1 00:00:03,240 --> 00:00:07,600 Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio. 2 00:00:08,320 --> 00:00:13,440 Speaker 1: This week on the podcast, I have an absolutely fascinating conversation. 3 00:00:13,640 --> 00:00:17,880 Speaker 1: My special guest is Keith Ross. He is the current 4 00:00:17,960 --> 00:00:21,400 Speaker 1: CEO and chairman of p d Q Enterprises, which is 5 00:00:21,960 --> 00:00:26,880 Speaker 1: a really interesting innovative automated trading system and dark pool 6 00:00:27,520 --> 00:00:30,880 Speaker 1: that has a novel approach to getting X. I think 7 00:00:30,920 --> 00:00:34,280 Speaker 1: it's novel. I don't know enough about dark pools because 8 00:00:34,520 --> 00:00:37,680 Speaker 1: much of them are dark but his description of how 9 00:00:37,800 --> 00:00:42,159 Speaker 1: they sort of put the auction process UH in an 10 00:00:42,159 --> 00:00:46,120 Speaker 1: inverted form to obtain the best price and execution for 11 00:00:46,200 --> 00:00:50,239 Speaker 1: their clients is quite fascinating. He has been in the 12 00:00:50,280 --> 00:00:53,280 Speaker 1: front lines of high frequency trading for a long time. 13 00:00:53,600 --> 00:00:56,840 Speaker 1: He used to be the CEO of get Go, sold 14 00:00:56,880 --> 00:00:59,200 Speaker 1: for about a billion for to night Trading a couple 15 00:00:59,200 --> 00:01:02,640 Speaker 1: of years ago, one of the biggest h f t 16 00:01:02,920 --> 00:01:07,800 Speaker 1: s by volume. If you are at all a student 17 00:01:07,880 --> 00:01:13,000 Speaker 1: of market structure, if you're interested in institutional execution, dark pools, 18 00:01:13,240 --> 00:01:16,360 Speaker 1: h f t S algorithms, if you're a critic of 19 00:01:16,560 --> 00:01:19,200 Speaker 1: h f t s as well, you will find this 20 00:01:19,280 --> 00:01:23,240 Speaker 1: to be an informative and fascinating conversation. So rather than 21 00:01:23,280 --> 00:01:27,640 Speaker 1: have me babil incessantly without any further ado. Here is 22 00:01:27,720 --> 00:01:35,000 Speaker 1: my conversation with Keith Ross. This is Masters in Business 23 00:01:35,080 --> 00:01:39,400 Speaker 1: with Barry Ridholts on Bloomberg Radio. My special guest this 24 00:01:39,440 --> 00:01:43,360 Speaker 1: week is Keith Ross. Here's the chairman and CEO of 25 00:01:43,480 --> 00:01:48,920 Speaker 1: pd Q Enterprises, a trading and finance firm. Previously he 26 00:01:49,040 --> 00:01:52,120 Speaker 1: was CEO of get go Uh, one of the largest 27 00:01:52,200 --> 00:01:55,800 Speaker 1: high frequency trading shops. Keith Ross, Welcome to Bloomberg. Thank 28 00:01:55,840 --> 00:01:57,920 Speaker 1: you very much, Barry. Pleasure to be here. So so 29 00:01:58,000 --> 00:02:01,560 Speaker 1: let's keep start out simple and will build in complexity 30 00:02:01,600 --> 00:02:06,320 Speaker 1: as we go. First off, what is high frequency algorithmic 31 00:02:06,360 --> 00:02:10,160 Speaker 1: trading and why should people care about it? Well, high 32 00:02:10,160 --> 00:02:15,080 Speaker 1: frequency trading is just regular trading by computers instead of 33 00:02:15,160 --> 00:02:20,000 Speaker 1: humans clicking a mouse. Computers handle everything from identifying the 34 00:02:20,000 --> 00:02:24,480 Speaker 1: trade to executing it precisely, and it turns out I 35 00:02:24,520 --> 00:02:27,200 Speaker 1: believe it's a it's a wonderful efficiency for our markets. 36 00:02:27,320 --> 00:02:32,040 Speaker 1: Trading costs and commissions have come down dramatically over the years. Um. 37 00:02:32,080 --> 00:02:34,440 Speaker 1: I know there's a lot of concern about the robots 38 00:02:34,480 --> 00:02:39,519 Speaker 1: taking over the world, but um, the vast majority of 39 00:02:39,600 --> 00:02:43,760 Speaker 1: high frequency traders are passive liquidity providers. So they are 40 00:02:43,800 --> 00:02:46,400 Speaker 1: in the market virtually all the time, and we can 41 00:02:46,440 --> 00:02:49,000 Speaker 1: talk about that in a little bit. But their goal 42 00:02:49,240 --> 00:02:52,240 Speaker 1: is to capture spread the way market makers have done 43 00:02:52,320 --> 00:02:56,520 Speaker 1: for centuries, and provide liquidity. So here's the here's the 44 00:02:56,560 --> 00:03:00,800 Speaker 1: pushback on liquidity as always well, they like the banku 45 00:03:00,840 --> 00:03:03,080 Speaker 1: who will lend you the umbrella when it's sonny out. 46 00:03:03,360 --> 00:03:06,320 Speaker 1: They provide liquidly when it's not needed. But when things 47 00:03:06,360 --> 00:03:08,400 Speaker 1: get very well, they just shut off the machines and 48 00:03:08,440 --> 00:03:11,440 Speaker 1: step away from the market. So I want to respond 49 00:03:11,480 --> 00:03:14,800 Speaker 1: to that and say it's actually a myth. Because a 50 00:03:14,919 --> 00:03:19,639 Speaker 1: couple of folks were out loud about backing away from 51 00:03:19,639 --> 00:03:22,200 Speaker 1: the market. The guys who knew what they were doing 52 00:03:22,240 --> 00:03:27,040 Speaker 1: did not, And my understanding is they had very good days. 53 00:03:27,360 --> 00:03:29,320 Speaker 1: So there's actually an incentive for them to stay in 54 00:03:29,360 --> 00:03:32,000 Speaker 1: the market. With all that volatility and chaos, there's a 55 00:03:32,040 --> 00:03:36,640 Speaker 1: lot of opportunity um and you know, those that are 56 00:03:36,680 --> 00:03:40,440 Speaker 1: not as concerned about that would argue. And at other 57 00:03:40,480 --> 00:03:45,000 Speaker 1: times in market chaos, market makers specialists didn't pick up 58 00:03:45,040 --> 00:03:48,160 Speaker 1: the phone. That's the same problem. So you couldn't get 59 00:03:48,200 --> 00:03:51,440 Speaker 1: to your broker. Maybe you wanted thought you wanted to 60 00:03:51,480 --> 00:03:53,880 Speaker 1: do something, but you couldn't find anyone to take the 61 00:03:53,920 --> 00:03:57,840 Speaker 1: other side. Again, I'll take the other side. Seven day 62 00:03:57,960 --> 00:04:02,240 Speaker 1: was really a one off down. No one could get 63 00:04:02,280 --> 00:04:05,960 Speaker 1: through to anybody. Let's talk about the flash crash, which 64 00:04:06,000 --> 00:04:09,320 Speaker 1: is the modern version. So May ten, two thousand and ten, 65 00:04:09,400 --> 00:04:15,080 Speaker 1: we saw a seven point practically instantaneous drop. What caused that? 66 00:04:15,240 --> 00:04:18,679 Speaker 1: A lot of people insisted on blaming five frequency traders 67 00:04:18,680 --> 00:04:21,080 Speaker 1: for that. Well, they're going to be the scapegoat because 68 00:04:21,240 --> 00:04:23,360 Speaker 1: like the specialist in the old days, they're the ones 69 00:04:23,400 --> 00:04:27,919 Speaker 1: that everyone believes are the operators in the market um 70 00:04:28,000 --> 00:04:31,000 Speaker 1: and have that opportunity to either make the market or not. 71 00:04:31,880 --> 00:04:37,520 Speaker 1: Both cases. The macro environment was very, very bearish, and 72 00:04:37,680 --> 00:04:41,880 Speaker 1: so the question becomes, you know, what is the responsibility 73 00:04:41,920 --> 00:04:47,880 Speaker 1: of the participants? Uh, they took time off and withdrew dramatically. 74 00:04:48,520 --> 00:04:51,840 Speaker 1: The beautiful part about the flash crash to me is 75 00:04:51,880 --> 00:04:56,240 Speaker 1: the following flash dash after a five second pause in 76 00:04:56,320 --> 00:05:01,680 Speaker 1: the many futures, the whole market was able to recalibrate, reassess, 77 00:05:02,160 --> 00:05:04,200 Speaker 1: and it was it was a hard event during the day, 78 00:05:04,240 --> 00:05:06,960 Speaker 1: but it was over in an hour. It's funny because 79 00:05:07,000 --> 00:05:10,040 Speaker 1: I was flying back from Dallas that day or somewhere 80 00:05:10,080 --> 00:05:14,200 Speaker 1: in Texas, and I look at my screen when I landed, 81 00:05:14,240 --> 00:05:16,360 Speaker 1: I'm like, that's got to be a mistake. And it 82 00:05:16,400 --> 00:05:18,839 Speaker 1: was until I got in the cab and started speaking 83 00:05:18,839 --> 00:05:21,120 Speaker 1: to my office that I found out what happened. We 84 00:05:21,120 --> 00:05:24,280 Speaker 1: were down a thousand points. We closed down three, explained 85 00:05:24,320 --> 00:05:29,480 Speaker 1: to me. So so that that's the big criticism UM 86 00:05:29,560 --> 00:05:31,920 Speaker 1: in general. There are other criticism will get to later, 87 00:05:31,960 --> 00:05:33,839 Speaker 1: but I want to set the table a little bit 88 00:05:34,360 --> 00:05:37,640 Speaker 1: with what you currently do in some quotes of yours. 89 00:05:37,680 --> 00:05:40,000 Speaker 1: Let me let me just start asking what is p 90 00:05:40,160 --> 00:05:43,840 Speaker 1: d Q Enterprises and PDQ Trading actually do. So. P 91 00:05:43,960 --> 00:05:46,760 Speaker 1: d Q Enterprises is the parent of p d Q 92 00:05:46,960 --> 00:05:51,840 Speaker 1: A t S are broker dealer. We are a probably 93 00:05:51,839 --> 00:05:54,599 Speaker 1: considered a dark pool, even though we believe we operate 94 00:05:54,720 --> 00:05:57,719 Speaker 1: differently than all the others. We have a unique market structure. 95 00:05:58,560 --> 00:06:02,919 Speaker 1: We can actually create liquidity on demand for orders, we 96 00:06:03,000 --> 00:06:08,400 Speaker 1: can consolidate fragmented liquidity. And the beauty of our auction process, 97 00:06:08,440 --> 00:06:10,359 Speaker 1: which is kind of the key aspect of why we 98 00:06:10,400 --> 00:06:14,640 Speaker 1: are different, is that we can aggregate people with different 99 00:06:14,760 --> 00:06:19,880 Speaker 1: time latency sensitivity. So whether the people who are either 100 00:06:20,040 --> 00:06:23,159 Speaker 1: very high speed or high speed or normal speed correct 101 00:06:23,480 --> 00:06:28,039 Speaker 1: all right, and how is PDQ different than your previous employer. 102 00:06:28,760 --> 00:06:31,240 Speaker 1: Get Go, who is not too long ago sold to 103 00:06:31,920 --> 00:06:34,480 Speaker 1: Night Trading, and at the time I think they still 104 00:06:34,520 --> 00:06:37,039 Speaker 1: are one of the biggest h f T shops in 105 00:06:37,080 --> 00:06:39,400 Speaker 1: the world. I believe they're one of the biggest traders. 106 00:06:39,400 --> 00:06:43,560 Speaker 1: They did merge with night Um. I went from the 107 00:06:43,600 --> 00:06:46,560 Speaker 1: liquidity providing side, which we were doing it get Go 108 00:06:47,279 --> 00:06:51,680 Speaker 1: when I saw the PDQ opportunity. So the way PDQ works, 109 00:06:51,720 --> 00:06:54,479 Speaker 1: an order comes to us and we pause it for 110 00:06:54,680 --> 00:06:58,680 Speaker 1: up to twenty milliseconds. That sounds vaguely familiar, but in 111 00:06:58,760 --> 00:07:02,040 Speaker 1: that time we do something very constructive for the order. 112 00:07:02,480 --> 00:07:05,680 Speaker 1: What we do is we ping our liquidity providers with 113 00:07:05,800 --> 00:07:09,720 Speaker 1: only the symbol and effectively bring back the question that 114 00:07:09,880 --> 00:07:12,160 Speaker 1: used to be asked at the post of what is 115 00:07:12,200 --> 00:07:14,360 Speaker 1: the market? So in other words, you don't say I'm 116 00:07:14,400 --> 00:07:17,360 Speaker 1: buying a hundred thousands of selling a hundred thousand. You say, 117 00:07:17,400 --> 00:07:20,320 Speaker 1: here's the symbol, what's your price, what's your best market? 118 00:07:20,800 --> 00:07:24,000 Speaker 1: We have a dozen providers that are all responding. We 119 00:07:24,040 --> 00:07:29,160 Speaker 1: can also include institutional passive liquidity providers, and we build 120 00:07:29,160 --> 00:07:32,280 Speaker 1: a book and once we have the book, we take 121 00:07:32,320 --> 00:07:35,480 Speaker 1: the instructions from our client to execute the order against 122 00:07:35,480 --> 00:07:38,880 Speaker 1: the book. So we create competition for every order, and 123 00:07:39,600 --> 00:07:45,400 Speaker 1: in this pause we're in position to take speed out 124 00:07:45,400 --> 00:07:48,320 Speaker 1: of the equation. I'm Barry Ridults. You're listening to Masters 125 00:07:48,320 --> 00:07:51,600 Speaker 1: in Business on Bloomberg Radio. My special guest today is 126 00:07:51,760 --> 00:07:56,600 Speaker 1: Keith Ross. He is the CEO of PQ Enterprises, a 127 00:07:56,760 --> 00:08:00,800 Speaker 1: rather interesting trading shop. Dark Pool goes by a number 128 00:08:00,800 --> 00:08:03,760 Speaker 1: of different names. Keith, I want to start with a 129 00:08:03,880 --> 00:08:07,160 Speaker 1: quote of yours and have you comment on it, and 130 00:08:07,240 --> 00:08:10,640 Speaker 1: it goes something like this, there is nothing wrong with 131 00:08:10,720 --> 00:08:14,800 Speaker 1: speed in any other industry. It's applauded. It's an efficiency 132 00:08:15,280 --> 00:08:20,040 Speaker 1: discuss well. UM. One of my favorite examples is your telephone. 133 00:08:21,040 --> 00:08:23,840 Speaker 1: Back in the day, we had telephone operators pulling cables 134 00:08:23,880 --> 00:08:27,320 Speaker 1: and plugging them into the wall to connect you to 135 00:08:27,880 --> 00:08:31,400 Speaker 1: your call. And today we have cell phones that are 136 00:08:31,440 --> 00:08:33,760 Speaker 1: many computers and you can do everything on your phone. 137 00:08:34,360 --> 00:08:39,880 Speaker 1: Incredible technology advancement proficiency. I haven't heard in the early 138 00:08:39,960 --> 00:08:43,959 Speaker 1: days of of UM cell phones there were connection issues, 139 00:08:43,960 --> 00:08:46,280 Speaker 1: but those have gotten so much better. You know, it's 140 00:08:46,320 --> 00:08:50,360 Speaker 1: all about how many megabytes of upload and download and 141 00:08:50,400 --> 00:08:53,600 Speaker 1: so forth. I believe the same things happened for trading, 142 00:08:54,280 --> 00:08:58,520 Speaker 1: so spreads have gotten tighter, commissions have come down dramatically, 143 00:08:58,640 --> 00:09:02,960 Speaker 1: the cost of execution and has never been lower. Um 144 00:09:03,000 --> 00:09:04,839 Speaker 1: I think it was. Vanguard in two thousand and ten 145 00:09:04,960 --> 00:09:09,480 Speaker 1: said our portfolios due to electronic trading have a one 146 00:09:09,559 --> 00:09:14,400 Speaker 1: percent per annum increase in return. Given the fact that 147 00:09:14,400 --> 00:09:18,360 Speaker 1: they're pension problems across our whole country. Anyone that's involved 148 00:09:18,400 --> 00:09:21,720 Speaker 1: with the retirement programmer has pension money working in the 149 00:09:21,760 --> 00:09:26,640 Speaker 1: marketplace is a beneficiary of a more efficient market. Jack Brennan, 150 00:09:26,679 --> 00:09:31,320 Speaker 1: who's now chairman emeritus of Vanguard, when we spoke with him, 151 00:09:31,440 --> 00:09:35,439 Speaker 1: he said something along those lines. But let me give 152 00:09:35,440 --> 00:09:38,559 Speaker 1: you the pushback from the other side. Hey, h f 153 00:09:38,640 --> 00:09:41,120 Speaker 1: T firms are taking out billions of dollars a year 154 00:09:41,160 --> 00:09:45,880 Speaker 1: in profit. Trading is essentially a zero sum game. That 155 00:09:46,440 --> 00:09:49,320 Speaker 1: profit has to be coming from somewhere, and it's coming 156 00:09:49,320 --> 00:09:54,600 Speaker 1: from grandma's retirement account. Would actually vehemently disagree on almost all. 157 00:09:54,640 --> 00:09:58,319 Speaker 1: I would hope you would disagree. Tell me why that 158 00:09:59,240 --> 00:10:03,600 Speaker 1: description is an error, and I sort of have a 159 00:10:03,640 --> 00:10:07,360 Speaker 1: foot in that camp that that makes some sense to me. Okay, 160 00:10:07,400 --> 00:10:11,520 Speaker 1: first of all, let's start with the zero sum game problem. 