WEBVTT - How Jane Street, CitSec Are Usurping Wall Street 0:00:01.400 --> 0:00:07.040 Jane Street, Citadel Securities, Virtue Financial. These aren't necessarily household 0:00:07.160 --> 0:00:11.880 names that these high frequency trading firms dominate financial markets. 0:00:12.480 --> 0:00:15.800 Companies like these control up to half of equity trading 0:00:15.880 --> 0:00:19.200 volumes in the US, and their revenues are surging. In 0:00:19.239 --> 0:00:22.919 the second quarter alone, Jane Street made over ten billion 0:00:23.000 --> 0:00:26.160 dollars in net trading revenue, beating out all of Wall 0:00:26.160 --> 0:00:29.720 Street's biggest banks, including JP Morgan and Goldman Sachs. 0:00:30.480 --> 0:00:35.000 But it's also raised some questions. Earlier this year, Indian 0:00:35.080 --> 0:00:40.239 regulator SABBY accused Jane Street of market manipulation, something the 0:00:40.280 --> 0:00:44.800 company has denied. So how do these electronic market makers 0:00:45.159 --> 0:00:48.880 get an edge and make so much profit? How much 0:00:48.880 --> 0:00:52.080 of a threat do they pose to traditional Wall Street banks? 0:00:52.760 --> 0:00:55.440 And can they replicate their success in Asia. 0:00:57.560 --> 0:01:01.120 You're listening to Asia Centric from Bloomberg Intelligence. I'm John 0:01:01.200 --> 0:01:02.360 Lee in Hong Kong and. 0:01:02.320 --> 0:01:04.120 I'm Kajudmitrivelso in Hong Kong. 0:01:04.680 --> 0:01:08.319 Today we're covering the sacred world of electronic market makers 0:01:08.360 --> 0:01:12.040 with Larry tab head of market structured Research at Bloomberg 0:01:12.040 --> 0:01:14.040 Intelligence based in the US. 0:01:14.240 --> 0:01:15.399 Larry, Welcome to the show. 0:01:15.880 --> 0:01:18.040 Glad to be here, Katya, John. 0:01:18.200 --> 0:01:21.840 Well, Larry, maybe we could start just, you know, kind 0:01:21.840 --> 0:01:26.640 of back to basics. What are electronic market makers? Is 0:01:26.680 --> 0:01:29.080 it the same as high frequency traders? How do they work? 0:01:29.120 --> 0:01:31.880 And wire people? Kind of raising eyebrows. 0:01:32.000 --> 0:01:34.160 You know, Kacha, that's a great question. There are a 0:01:34.160 --> 0:01:38.200 lot of subtle differences, but by and large, these are companies. 0:01:39.000 --> 0:01:42.319 You know, there aren't humans making decisions. Mostly they're machines 0:01:42.400 --> 0:01:46.480 making decisions, and they're making decisions by analyzing a tremendous 0:01:46.560 --> 0:01:50.960 amount of data from the various exchanges and trading venues 0:01:51.480 --> 0:01:54.360 and ascertaining is it time to buyer? 0:01:54.400 --> 0:01:56.240 Is a time to sell? Now? 0:01:56.600 --> 0:01:59.440 The high frequency traders, and you know, the ones that 0:01:59.520 --> 0:02:04.280 are priced a little bit more nefariously, generally take more 0:02:04.320 --> 0:02:08.200 liquidity than they provide. And what that means is that 0:02:08.760 --> 0:02:12.640 when they see a price that's mispriced, they're going to 0:02:12.720 --> 0:02:14.760 jump on it, and they're going to be faster to 0:02:14.800 --> 0:02:17.440 the market than you or me or anybody looking at 0:02:17.480 --> 0:02:21.760 market data and reacting with a keyboard. The market makers, 0:02:21.760 --> 0:02:24.239 which tend to be thought of a little bit more positively, 0:02:24.919 --> 0:02:27.079 they're a little bit more on the opposite side. They're 0:02:27.080 --> 0:02:30.800 providing liquidity. They're the guys, you know, creating the price 0:02:30.840 --> 0:02:33.600 that you see on the screen. Their goal is to 0:02:33.680 --> 0:02:37.880 outcompete other people who are providing prices and try to 0:02:37.919 --> 0:02:42.000 