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    Why it matters when trades settle

    THE PAEANS that followed the recent retirement of KKR founders Henry Kravis and George Roberts, formerly private equity’s barbarians-in-chief, are a reminder that the story of Wall Street is one of big deals, bold trades and the people behind them. Those further behind them, in the “back offices” of banks, brokers and buy-out firms, barely get a look in. Understandably so: their world is colourless compliance and “post-trade” processes, like clearing and settlement. They are the plumbers of finance, toiling behind the scenes to ensure that the pipework, well, works. Every so often, however, there’s a gurgling noise loud enough to unsettle even those cocksure colleagues out front.The system for settling stock trades—ensuring the buyer gets her security and the seller his cash—came under strain during the covid-induced volatility of March 2020. It creaked again early this year amid the meme-trading frenzy in GameStop shares. A report by regulators into that episode, published on October 18th, noted drily that post-trade processes, “normally in the background, entered the public debate”. It was thanks to spiking margin calls and volatility-induced settlement risks that Robinhood, a retail broker, restricted trading in GameStop stock, causing uproar.Risk is a function of time. The longer between trade execution and completion, the bigger the “counterparty” risk, or the chance that one side or the other fails to pony up—as anyone caught mid-trade when Lehman Brothers or Archegos Capital collapsed can attest. And, therefore, the heftier the margin payments that brokers and investors have to post with clearing-houses.Hence the long-running push to bring down trade-processing times—from 14 days (“T+14” in the parlance) in the 18th century, when certificates were carried on horseback and ship; to under a week following reforms in the wake of the 1968 Wall Street paperwork crunch, when a trading boom forced exchanges to close one day a week for months to allow the backroom boys to catch up; to T+5, then T+3, and, four years ago, T+2.Still, a lot can happen in two days on Wall Street, so why stop there? Spurred by the market gyrations of last year, a group representing banks, investors and clearers has been studying a move to T+1 and is expected within weeks to unveil a plan for how to get there. The signs are that the Securities and Exchange Commission will bless it. If so, the halving of settlement time could kick in as early as 2023. Europe, for one, would probably follow suit.Lest anyone think the titans of finance are going soft, it should be pointed out that they are not pushing this solely for the greater good. They are as interested in cutting their own costs as systemic risks. During last year’s market turmoil, overall margin demanded by the DTCC, America’s clearing agency for stocks, jumped five-fold, to more than $30bn daily. Hundreds of billions more a year are tied up by “fails-to-deliver”, delays owing to settlement failures (the causes of which range from mistyping errors to more sinister practices such as failing deliberately in order to manipulate the price of a stock). Freeing up this capital would leave financial firms with a lot more to invest profitably.Why then stop at one-day settlement? Evangelists for so-called distributed-ledger technology are touting the possibility of going to T+0, known as “atomic” settlement. This looks technically feasible; indeed, some broker-to-broker trades at the DTCC are already settled on a near-instantaneous basis.But is it desirable? There is a big difference between reducing settlement time and eliminating it. In the latter, the buyer would have to be pre-funded and the seller immediately ready to swap. Every bit of a complex process would need to be synchronised, with no room for error. It may also require a wrenching restructuring of the giant securities-lending market, which is designed to fit with settlement with a time lag.Cue cries of “Luddite!” But Buttonwood is in good company in advocating keeping some redundancy in the process. Ken Griffin, boss of Citadel, one of America’s largest marketmakers, and thus no techno-slouch, has described real-time settlement as “a bridge too far” because it requires “everything [to] work perfectly in a world where there’s still people involved”. The message is clear: pushing things too far could replace one set of risks with another, scarier one, in which a small number of failed trades set off a chain-reaction across back offices worldwide. Atomic indeed.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “When the pipes creak” More

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    Time for orderly resolution for Evergrande is running out

