Monday Night Links

• CME is a stellar business. You best bet their employees get paid pretty well. After all, they generate more revenue per employee than many venerated Wall Street names and even Microsoft. Remarkably, they convert a lot of that revenue into profits. Each CME employee generates a net income that is 3.6x and 5.3x of a Goldman Sachs and a JP Morgan employee respectively. Exchanges enjoy natural monopoly economics by design. There is a high regulatory burden to get licensed and high capital requirements to operate, and even if those two conditions are met, the cold start problem is very hard to overcome. Unsurprisingly, exchanges tend to be national and asset-focused. Once an exchange achieves critical mass in a particular market (like CME did in futures), traders naturally gravitate there for the best liquidity. More traders mean better prices, which attracts even more traders, and the feedback loop is hard to break (network effects) for any new entrant. The strong network effects automatically drive revenue, significantly reducing the need for traditional operating expenses like sales and marketing. Ongoing capex is limited to tech spending that ensures necessary maintenance and gradual modernization of infrastructure. For CME, capex is to the tune of 5.5% of FCF. That is closer to other zero marginal cost industries, like Netflix (also at 5% capex to FCF) and well below traditional financial services firms like GS (12%) and MS (11%, all figures for trailing twelve months). [The Terminalist]
• Ilya talks about data as fossil fuels, a finite and exhaustible source. But they might well be like fossil fuels, where we identify more as we start to really look for them. The amount of oil that’s available at $100 a barrel is much more than the amount of oil that’s available at $20 a barrel. Even in the larger model runs, they don't contain a large chunk of data we normally see around us. Twitter, for the most famous one. But also, a large part of our conversations. The process data on how we learn things, or do things, from academia to business to sitting back and writing essays. Data on how we move around the world. Video data from CCTVs around the world. Temporal structured data. Data across a vast range of modalities, yes even with the current training of multimodal models, remains to be unearthed. Three dimensional world data. Scientific research data. Video game playing data. An entire world or more still lay out there to be mined! [Rohit Krishnan]
• In both countries, researchers and companies are working furiously to make batteries that rely on a very different starting material than the lithium-ion batteries currently powering everything from our cellphones to our power grids. Such a battery could break China’s near monopoly on crucial battery-making elements at a time when trade tensions and America’s electric storage needs are on a collision course. Instead of lithium, this nascent battery tech uses a sodium compound called soda ash, which can be produced using table salt. Unlike lithium, sodium is easily accessible everywhere. Even better for the U.S. is that China must synthesize soda ash from salt, while it is cheap and plentiful here. In fact, with 92% of the world’s reserves, you might even say that the U.S. is the Saudi Arabia of the stuff. [WSJ]
• Until the fever broke. Today, Donald Trump is victorious, and Obama is the loser. In fact, he looks physically awful—angry and gaunt, after a summer and fall spent lecturing Black men, and Americans in general, on their failure to vote enthusiastically enough for his chosen heir, Kamala Harris, the worst major party presidential candidate in modern American history. The totality of Obama’s failure left party donors feeling cheated. Even George Clooney now disavows him. Meanwhile, Trump and his party are in control of the White House, the Senate, the House of Representatives, and the Supreme Court. [Tablet]
• The problem, as always, is bid-ask. The more granular the noise you want to target, the harder it is to overcome transaction costs. If you’re paying 1bp to enter or exit a trade, you need 2bps of opportunity just to break even, and at least 3-4 times that to make it worth the risk. (This is why there’s an entry threshold for your trades). In the late 1990s, the market was inefficient, but it wasn't that inefficient; the oscillations we were trying to capture were much smaller. [The Terminalist]
• This is what Amundsen realized, and Scott did not. The risks of failure — from exhaustion, starvation, injury, illness, accident, mishap — increase super-linearly with time; so the correct, risk-averse thing to do is to spend as little time as possible on the journey. [The Terminalist]
• While China’s overall oil demand still appears stable, its composition is shifting gears rapidly. Gasoline and diesel demand seems to have peaked: China’s total demand for these transportation fuels in 2024 will be 3.6% lower than in 2021, according to IEA estimates. China’s housing bust is partly to blame, as a slowdown in construction led to weaker demand for diesel used in machinery. But a bigger story comes from China’s rapid shift in personal transportation, and especially the rise of electric vehicles. More than half of the passenger cars sold in the country in recent months were new-energy vehicles, which includes plug-in hybrids, according to the China Passenger Car Association. Largely because of that trend, China’s gasoline demand in 2025 is expected to be 6.4% lower than the peak in 2021, according to IEA projections. More new heavy-duty trucks in the country are also using liquefied natural gas instead of diesel. Diesel and gasoline accounted for 44% of China’s oil demand in 2024, down from 51% in 2018. While transportation fuels are running out of road, China’s growing petrochemical sector has been gobbling up oil products. Consumption of naphtha, ethane and liquefied petroleum gas, all feedstocks for petrochemicals, has risen 59% between 2019 and 2024. [WSJ]