Speaker 1: The market has been going up for a while. Nothing
Speaker 1: goes up forever. If you have been away from your
Speaker 1: television set and haven't heard about the stock market, this
Speaker 1: was it. The market declined to practice. It was probably
Speaker 1: the scariest time of whom in my sixteen years to
Speaker 1: the SEC that Monday and into Tuesday. But the idea
Speaker 1: was to create a factual reconstruction of what happened. Meanwhile,
Speaker 1: in downtown New York you had the American Stock Exchange
Speaker 1: and that's where Nate Most and Steve Bloom we're working together.
Speaker 1: These are market nerds, So we were hoping that day
Speaker 1: would take debate, so to speak, and the m X did.
Speaker 1: This is Tralians Presents. I'm Joel Weber. Over the course
Speaker 1: of this podcast, we're going to be sharing the story
Speaker 1: behind the e t F. In our first episode, we
Speaker 1: got into what happened on October nineteenth, or Black Monday,
Speaker 1: when the stock market crash. Every American at those day
Speaker 1: of the game needs to get the house in order
Speaker 1: and also the response of the federal government and regulators.
Speaker 1: I'd say for the next three months through early January,
Speaker 1: a bunch of us had two jobs, which was, you know,
Speaker 1: investigating what happened and writing the report up and doing
Speaker 1: our day job. So the FEDS want to make sure
Speaker 1: this never happens again, and the SEC starts digging to
Speaker 1: find answers and a way to prevent another crash like
Speaker 1: this one, which brings us back to these two guys,
Speaker 1: Nathan Most and Stephen Bloom. Nate Most was in his
Speaker 1: seventies with the background in physics and commodities trading, among
Speaker 1: other things. And then there's Stephen Bloom who at twenty
Speaker 1: seven was fresh out of Harvard with the PhD in economics,
Speaker 1: and the two of them were teamed up at am
Speaker 1: X to create innovative products for the exchange. They had
Speaker 1: just read the SEC Market Break Report, and we're beginning
Speaker 1: to toy with an idea for a new financial tool,
Speaker 1: one modeled after a section that they'd read in the report.
Speaker 1: What the SEC effectively did was to provide the sketch, right,
Speaker 1: It's almost like drawing on paper of what they would
Speaker 1: envision as a market basket instrument. So what Most in
Speaker 1: Bloom did was to take this sketch and fill out
Speaker 1: all the colors, make it into sort of a full
Speaker 1: blown painting, if you will. But instead of a painting.
Speaker 1: It was a legit product that was given back to
Speaker 1: the SEC that was above and beyond what they initially
Speaker 1: put down in their sketch. And here's that initial sketch
Speaker 1: read by one of its artists who you'll remember from
Speaker 1: episode one, the SECS, Howard Kramer. We suggest that an
Speaker 1: alternative approach be examined. Presently, program trades must be broken
Speaker 1: up and distributed around the stock floor, with the resulting
Speaker 1: substantial transaction costs and effects discussed above. The creation, however,
Speaker 1: of one or more posts where the actual market baskets
Speaker 1: could be traded, might alter the dynamics of program trading.
Speaker 1: The availability of basket trading on the n y C
Speaker 1: would in effect restore program trades two more traditional block
Speaker 1: trading techniques. The basket specialists would be able to identify
Speaker 1: the nature of each trade. We are hopeful that this
Speaker 1: would encourage block positioners to again become active in providing
Speaker 1: capital to position the program blocks, while arbitrage would continue
Speaker 1: to flow directly to the individual stocks to maintain their
Speaker 1: pricing efficiency. Other institutional trades could be focused on the
Speaker 1: basket posts, where the specialists and trade and crowd could
Speaker 1: provide an additional layer of liquidity to the system and
Speaker 1: cushioned somewhat the individual stocks from the intra day volatility
Speaker 1: caused by program activity. Okay, that was a little dense, Eric,
Speaker 1: Can you help us make sense of what that means.
Speaker 1: What they're basically outlining here is, Look, you're gonna have
Speaker 1: a product that represents a bunch of stocks, it's gonna
Speaker 1: be traded by market makers, and it's gonna be physically
Speaker 1: backed after the SEC publishes this thing. Grammer says he
Speaker 1: remembers getting a slew of phone calls about the report.
Speaker 1: The report came out with some time in early eight
Speaker 1: so I'm guessing, you know, just just a guess, you know,
Speaker 1: six months later, eight months later or something like that.
Speaker 1: Then he hears from most in Bloom and they're like, hey,
Speaker 1: you know, we we noticed that you have this suggestion
Speaker 1: in the report, and we'd like to hear a little
Speaker 1: bit more about it. And there are some discussions back
Speaker 1: and forth. I highly respected name Moos and Steve Bloom.
Speaker 1: They were rocket scientists at that time and in that
Speaker 1: sense of the word, and they were really good at
Speaker 1: and adapted developing the products. Myself and others in the
Speaker 1: division had some discussions, and at some point, I don't
Speaker 1: remember when, they probably sent in a draft prototype and
Speaker 1: or draft of what they were talking about. Creamer and
Speaker 1: the others at the SEC are not the only ones
Speaker 1: with whom they share this prototype. Most took the idea
Speaker 1: to Jack Bogel, who was running Vanguard at the time.
Speaker 1: Bogel says he gets a cold call from Nate Most.
Speaker 1: And it's important to note here that Jack Bogel may
Speaker 1: be the most influential investor of all time, even more
Speaker 1: so than Warren Buffett. Bogel basically invented indexing and founded
Speaker 1: the behemoth Vanguard, whose low cost mutual funds have helped
Speaker 1: millions of Americans retire. So it's a big deal to
Speaker 1: just cold column. And he has very clear thoughts about
Speaker 1: Wall Street and investing, namely, watch the fees, diversify, focus
Speaker 1: on the long term. But Bogel says Nate was different
Speaker 1: than all the other cold colors he's had through the years.