161 00:10:11,559 --> 00:10:15,319 Speaker 1: The capital markets are not zero sum the capital markets 162 00:10:15,320 --> 00:10:18,800 Speaker 1: can create wealth and wealth can be destroyed in them. 163 00:10:18,840 --> 00:10:21,800 Speaker 1: So I have a good friend, what's a thousand shares 164 00:10:21,800 --> 00:10:26,000 Speaker 1: of apple for each of his kids? He sold it 165 00:10:26,160 --> 00:10:30,839 Speaker 1: in two thousand and ten, he made times his money 166 00:10:31,440 --> 00:10:35,320 Speaker 1: wealth creation. Anyone who's bought an apple product knows apple 167 00:10:35,360 --> 00:10:39,640 Speaker 1: stock has gone to the moon. So that's not zero sum. 168 00:10:39,679 --> 00:10:42,320 Speaker 1: But what happens if he goes to sell it and 169 00:10:42,400 --> 00:10:45,079 Speaker 1: instead of selling that at a hundred one dollars and 170 00:10:45,160 --> 00:10:48,160 Speaker 1: fifty cents, he only gets a hundred one dollars and 171 00:10:48,640 --> 00:10:52,199 Speaker 1: five cents because someone jumped in the middle of his execution. 172 00:10:52,720 --> 00:10:57,960 Speaker 1: So there could be that could be an issue. I 173 00:10:58,040 --> 00:11:00,560 Speaker 1: don't think that it is, because in the old days 174 00:11:00,679 --> 00:11:03,600 Speaker 1: it would have been a twenty five or fifty cent bid, 175 00:11:04,160 --> 00:11:07,439 Speaker 1: a nickel much bigger. So you're talking commission, not spread. 176 00:11:07,559 --> 00:11:10,080 Speaker 1: So in other words, the tradeoff is it used to 177 00:11:10,120 --> 00:11:14,600 Speaker 1: be higher commissions and wider spreads, and now the spreads 178 00:11:14,600 --> 00:11:17,959 Speaker 1: are tighter, the commissions are smaller, and if there's an 179 00:11:17,960 --> 00:11:22,440 Speaker 1: execution charge that finds its way into this net net, 180 00:11:22,760 --> 00:11:26,160 Speaker 1: it's still better for the UH traders that retail has 181 00:11:26,200 --> 00:11:29,640 Speaker 1: never had it better. Bill McNabb, current chairman and CEO 182 00:11:29,840 --> 00:11:33,480 Speaker 1: Vanguard and also a former guest on Mester's business. He 183 00:11:33,640 --> 00:11:39,360 Speaker 1: said something very similar, and I was more vehemently questioning 184 00:11:39,600 --> 00:11:43,240 Speaker 1: when I keep reading and hearing about market structure, and 185 00:11:43,240 --> 00:11:46,800 Speaker 1: when I get a guy like McNabb saying, hey, you 186 00:11:46,840 --> 00:11:50,120 Speaker 1: know this has made our trading costs lower, it forced 187 00:11:50,120 --> 00:11:54,120 Speaker 1: me to at least rethink, well, now I have to 188 00:11:54,160 --> 00:11:56,440 Speaker 1: take this with a grain of salt because he's got 189 00:11:56,520 --> 00:12:00,360 Speaker 1: zero incentive to say anything. But what what is true 190 00:12:00,480 --> 00:12:03,480 Speaker 1: true for Vanguard? So let's move to the other issue 191 00:12:03,600 --> 00:12:06,439 Speaker 1: I always hear about, which is the front running. If 192 00:12:06,480 --> 00:12:10,360 Speaker 1: somebody sniffs out what my order is and rather than 193 00:12:10,480 --> 00:12:12,960 Speaker 1: executing that order, runs ahead of me, buys it and 194 00:12:12,960 --> 00:12:15,640 Speaker 1: sells it back to me for whatever, and if we're 195 00:12:15,720 --> 00:12:20,480 Speaker 1: petting higher cunitively, isn't that a huge drag on total 196 00:12:20,480 --> 00:12:24,440 Speaker 1: returns for everybody? In the end, it's incredibly small relative 197 00:12:24,480 --> 00:12:27,560 Speaker 1: to the markets to begin with. Second of all, the 198 00:12:27,679 --> 00:12:31,280 Speaker 1: person doing that, the person the HFT that takes out 199 00:12:31,320 --> 00:12:34,280 Speaker 1: the penny up offer, that's some price improvement for that guy, 200 00:12:34,760 --> 00:12:38,040 Speaker 1: so he's a happy guy. The seller is paying a penny, 201 00:12:38,160 --> 00:12:40,760 Speaker 1: is getting a penny more than they might have. I'm 202 00:12:40,800 --> 00:12:44,240 Speaker 1: just saying that's certainly a possibility that's never talked about, 203 00:12:44,280 --> 00:12:49,520 Speaker 1: that it's price improvement for a contra party. Certainly, the 204 00:12:49,600 --> 00:12:53,320 Speaker 1: sniffing ability is only an educated guess, just the way 205 00:12:53,320 --> 00:12:55,840 Speaker 1: people used to do in the market back in the day. 206 00:12:55,960 --> 00:12:59,720 Speaker 1: So they can't see the order. That's a that's a myth. 207 00:13:00,760 --> 00:13:05,080 Speaker 1: And the models understand supply and demand and they're trying 208 00:13:05,080 --> 00:13:07,960 Speaker 1: to find that balance between supply and demand all the time. 209 00:13:08,000 --> 00:13:10,840 Speaker 1: All of a sudden, if there's a big demand, the 210 00:13:10,880 --> 00:13:17,720 Speaker 1: supply is gonna move their price higher. So, um, it's 211 00:13:17,840 --> 00:13:20,920 Speaker 1: much ado about nothing in my opinion. And what I'll 212 00:13:20,920 --> 00:13:23,680 Speaker 1: do is, I'll say this, most of the people that 213 00:13:23,760 --> 00:13:29,280 Speaker 1: talk about that don't understand that liquidity provision is a service. Okay, 214 00:13:29,480 --> 00:13:34,160 Speaker 1: So there to me, there's this mythical idea that when 215 00:13:34,160 --> 00:13:37,800 Speaker 1: a trade takes place, the buyer and seller have this 216 00:13:38,280 --> 00:13:43,040 Speaker 1: come bay, let's hold hands moment and exchange our whatever 217 00:13:43,240 --> 00:13:46,120 Speaker 1: security is at whatever the price is, which is fine 218 00:13:46,160 --> 00:13:48,840 Speaker 1: at the moment of the trade, but one tick later 219 00:13:49,240 --> 00:13:52,200 Speaker 1: one of the parties has been disadvantaged. And when I 220 00:13:52,240 --> 00:13:55,360 Speaker 1: was on the floor, used to trade with people and 221 00:13:55,440 --> 00:13:58,000 Speaker 1: you'd confirm and you'd smile, and you'd say thank you, 222 00:13:58,280 --> 00:14:00,440 Speaker 1: and then one second later you'd say, that's of a gun, 223 00:14:00,440 --> 00:14:03,240 Speaker 1: he just picked me off, right, because the tick went 224 00:14:03,320 --> 00:14:05,880 Speaker 1: agains well, But that's after the fact. You know, once 225 00:14:05,920 --> 00:14:08,720 Speaker 1: the market moves either in your favor against you. Hey, 226 00:14:08,760 --> 00:14:11,000 Speaker 1: that transaction is done, you can't blame the guy that 227 00:14:11,040 --> 00:14:13,959 Speaker 1: you bought something you shouldn't or sold something too early. 228 00:14:14,080 --> 00:14:18,440 Speaker 1: That it's it's you know, after the transaction is done. 229 00:14:18,960 --> 00:14:22,560 Speaker 1: It's pre transaction or during the transaction that I think 230 00:14:22,600 --> 00:14:26,960 Speaker 1: some people are are complaining about. Certainly UM. The counter 231 00:14:27,120 --> 00:14:32,440 Speaker 1: argument to that was explained extremely well in Uh, a 232 00:14:32,520 --> 00:14:36,400 Speaker 1: book by Covic. I believe Peter Kovic uh Flashboys Not 233 00:14:36,440 --> 00:14:40,960 Speaker 1: so Fast. It was the the antidote to Michael Lewis. 234 00:14:41,160 --> 00:14:43,920 Speaker 1: I'm Barry Ridhults. You're listening to Masters in Business on 235 00:14:43,960 --> 00:14:47,840 Speaker 1: Bloomberg Radio. My special guest today is Keith Ross. He 236 00:14:48,160 --> 00:14:53,720 Speaker 1: is the CEO of PDQ Enterprises, a trading dark pool 237 00:14:53,760 --> 00:14:58,400 Speaker 1: as well as a broker dealer that Correct and Ats 238 00:14:58,640 --> 00:15:02,040 Speaker 1: was formally CEO get Go, which is now part of 239 00:15:02,160 --> 00:15:05,280 Speaker 1: Night Training and is one of the largest h f 240 00:15:05,360 --> 00:15:09,320 Speaker 1: T s in the world. Let's talk about Michael Lewis's 241 00:15:09,360 --> 00:15:13,480 Speaker 1: book Flashboys, which I read on vacation and found to 242 00:15:13,520 --> 00:15:15,840 Speaker 1: be a couple of summers ago and found to be 243 00:15:16,320 --> 00:15:20,560 Speaker 1: an entertaining romp that raised all sorts of questions about 244 00:15:20,720 --> 00:15:25,160 Speaker 1: market structure. But I have heard that you didn't think 245 00:15:25,160 --> 00:15:28,840 Speaker 1: it was especially accurate. Well, I actually wrote a review 246 00:15:29,000 --> 00:15:32,120 Speaker 1: of the book the day after it came out, so 247 00:15:32,160 --> 00:15:35,080 Speaker 1: I got it on mike Kindle and read it electronically overnight. 248 00:15:36,480 --> 00:15:40,400 Speaker 1: Fascinating story. I'm a Michael Lewis fan. He writes great novels. 249 00:15:40,920 --> 00:15:44,680 Speaker 1: But it's a novel. So the problem, the issue that 250 00:15:44,760 --> 00:15:47,960 Speaker 1: I have is it's the story of Brad Katsiama, which 251 00:15:47,960 --> 00:15:51,520 Speaker 1: is a fun story, terrific guy, really another guest on 252 00:15:51,560 --> 00:15:55,800 Speaker 1: the show, absolutely and endlessly entertaining story is as told 253 00:15:55,840 --> 00:15:59,200 Speaker 1: by Michael Lewis, and it helped me dramatically. There's a 254 00:15:59,240 --> 00:16:04,720 Speaker 1: YouTube interview between Michael um glad Well. It's not Michael Gladwell. 255 00:16:05,880 --> 00:16:09,720 Speaker 1: Malcolm Gladwell and Michael was a seventy minute love fest 256 00:16:09,800 --> 00:16:12,400 Speaker 1: between the two of them. And what helped me the 257 00:16:12,440 --> 00:16:14,720 Speaker 1: most was when Michael Lewis explained what I do is 258 00:16:14,760 --> 00:16:16,960 Speaker 1: I find a person I'm interested in and I write 259 00:16:17,000 --> 00:16:19,600 Speaker 1: their story, which is exactly what he did in the book. 260 00:16:20,360 --> 00:16:24,760 Speaker 1: My issue is as a treatise on market structure, he 261 00:16:24,800 --> 00:16:27,720 Speaker 1: never talked to any of the exchanges, any of the 262 00:16:27,760 --> 00:16:30,400 Speaker 1: other a t s s, any of the high frequency traders, 263 00:16:30,840 --> 00:16:34,600 Speaker 1: any of the electronic algorithm people that are in the business. 264 00:16:35,080 --> 00:16:40,240 Speaker 1: So it's one view from one person, and I don't 265 00:16:40,280 --> 00:16:44,280 Speaker 1: think it's a whole picture of the marketplace. So Lewis 266 00:16:44,320 --> 00:16:47,280 Speaker 1: and Katsuyam were on sixty minutes, came out and said 267 00:16:47,560 --> 00:16:52,360 Speaker 1: markets are rigged. Yes, the markets are rigged, and it 268 00:16:52,360 --> 00:16:55,800 Speaker 1: it's a perfect headline. It's the perfect marketing way to 269 00:16:55,840 --> 00:16:58,520 Speaker 1: get your book sold to hundreds of thousands of people. 270 00:16:59,320 --> 00:17:02,920 Speaker 1: The issue is if you listen or read the book, 271 00:17:03,480 --> 00:17:07,000 Speaker 1: what they really said was it's possible that the execution 272 00:17:07,040 --> 00:17:10,080 Speaker 1: of an order in the marketplace is rigged. Later on, 273 00:17:10,080 --> 00:17:12,720 Speaker 1: when Michael Lewis was asked you invest in the stock market, 274 00:17:13,000 --> 00:17:16,280 Speaker 1: he says, oh, yeah, I've on dtfs for years and years. 275 00:17:16,320 --> 00:17:19,720 Speaker 1: My family has always been an investor. So when the 276 00:17:19,760 --> 00:17:23,600 Speaker 1: market is rigged, that headline screams it's a three card 277 00:17:23,640 --> 00:17:27,480 Speaker 1: Monty game, there's no way you can win. Absolutely untrue. 278 00:17:28,080 --> 00:17:31,240 Speaker 1: By your apple twenty years ago, you're a happy guy today. 279 00:17:31,400 --> 00:17:37,200 Speaker 1: So that nuance is totally lost. In a sixty minutes piece, 280 00:17:37,880 --> 00:17:40,840 Speaker 1: the world was in a tizzy. It appeared that the 281 00:17:41,200 --> 00:17:43,199 Speaker 1: high frequency guys were making a lot of money. They 282 00:17:43,240 --> 00:17:48,200 Speaker 1: had a two, but they're not making that much money anymore. 283 00:17:48,560 --> 00:17:51,840 Speaker 1: Volumes have just completely dried up. And volumes have dried up. 284 00:17:52,200 --> 00:17:54,639 Speaker 1: Let me share a quick story around efficiency that I 285 00:17:54,720 --> 00:17:56,920 Speaker 1: like to tell. If you buy or sell a house, 286 00:17:57,240 --> 00:18:00,200 Speaker 1: five percent commission. When you go to Starbucks and buy 287 00:18:00,240 --> 00:18:03,560 Speaker 1: a latte with your credit card, you pay Master Carter 288 00:18:03,720 --> 00:18:07,560 Speaker 1: visa three percent commission on a three dollar latte, So 289 00:18:07,600 --> 00:18:13,320 Speaker 1: that's nine cents. If you trade three shares of Starbucks 290 00:18:14,040 --> 00:18:17,680 Speaker 1: and you're an electronic market maker, they make about three 291 00:18:17,720 --> 00:18:21,280 Speaker 1: cents per hundred, so they're gonna make the same ninth 292 00:18:21,280 --> 00:18:26,399 Speaker 1: sense that you're gladly play Visa for your latte. And 293 00:18:26,480 --> 00:18:29,919 Speaker 1: yet they're going to trade dollars worth of stock and 294 00:18:29,960 --> 00:18:33,640 Speaker 1: take risk while they're doing the trade. Their margins are 295 00:18:33,760 --> 00:18:40,800 Speaker 1: so infinitesimally small. There's no other capital transaction anywhere that 296 00:18:40,920 --> 00:18:45,400 Speaker 1: comes close to that type of efficiency. So my colleague 297 00:18:45,440 --> 00:18:48,920 Speaker 1: Josh Brown likes to say the people complain that high 298 00:18:48,960 --> 00:18:53,160 Speaker 1: frequency trading uh and the markets are rigged. His responses 299 00:18:53,200 --> 00:18:55,760 Speaker 1: the markets have always been rigged. There's always been a specialist. 300 00:18:55,760 --> 00:18:58,560 Speaker 1: There's always been somebody taking the pound of flash. At 301 00:18:58,600 --> 00:19:01,879 Speaker 1: least today we know who would is. Again, I'll go 302 00:19:01,920 --> 00:19:06,040 Speaker 1: back to my comment earlier that liquidity provision is a service. 