actually a sort of accomplishment? I don’t know? I don’t especially believe that, but one does want some sort of explanation for everything that’s going on. “The whole economy is a meme stock now, so enjoy the ride” feels like a grim but useful explanation. [1]

On that note, here’s a Bloomberg News story:

US Treasury Secretary Scott Bessent told a closed-door investor summit Tuesday that the tariff standoff with China cannot be sustained by both sides and that the world’s two largest economies will have to find ways to de-escalate.

That de-escalation will come in the very near future, Bessent said during an event hosted by JPMorgan Chase & Co. in Washington, which wasn’t open to the public or media. He characterized the current situation as essentially a trade embargo, according to people who attended the session.

The US stock market was up this morning, on some combination of “ Donald Trump won’t fire Jerome Powell” and “ China tariffs might ease” news. (Though the rally faded after “Scott Bessent cast doubts on a timely resolution to the US-China trade war,” since his previous optimistic remarks were made yesterday.) I suppose if the Treasury secretary told you, in closed-door investor summit, “the China tariffs will ease very soon,” you might reasonably say “hmm that should make the stock market go up” and then go buy some stocks. Is that … should he be doing that? Paul Krugman writes: “What the hell was the Treasury secretary doing giving a closed-door briefing on a significant policy change that hadn’t yet been officially announced? Isn’t that a setup for large-scale insider trading?”

And, I guess? I feel like economic policymakers have a long history of meeting with financial markets participants and sharing views; it is awkward, but it’s useful for the policymakers too. Possibly standards are lower in this administration, but I think the bigger difference is that this administration makes more news. Previous Treasury secretaries would have met with investors and said things like “the world’s two largest economies will have to find ways to work together,” and the investors would have said “sure of course” and it would not have been particularly market-moving. But when this Treasury secretary tells you that, your reaction is “oh wow that is a drastic policy shift from yesterday” and you rush to buy stocks. When economic policy reverses every day, it’s much more valuable to be in the room when it changes.

Elsewhere: “ Trump to Host Dinner With Top Holders of His Memecoin.” Okay!

A stylized story of trading is that, in the olden days, customers traded by calling a dealer (often an investment bank), which did two essential jobs:

1. The dealer made markets: When a customer called to say “what’ll you pay for this bond,” the dealer would say “we’d pay you 99.5 or sell it to you for 100.” And the customer would say “you buy” and the dealer would give the client $99.50 and buy the bond for its own inventory, hoping to sell it later, to another customer, for $100.
2. The dealer provided customer service: The dealer, for one thing, had a phone number that customers could call; it advertised itself as being in the business of buying and selling bonds for customers. When a customer didn’t call to say “what’ll you pay for this bond,” the dealer would call the customer up proactively and say “he we got a lot of nice bonds for sale if you’re interested.” The dealer would send customers research and market updates, to encourage trading and to make the customers think fondly of it. The dealer’s salespeople would take the customers out for drinks and dinners and sporting events, hoping to win the customers’ loyalty.

And then many important stories of modern markets are about the unbundling of these two services. Now, lots of firms compete successfully at making markets without doing the customer-service stuff, while other firms compete to do the customer-service stuff and leave the market-making to others. Some examples that we have discussed:

• US retail stock brokerage is all like this: There are retail brokers who have shiny apps and customer relationships, but when a customer wants to trade, the broker sends her order to an electronic market making firm to fill it. The market maker makes markets; the broker handles the customer service.
• Hedge funds and proprietary trading firms are increasingly in the business of making markets in bonds, to the point that for a while the US Securities and Exchange Commission wanted to regulate them as “dealers.” I wrote that now “you can have the trading model of a dealer (making markets, providing liquidity, making the bid/ask spread) without the traditional business model of a dealer (salespeople, customer service, advertising).”
• Meanwhile, some banks have retreated a bit from doing trades on their own balance sheets, but they remain in the business of customer service. When a customer calls looking to sell a bond, the bank will take the call, but it won’t buy the bond itself. Instead it will find some other customer to buy it. Or, more efficiently, it will set up an arrangement with Citadel Securities, where the bank keeps the customer relationship but Citadel Securities provides the price and takes the other side of the trade.