    HOMEBUYERS, investors and analysts have been waiting for months for a peep from China’s regulators on a plan for Evergrande, a massive homebuilder on the brink of collapse. But when the central bank at last chimed in on October 15th to say that the risks were controllable, few took comfort.The situation in recent weeks has become only more unwieldy. Evergrande has already missed several offshore-bond payments and could, after a 30-day grace period, officially default on October 23rd. A plan to raise $2.6bn by selling a stake in its property-services arm has fallen through. Confidence in China’s housing market has been jolted. A handful of other developers have either missed or say they plan to miss offshore-bond payments. Sinic became the latest to default on October 19th.Many investors fear that the authorities are running out of time to avert greater turmoil in the housing market. The main concern is that Evergrande and other troubled developers will not be able to complete the homes they have already sold to ordinary Chinese people. (Evergrande alone owes an estimated 1.4m pre-sold units to buyers.) That would further drain confidence from the housing market and deliver a devastating shock to already weak economic growth.Averting broader fallout will depend on two things. The first is opening the channels of finance, in order to keep building sites buzzing with workers and suppliers. Here things do not look good. Many industry-watchers had expected the central government to capitulate to the crisis and command banks to lend more to developers. But that has not happened so far. The situation in the bond market is worse. The distress at Evergrande has helped fuel a cash crunch for other high-yield-bond issuers, shutting even non-property firms out of the market for desperately needed dollars.Developers were once able to bring in lots of liquidity by pre-selling homes. But now activity is slowing down. Developers’ spending on capital expenditure and land purchases fell by 3.5% in September, compared with a year earlier. Home starts and sales by value have continued to slide. House prices fell in September, the first monthly decline since 2015.Help could also come in a second form: a grand restructuring plan. But that would take time. Evergrande alone has more than 1,000 projects across China; other developers will only add more to the count. If the projects are to be kept running, local governments will probably need to take over their operation, requiring complex negotiations in hundreds of cities. Whether all this can be pulled off is far from clear. Yet failing to deliver on projects that have already been purchased would be catastrophic for the government, given that Xi Jinping, the president, has promised a new era of social equality. If the state has a plan, it will need to make it known soon.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Evergrande plans” More

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    Southwest Airlines' October flight cancellations cost carrier $75 million

    Southwest’s meltdown earlier this month disrupted travel for tens of thousands of customers.
    The airline had been struggling with understaffing for months.
    The carrier posted a third-quarter profit thanks to a boost from federal payroll support.

    Passengers check in for a Southwest Airlines flight at Orlando International Airport in Orlando, Florida, U.S., October 11, 2021.
    Joe Skipper | Reuters

    Southwest Airlines on Thursday said mass flight cancellations and delays that disrupted travel for tens of thousands of customers earlier this month cost it $75 million.
    Dallas-based Southwest canceled more than 2,000 flights between Oct. 8 and Oct. 13. It blamed the meltdown on bad weather in Florida and air traffic control issues, which was compounded by staffing shortages. Its closest rivals, including those in Florida, had relatively minimal cancellations.

    The hit came from flight cancellations, customer refunds and “gestures of goodwill.”
    The airline reported a third-quarter profit of $446 million on Thursday thanks to a boost from federal aid and voluntary leaves of absence by employees, but it said staff shortages led to operational problems that hurt its bottom line.
    “Our active (versus inactive) and available staffing fell below plan and, along with other factors, caused us to miss our operational ontime performance targets, and that created additional cost headwinds,” Southwest CEO Gary Kelly said. That along with a surge in Covid-19 cases led to a revenue hit of $300 million, he said.
    Here’s how Southwest performed in the third quarter compared with what Wall Street expected, based on average estimates compiled by Refinitiv:

    Adjusted results per share: a loss of 23 cents versus an expected loss of 27 cents.

    Total revenue: $4.68 billion versus expected $4.58 billion.

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    Twitter buys chat app founded by a serial entrepreneur who sold his first start-up to Yahoo when he was 17

    Incorporated in 2016, Sphere started out as a real-time question and answer app that involved micropayments before it pivoted to become more of a group chat app.
    It raised around $30 million over three funding rounds from investors including Index Ventures, Airbnb co-founder Brian Chesky, Tinder co-founder Sean Rad and Sequoia venture capitalist Mike Moritz.
    “The Sphere team’s expertise and leadership’s passion for finding ways to help people connect will help accelerate our Communities, DM, and Creators roadmaps,” said Twitter’s vice president of engineering, Nick Caldwell.