303 00:19:06,280 --> 00:19:08,160 Speaker 1: If you want to be able to trade and transfer 304 00:19:08,280 --> 00:19:11,240 Speaker 1: risk whenever you want, someone needs to stand there and 305 00:19:11,280 --> 00:19:14,760 Speaker 1: take the other side. The way money has always been 306 00:19:14,760 --> 00:19:17,639 Speaker 1: made in the markets is to capture spread between the 307 00:19:17,640 --> 00:19:21,800 Speaker 1: bid and the ask. That's done very quickly now and 308 00:19:22,720 --> 00:19:27,240 Speaker 1: very scientifically. So it's not that the game has changed, 309 00:19:27,280 --> 00:19:29,720 Speaker 1: just the players have changed. So in the last thirty 310 00:19:29,760 --> 00:19:32,000 Speaker 1: seconds or so that we have what do you think 311 00:19:32,200 --> 00:19:37,600 Speaker 1: of I e X that's the shop that Bradcotts Yam 312 00:19:37,640 --> 00:19:39,840 Speaker 1: opened up. What do you think of their proposal to 313 00:19:39,880 --> 00:19:44,760 Speaker 1: actually becommon exchange as an A T S. I applaud 314 00:19:44,840 --> 00:19:49,240 Speaker 1: them and appreciate their innovation as an exchange, their protected 315 00:19:49,320 --> 00:19:54,159 Speaker 1: quote hidden behind the delay could be very problematic. And 316 00:19:54,240 --> 00:19:57,520 Speaker 1: my concern is other exchanges imitate I e X if 317 00:19:57,520 --> 00:20:02,159 Speaker 1: they start to get market share, and we would have 318 00:20:02,200 --> 00:20:05,200 Speaker 1: the situation of quotes that are not valid because they're 319 00:20:05,200 --> 00:20:07,920 Speaker 1: being canceled, but no one knows because the cancel is 320 00:20:07,960 --> 00:20:11,000 Speaker 1: going through the speed bump. This is Masters in Business 321 00:20:11,119 --> 00:20:15,080 Speaker 1: on Bloomberg Radio. I'm Barry Ridhalts. My special guest today 322 00:20:15,240 --> 00:20:19,480 Speaker 1: is Keith Ross. He is the CEO of PDQ Enterprises 323 00:20:20,040 --> 00:20:23,680 Speaker 1: on a T S dark Pool, And there are all 324 00:20:23,720 --> 00:20:29,080 Speaker 1: sorts of other technical terms we can discuss. So earlier 325 00:20:29,080 --> 00:20:32,960 Speaker 1: we were talking about how market structure has changed. One 326 00:20:33,000 --> 00:20:36,879 Speaker 1: of the claims about issues with high frequency trading is 327 00:20:36,920 --> 00:20:42,159 Speaker 1: that it has introduced new systemic risk into the markets. 328 00:20:42,200 --> 00:20:47,520 Speaker 1: True or false, it's got to be true. Systemic risk 329 00:20:47,600 --> 00:20:52,120 Speaker 1: is very hard to understand and know. UM. But there's 330 00:20:52,160 --> 00:20:55,479 Speaker 1: always been systemic risk, So it's not as though it 331 00:20:55,480 --> 00:20:58,800 Speaker 1: didn't exist before. Electronic trades just different today and it's 332 00:20:58,840 --> 00:21:03,560 Speaker 1: just a different fashion. UM. I think the regulators actually 333 00:21:03,720 --> 00:21:07,159 Speaker 1: actually after the flash crash with UH some of the 334 00:21:07,200 --> 00:21:10,320 Speaker 1: things they put in place limit up, limit down, UM 335 00:21:10,359 --> 00:21:13,320 Speaker 1: attempting to get the venues to synchronize with each other. 336 00:21:14,200 --> 00:21:17,440 Speaker 1: UM are certainly going to go help us move forward 337 00:21:17,560 --> 00:21:25,840 Speaker 1: to create confidence in the market structure. UM, but systemic risk. Interestingly, 338 00:21:25,880 --> 00:21:30,159 Speaker 1: to me, during the crash, none of the listed and 339 00:21:30,280 --> 00:21:34,480 Speaker 1: cleared futures options or stock exchanges had any issues. It 340 00:21:34,560 --> 00:21:36,880 Speaker 1: was only the over the counter trades where there wasn't 341 00:21:36,920 --> 00:21:41,320 Speaker 1: a central counterparty. The central counterparty is the to me, 342 00:21:41,440 --> 00:21:47,080 Speaker 1: the lynchpin of creating eliminating systemic risk, and Dodd Frank 343 00:21:47,560 --> 00:21:50,920 Speaker 1: all seven hundred whatever pages of it should be one page. 344 00:21:51,240 --> 00:21:54,320 Speaker 1: Everyone has to centrally clear their trades, no matter what 345 00:21:54,400 --> 00:21:58,199 Speaker 1: they are, through some exchange, through an exchange, or a 346 00:21:58,200 --> 00:22:01,360 Speaker 1: third party, because then the third party manages the risk 347 00:22:01,920 --> 00:22:04,280 Speaker 1: and and they know where all the risk is from 348 00:22:04,280 --> 00:22:10,000 Speaker 1: all the participants. That's that's interesting. So let's talk a 349 00:22:10,040 --> 00:22:14,320 Speaker 1: little bit about that structure in some um greater detail. 350 00:22:15,520 --> 00:22:18,439 Speaker 1: At one point in our history, the exchanges, the New 351 00:22:18,480 --> 00:22:23,360 Speaker 1: York Stock Exchanged, other exchanges were really almost public utilities. 352 00:22:23,359 --> 00:22:26,800 Speaker 1: They were not for profits. We eventually run into trouble 353 00:22:26,880 --> 00:22:30,399 Speaker 1: with compensation and other issues under Dick Rasso. There was 354 00:22:30,440 --> 00:22:34,479 Speaker 1: that whole digression. What should the proper role of the 355 00:22:34,520 --> 00:22:40,200 Speaker 1: stock exchange be in modern trading? Well, let's it should 356 00:22:40,200 --> 00:22:45,600 Speaker 1: be risk transfer among consenting parties. And so besides the 357 00:22:45,680 --> 00:22:48,119 Speaker 1: risk transfer process, which is the matching of the trade, 358 00:22:48,520 --> 00:22:50,840 Speaker 1: you also want to know that it's going to clear properly. 359 00:22:51,240 --> 00:22:53,200 Speaker 1: If you're a buyer, you're going to get your securities. 360 00:22:53,240 --> 00:22:55,400 Speaker 1: If you're a seller, you're gonna get your money. So 361 00:22:55,480 --> 00:22:58,520 Speaker 1: it's the first step in a chain of several events 362 00:22:59,080 --> 00:23:03,760 Speaker 1: that worked lawlessly through the financial crisis. For the list 363 00:23:03,800 --> 00:23:06,960 Speaker 1: that exchanges, the the issue was in the over the 364 00:23:07,040 --> 00:23:11,880 Speaker 1: counter credit swaps and some of those issues where everyone 365 00:23:11,960 --> 00:23:16,760 Speaker 1: became suspicious of their counterparties required more margin, and companies 366 00:23:16,800 --> 00:23:19,240 Speaker 1: that had tens of billions of dollars two weeks later, 367 00:23:19,720 --> 00:23:22,840 Speaker 1: we're needing to be rescued. So when I was coming up, 368 00:23:22,920 --> 00:23:26,480 Speaker 1: we had the AMMAX, the Nasdack, the New York Stock exchanged. 369 00:23:26,520 --> 00:23:31,680 Speaker 1: Today there's twelve exchanges, almost fifty dark pools, maybe even more. 370 00:23:31,720 --> 00:23:33,919 Speaker 1: I have you lose track of forty is probably a 371 00:23:33,920 --> 00:23:39,560 Speaker 1: better Okay, so forty plus dark pools. What about this fragmentation? 372 00:23:39,720 --> 00:23:44,000 Speaker 1: What does this mean for getting orders executed? I've spoken 373 00:23:44,000 --> 00:23:46,800 Speaker 1: to traders who have complained they go out to buy 374 00:23:46,920 --> 00:23:49,359 Speaker 1: five or ten thousand shares. I don't need a hundred 375 00:23:49,400 --> 00:23:51,800 Speaker 1: or five hundred, and they get forty seven here and 376 00:23:51,840 --> 00:23:54,760 Speaker 1: a hundred twenty two there, and it takes a dozens 377 00:23:54,760 --> 00:23:56,840 Speaker 1: of orders to get what used to be a simple 378 00:23:57,200 --> 00:24:01,639 Speaker 1: transaction filled. What is this fragmentation and mean for for 379 00:24:02,000 --> 00:24:08,240 Speaker 1: execution and structure? So too. Two parts to that answer. UM, 380 00:24:08,359 --> 00:24:11,399 Speaker 1: One is it actually is redundancy if you look at 381 00:24:11,440 --> 00:24:14,119 Speaker 1: it a different way. So a little while ago, this 382 00:24:14,280 --> 00:24:17,520 Speaker 1: New York socket exchange was down for four hours. No 383 00:24:17,600 --> 00:24:20,720 Speaker 1: one even new right, So that's actually a good thing. 384 00:24:20,920 --> 00:24:25,000 Speaker 1: So you know, we get a start for that. Um 385 00:24:25,160 --> 00:24:29,440 Speaker 1: the difficulty with the fragmentation. So the generic answer would 386 00:24:29,440 --> 00:24:32,919 Speaker 1: be innovation. Innovation has come through a t S S 387 00:24:33,240 --> 00:24:37,280 Speaker 1: has forced the stock exchanges to compete with each other again, 388 00:24:37,320 --> 00:24:40,080 Speaker 1: has driven costs down, taking a lot of people out 389 00:24:40,119 --> 00:24:42,080 Speaker 1: of the equation. There used to be many more bodies 390 00:24:42,119 --> 00:24:46,760 Speaker 1: on the floor and on trading. Really it's it's going traumatically. 391 00:24:47,280 --> 00:24:48,840 Speaker 1: It used to be like eight rooms. I think they're 392 00:24:48,880 --> 00:24:52,439 Speaker 1: down to one room. It's a it's a that's right, 393 00:24:52,480 --> 00:24:56,639 Speaker 1: it's a it's a television front. But here's how you 394 00:24:56,680 --> 00:25:02,120 Speaker 1: solve that problem. If you have a structural pause, that 395 00:25:02,200 --> 00:25:05,480 Speaker 1: can do good things for the order at PDQ, we 396 00:25:05,560 --> 00:25:09,720 Speaker 1: can consolidate orders from other venues. So let's talk about that. 397 00:25:09,880 --> 00:25:13,600 Speaker 1: So the complaint that some people have raised about I 398 00:25:14,080 --> 00:25:17,680 Speaker 1: X CATSI Yamas Shop is that they introduced the speed bump. 399 00:25:17,760 --> 00:25:21,960 Speaker 1: It's eight miles of coiled fiber. Optiction is right right, 400 00:25:22,000 --> 00:25:24,720 Speaker 1: So that that introduces I'm doing the soft top of 401 00:25:24,720 --> 00:25:28,560 Speaker 1: my head about a three and fifty micro second delay, 402 00:25:28,800 --> 00:25:33,320 Speaker 1: so that nobody is disadvantaged by faster speed. It's still 403 00:25:33,520 --> 00:25:37,399 Speaker 1: crazy fast, but that prevents what we talked about earlier, 404 00:25:37,520 --> 00:25:42,439 Speaker 1: the front running, the picking off orders. Your twenty micro second, 405 00:25:42,520 --> 00:25:49,080 Speaker 1: it's actually millisecond. Okay, speed guys, right, So that's a 406 00:25:49,280 --> 00:25:51,840 Speaker 1: that's a longer delay. In other words, all right, so 407 00:25:51,920 --> 00:25:56,439 Speaker 1: this is a twenty miller as opposed to three micro 408 00:25:57,240 --> 00:26:02,439 Speaker 1: second delay that similarly forces is everybody uh with the 409 00:26:02,520 --> 00:26:05,800 Speaker 1: speed advantage, or you're going to them on the lion 410 00:26:05,880 --> 00:26:09,320 Speaker 1: making them compete for the order. We reverse the flow, 411 00:26:10,200 --> 00:26:12,760 Speaker 1: so I e X. All they do is it's a 412 00:26:12,800 --> 00:26:15,160 Speaker 1: speed bump for people to get in and out. It's 413 00:26:15,240 --> 00:26:18,560 Speaker 1: it's like a turnstile at a door, right, everyone has 414 00:26:18,600 --> 00:26:22,479 Speaker 1: to stop and go through the turnstyle. They've made an 415 00:26:22,480 --> 00:26:26,760 Speaker 1: effective business out of convincing people that that's helpful. I 416 00:26:26,800 --> 00:26:31,679 Speaker 1: think it's more helpful if you take that pause, share 417 00:26:31,720 --> 00:26:34,480 Speaker 1: the symbol only. This is an incredibly important part of 418 00:26:34,480 --> 00:26:37,359 Speaker 1: the equation, not the volume, not the product, the side, 419 00:26:37,400 --> 00:26:41,440 Speaker 1: the size, or the price, and ask that question, where 420 00:26:41,560 --> 00:26:46,879 Speaker 1: is the market in apple the high frequency folks, the providers, 421 00:26:46,920 --> 00:26:49,960 Speaker 1: the institution, anyone who wants to provide liquidity then has 422 00:26:50,000 --> 00:26:54,000 Speaker 1: to respond with a committed order. That committed orders aggregated 423 00:26:54,000 --> 00:26:57,159 Speaker 1: into a book, and then that book is used to 424 00:26:57,200 --> 00:27:01,040 Speaker 1: get to pick the best price and size exactly. That 425 00:27:01,080 --> 00:27:06,080 Speaker 1: sounds like a really interesting innovation to deal with questions 426 00:27:06,160 --> 00:27:10,720 Speaker 1: of of structure and fragmentation. You're actually taking advantage of 427 00:27:10,760 --> 00:27:17,159 Speaker 1: the fragmentation. Well, we're consolidating it in this process. And 428 00:27:17,480 --> 00:27:20,160 Speaker 1: interesting to me, I mean, I think it's somewhat ironic 429 00:27:20,560 --> 00:27:22,960 Speaker 1: that this process replicates the way the floor used to 430 00:27:22,960 --> 00:27:25,720 Speaker 1: work for the way an active pit would work in Chicago. 431 00:27:25,800 --> 00:27:30,280 Speaker 1: Let's say, so let's talk a bit about order flow. 432 00:27:30,320 --> 00:27:33,280 Speaker 1: What do you think about the payment for order flow? 433 00:27:33,359 --> 00:27:38,960 Speaker 1: That's been a somewhat controversial issue. I have no issue 434 00:27:38,960 --> 00:27:42,360 Speaker 1: with it. And let me explain why. Uh, just over 435 00:27:42,400 --> 00:27:45,719 Speaker 1: a year ago conference in New York, five different by side, 436 00:27:46,520 --> 00:27:50,280 Speaker 1: excuse me, five different retail brokers on the day as 437 00:27:50,400 --> 00:27:53,600 Speaker 1: talking about their experience with their wholesalers to say it 438 00:27:53,640 --> 00:27:57,959 Speaker 1: was a love fest as an understatement, every single person 439 00:27:58,040 --> 00:28:03,440 Speaker 1: this is schwab and a merritory aid, and um, I'm 440 00:28:03,520 --> 00:28:06,040 Speaker 1: trying to remember some of the other scott trade. Maybe 441 00:28:06,400 --> 00:28:10,760 Speaker 1: it wasn't interactive brokers, but who's who of retail said, 442 00:28:11,080 --> 00:28:14,520 Speaker 1: here's what our wholesalers do. They help us build our infrastructure. 443 00:28:15,400 --> 00:28:18,359 Speaker 1: They the metrics that we track with them in terms 444 00:28:18,440 --> 00:28:24,160 Speaker 1: of present price improvement, quality inside the spread, uh, quickness 445 00:28:24,160 --> 00:28:26,760 Speaker 1: of response, number of trades that they don't feel to 446 00:28:26,880 --> 00:28:29,920 Speaker 1: get sent out to the marketplace, that met all those 447 00:28:29,960 --> 00:28:33,199 Speaker 1: metrics have gotten better over time. This was in I 448 00:28:33,240 --> 00:28:39,600 Speaker 1: believe January. They're thrilled. Payment for order flow is just 449 00:28:39,680 --> 00:28:43,320 Speaker 1: a different way of giving that spread capture to the dealer. 450 00:28:45,080 --> 00:28:49,520 Speaker 1: Commissions have collapsed for retail folks. All you can eat 451 00:28:49,560 --> 00:28:51,840 Speaker 1: on a trade, I mean it's virtually nothing. Go to 452 00:28:52,080 --> 00:28:55,120 Speaker 1: a website called robin Hood and trade for free actually 453 00:28:55,360 --> 00:28:58,440 Speaker 1: is zero cost. I assume it's built in somewhere in 454 00:28:58,440 --> 00:29:01,760 Speaker 1: a moll. You know. Everybody will capture the spread on 455 00:29:01,800 --> 00:29:06,520 Speaker 1: those trades, which is fine. But to the consumer it 456 00:29:06,600 --> 00:29:09,760 Speaker 1: looks like a free trade, which is fine. So so 457 00:29:09,840 --> 00:29:11,920 Speaker 1: let's talk. I would be remiss if we did not 458 00:29:12,120 --> 00:29:16,640 Speaker 1: discuss spoofing, which the concept of cranking out tens of 459 00:29:16,720 --> 00:29:20,440 Speaker 1: thousands of what some people call phantom orts that are 460 00:29:20,560 --> 00:29:25,360 Speaker 1: never intended to be executed and then immediately canceling those 461 00:29:26,680 --> 00:29:31,040 Speaker 1: which appears to be intended to manipulate markets to some degree. 