The most general and most important form of this story is that a crowd of high-speed electronic trading firms has grown up over the last decade or two, firms that are very much in the business of using technology to make markets, but that are not much in the business of customer service. Many of these firms started in equity and futures markets, which have historically been less dealer-driven than other financial markets: Stocks tend to trade on exchanges, so you can do trades just by quoting prices on the exchange without having a phone number for customers to call. But they have expanded into bonds, foreign exchange, swaps, etc., pushing those markets toward models involving more all-to-all electronic trading and less calling dealers on the phone. These firms can be more efficient than the big banks with their armies of salespeople: Their computers can quote the best price the fastest, so they win lots of trades, and they don’t need as many employees or US Open tickets, so they have high profit margins. Jane Street — which is more or less in this category — “generated $20.5bn of net trading revenues in 2024, up 94 per cent from 2023,” the Financial Times reported today, “as it elbows into a business once dominated by traditional Wall Street heavyweights.”

Still, there is a reason that the old model existed. I mean, some of it is just historical path dependency, but some of it is the obvious intuitive reasoning that, if you take the customers out for drinks, they will send you better trades. If you are an anonymous electronic quote on a screen, customers will only trade with you if your quote is better than all the other anonymous electronic quotes. If you build warm client relationships, your customers might call you first and trade without shopping around.

Also, if you are an anonymous electronic quote on a screen, you will trade with all sorts of people, including a lot of sharp customers who buy stocks for $100 knowing that they will soon go to $105. If you trade with people with whom you have warm client relationships, you can try to avoid the sharp customers, or at least adjust your prices appropriately. 

And so if you have built a successful modern market making firm that is in the business of doing lots of trades by offering the best prices anonymously on screens, you might want to re-bundle that product with the customer service business. You might hire some salespeople and build some relationships so that you can get good steady orders from good steady customers, rather than fighting to show the best price on every order on anonymous electronic platforms. 

Bloomberg’s Justina Lee and Ana Irrera write about the European electronic trading firms who are trying to sign up customers for bilateral trading:

[Oscar van Schaijk] is flying all over Europe, attending conferences, roundtables, and the offices of major money managers. Basically any place that puts him in front of the investors that his employer, the Dutch market maker Optiver Holding BV, increasingly deals with directly.  …

Van Schaijk’s mission is to sign deals that set up direct connections between Optiver and buy-side investors, cutting out the brokers and exchanges who usually sit between in a major challenge to the established stock-trading order. 

At the same time, rival market makers including XTX Markets and Tower Research Capital are also providing liquidity to the buy side on a bilateral basis, according to people familiar with the matter, albeit with a broker showing quotes and handling settlement. Goldman Sachs Group Inc., which acts as both a market maker and broker, has recently started streaming quotes directly to its money manager clients, another person familiar with the matter says.

These new kinds of arrangements — more akin to currency trading — are stirring concerns among some market participants, who fear they’re a threat to transparency and liquidity in an already fragmented financial landscape. But as ultra-fast firms take an increasingly key role on both sides of the Atlantic and ever-more activity migrates away from exchanges, this shift in how stock trades get done is gathering pace. …

These bilateral arrangements can help a market maker manage their own overall exposure, plus bring in flows while avoiding trading against ruthless rival firms or fast-money players who will be seeking to profit against it. The pitch for the investor is convenience, access to liquidity that might not be on exchange, and maybe even better pricing (since the market maker doesn’t need to build a cushion into their quotes in case they’re trading against a rival).

Yes: Trading with a customer is in many ways nicer, for a dealer, than trading with a quote on a screen. Which means that, if you get big enough in electronic trading, you might decide to sign up some customers.

If you are a big pension fund, you could have two types of relationship with a private equity fund:

1. You could be an investor in the fund. You give the fund your money, it invests the money in deals, you get the returns on the deals, you pay the fund’s managers 2% of assets and 20% of the returns.
2. You could be a co-investor with the fund. The fund’s managers call you up, they say “hey we have a deal to buy Company X, are you in,” you think about it, and you say “yes” or “no.” If you say no, you don’t invest in the deal. If you say yes, you invest some of your money in the deal, you get the returns on the deal, and you maybe pay the fund’s managers a fee for bringing you the deal: perhaps a 2-and-20 style arrangement for the co-investment, but more likely a reduced fee or even no fee.