trade without their price being stale and getting picked off 0:02:42.040 --> 0:02:44.440 by someone on the other side. You know, this is 0:02:44.480 --> 0:02:47.000 not one versus the other. A lot of times it's 0:02:47.520 --> 0:02:51.400 combinations of both, because anybody who provides liquidity eventually is 0:02:51.440 --> 0:02:53.960 going to take liquidity. Anybody takes liquidity is going to 0:02:53.960 --> 0:02:57.880 provide liquidity, So it's just a matter of degrees. As 0:02:57.919 --> 0:03:00.360 well as, to a certain extent, a lot of quote 0:03:00.400 --> 0:03:03.880 unquote market makers are registered with exchanges because they get 0:03:03.919 --> 0:03:08.600 special pricing for providing quotes and providing bids and offers 0:03:09.000 --> 0:03:10.359 as long as the market is open. 0:03:11.240 --> 0:03:12.400 Lart, you made an interesting point. 0:03:12.440 --> 0:03:15.760 You're saying that these are computer programs or algorithms. Were 0:03:15.800 --> 0:03:19.800 they traditionally done by humans in the past. This was 0:03:20.040 --> 0:03:22.799 an area that was traditionally dominated by Wall Street, Right. 0:03:23.960 --> 0:03:26.320 These are the guys that you saw, you know, jumping 0:03:26.400 --> 0:03:29.040 up and down and screaming in pits historically, and actually 0:03:29.120 --> 0:03:31.880 a lot of them come out of the CME and 0:03:32.080 --> 0:03:35.920 traditional futures exchanges, you know, like trading places where they're 0:03:35.920 --> 0:03:38.440 trying to buy and sell large, concentrated or whatever they 0:03:38.480 --> 0:03:41.960 were trading back when the dan Ackroyd days and Eddie 0:03:42.000 --> 0:03:45.560 Murphy days. But yeah, these positions were mostly done by 0:03:45.640 --> 0:03:49.880 humans with paper tickets, gathering around centralized posts on exchanges, 0:03:49.960 --> 0:03:53.680 buying and selling. A lot of that has been automated 0:03:54.320 --> 0:03:57.200 to a certain extent. A lot of these strategies. You know, 0:03:57.280 --> 0:03:59.560 they're not the same, and they're absolutely not the same, 0:03:59.600 --> 0:04:02.000 but they do similar functions that they used to do 0:04:02.040 --> 0:04:02.840 with at exchanges. 0:04:03.640 --> 0:04:06.200 So how are they able to trade so quickly? You 0:04:06.280 --> 0:04:08.920 mentioned that it's usually a computer, so I'm guessing this 0:04:09.080 --> 0:04:10.880 is like an algorithm that's set up. 0:04:11.680 --> 0:04:15.720 The market makers have different types of strategies, okay, and 0:04:15.840 --> 0:04:19.960 each of the different market makers, given their backgrounds, have 0:04:20.080 --> 0:04:22.359 different strategies, so it's not like they're role of running 0:04:22.360 --> 0:04:23.560 off the same cueues. 0:04:24.640 --> 0:04:24.800 You know. 0:04:24.839 --> 0:04:27.960 The simplest type of strategy is a provide and take 0:04:28.040 --> 0:04:31.240 strategy where they buy one thing and they sell it 0:04:31.320 --> 0:04:34.200 either at a better price or in a different location 0:04:34.320 --> 0:04:37.400 at a better price, or they buy something and sell something. 0:04:38.000 --> 0:04:40.760 You know, there's a share of IBM they buy, they 0:04:40.800 --> 0:04:43.440 turn around and sell it. Then you get into more 0:04:43.480 --> 0:04:48.920 sophisticated strategies where you're trading an underlying stock and you're 0:04:48.960 --> 0:04:52.240 hedging it or you're training it against an ETF or 0:04:52.279 --> 0:04:55.720 a future or an option, and so you're looking at 0:04:55.839 --> 0:04:59.400 you know, the price of IBM maybe against the tech basket, 0:04:59.560 --> 0:05:01.599 or you're looking at it against the S and P 0:05:01.720 --> 0:05:04.479 