    Jack Dorsey creator, co-founder, and Chairman of Twitter and co-founder & CEO of Square arrives on stage at the Bitcoin 2021 Convention, a crypto-currency conference held at the Mana Convention Center in Wynwood on June 04, 2021 in Miami, Florida.
    Joe Raedle | Getty Images

    LONDON — Twitter announced that it’s acquired a chat app called Sphere, which was co-founded by British serial entrepreneur Nick D’Aloisio.
    Incorporated in 2016, Sphere started out as a real-time question and answer app that involved micropayments before it pivoted to become more of a group chat app.

    Between 2017 and 2019, it raised around $30 million from investors including Index Ventures, Airbnb co-founder Brian Chesky, Tinder co-founder Sean Rad and Sequoia venture capitalist Mike Moritz.
    “It’s really important and necessary in order to achieve impact to partner with the right companies at the right time that have similar visions and ideas,” D’Aloisio told CNBC on a call.
    Roughly 500,000 people used the first version of the app, D’Aloisio said, but he declined to comment on the latest user numbers.

    The terms of the deal, which was announced Wednesday and will see approximately 20 Sphere employees join Twitter, have not been disclosed. But D’Aloisio claimed “everyone is happy.”
    Sphere said in a blogpost that it will be “winding down” its standalone product in November as a result of the acquisition. “Obviously Sphere was our own thing and that’s no longer relevant to what Twitter is trying to achieve,” D’Aloisio said.

    The entrepreneur added that he and his team will work alongside Twitter employees to try to take the “vision” they had at Sphere and “integrate that into various parts” of Twitter.  

    Nick Caldwell, vice president of engineering at Twitter, announced the acquisition of Sphere via his company’s social network.
    “The Sphere team’s expertise and leadership’s passion for finding ways to help people connect will help accelerate our Communities, DM, and Creators roadmaps,” he said.
    D’Aloisio sold his first start-up, a mobile news app called Summly, to Yahoo for $30 million in 2013 when he was 17 years old. He spent two and a half years as a product manager at Yahoo before becoming an “entrepreneur in residence” at Airbnb, where he worked with Chesky.
    He started Sphere while studying computer science and philosophy at the University of Oxford, which is where he met his co-founder, Tomas Halgas.
    Over the years, Twitter has acquired several other U.K. start-ups with the best-known one being TweetDeck. It has also bought artificial intelligence firms Magic Pony Technology, Fabula.ai and Aiden.ai.

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    5 things to know before the stock market opens Thursday

    5 Things to Know

    Here are the most important news, trends and analysis that investors need to start their trading day:

    1. Dow set to drop after hitting an intraday record

    Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., October 20, 2021.
    Brendan McDermid | Reuters

    Loading chart…

    The S&P 500’s rose for the sixth straight session, ending fractionally shy of its Sept. 2 record close. The Nasdaq fell modestly Wednesday. The tech-heavy index was more than 1.6% away from its Sept. 7 record close. Bitcoin took a breather Wednesday, one day after hitting an all-time high near $67,000. The 10-year Treasury yield rose above 1.66% after Thursday’s look at weekly initial jobless claims showed a drop to 290,000. That’s fewer than expected and another Covid-era low.

    2. Southwest, American report adjusted losses but better revenues

    A Southwest Airlines Co. Boeing 737 passenger jet arrives at Midway International Airport (MDW) in Chicago, Illinois, U.S., on Monday, Oct. 11, 2021.
    Luke Sharrett | Bloomberg | Getty Images

    Southwest Airlines on Thursday reported a third-quarter profit thanks to a boost from federal payroll aid. However, excluding one-time items, the carrier posted a per-share loss of 23 cents. Revenue was also better than analysts had expected. Southwest earlier this month canceled more than 2,000 flights, blaming the issues on bad weather in Florida and air traffic control issues compounded by staffing shortages. The airline said the cancellations and customer refunds cost $75 million. Shares of Southwest — up just 6% this year — rose slightly in the premarket.

    Pilots talk as they look at the tail of an American Airlines aircraft at Dallas-Ft Worth International Airport.
    Mike Stone | Reuters

    American Airlines on Thursday reported a profit for the third quarter thanks to federal payroll support. Excluding one-time items, American posted a loss of 99 cents per share. Revenue for the quarter was also better than expectations. Shares of American — up nearly 24% in 2021 — gained 1% in the premarket.