Speaker 1: But he was not a promoter type. You could warm
Speaker 1: up to Nate Most and maybe he's he's more of
Speaker 1: my type of guy than some flashy US star salesman,
Speaker 1: if you will, so, Most gives Bogol an outline of
Speaker 1: his proposal. The proposal was that we would let him
Speaker 1: use our s and P. Five hundred for his spire
Speaker 1: as as I guess it was called. Man, anyone who
Speaker 1: knows Jack Bogel knows that that's like, you know, I'm
Speaker 1: gonna say this, that's borderline insulting. I mean, he's so
Speaker 1: anti trading. He wants you to go win the fund
Speaker 1: and like never touched it for twenty five years. And
Speaker 1: he said he wanted to come down and talk to
Speaker 1: me about and I said, fine. He seemed like a
Speaker 1: nice person. And he came into my all of a
Speaker 1: sudden the Monday morning, and he was not a nice person.
Speaker 1: He was the nicest person I've ever met in my life.
Speaker 1: And I said to however, Nathan, Mr mos Nate, they
Speaker 1: proposing you sent me last week doesn't work. It has
Speaker 1: these three flaws and you're gonna have to get them
Speaker 1: fixed before you can never do anything with it. The
Speaker 1: way he told me the story later was he got
Speaker 1: back on the train and fixed the three things and
Speaker 1: got on the next train to stay three. Bogus says
Speaker 1: he doesn't remember what those three things were. Wasn't that
Speaker 1: the big concern was you're gonna just rack up costs
Speaker 1: for the linehold people if you'd let this thing trade
Speaker 1: all the time. You know, Eric, I'm sorry, but a
Speaker 1: just taking his toll. Hey. He remembers the meeting though,
Speaker 1: but a nice meeting. We parted friends, and I like that.
Speaker 1: You know, you can have different ideas with people. In Jonathan,
Speaker 1: what our ideas ideas or Diamond doesn't and friends are
Speaker 1: much more important. So whether or not it was on
Speaker 1: that train ride back from meeting with Bogel, Most goes
Speaker 1: back to the drawing board, or more specifically, back to
Speaker 1: his days of running the Pacific Commodities Exchange. And there
Speaker 1: you had these warehouses that would store the commodities. Let's see,
Speaker 1: you had like soybean oil, and you would take your
Speaker 1: soybean oil in store it in the locker, and you
Speaker 1: get a receipt, and the receipt then you could trade
Speaker 1: with somebody without having to move merchandise. So Most thought, well,
Speaker 1: what if we took that model of commodity warehouse receipts
Speaker 1: and instead of the actual physical commodity, we just made
Speaker 1: it in the sp So this concept of the receipts
Speaker 1: trading back and forth, that trading does nothing to the
Speaker 1: soybean oil sitting in the warehouse or in this case,
Speaker 1: the stocks. That is a way to keep the investors
Speaker 1: from incurring costs from people who are trading. Most in
Speaker 1: Bloom now have their idea. It's been vetted. Now they
Speaker 1: have to name it, and they go with Spider SNP
Speaker 1: for the snp F and d R for depository receipts.
Speaker 1: And to me, that is the heartbeat of the E
Speaker 1: t F and that's what made it a very special product.
Speaker 1: And you have to know that at this time Nate
Speaker 1: Most and Steve Bloom aren't the only people thinking about
Speaker 1: index is being able to be traded like that. There
Speaker 1: were several other types of versions, but most of them
Speaker 1: had a variety of issues. And just like any invention,
Speaker 1: you know, Steve Jobs and Wozniak weren't the only two
Speaker 1: guys in a garage. There were plenty of people in
Speaker 1: Silicon Valley working on things like that. They just happened
Speaker 1: to just get the right way to do it, and
Speaker 1: in this case it was the creation redemption meca is.
Speaker 1: I think that gave Spy its edge. That creation redemption
Speaker 1: mechanism is ultimately what they put into the spy filing.
Speaker 1: They followed it with the SEC and then they had
Speaker 1: to wait. And this is where a superhero comes in.
Speaker 1: Spider Woman. I got that nickname right around the time
Speaker 1: we launched Spiders. You may remember her from episode one.
Speaker 1: Her name is Kathleen Moriarty. My legal assistant, Debbie Ferraro,
Speaker 1: gave me a present. It was a front cover of
Speaker 1: a comic book with like the Hulk going after some
Speaker 1: huge monster, and she doctored it all up and she
Speaker 1: made the Hulk me, and she made the monster of
Speaker 1: the SEC, and she changed all the numbers to make
Speaker 1: SEC things and you know, sort of tongue in cheek,
Speaker 1: and then she wrote Spider Woman on the top of it,
Speaker 1: and it's still in my office. Next time on Trillions,
Speaker 1: we'll hear more from Spider Woman about what it was
Speaker 1: like to actually design Spy. People were afraid that a
Speaker 1: lot of arachnophobes would be turned off and not want
Speaker 1: to buy the E t F, but we ultimately called
Speaker 1: it Spider anyway. Oh and in case you are wondering
Speaker 1: what Jack Bogo thinks of ETS, well, in E t
Speaker 1: F it is just another form of indice fun, a
Speaker 1: sort of bastardized forum for the one of a better word.
Speaker 1: Thanks for listening to Trillions Presents until next time. You
Speaker 1: can find us on the Bloomberg terminal, Bloomberg dot com,
Speaker 1: Apple Podcast, and whever else you listen to podcasts. Trillions
Speaker 1: Presents is produced by Jordan Bell. Francesca Leavey is the
Speaker 1: head of Bloomberg Podcast