five hundred or a future or an option based on 0:05:04.520 --> 0:05:06.920 the S and P five hundred, or the QQQ at 0:05:06.960 --> 0:05:09.920 you know, Nasdaq Tech basket, and then you get into 0:05:10.480 --> 0:05:14.960 the next derivative of that is an ETF. And that's 0:05:15.040 --> 0:05:19.039 kind of where Jane Street. That was Jeane Street's main business, 0:05:19.040 --> 0:05:23.000 making markets and ETFs, so they could better understand less 0:05:23.040 --> 0:05:27.080 liquid actually more bonds than stocks, but they do a 0:05:27.120 --> 0:05:31.200 big job in stocks, and they can take liquidity from 0:05:31.240 --> 0:05:35.400 individual investors selling bonds and then turn those bonds into 0:05:35.480 --> 0:05:38.880 ETFs and turn that liquidity over and then you start 0:05:38.880 --> 0:05:42.200 getting into even more complicated things like I'm going to 0:05:42.240 --> 0:05:45.640 do parish trades, or you know, I believe one share 0:05:45.680 --> 0:05:48.800 of IBM is worth one of HP and one of Apple, 0:05:48.960 --> 0:05:52.040 and so you wind up with one stock to another stock. 0:05:52.680 --> 0:05:55.360 And so there are all these different types of strategies 0:05:55.600 --> 0:05:59.599 as well as different locations. So less so in Asia, 0:05:59.640 --> 0:06:02.839 but more or so in the States. In Europe, the 0:06:03.000 --> 0:06:08.320 equity marketplace is very fragmented. We have sixteen equity exchanges 0:06:08.400 --> 0:06:10.880 plus another thirty two or so dark pools. 0:06:11.680 --> 0:06:12.360 So if you. 0:06:12.360 --> 0:06:17.520 Can understand which exchanges lead versus which exchange is lag 0:06:17.839 --> 0:06:21.200 and where liquidity may possibly be sitting in dark pools, 0:06:22.000 --> 0:06:26.040 you can execute within microseconds at one venue, turned around 0:06:26.120 --> 0:06:27.760 and sell it off in another venue. 0:06:28.000 --> 0:06:31.039 And sorry, what's a dark pool? Just for listeners? I 0:06:31.040 --> 0:06:32.839 mean you can't say dark pool to a reporter and 0:06:32.880 --> 0:06:33.640 not have me ask. 0:06:34.880 --> 0:06:35.840 No, that's fine. 0:06:37.080 --> 0:06:40.480 In the US they're called alternative trading systems. In Europe 0:06:40.520 --> 0:06:44.720 they're called MtFs. In Japan they're called pts's. But by 0:06:44.760 --> 0:06:48.080 and large it's a non exchange marketplace. Many of them 0:06:48.200 --> 0:06:52.840 don't display quotes, so you're used to seeing the Hong 0:06:52.960 --> 0:06:55.880 Kong Exchange have a bit or an offer on a stock, 0:06:55.920 --> 0:06:59.360 and you see the quotes because you see them, they're 0:06:59.480 --> 0:07:04.080 in effect lit up. A dark pool still has bids 0:07:04.120 --> 0:07:07.360 and offers for stocks, but they're not displayed, so you 0:07:07.440 --> 0:07:09.840 actually have to go to them and say, hey, look, 0:07:10.480 --> 0:07:13.800 I want to trade synpore telephone. Does anybody want to 0:07:13.800 --> 0:07:17.560 buy or sell Singapore telephone in this alternative trading system, 0:07:17.840 --> 0:07:19.880 and they may say yes, they have a buyer or 0:07:19.920 --> 0:07:22.440 seller that may want to trade at the bid or 0:07:22.480 --> 0:07:26.680 the offer or the midpoint or somewhere in between, or 0:07:26.720 --> 0:07:28.720 they may say no, we don't and they turn around 0:07:28.800 --> 0:07:30.720 and send your order back to you one filled, in 0:07:30.760 --> 0:07:32.400 which case you have to go to some other place 0:07:32.400 --> 0:07:36.800 and look for in These high frequency traders or market 0:07:36.800 --> 0:07:40.320 makers are connected to all of these venues at very 0:07:40.400 --> 0:07:43.440 very high speeds. Now when we're talking