    3. Tesla beat on earnings, revenue; delivered lots more cars

    A Tesla car charges at a Tesla Supercharger station on April 26, 2021 in Corte Madera, California.
    Justin Sullivan | Getty Images

    Shares of Tesla — up more than 20% in 2021 and up 100% over the past 12 months — slipped 1% in Thursday’s premarket, the morning after the electric automaker reported third-quarter earnings and revenue that best estimates. Tesla delivered about 73% more vehicles than it had in the same quarter a year ago. Despite citing a variety of challenges, including semiconductor shortages and rolling blackouts, Tesla reiterated prior guidance that it expects to “achieve 50% average annual growth in vehicle deliveries” over a multiyear horizon.

    4. WeWork to go public in a SPAC deal at much lower valuation

    General view of WeWork Weihai Road flagship is seen on April 12, 2018 in Shanghai, China. World’s leading co-working space company WeWork will acquire China-based rival naked Hub for 400 million U.S. dollars. (Photo by Jackal Pan/Visual China Group via Getty Images)
    VCG | Getty Images

    WeWork is set to start trading as a public company Thursday, two years after its much-anticipated planned IPO imploded due to investor concerns over its business model and founder Adam Neumann’s management style. After Neumann was ousted, Japan’s SoftBank, already a major investor, bailed out the teetering WeWork. In March, the office-sharing company agreed to merge and go public in a deal with special purpose acquisition company BowX Acquisition. It values WeWork at $9 billion, a far cry from its steep valuation in 2019 of $47 billion.

    5. Trump announces social media platform launch plan, SPAC deal

    Homepage and app announcement of “Truth Social”. Former US President Donald Trump wants to start an alternative social network. Apart from the announcement, however, there is not much to see yet.
    Christoph Dernbach | picture alliance | Getty Images

    Former President Donald Trump announced Wednesday he will be launching his own media network, including a social media platform. The app appears to be the first project of the Trump Media and Technology Group, which will go public through a SPAC merger with Digital World Acquisition. That’s according to an announcement tweeted out by spokeswoman Liz Harrington. Trump, while president, was notoriously banned by major social media giants earlier this year, following his posts related to the Jan. 6 riot at the U.S. Capitol.
    — Reuters contributed to this report. Follow all the market action like a pro on CNBC Pro. Get the latest on the pandemic with CNBC’s coronavirus coverage. More

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    Don't bet against Tesla, says former president. But here's why he's not a shareholder

    Former Tesla president Jon McNeill told CNBC on Thursday he wouldn’t bet against the company.
    Currently not a Tesla investor, McNeill said the stock is “priced to perfection” right now,
    McNeill, now a venture capitalist, predicts the EV industry is at the beginning of what will be a “multi-decade growth story.”

    The former president of electric vehicle giant Tesla said Thursday he would not bet against the company, noting that it’s emerging as a “formidable competitor” to automakers around the world after the company beat third-quarter earnings expectations.
    Currently not a Tesla investor, Jon McNeill told CNBC’s “Squawk Box” the stock is “priced to perfection” right now, but he said he still drives Teslas. McNeill, also a former Lyft COO, highlighted strong gross margins at the company.

    “The gross margins are approaching 30%, just to put that in perspective, that is three times the gross margin level at GM, and about six times the gross margin level of Ford,” McNeill said.
    Despite supply chain issues, Tesla saw sales rise to record breaking numbers at the company, even as other automakers struggle to keep up with their own demand.
    “We’re up more than 70% year-over-year versus GM and Ford, which are seeing declines of around 30% year-over-year,” McNeill said, listing the multiple reasons he would not bet against Tesla. “They’re sitting now on $16 billion cash.”
    Drivers who order vehicles from Tesla often have to wait months before receiving the product, speaking to the demand for the electric vehicles but also raising production concerns among investors.
    With a new factory in Shanghai and two more expected to open in Texas and Berlin, the company has “proven they can open more than one factory now and produce at volume,” McNeill said, noting that Tesla’s Shanghai factory is producing so much that they’re exporting back to North America. “So I think the thing to keep an eye on here is their ability to increase production capacity to meet demand,” he added.

