The world relies on one semiconductor company. 

How did an economic ecosystem let itself get boxed in like that?  About the same way it happened in the stock market.  There’s a lesson for public companies and investors.

Yang Jie and colleagues at The Wall Street Journal June 19 wrote a thorough treatise (subscription required) on the extraordinary rise of TSMC, as it’s known, under founder and Texas Instruments veteran Morris Chang.

Courtesy Dreamstime.com

And how 92% of the world’s most sophisticated chips depend on it. And nearly 60% of all chips, including all the ones for iPhones, the chips for cars, for PCs, for a vast array of devices operating on microcircuitry.

The company is a juggernaut and Morris Chang, 89 and now retired, is a genius.  But a different term comes to mind for participants in the semiconductor industry who let themselves become so perilously dependent.

And what about the consumers of the products?  Was no one aware that the boulevard ferrying technological essentials had a sign on it saying “not a through road?”

There was a failure of hindsight and foresight, a fixation on discrete objectives at the expense of broad comprehension of its mechanics and structure. Seems to me, anyway.

What’s this got to do with the stock market?

There’s a similar lack of imagination over the past 15 years among public companies participating in it.  Finra says it regulates about 3,400 brokers.  But 30 of them execute nearly all trading volume, data we’ve observed ourselves as the leader in Market Structure Analytics for public companies.

If you want to know how the stock market works, join ModernIR June 24 to learn how the Great Meme Stock Craze of 2021 happened – and can happen to you. 

Back to the point, it’s far worse than 30. About ten firms handle nearly all customer orders, and another ten set most of the prices but have no clients and aim to own nothing.

And $500 billion daily dances delicately through that machinery.

It happened the way it did for TSMC.  Once, there were many designers and fabricators.  Then designers discovered they could cut costs and burdens by leaving the fab business, outsourcing it to TSMC.

It made sense operationally. It’s a lot cheaper not building and running factories.  The WSJ article says a single fab may cost $20 billion to build.

And by the time you finish, maybe the technology has moved on, and now what?  TSMC will spend $100 billion the next three years staying current.  Hard to compete with that.

The same thing happened in the stock market, though for somewhat different reasons.  Among the thousands of broker-dealers buying and selling securities for investors, the great majority got out of the fab business, so to speak.

They don’t clear their own trades. They don’t even execute their own trades. They’re introducing brokers.  They sell to customers but outsource trading and account services.

It’s an operational decision. You can’t make money owning the infrastructure.  But the reason is market rules created by Congress and regulators.  First, stocks were decimalized. Brokers counted on the spread between buying and selling for profits.  Poof, gone. There went the fabs.

Then regulators in 2007 implemented the 1975 Congressional vision of a “national market system” connecting all markets electronically and setting in motion a rigorous rules matrix on handling trades. It forced most firms to send their trades to a handful capable of making the equivalent of a $20 billion investment in chip fabrication.

And intermediary profits didn’t vanish. Oh no, they’re larger than ever. But where big spreads between stocks in the past supported sellside research and deep arrays of stock-trading by firms with customers, now tiny spreads accrue colossally to a handful of firms you’ve barely heard of.

Read the Front Month Newsletter piece called Jane Street and the Arbitrage Royal Family.  Sounds like a vocal group from the 1960s. If Gladys Knight ran a market-making firm, she’d call it PipTrading LLC.

Jane Street is killing it. Arbitragers. Should that not raise eyebrows?

The Stock Market has the very same supply-chain issue that besets chips.  We only learned about Chip Trouble through the 2020 Pandemic. We shut down the global supply chain.  Now it can’t get back to level.

Supply-chain flaws will show in the stock market when a fab fails, the supply chain stalls. I’m not worried about it. You should be!  Public companies. Investors.  You’ve let parties with no vested interest in the market – regulators – hang it on a fragile wire.  Like the kind etched by Extreme Ultraviolet Lithography.

Look that one up.

Will we ask for a report on the stock-market supply chain before it’s our undoing?  Or is it TSMC all over again?

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