about high speeds, 0:07:43.440 --> 0:07:46.679 we're not talking about seconds. We're not even talking about 0:07:46.760 --> 0:07:50.760 milliseconds or thousands of a second. We're talking millions of 0:07:50.800 --> 0:07:55.840 a second and faster, so very very very quick. You know, 0:07:56.240 --> 0:07:59.480 they aggregate all of the market data from all these 0:07:59.480 --> 0:08:02.720 different vings news put them into a unified what we 0:08:02.880 --> 0:08:06.480 call the montage, basically a bigger order book, and so 0:08:06.560 --> 0:08:09.320 they know if they get a bid for this asset 0:08:09.400 --> 0:08:11.280 or that asset, they know that they can turn it 0:08:11.320 --> 0:08:14.000 around or sell it in another venue, and they can 0:08:14.000 --> 0:08:14.960 do it super quick. 0:08:15.880 --> 0:08:19.200 Asia Centric is produced by Bloomberg Intelligence. We're more than 0:08:19.240 --> 0:08:23.080 five hundred experienced analysts and strategists work around the clock 0:08:23.160 --> 0:08:26.640 to bring you timely world class research. Our coverage spans 0:08:26.680 --> 0:08:31.000 two hundred market industries, currencies, commodities, and industries, as well 0:08:31.000 --> 0:08:34.000 as over two thousand equities and credits. To learn more 0:08:34.040 --> 0:08:38.280 about Bloomberg Intelligence, visit bi go on the Bloomberg terminal. 0:08:38.800 --> 0:08:41.280 If you like what you hear, don't forget to subscribe 0:08:41.320 --> 0:08:41.680 and share. 0:08:42.800 --> 0:08:43.040 Larry. 0:08:43.120 --> 0:08:47.479 What's the relationship between say, these retail brokers like Robinhood, 0:08:47.720 --> 0:08:52.040 they don't charge any commission rates and these electronic market makers. 0:08:52.480 --> 0:08:55.200 Oh man, now you're getting deeper into the weeds in 0:08:55.280 --> 0:08:59.800 the States. Less so in Europe because Europe doesn't favor this. 0:09:00.840 --> 0:09:03.360 But in the States they have something called payment for orterflow. 0:09:04.080 --> 0:09:07.280 And what payment for order flow is that the retail 0:09:07.440 --> 0:09:11.199 broker gets paid. So robin Hood gets paid by Jane 0:09:11.200 --> 0:09:15.520 Street or Virtue or Citadel a fraction of a cent 0:09:15.880 --> 0:09:19.160 to send their order to one of these market makers 0:09:19.600 --> 0:09:23.600 and they execute it in the US. As long as 0:09:23.640 --> 0:09:26.640 they execute at work better than the best price that's 0:09:26.679 --> 0:09:30.880 displayed in the market, everything's fine. So in the States 0:09:31.360 --> 0:09:34.640 they have these arrangements where Robinhood will send their order 0:09:34.679 --> 0:09:38.319 flow to usually a half dozen of these guys, maybe 0:09:38.320 --> 0:09:41.920 three or four, and they get paid for that order flow, 0:09:42.480 --> 0:09:47.559 they generally get zero point one the zero point two 0:09:47.720 --> 0:09:52.199 cents per share. Generally it's around eleven to twelve cents 0:09:52.200 --> 0:09:55.320 per hundred shares, and that's the payment for order flow 0:09:55.360 --> 0:09:59.280 they get. And because of that, and because Citadel or 0:09:59.360 --> 0:10:03.000 Jane st referred to, gets the first look at this trade, 0:10:03.440 --> 0:10:06.280 they're able to price it better than they would price 0:10:06.440 --> 0:10:09.240 a trade done on an exchange or trading venue. So 0:10:09.840 --> 0:10:12.520 by and large, the retail investor gets a better price 0:10:13.240 --> 0:10:16.440 and the market maker shares a bit of that profit 0:10:16.520 --> 0:10:17.640 with the retail broker. 