    Other automakers introducing hybrid or electric vehicles of their own just “opens more eyes to EVs,” according to McNeill. “Tesla’s got a dominant share in the U.S., they’re at 65% market share in the U.S., 21% worldwide, but I think that’s in the context of Tesla only having 1% market share in the global car market and EVs only have 4%.”
    McNeill, currently CEO of DVx Ventures, predicts the EV industry is at the beginning of what will be a “multi-decade growth story” for electric vehicles around the world.
    Shares of Tesla — up more than 20% in 2021 and up 100% over the past 12 months — slipped nearly 1.5% in Thursday’s premarket.

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    Crocs shares soar as earnings crush estimates and the retailer hikes its full-year outlook

    Crocs’ fiscal third-quarter earnings and sales trounced analysts’ expectations.
    The shoe retailer also raised it outlook for the full year, saying it has worked to minimize any impact from the global supply chain disruption.
    Crocs now sees fiscal 2021 revenue growing between 62% and 65% from 2020 levels, compared with a prior range of 60% to 65%.

    Footwear is offered for sale at a Crocs retail store on July 22, 2021 in Chicago, Illinois.
    Scott Olson | Getty Images

    Shares of Crocs soared in extended trading Thursday after the retailer reported fiscal third-quarter earnings and revenue that exceeded analysts’ expectations, as demand for its shoes remained strong.
    Crocs also raised it outlook for the full year, saying it has worked to minimize any impact from the global supply chain disruption. Despite manufacturing facilities in Vietnam being temporarily shut down in recent months, the retailer said it’s shifted production and leveraged air freight to transport goods.

    Its stock was recently up more than 11%, having rallied more than 115% year to date. Shares had closed Wednesday down nearly 5%.
    Here’s how Crocs did in the three-month period ended Sept. 30 compared with what analysts were anticipating, using a survey of analysts by Refinitiv:

    Earnings per share: $2.47 adjusted vs. $1.88 expected
    Revenue: $626 million vs. $610 million expected

    Third-quarter net income jumped to $153.5 million, or $2.42 per share, from $61.9 million, or 91 cents per share, a year earlier. Excluding one-time items, the company earned $2.47 per share, well ahead of the $1.88 that analysts had predicted.
    Revenue soared 73% to $626 million from $362 million a year earlier. That topped expectations for $610 million.
    Crocs said its direct-to-consumer sales were up 60.4% in the quarter, while wholesale revenue rose 88.2%. Digital sales climbed 68.9%, accounting for 36.8% of total sales, compared with 37.7% a year earlier.

    For the full year, Crocs now sees revenue growing between 62% and 65% from 2020 levels, compared with a prior range of 60% to 65%.
    In fiscal 2022, it said sales should be up more than 20% year over year.
    “Globally, our teams are managing through the supply chain disruptions to mitigate the impact on our business,” CEO Andrew Rees said in prepared remarks. “Despite the temporary disruptions, we expect 2022 revenues to grow … fueled by the strength of our brand and consumer demand globally.”
    Find the full earnings press release from Crocs here.

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    American Airlines posts profit thanks to federal aid, revenue improves

    American said it expects its fourth-quarter revenue will fall about 20% from 2019.
    Revenue improved sharply from last year.
    The carrier said it expects its capacity to be down 11% to 13% in the fourth quarter of 2021.

    American Airlines on Thursday reported a $169 million profit for the third quarter thanks to more than $990 million in federal payroll support.
    Revenue for the quarter totaled $8.97 billion down about 25% from the same period of 2019 but up from the $3.17 billion American brought in a year ago. That was ahead of analysts’ expectations of sales of $8.94 billion. Without one-time items, like government payroll support, American lost 99 cents per share, less than $1.04 per-share loss analysts expected.

    “While we don’t like reporting losses, this was our smallest quarterly loss since the pandemic began,” American’s CEO Doug Parker and the carrier’s president, Robert Isom, wrote in a note to employees.
    American’s shares were up 1.2% in premarket trading.
    For the fourth-quarter, American expects its revenue to fall by about 20% from 2019, when it generated $11.3 billion. It also said its capacity will be down 11% to 13% compared with two years ago.
    The Fort Worth, Texas-based airline forecast pretax margins, excluding special items, in the fourth quarter to be between negative 16% and negative 18%.

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