462 00:29:31,600 --> 00:29:34,920 Speaker 1: Why in a normal market would we ever need something 463 00:29:34,960 --> 00:29:40,920 Speaker 1: like spoofing? Why would you ever bluff in a poker hand? Well, 464 00:29:40,960 --> 00:29:43,560 Speaker 1: you bluff once, but you don't bluff ten thousand times 465 00:29:43,600 --> 00:29:46,160 Speaker 1: in a micro second. Seems like a lot of bluffing 466 00:29:46,200 --> 00:29:50,360 Speaker 1: going on. Yes, I'm being somewhat facetious. It's one person's bluff, 467 00:29:50,440 --> 00:29:54,920 Speaker 1: maybe another person's brilliant move um or defensive move. But 468 00:29:56,200 --> 00:29:59,800 Speaker 1: interesting to me that when the Commission decided to focus 469 00:29:59,840 --> 00:30:02,719 Speaker 1: on these issues, and when you say commission you mean 470 00:30:02,760 --> 00:30:06,440 Speaker 1: the SEC. The SEC and Finrie both creating rules around 471 00:30:06,520 --> 00:30:10,120 Speaker 1: these types of events. They have yet to actually defined 472 00:30:10,240 --> 00:30:13,040 Speaker 1: spoofing or layering, But what they did define over a 473 00:30:13,120 --> 00:30:18,320 Speaker 1: year ago was disruptive trading. And I think that's much 474 00:30:18,400 --> 00:30:23,520 Speaker 1: easier to focus on because it doesn't necessarily imply intent. 475 00:30:24,400 --> 00:30:27,920 Speaker 1: So spoofing implies intent. I wasn't really meaning to trade, 476 00:30:28,320 --> 00:30:31,000 Speaker 1: But if you've put those orders in, and there's so 477 00:30:31,040 --> 00:30:33,840 Speaker 1: many risk parameters in place for you to put those 478 00:30:33,920 --> 00:30:37,320 Speaker 1: orders in, meaning you've got to have enough capital in 479 00:30:37,360 --> 00:30:39,840 Speaker 1: case you get killed that you can do the trade. 480 00:30:41,000 --> 00:30:45,560 Speaker 1: It's a matter of debate whether they're spoofing or not. 481 00:30:45,640 --> 00:30:48,840 Speaker 1: What's the actual intent. It's really really hard to define 482 00:30:49,040 --> 00:30:51,560 Speaker 1: and certainly going to be very hard to prosecute someone. 483 00:30:51,880 --> 00:30:55,200 Speaker 1: So if we people who are listening are intrigued as 484 00:30:55,240 --> 00:30:57,640 Speaker 1: I am by h F T and algorithmic trading, if 485 00:30:57,640 --> 00:31:00,280 Speaker 1: they wanted to find out more about p d Q, 486 00:31:00,600 --> 00:31:02,760 Speaker 1: where's the best place for them to learn? P d 487 00:31:02,880 --> 00:31:05,200 Speaker 1: Q A t S dot com p d Q A 488 00:31:05,320 --> 00:31:08,520 Speaker 1: t s dot com. We have been speaking with Keith Ross. 489 00:31:08,800 --> 00:31:13,640 Speaker 1: He is the chairman and CEO of p d Q Enterprises. UH. 490 00:31:13,680 --> 00:31:16,120 Speaker 1: If you would like to learn more about this, you 491 00:31:16,160 --> 00:31:19,600 Speaker 1: can check out the website p d Q A t 492 00:31:19,840 --> 00:31:22,959 Speaker 1: S dot com. Be sure and check out my daily 493 00:31:23,040 --> 00:31:26,440 Speaker 1: column on Bloomberg View dot com or follow me on 494 00:31:26,480 --> 00:31:30,760 Speaker 1: Twitter at Riolts. I'm Barry Ridholts. You've been listening to 495 00:31:30,880 --> 00:31:35,320 Speaker 1: Masters in Business on Bloomberg Radio. All right, welcome back 496 00:31:35,320 --> 00:31:37,560 Speaker 1: to the podcast. Keith Keith I want to call you 497 00:31:37,640 --> 00:31:40,400 Speaker 1: Donald keith Um. Thank you so much for doing this. 498 00:31:40,400 --> 00:31:43,880 Speaker 1: This is really fascinating stuff. I know we are deep 499 00:31:44,040 --> 00:31:48,000 Speaker 1: in the wonky weeds for the average listener, but trust 500 00:31:48,000 --> 00:31:50,480 Speaker 1: me when I tell you there is an intense audience 501 00:31:50,640 --> 00:31:53,400 Speaker 1: for this conversation. And I know I'm going to get 502 00:31:53,440 --> 00:31:56,920 Speaker 1: all sorts of email, one half of which is gonna 503 00:31:56,920 --> 00:32:00,520 Speaker 1: be saying, hey, the anti h f T guys, are 504 00:32:00,840 --> 00:32:03,280 Speaker 1: you know vociferous? It was good you had a guy 505 00:32:03,320 --> 00:32:05,840 Speaker 1: like he threw us on. And then the other emails 506 00:32:05,880 --> 00:32:08,680 Speaker 1: are going to be and by the way, the first 507 00:32:08,720 --> 00:32:11,000 Speaker 1: group will say, but you were a little rough on him, 508 00:32:11,280 --> 00:32:13,600 Speaker 1: And then the other group are gonna say, hey, man, 509 00:32:13,680 --> 00:32:16,080 Speaker 1: you let Keith r Us just get away with murder. 510 00:32:16,160 --> 00:32:18,400 Speaker 1: You should have asked him. So let me go over 511 00:32:18,520 --> 00:32:21,600 Speaker 1: some of the questions that they're gonna they're gonna ask 512 00:32:21,680 --> 00:32:24,240 Speaker 1: us about. I think at this point in time, most 513 00:32:24,280 --> 00:32:28,520 Speaker 1: people know what co location means. The servers at the 514 00:32:28,600 --> 00:32:32,720 Speaker 1: various exchanges that people fight to be the closest one 515 00:32:32,760 --> 00:32:35,680 Speaker 1: to the end of the run so that there's that 516 00:32:35,880 --> 00:32:40,280 Speaker 1: little speed advantage of ten ft at the speed of light. 517 00:32:40,320 --> 00:32:43,880 Speaker 1: How important are things like co location to h f 518 00:32:43,960 --> 00:32:48,760 Speaker 1: T firms? Actually there, they probably created the whole idea 519 00:32:49,440 --> 00:32:53,320 Speaker 1: in terms of doing it electronically. Co location and position 520 00:32:53,360 --> 00:32:57,560 Speaker 1: in the pit years ago was also incredibly important, and 521 00:32:57,600 --> 00:32:59,560 Speaker 1: people would get up at four am to make sure 522 00:32:59,600 --> 00:33:01,840 Speaker 1: they had their spot next to their favorite broker so 523 00:33:01,880 --> 00:33:05,040 Speaker 1: they could deal with him and trade his flow. So 524 00:33:05,200 --> 00:33:08,200 Speaker 1: it's not new, it's just got a different shape. And 525 00:33:08,360 --> 00:33:11,640 Speaker 1: it fascinates me that now that orders are done and 526 00:33:11,880 --> 00:33:16,520 Speaker 1: completed in milliseconds and micro seconds, essentially, the world seems 527 00:33:16,560 --> 00:33:19,000 Speaker 1: to be displaced by it. Where it used to take minutes, 528 00:33:19,480 --> 00:33:21,800 Speaker 1: if not hours, to get a trade done, and it 529 00:33:21,800 --> 00:33:23,800 Speaker 1: didn't seem to be an issue. So we went from 530 00:33:23,840 --> 00:33:29,680 Speaker 1: hand gestures to software right to software. Operating at high speeds, 531 00:33:30,040 --> 00:33:33,719 Speaker 1: many of the venues measure their cables so that everyone 532 00:33:33,760 --> 00:33:37,280 Speaker 1: has the virtual same distance to the matching engine. So 533 00:33:37,400 --> 00:33:40,440 Speaker 1: the CME does that, I know for sure, and it's 534 00:33:40,480 --> 00:33:43,280 Speaker 1: an f it's in an effort to try to level 535 00:33:43,280 --> 00:33:47,520 Speaker 1: the playing field. If you're in the co location, well, 536 00:33:47,560 --> 00:33:50,600 Speaker 1: if you're not, you're a disadvantage, which is why they 537 00:33:50,600 --> 00:33:54,880 Speaker 1: could charge big rents for those wrecks. And so for 538 00:33:54,920 --> 00:33:57,080 Speaker 1: the high speed guys, the reason they need to co 539 00:33:57,240 --> 00:33:59,720 Speaker 1: locate is they have to compete with each other. They're 540 00:33:59,760 --> 00:34:03,120 Speaker 1: sho works fighting over anything that might be there, and 541 00:34:03,160 --> 00:34:05,920 Speaker 1: they're very worried that if they're too slow, they're going 542 00:34:05,960 --> 00:34:08,719 Speaker 1: to be the victim. This is a giant arms race 543 00:34:08,840 --> 00:34:12,279 Speaker 1: is what's what's actually happen. So let's let's go through 544 00:34:12,320 --> 00:34:15,840 Speaker 1: some of these other favorite terms. What is packet sniffing. 545 00:34:16,920 --> 00:34:20,839 Speaker 1: It's an attempt to decipher what's in a message in 546 00:34:20,880 --> 00:34:24,960 Speaker 1: a network, meaning in this context, to figure out what 547 00:34:24,960 --> 00:34:27,879 Speaker 1: what might actually be the size and price of an 548 00:34:27,960 --> 00:34:32,080 Speaker 1: order in order to get ahead of that line. It's 549 00:34:32,160 --> 00:34:35,160 Speaker 1: not it's not clear to me that you can actually 550 00:34:35,160 --> 00:34:36,880 Speaker 1: see what the order is, but you can see that 551 00:34:36,920 --> 00:34:39,719 Speaker 1: maybe an order is coming. So I was always in 552 00:34:39,760 --> 00:34:46,120 Speaker 1: the impression that since since every once the order goes 553 00:34:46,239 --> 00:34:50,400 Speaker 1: into the exchange and the exchange exchange pings out to 554 00:34:50,640 --> 00:34:54,080 Speaker 1: see what the best prices, once that happens, the h 555 00:34:54,160 --> 00:34:56,520 Speaker 1: f t s have full access to it, and if 556 00:34:56,520 --> 00:34:58,919 Speaker 1: they could beat everybody else to go by the order 557 00:34:58,960 --> 00:35:01,640 Speaker 1: and fill that at a lower rice, they're allowed to 558 00:35:01,640 --> 00:35:04,480 Speaker 1: do that. They're not the broker, so they don't have 559 00:35:04,560 --> 00:35:07,120 Speaker 1: front running rules that apply to them. They're just a 560 00:35:07,160 --> 00:35:12,120 Speaker 1: liquidity provider. And they're faster and getting if this is 561 00:35:12,120 --> 00:35:14,200 Speaker 1: available for seven cents, and I'm going to turn around 562 00:35:14,200 --> 00:35:17,000 Speaker 1: and flip it for eight cents. If they're faster than 563 00:35:17,040 --> 00:35:20,600 Speaker 1: other guys doing that, they get to pocket that penny 564 00:35:20,760 --> 00:35:23,719 Speaker 1: once it gets posted at the matching engine or at 565 00:35:23,719 --> 00:35:26,880 Speaker 1: the venue. The matching engine would be actually executing a 566 00:35:26,960 --> 00:35:30,120 Speaker 1: match once it's posted and everyone can see it. I 567 00:35:30,160 --> 00:35:35,040 Speaker 1: think you know it's fair gets declared in fair game. Absolutely. Um. 568 00:35:35,080 --> 00:35:39,760 Speaker 1: I was aware that in the future's world, some folks, 569 00:35:40,280 --> 00:35:47,200 Speaker 1: we're putting one lots into the marketplace, meaning one futures contract, 570 00:35:48,680 --> 00:35:52,200 Speaker 1: so the equivalent of one share of stock of order 571 00:35:52,440 --> 00:35:55,880 Speaker 1: or it's like twenty or thirty dollars principle amount for 572 00:35:55,920 --> 00:35:58,239 Speaker 1: a one lot, because the futures are leveraged. And now 573 00:35:58,480 --> 00:36:01,080 Speaker 1: then going on the other side with the order, well, 574 00:36:01,160 --> 00:36:03,160 Speaker 1: know what they did was they'd leave it in the 575 00:36:03,200 --> 00:36:06,160 Speaker 1: marketplace until they got to fill. And at the time, 576 00:36:06,880 --> 00:36:10,280 Speaker 1: the mechanics behind reporting the fill was quicker than changing 577 00:36:10,320 --> 00:36:13,040 Speaker 1: the quote, so the phil would tell them that the 578 00:36:13,120 --> 00:36:16,200 Speaker 1: quote was changing, so in other words, they would get 579 00:36:16,239 --> 00:36:20,520 Speaker 1: filled before the quote would even show up and micro 580 00:36:20,719 --> 00:36:26,879 Speaker 1: seconds nobody actually knows this report. I believe that's been 581 00:36:28,480 --> 00:36:31,160 Speaker 1: sequenced so that it's everyone gets the information at the 582 00:36:31,160 --> 00:36:34,399 Speaker 1: same time. But there was an opportunity. Oh, I see 583 00:36:34,440 --> 00:36:36,680 Speaker 1: exactly what you're saying. So if you're filled before the 584 00:36:36,760 --> 00:36:39,279 Speaker 1: quote moves, you know, the quote's gonna move right, so 585 00:36:39,320 --> 00:36:41,600 Speaker 1: you have an information, so you have a chance to 586 00:36:42,000 --> 00:36:44,680 Speaker 1: just because you were executed, and that's considered public, so 587 00:36:44,719 --> 00:36:47,600 Speaker 1: everyone should have access to that. This doesn't get complicated 588 00:36:47,719 --> 00:36:51,200 Speaker 1: enough of it. So so we talked about spoofing. What 589 00:36:51,280 --> 00:36:54,960 Speaker 1: about quote stuffing, which is a term that I just love. 590 00:36:55,400 --> 00:36:58,680 Speaker 1: What is quote stuffing? Well, it's an attempt to overwhelm 591 00:36:58,760 --> 00:37:02,359 Speaker 1: the quote system so that people can't really understand where 592 00:37:02,360 --> 00:37:05,560 Speaker 1: the market is. And is that considered manipulation or is 593 00:37:05,600 --> 00:37:10,560 Speaker 1: there I would expect the SEC to use their disruptive 594 00:37:10,600 --> 00:37:14,840 Speaker 1: Trading card and say you were trying to disrupt trading. 595 00:37:15,080 --> 00:37:18,040 Speaker 1: This doesn't make sense. You know, you're fined or whatever. 596 00:37:18,080 --> 00:37:20,600 Speaker 1: The results do we still see the sort of quote 597 00:37:20,600 --> 00:37:25,640 Speaker 1: stuffing that was pretty common. I'm away from being on 598 00:37:25,680 --> 00:37:27,319 Speaker 1: the front line the way I used to be at 599 00:37:27,320 --> 00:37:33,080 Speaker 1: get go Um. Everyone is so fast and so on 600 00:37:33,200 --> 00:37:34,920 Speaker 1: top of their game, so to speak. I would think 601 00:37:34,920 --> 00:37:38,879 Speaker 1: it would be extraordinarily difficult now. But I can't say 602 00:37:38,920 --> 00:37:40,719 Speaker 1: that it doesn't happen. I don't know for sure. You 603 00:37:40,760 --> 00:37:44,760 Speaker 1: would think if someone is jamming a lot of quotes 604 00:37:44,920 --> 00:37:48,279 Speaker 1: in order to cause confusion in the marketplace, that does 605 00:37:48,400 --> 00:37:51,040 Speaker 1: make sense for the sec to want to stop that absolutely, 606 00:37:51,200 --> 00:37:55,600 Speaker 1: and most venues, including PDQ, have limits on the number 607 00:37:55,680 --> 00:37:57,960 Speaker 1: of orders on the same side and a given security 608 00:37:58,000 --> 00:38:01,960 Speaker 1: that anyone client can send, so that if we see 609 00:38:02,000 --> 00:38:04,920 Speaker 1: more than a couple of orders in one second, same side, 610 00:38:04,960 --> 00:38:10,359 Speaker 1: same price, same um customers sending the order, that's problematic. 