Salt Liquidity

Malt Liquidity 135

A core principle of mine (“liquidity theory”) is that everything can be contextualized as a market of sorts, as supply/demand is innate to pretty much any interaction. As such, pretty much every good or experience can be somewhat predictable, and every event can be interpretable in this manner — concert ticket resale can be understood through the lens of venue supply constraints and excess demand, where the artist doesn’t want to take the reputational hit or logistical burden of charging the “true” equilibrium price, so the cost of outsourcing it is the profit that a middleman can make (and use to pay Ticketmaster’s rent-seeking fees accordingly.) The same mechanic works with sneakers — obviously this is an artificial supply constraint, as Nike could just make more of each model, but selling out and facilitating a grey market acts as organic marketing. Sellouts are predictable, and the cost and allure of secondary profit mechanisms is outside the purview of shareholder-driven value creation. I’ve noted before that

many things trade like a quasi-security but aren’t treated as such, especially in a high-tech age where designer shoes, luxury goods, and trading cards all have internet-based real-time candlestick charts and bid-ask platforms that enable their trading

and that smartphones enable this to an absurd degree:

In the smartphone-driven instantaneous information access age, there's virtually no ability to remove the prior of access. One imagines Dostoevsky's Gambler would be much less interesting to read about if he existed in a nation that had no roulette. Beyond the sports betting ads shoved ad nauseam in every broadcast, nook, and cranny of ordinary society, it's never been more impossible to avoid it all. The securitization of everything was not made to withstand seamless speculation. The endless operation of markets, and markets on those markets, and markets on *those* markets, means that no matter where you are in the world, as long as there is internet access available, you can place a trade, having done so myself 35,000 feet above the Pacific Ocean on my way to Singapore.

Everything has always had an equilibrium price, finding it was just a matter of self-sourcing liquidity — maybe you surreptitiously hand the maître d a $20 to cut down on a wait or offer a cabbie an extra $10 for every red light he runs so you can make your flight. The old mentality was more of a don’t ask don’t tell situation: everyone tacitly knew that things work this way, but it was unseemly to talk about money. This naturally changed post-2020, where not only did everyone get in on the finance game (seriously, I remember seeing dozens of teenagers sitting in Discord voice channels listening to Fed testimony — what the hell was going on in 2021??), but the curtain hiding the market at work behind everything was pulled, and the illusion was revealed. Nowadays, we have mainstream humor going viral regarding Wendy’s making a market for Baconators,

which highlights that liquidity and equilibrium prices are not just a business concern, but an everyone concern:

The “simple Econ 101” explanation of price as the equilibrium of supply and demand has a problem in reality: it assumes infinite liquidity. The price of an asset is defined by where the bid meets the ask, but I cannot simply buy as much of the asset as I want at this price unless there are enough sellers willing to provide me the supply. Liquidity, as a result, is both a measure of how true the price that the discovery mechanism has given us is, and the ease with which you can increase or decrease exposure to the asset.

The price for a Baconator is not fixed. It may have a sticker equilibrium price for a specific store location or neighborhood, but that is a function of the CoGS, the labor, how much demand they expect in a day, a waste threshold, and more. The cost is necessarily dynamic and the price is a volatility-stabilizing way to run a business.

I’ve made some jokes (and proffered a theory related to it) about how a piece of really good satire can be enveloped in reality regarding the fact that the hottest restaurant reservation app is quite literally called Dorsia,

so it’s not a surprise that the next step would be securitizing the restaurant reservation. The ideal of a market, of course, is to properly match supply to demand in a more liquid fashion, ensuring as little slippage as possible. So, ideally, a market for restaurant reservations places people more efficiently at restaurant tables. But in practice, it seems that this market heavily alters and skews “dining liquidity” to the misfortune of basically everyone involved other than the middlemen, as highlighted by the New Yorker:

Leventhal [co-founder of Resy ~ed.]ordered a tequila and jumped right in, “mapping the reservations ecosystem,” as he called it, on a cocktail napkin.

His list of possible approaches went like this: phone call, e-mail, Instagram D.M., in-person (“Before you leave a place, you could make another reservation. It’s a great way to get one”), texting someone you know (the maître d’, a chef, even servers and line cooks), hotel concierges (some residential buildings—432 Park Avenue, 15 Hudson Yards—have their own), élite credit-card partners (“Chase has tables, Amex has tables”), membership reservation clubs like Dorsia, new apps (TableOne claims to show every available publicly listed reservation at the most in-demand restaurants, in real time), secondary marketplaces (in the manner of ticket scalpers, Web sites like Cita Marketplace and Appointment Trader will sell you a reservation, often procured by a bot, usually made in someone else’s name), the restaurant’s Web site, and online-reservation systems (OpenTable, Resy, Tock, Yelp). Leventhal described this last category, by far the most common way to book a table, as “the land of democracy, the land of first come, first served.” Then he smirked and said, “In theory.”

There’s nothing new here — restaurants have a capped supply of tables, the demand is much higher than availability, and electronic trading helps facilitate and price the value of a spot according to who desires it most. But restaurants don’t really seem to benefit from this liquidity provision:

Restaurants don’t like it either. “It’s bad for business,” Eric Ripert, at Le Bernardin, told me. “Every day, we spend hours trying to track down the bots and the fake reservations. Last week, we caught eight fake reservations.” Unusual e-mail addresses and disconnected phone lines are a dead giveaway; reservationists always call or text to confirm. He went on, “If you have tables that are no-shows, the profit of the night is done. So, we cannot lose reservations!”