The second arrangement seems pretty good for you: You get the private equity firm’s expertise at finding and negotiating deals and managing portfolio companies, but you get the option to say no to any deals you don’t like. And you generally pay lower fees. 

The first arrangement seems obviously better for the private equity fund’s managers: They have committed capital to make the deals they want, rather than having to come to you individually for each deal and risk getting declined. And they can charge higher and more consistent fees.

If you are a big pension fund you will probably do some mix of these things, with the exact mix determined by how much leverage you have and how much leverage the private equity managers have. If you are desperate to get into their deals, you will have to do that through their funds. If they are desperate to get your money, they will have to offer you co-investments.

There is also a third approach, which is that you get big enough to build in-house private equity expertise, and just do deals yourself without any help from a private equity fund manager. Again the mix will depend on relative leverage: The more deals you do yourself, the more you will compete with private equity fund managers, and the less access you will get to their deals. If you do better deals than they do, you won’t care about missing out. If you need their deals, you will dial back your own.

The stylized story of private equity these days — exits are scarce, limited partners want liquidity, fundraising is challenging — might suggest that the pensions would have a lot of leverage and the private equity managers would have less: The funds need investors’ money more than the investors need the funds. But here’s a Financial Times story about Canadian pension managers:

Caisse de dépôt et placement du Québec (CDPQ) and the Ontario Municipal Employees Retirement System (Omers) are scaling back the proportion of their funds exposed to directly owned private companies, while Ontario Teachers’ Pension Plan has said it is eyeing more strategic partnerships. …

At present, the nine biggest Canadian pension funds have about half of their private equity exposure in buyout funds and half through direct holdings and co-investments, according to analysis from CEM Benchmarking.

But that balance has shifted as pension funds have come under pressure to invest in buyout funds to secure access to the best co-invest deals, where they get to invest alongside the firms but without having to pay fund fees. …

Marlene Puffer, former chief investment officer at Alberta Investment Management Corporation, said … that pension plans allocated money to private equity funds on the understanding that they would be invited to invest in many of the co-investment opportunities that arise with them.

It was “difficult for Canadian pension funds to compete for talent with Apollo that pays much better”, another fund executive said. 

Martin Longchamps, CDPQ’s head of private equity and credit, said the rationale behind its shift towards more partnerships was to “drive access to deal flow through those relationships”. Omers’ chief investment officer, Ralph Berg, said the pension fund had “evolved our investment strategy over the last couple of years to explore different models and use funds where it is complementary”. 

I guess they need the deals more than the deals need their money.

Ahahahaha:

Hedge fund manager Robert Gibbins, who returned clients’ capital in 2022 following years of losses, is looking to raise external money again after his revamped strategy produced double-digit gains for his macro hedge fund.

The founder of Autonomy Capital Research is wooing potential investors to back what he calls a “modern macro” strategy that looks at disruptive technological shifts as a source of major macroeconomic drivers, according to a person familiar with the matter and an investor letter sent by Gibbins last week.

One such trade — profiting from falling share prices of conventional European automakers disrupted by Chinese electric vehicle manufacturers — helped his macro hedge fund surge 53.8% last year, the second-biggest annual gain for Gibbins since he founded Autonomy in 2003, the person said, asking not to be identified because the information is private.

A representative for the investment firm declined to comment.

The fund, which currently manages Gibbins’ own and partners’ capital, made 28% in 2023 and was up 9% during the first quarter of 2025 amid a challenging environment, according to the letter. The returns are net of expenses. Assets at Autonomy peaked at about $6.3 billion in 2019 and declined to less than $1 billion by March 2022. It’s unclear how much the strategy runs currently.

I wonder how many times you get to do that. Obviously if you are a hedge fund manager who alternates runs of losses with runs of impressive gains, it is better for the clients if you manage outside money during the gains and only your own money during the losses. But that is hard to do in practice. People want to invest with you after a run of gains, not after a run of losses, which has the unfortunate result that they invest with you right before the run of losses.

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