611 00:38:10,560 --> 00:38:13,160 Speaker 1: It pops up on our compliance and we can check 612 00:38:13,200 --> 00:38:15,719 Speaker 1: them out and make sure that they're not going Now 613 00:38:15,760 --> 00:38:17,880 Speaker 1: is that going to be an automated interrupt or is 614 00:38:17,920 --> 00:38:20,160 Speaker 1: that get kicked out with an email to somebody in 615 00:38:20,200 --> 00:38:22,400 Speaker 1: a week later or someone So we're not the broker 616 00:38:22,480 --> 00:38:25,520 Speaker 1: dealer of record, so it's up to us to inform 617 00:38:25,560 --> 00:38:27,480 Speaker 1: the broker dealer and then it's up to him to 618 00:38:27,600 --> 00:38:29,680 Speaker 1: decide what to do with it. So this won't be 619 00:38:29,800 --> 00:38:32,719 Speaker 1: stopped at the point of contact. This is Hey, this 620 00:38:32,760 --> 00:38:35,440 Speaker 1: person is abusing the system, and eventually they get kicked out. 621 00:38:35,480 --> 00:38:37,920 Speaker 1: We have the capability to turn them off. I mean 622 00:38:38,040 --> 00:38:41,400 Speaker 1: we've are compliance systems are in sync enough that we 623 00:38:41,440 --> 00:38:46,000 Speaker 1: could if we needed to. UM we'd prefer to have 624 00:38:46,040 --> 00:38:49,920 Speaker 1: the broker deal it do it because they know exactly 625 00:38:49,960 --> 00:38:52,160 Speaker 1: where the client is and what the clients expectation, and 626 00:38:52,160 --> 00:38:55,400 Speaker 1: they have the compliance over sure to do that. That 627 00:38:55,400 --> 00:38:59,439 Speaker 1: that makes some sense. Um, walking away? What is walking away? Well, 628 00:38:59,560 --> 00:39:01,920 Speaker 1: this is what we talked about earlier in terms of 629 00:39:02,360 --> 00:39:06,040 Speaker 1: turning off your system. UM. I'd like to share an 630 00:39:06,120 --> 00:39:11,279 Speaker 1: urban legend. There was a person writing a book interviewed 631 00:39:11,280 --> 00:39:15,080 Speaker 1: a prominent high frequency trader who said, off the record, 632 00:39:15,320 --> 00:39:19,040 Speaker 1: I recall this, I promise, off the record, we turned 633 00:39:19,040 --> 00:39:22,840 Speaker 1: our machines off during the flash crash. During the flash crash, 634 00:39:23,200 --> 00:39:26,800 Speaker 1: Um the reporter decided to put it on the record. 635 00:39:27,520 --> 00:39:31,319 Speaker 1: The world assumed that everyone turned off their machines and 636 00:39:31,400 --> 00:39:34,400 Speaker 1: walked away, and we're not making a market, when in fact, 637 00:39:34,440 --> 00:39:39,120 Speaker 1: I know a lot of good firms took advantage, literally 638 00:39:39,160 --> 00:39:41,680 Speaker 1: took advantage of the opportunity and made a lot of money. 639 00:39:41,719 --> 00:39:45,399 Speaker 1: Anytimes volatility, if you so. I began my career as 640 00:39:45,400 --> 00:39:47,960 Speaker 1: a trader, and one of the things I used to 641 00:39:48,040 --> 00:39:50,600 Speaker 1: love to do. This is a hundred years ago and 642 00:39:50,640 --> 00:39:54,359 Speaker 1: I'm sucking manually. This is brightly algorithms. I would leave 643 00:39:54,719 --> 00:39:59,160 Speaker 1: a bid out a quarter or half a point under 644 00:39:59,200 --> 00:40:02,200 Speaker 1: the market, and every now and then you got something, 645 00:40:02,320 --> 00:40:04,719 Speaker 1: you get filled and it was just quick, you know, 646 00:40:05,680 --> 00:40:08,600 Speaker 1: with one handed flick you turn around and sell it 647 00:40:08,640 --> 00:40:11,200 Speaker 1: at the bid, Hey I sold a thousand shares a 648 00:40:11,320 --> 00:40:14,960 Speaker 1: quarter point higher, it was free money. Now eventually that 649 00:40:15,080 --> 00:40:18,040 Speaker 1: sort of nonsense stopped in the lad Or nineties, but 650 00:40:18,280 --> 00:40:23,719 Speaker 1: I was astonished occasionally, Hey here's two for free. Um 651 00:40:23,760 --> 00:40:25,600 Speaker 1: I had a friend who said, why don't we write 652 00:40:25,600 --> 00:40:29,000 Speaker 1: a program to do that automatically? So they tried, and 653 00:40:29,040 --> 00:40:31,040 Speaker 1: it made some money for about a month, and then 654 00:40:31,320 --> 00:40:34,040 Speaker 1: that stuff just kind of dried up. So I look 655 00:40:34,080 --> 00:40:36,640 Speaker 1: at that as an early h f T sort of 656 00:40:36,680 --> 00:40:40,799 Speaker 1: thing and an arms race where the other side eventually 657 00:40:41,200 --> 00:40:44,560 Speaker 1: nobody likes getting picked off for a quarter point constantly 658 00:40:44,600 --> 00:40:48,239 Speaker 1: at a certain certain point they basically say you can't 659 00:40:48,239 --> 00:40:50,960 Speaker 1: do this, or they just figure out, let's look at 660 00:40:50,960 --> 00:40:53,359 Speaker 1: all the quotes and make sure that we're in the 661 00:40:53,400 --> 00:40:55,480 Speaker 1: market and not now, if it's a buck outside of 662 00:40:55,520 --> 00:40:58,520 Speaker 1: the market, that trade gets broken, but a quarter point 663 00:40:58,520 --> 00:41:02,000 Speaker 1: in a fast moving market, but nobody's gonna care about that, 664 00:41:02,400 --> 00:41:06,440 Speaker 1: so um or walk away from that. So so, given 665 00:41:06,560 --> 00:41:12,600 Speaker 1: all these things, given everything that we have learns um 666 00:41:12,800 --> 00:41:15,800 Speaker 1: is it's let me ask this in an open ended question. 667 00:41:16,840 --> 00:41:19,680 Speaker 1: There was a lot of storm un drang and a 668 00:41:19,680 --> 00:41:22,359 Speaker 1: lot of upset about h f T s a few 669 00:41:22,440 --> 00:41:26,960 Speaker 1: years ago Certainly, as closer we get to the flash 670 00:41:27,000 --> 00:41:30,120 Speaker 1: crash six years ago, the more people are upset. Is 671 00:41:30,160 --> 00:41:32,759 Speaker 1: it that we've forgotten about the flash crash and these 672 00:41:32,800 --> 00:41:37,719 Speaker 1: fears have faded? Has the market structure and the oversight improved. 673 00:41:37,840 --> 00:41:41,480 Speaker 1: Has everybody kind of figured out, Hey, this technology thing 674 00:41:41,560 --> 00:41:44,040 Speaker 1: is going to be here for a while. What's changed 675 00:41:44,080 --> 00:41:46,760 Speaker 1: in the past five or six years that have kind 676 00:41:46,760 --> 00:41:51,240 Speaker 1: of made the general outrage over h f T sort 677 00:41:51,280 --> 00:41:53,960 Speaker 1: of settled down? I don't know if I'm asking that question. 678 00:41:54,400 --> 00:41:56,320 Speaker 1: I think I get it. I mean it has dampened 679 00:41:56,360 --> 00:42:00,279 Speaker 1: down quite a bit. Um. I think several factors. One 680 00:42:00,440 --> 00:42:02,839 Speaker 1: is the stock markets much higher than it was five 681 00:42:02,920 --> 00:42:06,120 Speaker 1: years ago. It's recovered dramatically, so so people look at 682 00:42:06,160 --> 00:42:07,560 Speaker 1: their four oh one K and they don't have to 683 00:42:07,640 --> 00:42:10,520 Speaker 1: jump out the window anymore. So that just in general, 684 00:42:10,560 --> 00:42:12,839 Speaker 1: that helps a lot for people to feel better about 685 00:42:12,840 --> 00:42:18,239 Speaker 1: the market. Um, the markets have put in some more 686 00:42:18,320 --> 00:42:21,319 Speaker 1: rules and regulations, so we expected to behave better and 687 00:42:21,320 --> 00:42:26,200 Speaker 1: I think it has. Um people are becoming more comfortable. 688 00:42:27,239 --> 00:42:29,680 Speaker 1: So five, six, seven, eight years ago, people wouldn't even 689 00:42:29,719 --> 00:42:32,840 Speaker 1: go online to do banking because they were anxious about security. Sure, 690 00:42:32,920 --> 00:42:35,239 Speaker 1: people afraid to buy from Amazon. If you go back 691 00:42:35,239 --> 00:42:37,560 Speaker 1: far enough, I can't I can't buy some put a 692 00:42:37,560 --> 00:42:40,719 Speaker 1: credit card over the internet. Now, if you don't do it, 693 00:42:40,800 --> 00:42:43,160 Speaker 1: you know you're you're not part of the world in 694 00:42:43,200 --> 00:42:47,480 Speaker 1: which we live exactly. So all those things have changed. Um, 695 00:42:47,960 --> 00:42:51,760 Speaker 1: the proper structure gotten better. Do you think the market 696 00:42:51,800 --> 00:42:57,040 Speaker 1: structure is less precarious, more stable, less likely to be 697 00:42:57,080 --> 00:43:01,560 Speaker 1: subject to another flash crash like event. I think it's 698 00:43:01,560 --> 00:43:06,040 Speaker 1: more resilient. That's a good word. The difficulty with those 699 00:43:06,120 --> 00:43:08,239 Speaker 1: kinds of things is they're not going to be where 700 00:43:08,239 --> 00:43:12,319 Speaker 1: you expect them. They're gonna they're gonna be in its 701 00:43:12,360 --> 00:43:15,240 Speaker 1: own fash crash type of thing. That's really the wrong 702 00:43:15,239 --> 00:43:18,720 Speaker 1: phrase for it. But you had some really surprising movement 703 00:43:18,760 --> 00:43:23,560 Speaker 1: in bonds, not where people expected to see that. What 704 00:43:23,719 --> 00:43:27,080 Speaker 1: I've always thought is that there'll be people like you 705 00:43:27,160 --> 00:43:29,239 Speaker 1: used to trade in the nineties that will put some 706 00:43:29,320 --> 00:43:31,440 Speaker 1: bids in below the market because they do want to 707 00:43:31,440 --> 00:43:33,400 Speaker 1: own it and at a better price, they'll be happy 708 00:43:33,920 --> 00:43:36,799 Speaker 1: even in the bond market. And so one of the 709 00:43:36,840 --> 00:43:39,719 Speaker 1: issues at the moment is we have what some of 710 00:43:39,719 --> 00:43:43,440 Speaker 1: the academics called knife point liquidity. So everyone's around the 711 00:43:43,480 --> 00:43:47,319 Speaker 1: market a tick or two away because they understand that's 712 00:43:47,320 --> 00:43:49,080 Speaker 1: where the market is now, and that's where the supply 713 00:43:49,120 --> 00:43:52,880 Speaker 1: and demand are. But if the market moves handle for 714 00:43:53,040 --> 00:43:56,640 Speaker 1: a point, if it doesn't kind of gradually, that's okay 715 00:43:56,680 --> 00:43:59,160 Speaker 1: because they can all adjust along the way. But if 716 00:43:59,160 --> 00:44:02,120 Speaker 1: it happens quickly, they assume that there's some news out 717 00:44:02,560 --> 00:44:05,440 Speaker 1: that they don't understand or the model doesn't understand, so 718 00:44:05,520 --> 00:44:09,360 Speaker 1: they back away, and that creates the vacuum. It is 719 00:44:09,400 --> 00:44:12,080 Speaker 1: going to make sense to some people to say, you 720 00:44:12,120 --> 00:44:14,359 Speaker 1: know what, I'm gonna bid down a half a dollar, 721 00:44:14,560 --> 00:44:16,719 Speaker 1: down a dollar, down a dollar and a half, and 722 00:44:16,760 --> 00:44:18,480 Speaker 1: down two dollars, the way the book used to be 723 00:44:18,560 --> 00:44:22,360 Speaker 1: much more like, and stay out there until you know 724 00:44:22,440 --> 00:44:24,160 Speaker 1: they get what they need. If I get filled on 725 00:44:24,280 --> 00:44:27,279 Speaker 1: buying at a discount, what or if I sell it 726 00:44:27,360 --> 00:44:29,280 Speaker 1: on the way up, I'm selling it at a premium. 727 00:44:29,560 --> 00:44:34,439 Speaker 1: And there's all kinds of things you can do with that. So, yes, 728 00:44:34,520 --> 00:44:38,799 Speaker 1: we do have I still believe the structure. The structural 729 00:44:38,920 --> 00:44:43,359 Speaker 1: issue is we have to chase the liquidity rather than 730 00:44:43,400 --> 00:44:46,120 Speaker 1: making it come to the order. And that's where PDQ 731 00:44:46,400 --> 00:44:51,319 Speaker 1: is dramatically different. And it's hard for me to emphasize 732 00:44:52,200 --> 00:44:56,480 Speaker 1: the paradigm shift. So I've got the order. I'm holding 733 00:44:56,520 --> 00:44:58,160 Speaker 1: it here. You can't see it on the radio, but 734 00:44:58,160 --> 00:45:00,759 Speaker 1: I've got into my hand. I want of trade ten 735 00:45:00,800 --> 00:45:03,880 Speaker 1: thousand Apple. I'll tell you the size. What's your market? 736 00:45:05,680 --> 00:45:07,400 Speaker 1: You still don't know whether I'm a buyer or seller. 737 00:45:07,960 --> 00:45:12,240 Speaker 1: Give me your market. All the participants commit to the auction, 738 00:45:12,960 --> 00:45:15,640 Speaker 1: so they can't run away, they can't front run, they 739 00:45:15,640 --> 00:45:17,640 Speaker 1: can't spoof because they don't know what it is. They 740 00:45:17,680 --> 00:45:20,799 Speaker 1: can't penny. They're competing with each other, so their price 741 00:45:20,840 --> 00:45:23,200 Speaker 1: may be a penny better than somebody else. They want 742 00:45:23,239 --> 00:45:25,359 Speaker 1: to give their best price, but they're giving you best 743 00:45:25,400 --> 00:45:28,759 Speaker 1: bid and best gass simultaneously, and it's up to you 744 00:45:28,880 --> 00:45:31,560 Speaker 1: to to to run the auction and find the best 745 00:45:31,600 --> 00:45:33,640 Speaker 1: price for our clients. So that is a big shift 746 00:45:33,680 --> 00:45:36,600 Speaker 1: from what we typically see when someone goes to execute 747 00:45:36,600 --> 00:45:40,480 Speaker 1: an order out in the normal. Back back when I 748 00:45:40,520 --> 00:45:42,120 Speaker 1: was on a level three and you'd see all the 749 00:45:42,120 --> 00:45:45,680 Speaker 1: market makers on each side, you saw a few cents up. 750 00:45:45,719 --> 00:45:48,200 Speaker 1: You had no idea what the real size was, and 751 00:45:48,239 --> 00:45:50,399 Speaker 1: if you were trading any sort of size, you would 752 00:45:50,560 --> 00:45:53,120 Speaker 1: make a rough estimate. Hey, this is gonna cost me 753 00:45:53,239 --> 00:45:56,560 Speaker 1: ten cents to here's two thousand, there's three thousand, there's 754 00:45:56,600 --> 00:45:59,160 Speaker 1: four thousand, there's five thousand. That's how I'll get ten 755 00:45:59,239 --> 00:46:02,040 Speaker 1: or fifteen thousd and filled within a dime or so 756 00:46:02,440 --> 00:46:06,560 Speaker 1: of the actual current bit aness price. You guys have 757 00:46:06,719 --> 00:46:09,480 Speaker 1: turned that on its head. So we make that flow 758 00:46:09,520 --> 00:46:12,240 Speaker 1: come to you. If you're a natural buyer or seller, 759 00:46:13,200 --> 00:46:15,719 Speaker 1: the question is where is the market. We gather the 760 00:46:15,800 --> 00:46:19,520 Speaker 1: responses and it's committed flow to you, and they have 761 00:46:19,560 --> 00:46:22,600 Speaker 1: to commit first, so it's not like they get a 762 00:46:22,680 --> 00:46:26,520 Speaker 1: chance to peak and then run around. So let me 763 00:46:26,560 --> 00:46:30,160 Speaker 1: phrase it as slightly different fascinating. That's a fascinating business model. 764 00:46:30,560 --> 00:46:33,560 Speaker 1: Is there anybody who's a competitor to you for that? Not? 765 00:46:33,680 --> 00:46:37,400 Speaker 1: At the moment um? How much of that is patented trademark? 