According to the market-research firm IBISWorld, over the last decade, profit margins at American restaurants have languished at around four per cent. Gitnux, another research firm, reported that high-end restaurants may only see margins of two per cent…

…Dorsia claims that it saves twenty minutes per party (no waiting for the check) and so helps turn tables faster—a key to restaurant solvency. (Gabriel Stulman, of Sailor, which is not on Dorsia, told me that he needs to turn his tables three times a night to make money.)

The core issue here seems to be who has the leverage and the problems that come with broker priority. Restaurants don’t really scale — even if I happen to own the trendiest upscale Japanese cocktail bar in Manhattan, I am rate-limited on how much I can financialize my customers and induce them to eat and drink (which also has an, er, “internal” supply constraint.) This implies a ceiling on a single location’s profit potential, and copy-pasting the restaurant into new locations doesn’t scale linearly (and cheapens the entire appeal of the reservation in general — exclusivity.) Unless you’re, say, Carbone, the leverage entirely lies with the trendsetters (TikTok/IG influencers, Michelin guides, etc.) and the platform that facilitates the trading. I mean, just look at the txn cost here:

[Appointment Trader] resembles an artifact from the early days of the Internet: with its flashy banners and simple menus, it almost looks like eBay circa 1995. “We get a lot of smack for it being ugly,” Frey said, adding that it hasn’t hurt business. Appointment Trader cleared almost six million dollars in reservation sales during the past twelve months, a more than twofold increase from last year. New users create an account with their e-mail address to buy or sell reservations; sellers compete to earn “Traderpoints” and “medals,” which allow them to upload more reservations and thereby make more money. Frey takes a twenty- to thirty-per-cent commission.

This is nuts! People get mad at HFT firms for taking fractions of a penny for facilitating orders! Since the actual appointment trading platform is agnostic as to which restaurant’s reservations is providing the liquidity, it is very very hard for even a set of restaurants to actually derive value from the tables provided to the platform. Dorsia tries to work around this by setting “minimum spend” rather than charging for the reservations:

the table at Carbone would cost me a thousand dollars—not as a booking fee but as a prepayment for the meal…. Other minimum prepayments listed on the app: two hundred and eighty-five dollars per person at Le Pavillon, Boulud’s midtown seafood palace; two hundred and thirty-five at Marea, on Central Park South; and three hundred at Torrisi (on a Monday), a sister restaurant to Carbone.

Of course, restaurateurs do not intend to create a club “table minimum” atmosphere, but that is what the market has priced the restaurant experience as:

…Several restaurateurs who have opted out told me that they find the colossal-prepay concept unseemly, in part because it encourages binge eating. “It’s psychotic,” one owner said. “We don’t want to put people in that situation.”

The systematization of the equivalent of airline status for takers (as opposed to makers, who book and supply the reservations offered on a platform) also skews who ends up at these places, in what’s the equivalent of broker priority (a now-banned practice where stockbrokers would prioritize the orders of their best, high volume clients over others):

Resy has a data-driven feature called Notify, which puts diners on a waiting list for a restaurant… Diners add themselves to lots of restaurants’ Notify lists for a certain night with the hope of scoring just one. The moment a host decides that a table is a no-show, or if there’s a cancellation, a push notification—“New Table Alert”—is sent to everyone on the Notify list for that night. The table goes to whoever claims it first on the app. Curious, I added my name to the Notify list at every fully booked restaurant in my neighborhood, over a six-week period. I didn’t get a single e-mail or notification.

I thought I just had bad luck, until a conversation with Resy’s C.E.O., Pablo Rivero, clarified things… he explained that I would likely always be near the bottom of the Notify queue. After American Express acquired Resy, in 2019, anyone with a fancy Amex card—Centurion, Platinum, Reserve, or Aspire—has an advantage. If you have one of these cards… “You will get a Resy notification before other people do.”

The stark reality exposed by these electronic trading platforms is that the restaurant reservation market is implicitly a derivative market rather than a reservation market. By levering off of the desire of a restaurateur to create a great experience and the limited space to do so, a quasi-option market is created where the potential to get a table is priced and traded rather than the underlying meal itself. This is the same mechanic we see in meme-coins and meme stocks:

The phrase “attention economy” gets bandied about a lot, so it’s worth thinking about it more precisely… But when dollars are untethered from productivity, we get a different form of thinking, where Paris Hilton is more of a pioneer than Benjamin Graham. No longer is future cash flows the driver of valuation, but rather how much attention paid convert to bid? When we look at it from this purview, we arrive at my concept of “tradable hype” which explains a lot of the crypto/resale market

The restaurant meal might be the underlying, but the true driver of liquidity is the attention paid, which is driven by potential diners, and when that converts to dollars, it entirely passes between people who are buying and selling it, acting as kind of a “notional value” representation of the meal itself, similar to how nobody trading AAPL calls actually intends to ever pony up for the shares themselves. All this has the effect of merging restaurant culture with club culture, where the clout of saying you are going to a restaurant and post about how you did go to the restaurant is much more valuable than the meal itself, much like how drug culture and festival culture became synonymous post-Snapchat flower crown.

Personally, I’m glad I don’t partake in all this — at the same time, I’ll begrudgingly admit that I’m glad I have friends that play the game for me whenever I’m in town. The way to win in the attention economy is the same age-old career advice you’ll get from any top salesman — it’s not what you know, it’s who you know.