766 00:46:37,760 --> 00:46:41,200 Speaker 1: We have some IP protection and some patent protection some 767 00:46:41,320 --> 00:46:44,480 Speaker 1: of the venues. So Chicago Stock Exchange has introduced the 768 00:46:44,520 --> 00:46:48,200 Speaker 1: snap auction New York Stock Exchanges talking about a midday 769 00:46:48,239 --> 00:46:52,080 Speaker 1: auction for lightly traded stocks. The London Stock Exchange is 770 00:46:52,120 --> 00:46:56,680 Speaker 1: also now I believe, executing a midday auction, meaning why 771 00:46:56,800 --> 00:46:59,560 Speaker 1: mid day because they just had to pick a time. 772 00:47:00,000 --> 00:47:01,560 Speaker 1: Are doing it once a day. It's not an on 773 00:47:01,640 --> 00:47:05,279 Speaker 1: demand or continuously. You're on demands. Effectively, you send us 774 00:47:05,280 --> 00:47:07,800 Speaker 1: in order, we will create the auction for you whenever 775 00:47:07,840 --> 00:47:11,359 Speaker 1: you want. So that stocks does that include futures. We're 776 00:47:11,400 --> 00:47:14,120 Speaker 1: just stocks at this point, so there's technical reasons why, 777 00:47:14,160 --> 00:47:16,759 Speaker 1: but yes, it's almost on the future that you're going 778 00:47:16,800 --> 00:47:20,480 Speaker 1: to do bonds, futures or any other trade. So structurally, 779 00:47:20,560 --> 00:47:26,319 Speaker 1: the other markets UM have some issues that they don't 780 00:47:26,360 --> 00:47:28,960 Speaker 1: have the A T S functionality meaning to A T 781 00:47:29,200 --> 00:47:33,400 Speaker 1: S for people who automated trading system created by the 782 00:47:33,440 --> 00:47:39,600 Speaker 1: Commission SEC in I believe to promote innovative and alternative 783 00:47:39,640 --> 00:47:42,880 Speaker 1: ways of trading. So we act like a stock exchange 784 00:47:42,880 --> 00:47:46,480 Speaker 1: in terms of matching buyers and sellers, but we're only 785 00:47:46,520 --> 00:47:50,600 Speaker 1: a broker dealer and we're technically regulated by FINRA. The 786 00:47:50,680 --> 00:47:55,480 Speaker 1: exchanges are directly related and regulated to the SEC. And 787 00:47:55,520 --> 00:47:58,080 Speaker 1: this was reg I'm doing this from Emory reg NMS. 788 00:47:58,840 --> 00:48:04,040 Speaker 1: This was reg A t US. It was called um 789 00:48:04,160 --> 00:48:07,000 Speaker 1: Reagan MS was two thousand and five, and that was 790 00:48:07,040 --> 00:48:13,680 Speaker 1: a different market structure plan which actually was incredibly effective 791 00:48:14,160 --> 00:48:16,520 Speaker 1: achieving the goals that had set out to achieve, which 792 00:48:16,560 --> 00:48:22,319 Speaker 1: were well to make the exchanges and orders compete with 793 00:48:22,440 --> 00:48:26,360 Speaker 1: each other. UH and automate the marketplace. I was going 794 00:48:26,400 --> 00:48:28,759 Speaker 1: to say, some people have said Reagan MS is what 795 00:48:29,480 --> 00:48:33,720 Speaker 1: we're high frequency trading really exploded out of the box. 796 00:48:34,239 --> 00:48:38,000 Speaker 1: It turns out it was very beneficial for high frequency trading. 797 00:48:38,480 --> 00:48:41,560 Speaker 1: Little inside story. Back in the get Go days, I 798 00:48:41,640 --> 00:48:45,759 Speaker 1: was there during that period, we were actually concerned that 799 00:48:45,760 --> 00:48:47,959 Speaker 1: that Reagan MS was going to hurt our business because 800 00:48:48,000 --> 00:48:49,960 Speaker 1: you were going to get more competition. There would be 801 00:48:50,000 --> 00:48:55,800 Speaker 1: more competition, and the price protection and other issues would 802 00:48:55,800 --> 00:48:58,120 Speaker 1: make it more difficult for us to function. We had 803 00:48:58,160 --> 00:49:00,320 Speaker 1: no idea. It was going to be a softball all 804 00:49:00,400 --> 00:49:03,920 Speaker 1: down the middle of the right and everybody feasted. So 805 00:49:04,000 --> 00:49:07,120 Speaker 1: it looks like because that was really the wild West 806 00:49:07,160 --> 00:49:11,080 Speaker 1: for a while, and lots and lots. Look at Citadel, 807 00:49:11,560 --> 00:49:14,560 Speaker 1: which started how does the hedge funds is now one 808 00:49:14,600 --> 00:49:19,080 Speaker 1: of the larger, if not largest, liquidity providers. So how 809 00:49:19,120 --> 00:49:22,600 Speaker 1: does a shop that starts out as Ken Griffith Citadel 810 00:49:22,640 --> 00:49:26,399 Speaker 1: in Chicago starts out as essentially a hedge funds? How 811 00:49:26,440 --> 00:49:31,239 Speaker 1: does an enterprise like that suddenly become this giant h 812 00:49:31,320 --> 00:49:35,840 Speaker 1: f T algorithmic trading shop. So one of the changes 813 00:49:35,880 --> 00:49:38,960 Speaker 1: that we made at get Go was to understand that 814 00:49:39,000 --> 00:49:42,520 Speaker 1: we were really a technology shop, not that happened to 815 00:49:42,560 --> 00:49:45,719 Speaker 1: be in the trading space, So we shifted our emphasis 816 00:49:45,800 --> 00:49:50,840 Speaker 1: dramatically to our technology people. Fortunately, all the traders that 817 00:49:50,880 --> 00:49:53,960 Speaker 1: were running the models understood how important the technology was. 818 00:49:54,920 --> 00:49:59,120 Speaker 1: And what happened was that the brilliance of the technology 819 00:49:59,160 --> 00:50:03,160 Speaker 1: folk was was able to make UM the systems better 820 00:50:03,200 --> 00:50:06,040 Speaker 1: and faster, and every time you got better and faster, 821 00:50:06,160 --> 00:50:08,680 Speaker 1: you made more money. So where do you this is? 822 00:50:08,800 --> 00:50:10,759 Speaker 1: I just was up at M I T for the 823 00:50:11,760 --> 00:50:18,960 Speaker 1: Sloan Annual Conference last month. The whole audience were I 824 00:50:19,000 --> 00:50:21,960 Speaker 1: would say two thirds were students, and I very It 825 00:50:22,080 --> 00:50:24,719 Speaker 1: was one of the more intense rooms I've been in. 826 00:50:25,239 --> 00:50:29,279 Speaker 1: And my sense is that many of these kids are 827 00:50:29,400 --> 00:50:33,680 Speaker 1: destined for careers at shops like yours. Where do you 828 00:50:33,719 --> 00:50:37,360 Speaker 1: go out and find the talent, the staff? Where do 829 00:50:37,400 --> 00:50:40,759 Speaker 1: you guys recruit? How do you find the wizards to do? 830 00:50:41,080 --> 00:50:45,160 Speaker 1: What what your stuff? Your technology actually does? So we 831 00:50:45,239 --> 00:50:48,720 Speaker 1: started ten years ago and the team that we started 832 00:50:48,760 --> 00:50:55,120 Speaker 1: with is principally still with us UM. So we found 833 00:50:55,160 --> 00:50:58,800 Speaker 1: folks are Cto has done the recruiting. Were very small shop. 834 00:50:59,400 --> 00:51:03,040 Speaker 1: We just grew from twenty to twenty eight people in 835 00:51:03,080 --> 00:51:07,680 Speaker 1: the last year. So our technology staff is about a dozen. 836 00:51:08,760 --> 00:51:14,640 Speaker 1: We're not actively recruiting because we're not in the what 837 00:51:14,719 --> 00:51:17,600 Speaker 1: I might term is suicidal high speed race. We're going 838 00:51:17,640 --> 00:51:20,439 Speaker 1: to let other people do that. We have really good 839 00:51:20,440 --> 00:51:24,560 Speaker 1: technology and we want it to be incredibly robust, but 840 00:51:25,640 --> 00:51:28,920 Speaker 1: the last micro second isn't critical for our process. That's 841 00:51:28,960 --> 00:51:31,960 Speaker 1: fascinating to me because you spent so you began your 842 00:51:32,000 --> 00:51:35,719 Speaker 1: career on the floor, way back, run, eventually find your 843 00:51:35,719 --> 00:51:39,320 Speaker 1: way into h f T and you're there for the 844 00:51:39,960 --> 00:51:43,759 Speaker 1: fat part of that cycle. So you were really a 845 00:51:43,840 --> 00:51:48,040 Speaker 1: witness firsthands. What made you stop and say, you know, 846 00:51:48,640 --> 00:51:50,640 Speaker 1: there might be more money if we step back and 847 00:51:50,680 --> 00:51:54,319 Speaker 1: try and approach us from a different perspective. How did 848 00:51:54,360 --> 00:51:57,680 Speaker 1: you get to that? So the founder of PDQ is 849 00:51:57,719 --> 00:52:02,920 Speaker 1: a fellow named Christopher Keith. He's a brilliant, brilliant mind. 850 00:52:03,560 --> 00:52:07,160 Speaker 1: Five years young. Now. He's the former CTO of the 851 00:52:07,160 --> 00:52:10,960 Speaker 1: New York Stock Exchange. Okay, so he has some understanding 852 00:52:11,000 --> 00:52:13,279 Speaker 1: of how the exchange works. Perhaps he has a bit 853 00:52:13,320 --> 00:52:17,160 Speaker 1: of a clue about how markets function um understatement of 854 00:52:17,200 --> 00:52:20,520 Speaker 1: the year, understatement of the year. Even in two thousand 855 00:52:20,600 --> 00:52:22,880 Speaker 1: and one he applied for a patent for the p 856 00:52:23,040 --> 00:52:26,680 Speaker 1: d Q idea. Really he understood that at some point 857 00:52:26,760 --> 00:52:32,359 Speaker 1: the race for speed cycle would end, that there would be, 858 00:52:32,600 --> 00:52:34,799 Speaker 1: you know, a physical limit of how fast you could 859 00:52:34,840 --> 00:52:38,840 Speaker 1: go speed alight, speed alight. And even when I was 860 00:52:38,880 --> 00:52:41,080 Speaker 1: at get Go and we were doing better and better 861 00:52:41,120 --> 00:52:43,520 Speaker 1: and going faster and faster, in the back of my mind, 862 00:52:43,560 --> 00:52:45,239 Speaker 1: I was thinking, you know, there's gonna be some point 863 00:52:45,239 --> 00:52:50,400 Speaker 1: where speed doesn't win. It turns out that he we 864 00:52:50,440 --> 00:52:52,040 Speaker 1: had a chance to meet him while I was at 865 00:52:52,080 --> 00:52:55,320 Speaker 1: get Go and my partners made a small investment in PDQ. 866 00:52:57,040 --> 00:53:02,600 Speaker 1: Well it's it's doing fine, UM, but we figured at 867 00:53:02,600 --> 00:53:03,960 Speaker 1: the time we were thinking that it might be a 868 00:53:03,960 --> 00:53:06,400 Speaker 1: source for us to get flow, for us to interact 869 00:53:06,480 --> 00:53:11,040 Speaker 1: with UM. We ended up going in different directions once 870 00:53:11,080 --> 00:53:17,239 Speaker 1: I went to PDQ. But the market structure idea has 871 00:53:17,280 --> 00:53:20,319 Speaker 1: actually been around for quite a while, and so some 872 00:53:20,400 --> 00:53:23,080 Speaker 1: of the folks that think they've discovered new things recently, 873 00:53:25,120 --> 00:53:30,120 Speaker 1: it's it's actually they're just discovering things. Everything sold is 874 00:53:30,200 --> 00:53:33,680 Speaker 1: new again. You know, when you describe the time at 875 00:53:33,680 --> 00:53:37,239 Speaker 1: get co where there's a sense that, hey, this has 876 00:53:37,280 --> 00:53:41,160 Speaker 1: to eventually hit a limit. I just had that vision 877 00:53:41,480 --> 00:53:45,120 Speaker 1: of Robert de Val and apocalypse now where he turns 878 00:53:45,320 --> 00:53:49,279 Speaker 1: to Martin Sheen and says, as if it's a bad thing, 879 00:53:49,520 --> 00:53:52,839 Speaker 1: you know, son, someday this war is gonna end, and 880 00:53:52,880 --> 00:53:55,000 Speaker 1: then walks off, and Sheen looks at him like he 881 00:53:55,080 --> 00:53:59,239 Speaker 1: has two heads. But really that's a that's a fascinating 882 00:53:59,320 --> 00:54:03,080 Speaker 1: moment in the midst of the high frequency trading expansion, 883 00:54:03,160 --> 00:54:06,440 Speaker 1: where well, this has to bump up against the natural 884 00:54:06,520 --> 00:54:10,719 Speaker 1: limit and then what comes next that that's really an 885 00:54:10,719 --> 00:54:15,160 Speaker 1: insightful thought to have when everybody's making a lot of 886 00:54:15,200 --> 00:54:17,800 Speaker 1: money and hey, we figured out a new way of trading, 887 00:54:17,840 --> 00:54:21,000 Speaker 1: and well, let's let's see what this ghost. That's the 888 00:54:21,040 --> 00:54:24,520 Speaker 1: way Chris Keith thinks a step of two ahead of everybody, 889 00:54:24,560 --> 00:54:28,279 Speaker 1: miles ahead of the rest of us. And it was 890 00:54:28,320 --> 00:54:31,680 Speaker 1: fun to get to understand, you know, his ideas. And 891 00:54:31,719 --> 00:54:38,400 Speaker 1: of course the process of collecting the market aggregating the book, 892 00:54:39,360 --> 00:54:46,840 Speaker 1: forcing the providers to go first was a novel idea. Um, 893 00:54:46,880 --> 00:54:49,200 Speaker 1: but what happens I believe is that it benefits all 894 00:54:49,200 --> 00:54:52,760 Speaker 1: participants and what it does it certainly sounds like it would. 895 00:54:53,040 --> 00:54:56,280 Speaker 1: So I got excited about it as a provider because 896 00:54:56,320 --> 00:54:59,880 Speaker 1: I knew there was time to refresh the algorithm in 897 00:55:00,080 --> 00:55:04,120 Speaker 1: give my best market under circumstances that were defined over 898 00:55:04,160 --> 00:55:08,720 Speaker 1: a very short period of time, meaning milliseconds or sconds 899 00:55:09,320 --> 00:55:13,200 Speaker 1: so than microseconds, but still faster than the human eye, 900 00:55:13,400 --> 00:55:16,560 Speaker 1: right exactly. And I also knew that there would be 901 00:55:16,560 --> 00:55:21,880 Speaker 1: opportunities where the model could provide substantial liquidity given the 902 00:55:21,920 --> 00:55:26,520 Speaker 1: circumstances at a particular moment. So if you're doing a 903 00:55:26,560 --> 00:55:29,080 Speaker 1: pair's trade, if you're doing a trade of a stock 904 00:55:29,160 --> 00:55:32,120 Speaker 1: or an et F against futures, and you have a 905 00:55:32,200 --> 00:55:34,759 Speaker 1: chance to assess the market, run your model. Instead of 906 00:55:34,800 --> 00:55:36,839 Speaker 1: doing five chairs, you might be able to do five 907 00:55:39,719 --> 00:55:44,680 Speaker 1: at a given moment under prescribed circumstances. It's very interesting 908 00:55:44,719 --> 00:55:48,759 Speaker 1: to understand how specific that is and how important it 909 00:55:48,800 --> 00:55:50,799 Speaker 1: is to be able to respond with size. There may 910 00:55:50,800 --> 00:55:53,319 Speaker 1: be times when you can't make any market where the 911 00:55:53,320 --> 00:55:57,040 Speaker 1: futures markets. It's just that it's there, right Or you 912 00:55:57,080 --> 00:56:01,000 Speaker 1: think you're going to trade Microsoft against Oracle, and Microsoft 913 00:56:01,120 --> 00:56:04,080 Speaker 1: arneys came out and the market's going a little cucko, 914 00:56:04,800 --> 00:56:09,240 Speaker 1: Well we're gonna wait. But as you find the opportunity 915 00:56:09,280 --> 00:56:11,440 Speaker 1: where you can make a better market, and if you 916 00:56:11,480 --> 00:56:14,480 Speaker 1: have multiple participants who are all going to have a 917 00:56:14,480 --> 00:56:17,360 Speaker 1: different flavor of their better market, and you can aggregate 918 00:56:17,400 --> 00:56:19,839 Speaker 1: them together. All of a sudden, you're gonna you're gonna 919 00:56:19,840 --> 00:56:22,400 Speaker 1: start to find a market that will feel like it 920 00:56:22,520 --> 00:56:25,680 Speaker 1: used to feel. So so you're a dark pool, which 921 00:56:25,680 --> 00:56:29,160 Speaker 1: means you're trading pretty continuously. Do you guys trade before 922 00:56:29,239 --> 00:56:33,200 Speaker 1: market hours and after twenty four hours? Four? How do you? 923 00:56:33,640 --> 00:56:36,840 Speaker 1: How do you do that timeline? Our current trading clock 924 00:56:36,960 --> 00:56:40,920 Speaker 1: is four. We also have a routing business for our clients, 925 00:56:40,920 --> 00:56:43,799 Speaker 1: so if we don't fill them during the auction, we're 926 00:56:43,800 --> 00:56:46,719 Speaker 1: happy to send it either through the darker to a 927 00:56:46,719 --> 00:56:50,560 Speaker 1: destination that they're interested in. We will route before and 928 00:56:50,600 --> 00:56:53,000 Speaker 1: after the close, so we can take an order any time, 929 00:56:53,080 --> 00:56:55,239 Speaker 1: but we don't actually execute it before and after the 930 00:56:55,280 --> 00:56:57,759 Speaker 1: close at this point, and you mentioned the New York 931 00:56:57,760 --> 00:57:00,680 Speaker 1: and London are going to do these by appointment on trades. 932 00:57:00,800 --> 00:57:03,439 Speaker 1: We used to make fun of the illoquid stocks. It's 933 00:57:03,520 --> 00:57:07,160 Speaker 1: it's by appointment only. So from nine thirty to four, 934 00:57:08,160 --> 00:57:12,720 Speaker 1: how actively executing are you? What sort of share counting 935 00:57:12,920 --> 00:57:15,640 Speaker 1: are you guys doing massive shares or is it a 936 00:57:15,640 --> 00:57:18,160 Speaker 1: handful of big clients and you're doing a hundred thousand 937 00:57:18,280 --> 00:57:21,560 Speaker 1: year and half. So we have about a hundred broker dealers, subscribers, 938 00:57:21,920 --> 00:57:24,640 Speaker 1: so they're sending us flow during the day substantial, which 939 00:57:24,680 --> 00:57:27,720 Speaker 1: is pretty substantial. Yeah, I know, about anywhere from sixty 940 00:57:27,800 --> 00:57:30,880 Speaker 1: to seventy five are active on a given day are 941 00:57:31,000 --> 00:57:35,120 Speaker 1: routing and executing business combines for a little bit close 942 00:57:35,160 --> 00:57:36,840 Speaker 1: to one and a half percent of the market, So 943 00:57:36,880 --> 00:57:40,120 Speaker 1: we're doing like a hundred fifty million shares a day 944 00:57:40,920 --> 00:57:44,400 Speaker 1: that's combined. The routing actually is the substantial part of 945 00:57:44,440 --> 00:57:46,560 Speaker 1: the business. That's the lion share, although it may not 946 00:57:46,640 --> 00:57:49,160 Speaker 1: be the lion share profitability wise, but it's gonna be 947 00:57:49,160 --> 00:57:54,240 Speaker 1: the lion share volume wise. Yes, So we're thrilled. I mean, 948 00:57:54,280 --> 00:57:56,080 Speaker 1: when we got to one percent about a year ago, 949 00:57:56,120 --> 00:57:59,680 Speaker 1: we thought that was a great milestone, um, but that's 950 00:57:59,680 --> 00:58:02,720 Speaker 1: still relatively small for some of the dark pools out 951 00:58:02,760 --> 00:58:06,360 Speaker 1: there are are huge, right, there's five and ten percent. 952 00:58:06,560 --> 00:58:09,000 Speaker 1: The biggest ones is that is that Well, that might 953 00:58:09,040 --> 00:58:12,160 Speaker 1: be a little high, maybe closer three to six. But 954 00:58:12,640 --> 00:58:17,200 Speaker 1: a couple of other facets about our auction process after 955 00:58:17,240 --> 00:58:19,880 Speaker 1: a trade has made our t c A reports show 956 00:58:19,920 --> 00:58:22,200 Speaker 1: that we have very little impact on the market. So 957 00:58:22,200 --> 00:58:25,320 Speaker 1: you're not moving the price, so we're not moving right. 958 00:58:26,080 --> 00:58:28,520 Speaker 1: Institutions love that I should say, they want to be 959 00:58:28,560 --> 00:58:31,840 Speaker 1: able to get in or out without causing a disruption 960 00:58:32,040 --> 00:58:33,920 Speaker 1: because you never know what they have behind that they 961 00:58:33,960 --> 00:58:36,440 Speaker 1: might have another Hey, I got ten ten million more 962 00:58:36,480 --> 00:58:39,920 Speaker 1: to go, try not to wreck the bid. So familiar 963 00:58:39,960 --> 00:58:43,880 Speaker 1: of course days right, of course. UM. One thing that 964 00:58:43,920 --> 00:58:47,560 Speaker 1: I'm very proud of is when our liquidity providers respond. 965 00:58:48,360 --> 00:58:53,080 Speaker 1: Their average size is shares way above the average trade 966 00:58:53,080 --> 00:58:58,760 Speaker 1: size and in terms of larger trades. For the month 967 00:58:58,800 --> 00:59:04,160 Speaker 1: of February, we received about thirty five thousand trades of 968 00:59:04,280 --> 00:59:09,160 Speaker 1: over five thousand shares from our initiators from the subscribers 969 00:59:09,200 --> 00:59:13,360 Speaker 1: looking for liquidity, and our providers responded, this is our 970 00:59:13,440 --> 00:59:16,480 Speaker 1: daily average with over a hundred and thirty five thousand 971 00:59:16,560 --> 00:59:22,320 Speaker 1: blocks of over five thousand shares. A lot of it 972 00:59:22,480 --> 00:59:24,520 Speaker 1: may not have traded, but it was there and it 973 00:59:24,600 --> 00:59:29,760 Speaker 1: was available. Um. Sometimes the providers are on the same 974 00:59:29,760 --> 00:59:32,560 Speaker 1: side of the market as the order. Sometimes they're appending 975 00:59:32,600 --> 00:59:34,920 Speaker 1: your two away from the market, so they may not 976 00:59:35,520 --> 00:59:39,280 Speaker 1: they may not cross, they may not match, UM, but 977 00:59:39,440 --> 00:59:42,400 Speaker 1: that opportunity is there, and I think that's the important thing. 978 00:59:42,440 --> 00:59:44,800 Speaker 1: So how do you guys get paid? Is it on 979 00:59:44,840 --> 00:59:47,919 Speaker 1: a preshare basis? What do you guys judge for share 980 00:59:48,000 --> 00:59:51,800 Speaker 1: is that is that public info? Um, I'd love to 981 00:59:51,800 --> 00:59:57,240 Speaker 1: make it public information. And the problem is it's custom 982 00:59:57,240 --> 01:00:00,600 Speaker 1: So everybody, depending on what they're doing, the size frequency, 983 01:00:00,680 --> 01:00:03,680 Speaker 1: you're gonna work out some arrangement on some sort of 984 01:00:03,680 --> 01:00:07,680 Speaker 1: grid for them. Even more than that. So once we 985 01:00:07,720 --> 01:00:10,960 Speaker 1: have a conversation with our client, they're not latency sensitive, 986 01:00:11,000 --> 01:00:13,960 Speaker 1: they've agreed after PDQ we can route through the dark 987 01:00:14,080 --> 01:00:18,600 Speaker 1: and end up going through bats. Let's say we can 988 01:00:18,640 --> 01:00:21,400 Speaker 1: actually give them a sliding scale. Because we're in a 989 01:00:21,480 --> 01:00:24,240 Speaker 1: t S we don't have to have one size fits 990 01:00:24,240 --> 01:00:28,720 Speaker 1: all pricing, which in exchange does. So if you if 991 01:00:28,720 --> 01:00:30,280 Speaker 1: we feel you at p d Q, we can give 992 01:00:30,320 --> 01:00:33,080 Speaker 1: you a free fill. If we go into the dark, 993 01:00:33,240 --> 01:00:36,440 Speaker 1: we may have to charge you eight mills. It's costing 994 01:00:36,640 --> 01:00:40,000 Speaker 1: relatively inexpensive. Relatively inexpensive, but it might be costing US 995 01:00:40,040 --> 01:00:42,200 Speaker 1: four or five. We get a little mark up for 996 01:00:42,240 --> 01:00:44,160 Speaker 1: the house because we've got to keep the lights on 997 01:00:45,120 --> 01:00:49,200 Speaker 1: as we go through the dark. The price gradually goes up. 998 01:00:49,720 --> 01:00:53,680 Speaker 1: Eventually we send you to the lip market. Are active 999 01:00:54,480 --> 01:00:58,360 Speaker 1: traders save about of the take fee from the lip 1000 01:00:58,360 --> 01:01:01,000 Speaker 1: market by coming to PDQ, And and that's why people 1001 01:01:01,040 --> 01:01:05,240 Speaker 1: like Vanguard and Dimensional are not really that critical of 1002 01:01:05,360 --> 01:01:09,600 Speaker 1: HFT because to them there's a cost saving. Absolutely that 1003 01:01:09,600 --> 01:01:11,840 Speaker 1: that makes a lot of sense. I could stay in 1004 01:01:11,840 --> 01:01:15,600 Speaker 1: the weeds all day. I find this stuff fascinating, But 1005 01:01:15,720 --> 01:01:18,040 Speaker 1: I know I only have you for another fifteen minutes, 1006 01:01:18,360 --> 01:01:21,320 Speaker 1: so let me get to some of my favorite questions 1007 01:01:21,760 --> 01:01:25,240 Speaker 1: and uh, well, we'll see where this goes. So you 1008 01:01:25,320 --> 01:01:28,360 Speaker 1: mentioned in the early days you started, you were on 1009 01:01:28,400 --> 01:01:31,080 Speaker 1: the floor. Was it New York or Chicago? I started 1010 01:01:31,080 --> 01:01:33,280 Speaker 1: on the American Stock Exchange and then went to the 1011 01:01:33,320 --> 01:01:36,080 Speaker 1: CBO E flour And so what did you do before 1012 01:01:36,160 --> 01:01:39,960 Speaker 1: financial services? I jumped into it right out of college. 1013 01:01:40,160 --> 01:01:42,400 Speaker 1: When I was in college, I actually had a house 1014 01:01:42,400 --> 01:01:46,280 Speaker 1: painting business that I ran with ten other guys that 1015 01:01:46,320 --> 01:01:48,280 Speaker 1: were working for me. So that was less late and 1016 01:01:48,320 --> 01:01:50,760 Speaker 1: seem more LATEX and that sort of stuff. I got 1017 01:01:50,800 --> 01:01:54,280 Speaker 1: it good. Um, So, who are some of your early 1018 01:01:54,360 --> 01:01:58,280 Speaker 1: mentors in this industry? Um Ken langn oh? Really, I 1019 01:01:58,400 --> 01:02:02,120 Speaker 1: was actually depot Ends It was both medical center and 1020 01:02:02,440 --> 01:02:04,520 Speaker 1: in the med Associates is the name of his broke 1021 01:02:05,560 --> 01:02:10,920 Speaker 1: in the med e D. I was partners with him 1022 01:02:11,040 --> 01:02:13,720 Speaker 1: um in the late seventies and early eighties as a 1023 01:02:13,760 --> 01:02:17,280 Speaker 1: floor trader, and he said, I have this idea for 1024 01:02:17,400 --> 01:02:21,400 Speaker 1: a home. I was never to offer the opportunity. It 1025 01:02:21,400 --> 01:02:24,320 Speaker 1: turns out, I don't know whether I what I would 1026 01:02:24,360 --> 01:02:26,720 Speaker 1: have done, but I could dream. You want to sell 1027 01:02:26,920 --> 01:02:30,880 Speaker 1: plywood and giant warehouses, Ken, listen, stick to trade by 1028 01:02:30,880 --> 01:02:33,280 Speaker 1: the way, you become a multi billionaire, right that? It 1029 01:02:33,360 --> 01:02:35,480 Speaker 1: ends up? It's a It's a great American. We should 1030 01:02:35,480 --> 01:02:37,200 Speaker 1: have him on the air one of these days. I'd 1031 01:02:37,200 --> 01:02:40,200 Speaker 1: love to. He's still in touch with him. No, and 1032 01:02:40,240 --> 01:02:45,160 Speaker 1: he's a no nonsense, a little gruff. But was he 1033 01:02:45,200 --> 01:02:49,080 Speaker 1: always that way? Is that that's his persona, that's his persona. 1034 01:02:49,160 --> 01:02:52,520 Speaker 1: He never he calls a spade a spade, right that? 1035 01:02:52,520 --> 01:02:57,600 Speaker 1: That's pretty pretty funny? Any other mentors worth? A trader 1036 01:02:57,680 --> 01:03:00,760 Speaker 1: named John Mulhern was legendary back in the day, all right, 1037 01:03:00,840 --> 01:03:03,960 Speaker 1: I've heard the name. He was at Merrill Lynch Bar 1038 01:03:04,120 --> 01:03:07,880 Speaker 1: Wagner actually partners with is the England Or at one point. 1039 01:03:08,400 --> 01:03:13,320 Speaker 1: Um a man who just had a beautiful different perspective 1040 01:03:13,360 --> 01:03:20,960 Speaker 1: on the world. Um was a extraordinary natural trader, if 1041 01:03:20,960 --> 01:03:25,400 Speaker 1: there is such a thing. Back in the day when um, 1042 01:03:25,440 --> 01:03:27,720 Speaker 1: some people just have a feel for what's going on 1043 01:03:27,760 --> 01:03:32,920 Speaker 1: and what's about to happen? Um. I also did not 1044 01:03:33,040 --> 01:03:36,479 Speaker 1: know him personally, but followed the career Bob Ruben risk 1045 01:03:36,560 --> 01:03:39,240 Speaker 1: arb Trage from Goldman Saxon of course Secretary Treasury and 1046 01:03:39,240 --> 01:03:42,960 Speaker 1: other things like that. So um, I enjoyed reading about 1047 01:03:42,960 --> 01:03:46,120 Speaker 1: people in the business. And um, so let's talk about books. 1048 01:03:46,120 --> 01:03:48,720 Speaker 1: What are some of your favorite books? Fiction? Non fiction, 1049 01:03:48,880 --> 01:03:53,280 Speaker 1: finance nine finance. So I always get fascinating answers to 1050 01:03:53,360 --> 01:03:56,480 Speaker 1: this question. The one that I decided I want to 1051 01:03:56,480 --> 01:04:00,800 Speaker 1: tout is called the Rational Optimist. Oh, of course, Matt Ridley, 1052 01:04:01,760 --> 01:04:06,880 Speaker 1: and for folks that are struggling with the world in 1053 01:04:06,880 --> 01:04:11,680 Speaker 1: which we live and think things are not good. Um. 1054 01:04:11,840 --> 01:04:16,600 Speaker 1: His argument is, we've never there's never been a better 1055 01:04:16,640 --> 01:04:21,600 Speaker 1: time to be alive. You could look at it many metries, lifespan, healthcare, 1056 01:04:21,640 --> 01:04:25,320 Speaker 1: amount of wars, amount of murders, amount of crime. Even 1057 01:04:25,360 --> 01:04:27,520 Speaker 1: though these things are on the headlines and we all 1058 01:04:27,560 --> 01:04:30,600 Speaker 1: have more access to it. By the numbers, it's actually 1059 01:04:30,720 --> 01:04:34,680 Speaker 1: much better than it was even fifty or thirty years ago. Right, 1060 01:04:34,760 --> 01:04:39,720 Speaker 1: So um, Warren Buffett says, the normal average person today 1061 01:04:39,760 --> 01:04:41,920 Speaker 1: has a much better life than Rockefeller did a hundred 1062 01:04:42,000 --> 01:04:44,640 Speaker 1: years ago. I mean, I would agree with that completely 1063 01:04:45,880 --> 01:04:48,400 Speaker 1: relative to someone a hundred years ago. Sure, but at 1064 01:04:48,440 --> 01:04:52,200 Speaker 1: the time Rockefeller was he King of the health. It's 1065 01:04:52,240 --> 01:04:56,000 Speaker 1: always it's always uh hey, listen, Louis the sixteenth didn't 1066 01:04:56,040 --> 01:04:58,720 Speaker 1: have into a plumbing but four hundred servants to make 1067 01:04:58,720 --> 01:05:03,000 Speaker 1: his dinner. Right, That's that's exactly right. Um, so the 1068 01:05:03,120 --> 01:05:05,920 Speaker 1: Rational Optimist, any other books you you feel like mentioning 1069 01:05:06,680 --> 01:05:10,400 Speaker 1: trying to think of others that. I mean, some of 1070 01:05:10,440 --> 01:05:14,600 Speaker 1: the market structure ideas and so forth. Those types of 1071 01:05:14,640 --> 01:05:18,160 Speaker 1: things tend to wander up and down. I mean, some 1072 01:05:18,240 --> 01:05:22,640 Speaker 1: of them are great, some of them are terrible. Um, 1073 01:05:22,680 --> 01:05:24,600 Speaker 1: so you kind of have to be a little selective there. 1074 01:05:25,640 --> 01:05:29,120 Speaker 1: I'm involved. My wife and I have created a little 1075 01:05:29,120 --> 01:05:33,960 Speaker 1: foundation called the Raven Foundation. It's an education foundation that 1076 01:05:34,000 --> 01:05:38,120 Speaker 1: has a whole um anthropology behind it, if you will. 1077 01:05:38,920 --> 01:05:43,800 Speaker 1: Some of my reading is focused in that direction. Um. 1078 01:05:43,880 --> 01:05:51,320 Speaker 1: I remember reading the biography of Peter the Great, really fascinating. UM. 1079 01:05:51,440 --> 01:05:55,320 Speaker 1: Biography comes up all the time when the show people constantly. 1080 01:05:56,200 --> 01:05:58,080 Speaker 1: I can't tell you begin to tell you how many 1081 01:05:58,120 --> 01:06:02,520 Speaker 1: people have mentioned and um, the right Brothers body that 1082 01:06:02,640 --> 01:06:04,480 Speaker 1: just came in, right, I haven't got that. I know 1083 01:06:04,520 --> 01:06:06,680 Speaker 1: a lot of people have have that on the kindle 1084 01:06:06,800 --> 01:06:11,400 Speaker 1: waiting waiting to go. Um. So we've discussed all the 1085 01:06:11,440 --> 01:06:15,360 Speaker 1: different things that's changed over the past thirty years. Rather 1086 01:06:15,400 --> 01:06:18,760 Speaker 1: than reiterate that, what do you see shifting over the 1087 01:06:18,840 --> 01:06:24,920 Speaker 1: next decade in terms of anything involving markets and execution? 1088 01:06:25,000 --> 01:06:27,320 Speaker 1: What is the next wave of change gonna Well, I 1089 01:06:27,600 --> 01:06:30,080 Speaker 1: believe PDQ was part of that in terms of our 1090 01:06:30,120 --> 01:06:35,240 Speaker 1: process of aggregating the market and creating an auction right. Um, So, 1091 01:06:35,480 --> 01:06:39,040 Speaker 1: innovative trading structures are going to shift the way people 1092 01:06:39,080 --> 01:06:42,680 Speaker 1: get Excertainly that's our hope a PQ. Um. It certainly 1093 01:06:42,680 --> 01:06:44,640 Speaker 1: makes you should be you should be the CEO of 1094 01:06:44,640 --> 01:06:47,760 Speaker 1: the company. Becush, you are hounding the table on it. 1095 01:06:48,040 --> 01:06:50,920 Speaker 1: But not just your firm, I mean, but you guys 1096 01:06:50,960 --> 01:06:54,360 Speaker 1: have to anticipate where the market's going to go and 1097 01:06:54,400 --> 01:06:57,520 Speaker 1: how execution is going to change. What else do you 1098 01:06:57,560 --> 01:07:01,200 Speaker 1: see without revealing any of these So the where do 1099 01:07:01,240 --> 01:07:04,080 Speaker 1: you see this shifting in the future? The markets are 1100 01:07:05,200 --> 01:07:08,400 Speaker 1: still even though we think we're global, we're always becoming 1101 01:07:08,440 --> 01:07:11,840 Speaker 1: more global and so you know, China sneezes and we 1102 01:07:11,920 --> 01:07:15,840 Speaker 1: catch a cold. Those types of intricacies are going to 1103 01:07:15,920 --> 01:07:20,000 Speaker 1: continue to evolve. Do you guys have plans to expand overseas. 1104 01:07:20,120 --> 01:07:23,600 Speaker 1: Yet certainly London is an option, and then Hong Kong. 1105 01:07:23,920 --> 01:07:28,400 Speaker 1: London and Hong Kong are obvious options. It turns out 1106 01:07:28,480 --> 01:07:33,480 Speaker 1: that our market structure for an independent, non government firm 1107 01:07:33,760 --> 01:07:37,280 Speaker 1: to get started in a foreign country challenging, is very challenging. 1108 01:07:37,520 --> 01:07:41,360 Speaker 1: And so the beauty of Reggaets was a couple of 1109 01:07:41,360 --> 01:07:44,920 Speaker 1: guys with an idea could try to spin up a 1110 01:07:44,960 --> 01:07:47,960 Speaker 1: better matching process and if it hunts, we can make 1111 01:07:47,960 --> 01:07:52,600 Speaker 1: a living, hopefully make the market a better place. It's very, 1112 01:07:52,680 --> 01:07:55,200 Speaker 1: very difficult. In other countries. Most of the exchanges are 1113 01:07:55,240 --> 01:07:58,280 Speaker 1: run by the government. Is that true? So is it 1114 01:07:58,520 --> 01:08:02,200 Speaker 1: l and independent? And I believe the LSC is independent. 1115 01:08:02,240 --> 01:08:05,080 Speaker 1: So you you caught me on that one already. But 1116 01:08:05,160 --> 01:08:08,240 Speaker 1: I know China and Hong Kong are just totally different animals, 1117 01:08:08,920 --> 01:08:12,280 Speaker 1: although you would think Hong Kong would be the closest 1118 01:08:12,320 --> 01:08:15,760 Speaker 1: thing to a non government entity that China. I happened 1119 01:08:15,760 --> 01:08:18,360 Speaker 1: to be at a conference there a couple of summers 1120 01:08:18,360 --> 01:08:21,960 Speaker 1: ago and gave a little presentation on market structure, and 1121 01:08:22,000 --> 01:08:25,800 Speaker 1: the big buzzword then was kill switches. And it was 1122 01:08:25,840 --> 01:08:28,519 Speaker 1: fascinating to me because they had a person from the 1123 01:08:28,560 --> 01:08:31,799 Speaker 1: Hong Kong Exchange talking about it, and he says, kill switch. 1124 01:08:31,920 --> 01:08:35,320 Speaker 1: Are you kidding me? Who knows what the person that 1125 01:08:35,400 --> 01:08:37,960 Speaker 1: I'm turning off? What resources they have, what are the 1126 01:08:38,040 --> 01:08:40,560 Speaker 1: trades they have, what position they have. We're in exchange, 1127 01:08:40,560 --> 01:08:45,000 Speaker 1: We're not the broker dealer. We don't have the understanding 1128 01:08:45,040 --> 01:08:48,640 Speaker 1: of their financial wherewithal we may be forcing them to 1129 01:08:48,760 --> 01:08:52,000 Speaker 1: take incredible losses with a kill switch. They were terrified 1130 01:08:52,000 --> 01:08:55,439 Speaker 1: of kill switches. Over here we're talking about everyone should 1131 01:08:55,439 --> 01:08:56,720 Speaker 1: have a kill switch and be able to flip at 1132 01:08:56,760 --> 01:08:59,760 Speaker 1: any time. You've got to be really careful with these things, 1133 01:08:59,760 --> 01:09:04,519 Speaker 1: be because the unintended consequences can really be an issue. 1134 01:09:05,120 --> 01:09:10,400 Speaker 1: That that's that's quite fascinating. Um my favorite two questions 1135 01:09:10,840 --> 01:09:14,639 Speaker 1: in the last few minutes we have. So a recent 1136 01:09:14,760 --> 01:09:17,720 Speaker 1: college grad, a millennial comes to you and says, I'm 1137 01:09:17,720 --> 01:09:22,559 Speaker 1: thinking about going into finance. I'm interested in trading. What 1138 01:09:22,640 --> 01:09:27,240 Speaker 1: sort of advice would you give them? So back to 1139 01:09:27,280 --> 01:09:30,320 Speaker 1: your question about why I got involved, I thought it 1140 01:09:30,320 --> 01:09:34,280 Speaker 1: was going to be an easy way to make a living, right, 1141 01:09:34,520 --> 01:09:38,680 Speaker 1: so fully understand that whatever you earn you're gonna have 1142 01:09:38,720 --> 01:09:42,280 Speaker 1: to work very hard for even though it appears that 1143 01:09:42,840 --> 01:09:46,759 Speaker 1: you can show up and be Mr Citadel and trade 1144 01:09:46,800 --> 01:09:49,840 Speaker 1: from your dorm and create billions of dollars. How many 1145 01:09:49,840 --> 01:09:52,880 Speaker 1: people get to be It's a very rare event, Kevin Griffin. 1146 01:09:52,960 --> 01:09:55,800 Speaker 1: I mean, you're talking you. It's funny because people talk 1147 01:09:55,880 --> 01:10:01,360 Speaker 1: about Jim Simmons, or they'll talk about um uh Stevie Cohen. 1148 01:10:01,680 --> 01:10:04,799 Speaker 1: These are real outliers. These are one in a hundred 1149 01:10:04,840 --> 01:10:08,839 Speaker 1: million personalities. These aren't like, hey, let's all become traitors 1150 01:10:08,840 --> 01:10:14,799 Speaker 1: and become billionaires like Curry or Michael Jordan's. The odds 1151 01:10:14,840 --> 01:10:18,920 Speaker 1: are so overwhelmingly stacked against you that unless you are 1152 01:10:19,120 --> 01:10:24,320 Speaker 1: unusually gifted. I did an analysis on this exact subject 1153 01:10:24,360 --> 01:10:27,160 Speaker 1: some years ago, looking at how many kids were high 1154 01:10:27,200 --> 01:10:30,760 Speaker 1: school athletes millions, and then how many of those high 1155 01:10:30,800 --> 01:10:36,240 Speaker 1: school athletes become college athletes, which is a single digit percentage, 1156 01:10:36,479 --> 01:10:39,160 Speaker 1: And then how many of those college athletes actually get 1157 01:10:39,200 --> 01:10:43,280 Speaker 1: to enter the draft again a tiny, tiny percentage. And 1158 01:10:43,320 --> 01:10:45,400 Speaker 1: those people who go on to be in the draft, 1159 01:10:45,439 --> 01:10:48,320 Speaker 1: how many of them actually have a career. Forget Stephen 1160 01:10:48,320 --> 01:10:51,839 Speaker 1: Curry and Michael Jordan's earn a living as a professional athlete. 1161 01:10:52,600 --> 01:10:55,040 Speaker 1: So when you go back to that original pool of 1162 01:10:55,120 --> 01:10:59,960 Speaker 1: high school athletes. It's such an infinitessimal number, and it's 1163 01:11:00,000 --> 01:11:02,960 Speaker 1: turns out on the trading side, it's even smaller. The 1164 01:11:03,160 --> 01:11:06,880 Speaker 1: Jim Simons and Steve Cohens and Kevin Griffiths are like 1165 01:11:07,600 --> 01:11:11,479 Speaker 1: rarer than the Stephen Carries and Michael Jordan's. It's it's amazing, 1166 01:11:12,600 --> 01:11:16,160 Speaker 1: agree and so so the advice to a millennial would 1167 01:11:16,160 --> 01:11:21,160 Speaker 1: be what, Well, hopefully you're smart, Hopefully you're willing to 1168 01:11:21,160 --> 01:11:25,439 Speaker 1: work hard. There will always be capital transactions, there will 1169 01:11:25,479 --> 01:11:29,360 Speaker 1: always be mergers and acquisitions and corporations that need advice 1170 01:11:29,439 --> 01:11:35,400 Speaker 1: around financing and currency exposure and interest rate exposure. Find 1171 01:11:35,439 --> 01:11:38,760 Speaker 1: an area that you really love, understand it as well 1172 01:11:38,800 --> 01:11:43,120 Speaker 1: as you can. Probably spend some time with someone who's 1173 01:11:43,160 --> 01:11:45,479 Speaker 1: doing what you think you might want to do. So 1174 01:11:45,640 --> 01:11:49,680 Speaker 1: have an apprenticeship if you will, get into a training program, 1175 01:11:49,840 --> 01:11:53,639 Speaker 1: get a taste for it, and then decide if it's 1176 01:11:53,640 --> 01:11:55,240 Speaker 1: really for you, or if maybe you want to go 1177 01:11:55,280 --> 01:11:59,960 Speaker 1: back to business school and look at industry or something else, 1178 01:12:00,080 --> 01:12:02,920 Speaker 1: other other options. I tried to my son happens to 1179 01:12:02,920 --> 01:12:05,400 Speaker 1: be in the business, actually tried to talk him out 1180 01:12:05,400 --> 01:12:09,559 Speaker 1: of it. He wouldn't listen. Um Anyway, it's worked out 1181 01:12:09,600 --> 01:12:13,320 Speaker 1: for him, but it uh, it is very captivating and 1182 01:12:13,360 --> 01:12:16,599 Speaker 1: seductive to see the opportunity. And when you had those 1183 01:12:16,640 --> 01:12:18,120 Speaker 1: days where you caught a trade and you make two 1184 01:12:18,320 --> 01:12:21,360 Speaker 1: d fifty dollars without a lot of effort, you know 1185 01:12:21,400 --> 01:12:23,559 Speaker 1: that was a week of painting houses when I was 1186 01:12:23,640 --> 01:12:26,120 Speaker 1: that's exactly right, right, that's exactly when I sit there 1187 01:12:26,120 --> 01:12:29,960 Speaker 1: and go see which would I rather do. There's something 1188 01:12:29,960 --> 01:12:32,760 Speaker 1: about working with your hands that's satisfying, although I I 1189 01:12:32,840 --> 01:12:35,479 Speaker 1: prefer working in the garden once a week then painting house. 1190 01:12:36,120 --> 01:12:39,400 Speaker 1: My last question, and one of my favorites. What is 1191 01:12:39,439 --> 01:12:43,320 Speaker 1: it that you know about investing, about trading, about market 1192 01:12:43,360 --> 01:12:47,559 Speaker 1: structure that you wish you knew forty years ago when 1193 01:12:47,600 --> 01:12:51,760 Speaker 1: you were setting out on this career. So when I 1194 01:12:51,840 --> 01:12:56,040 Speaker 1: was studying in the markets, um I actually had Burton 1195 01:12:56,120 --> 01:13:00,920 Speaker 1: Malkiel efficient market theory random Walk Down, Random Walk Down 1196 01:13:00,920 --> 01:13:02,760 Speaker 1: Wall Street that had been published just a year or 1197 01:13:02,760 --> 01:13:06,439 Speaker 1: two before I took his course. UM I was a 1198 01:13:06,479 --> 01:13:09,760 Speaker 1: big believer of that coming out of school. Looking at 1199 01:13:09,800 --> 01:13:13,880 Speaker 1: thirty or forty years of the markets, I think he's 1200 01:13:13,960 --> 01:13:17,519 Speaker 1: right there. Efficient around the edges, they're efficient because you 1201 01:13:17,600 --> 01:13:19,960 Speaker 1: can't necessarily pick the ones that are going to win 1202 01:13:20,040 --> 01:13:25,360 Speaker 1: and lose, but well, the might the markets are also 1203 01:13:25,439 --> 01:13:31,200 Speaker 1: psychologically driven. Witness the Internet bubble, which I lived through, 1204 01:13:31,920 --> 01:13:35,840 Speaker 1: traded through. It was fascinating to me at one point 1205 01:13:37,200 --> 01:13:39,800 Speaker 1: and a ninety nine early two thousand. Some of the 1206 01:13:39,840 --> 01:13:46,040 Speaker 1: most brilliant minds, we're totally confused. So the biggest hedge 1207 01:13:46,040 --> 01:13:48,040 Speaker 1: fund guys. One was a chronic short, one was a 1208 01:13:48,120 --> 01:13:50,960 Speaker 1: chronic long. Neither one of them knew what to do 1209 01:13:51,080 --> 01:13:55,360 Speaker 1: with their portfolio because prices were in this new dimension. Well, 1210 01:13:55,360 --> 01:13:57,840 Speaker 1: it turned out there wasn't a new dimension. It was 1211 01:13:57,920 --> 01:14:00,599 Speaker 1: just that we thought there might be. So there are 1212 01:14:00,720 --> 01:14:03,960 Speaker 1: dislocations in the market. There will be times when having 1213 01:14:04,000 --> 01:14:08,360 Speaker 1: a level head gives you an opportunity, and the only 1214 01:14:08,400 --> 01:14:11,240 Speaker 1: way to really participate well with that is to not 1215 01:14:11,360 --> 01:14:15,759 Speaker 1: be levered. So it's leverage that has killed us, both 1216 01:14:15,880 --> 01:14:21,840 Speaker 1: in the recent crisis and in the past crises. Don't 1217 01:14:21,840 --> 01:14:25,040 Speaker 1: over extend yourself thinking that you've got the answer to 1218 01:14:25,080 --> 01:14:27,040 Speaker 1: where the market's gonna go or what's going to happen. 1219 01:14:27,960 --> 01:14:30,840 Speaker 1: Uh again, Warren Buffett tells a great story. If you 1220 01:14:30,920 --> 01:14:35,200 Speaker 1: had invested ten thousand dollars with him, and sixty seven 1221 01:14:35,240 --> 01:14:37,960 Speaker 1: would be worth whatever it is, tens of millions today 1222 01:14:38,360 --> 01:14:42,080 Speaker 1: if you had invested twenty dollars and borrowed ten, so 1223 01:14:42,120 --> 01:14:43,800 Speaker 1: if you did it on margin, you would have been 1224 01:14:43,800 --> 01:14:50,479 Speaker 1: out of business. Sometimes options and futures and all that 1225 01:14:50,560 --> 01:14:53,599 Speaker 1: kind of stuff. I like to say it's for people 1226 01:14:53,600 --> 01:14:56,080 Speaker 1: who want to get there in a hurry, but they 1227 01:14:56,080 --> 01:14:58,160 Speaker 1: may not know where they're going right, so it could 1228 01:14:58,200 --> 01:15:02,000 Speaker 1: work out, but it also could build a lot of characters. 1229 01:15:02,000 --> 01:15:03,880 Speaker 1: The way I used to talk about my losing trades. 1230 01:15:03,960 --> 01:15:07,440 Speaker 1: The Buffett quote I remember, and I'm sure i'm mangling 1231 01:15:07,479 --> 01:15:11,160 Speaker 1: this about leverage was, you know, dumb people should never 1232 01:15:11,280 --> 01:15:14,000 Speaker 1: use leverage, and smart people don't need to use leverage, 1233 01:15:14,040 --> 01:15:16,479 Speaker 1: so that that works that well. Keith, this has been 1234 01:15:16,560 --> 01:15:21,160 Speaker 1: absolutely fascinating. I appreciate you spending um so much time 1235 01:15:21,200 --> 01:15:24,840 Speaker 1: with us on this. We have been speaking with Keith Ross. 1236 01:15:25,000 --> 01:15:29,679 Speaker 1: He is the CEO and chairman of PDQ Enterprises. If 1237 01:15:29,720 --> 01:15:32,439 Speaker 1: you enjoy this conversation, be sure and look up an 1238 01:15:32,439 --> 01:15:35,280 Speaker 1: inch or down an inch on Apple iTunes. You can 1239 01:15:35,320 --> 01:15:39,360 Speaker 1: see the other ninety or so of these uh conversations 1240 01:15:39,400 --> 01:15:41,800 Speaker 1: we've had. I would be remiss if I did not 1241 01:15:41,920 --> 01:15:44,880 Speaker 1: thank Taylor Riggs, who was in charge of producing and 1242 01:15:44,920 --> 01:15:51,160 Speaker 1: booking our show. Charlie Vomer is our producer, Colin my engineer. 1243 01:15:51,640 --> 01:15:55,040 Speaker 1: Michael Batnick is the head of our research who helps 1244 01:15:55,240 --> 01:15:58,559 Speaker 1: put these questions together. You've been listening to Masters in 1245 01:15:58,640 --> 01:16:07,080 Speaker 1: Business on Bloomberg, a radioh