0:10:18.960 --> 0:10:21.920 Just talking about robin Hood and this concept that the 0:10:21.960 --> 0:10:24.960 retail investor would end up getting a better price, there's 0:10:24.960 --> 0:10:30.240 this idea that high frequency trading is crowding out or 0:10:30.840 --> 0:10:32.559 you know, the retail investor would always be on the 0:10:32.640 --> 0:10:35.079 losing end because by the time you think about a trade, 0:10:35.160 --> 0:10:39.319 make the trade on a platform like Robinhood, these algorithms 0:10:39.320 --> 0:10:42.640 have already you know, it's already happened, the trade has 0:10:42.679 --> 0:10:46.240 already been made by another company. So yeah, what would 0:10:46.240 --> 0:10:46.719 you say to that. 0:10:47.840 --> 0:10:50.640 I think that's a little idealistic. First of all, by 0:10:50.679 --> 0:10:54.959 the time the Robinhood investor sees that data, Citadels of 0:10:55.000 --> 0:10:59.120 the world have traded a thousand times, So Citadel is 0:10:59.200 --> 0:11:01.720 working on a you know, as I said, a microsecond 0:11:01.720 --> 0:11:06.200 to a sub micro second basis. And most retail investors, 0:11:06.280 --> 0:11:11.640 especially ones that they're trading on a handheld device, hey, 0:11:11.880 --> 0:11:14.679 they're not trading anywhere near the kind of frequency that 0:11:14.840 --> 0:11:18.719 Citadel or chained for Eat, Virtue or xtx or any 0:11:18.720 --> 0:11:22.640 of these guys trade aut So they're really completely different markets. Now, 0:11:22.720 --> 0:11:26.240 if you're saying that you've got somebody with a super 0:11:26.320 --> 0:11:30.560 powerful computer that's sitting crunching all these numbers, then you 0:11:30.640 --> 0:11:34.960 have a little bit better argument that Citadel is picking 0:11:35.000 --> 0:11:38.200 their pockets. But for retail investors getting better than the 0:11:38.240 --> 0:11:41.240 best bid, best offer, it's pretty hard to argue with it. 0:11:41.760 --> 0:11:45.640 So they're in very different games. The individual investors time 0:11:45.720 --> 0:11:49.360 frame is not seconds or a sub seconds at best. 0:11:49.440 --> 0:11:53.640 They're you know, a couple of minutes, hours hopefully, you know, 0:11:53.720 --> 0:11:58.160 they're looking at years or more than that. I've always 0:11:58.160 --> 0:12:02.640 been a fan of saying generally that most retail traders, 0:12:03.240 --> 0:12:05.760 you know, that's not a wealth creation business. 0:12:05.800 --> 0:12:07.760 It's mostly a wealth destruction business. 0:12:08.280 --> 0:12:11.160 Most individuals don't have the time or patients to really 0:12:11.200 --> 0:12:15.720 look at it, or analyze the market or really, you know, 0:12:15.800 --> 0:12:18.320 you really have to be special to make money this 0:12:18.440 --> 0:12:21.080 day in a day out. They're better off with much 0:12:21.480 --> 0:12:23.400 buying good companies and holding them. 0:12:23.920 --> 0:12:26.960 Larry, we talked earlier of the competitive landscape between these 0:12:27.120 --> 0:12:29.320 market makers and you know the sell side or you 0:12:29.320 --> 0:12:32.839 know traditional Wall Street investment banks. You talked about how 0:12:32.880 --> 0:12:36.000 they have It sounds like they have superior technology. Is 0:12:36.040 --> 0:12:39.439 that the reason why they sort of started dominating the 0:12:39.520 --> 0:12:43.800 market making space and displaced started displacing Cell sign Absolutely? 0:12:43.920 --> 0:12:45.319 Is there any other reasons? 0:12:45.679 --> 0:12:48.440 Well, it's not just the technology, it's the ability to 0:12:48.559 --> 0:12:52.199 use it and the agility of their infrastructure. And what 0:12:52.240 --> 0:12:56.040 that means is if you think about somebody ely JP Morgan, 0:12:56.120 --> 0:13:00.439 or Bank of America or HSBC, you know, any any 0:13:00.800 --> 0:13:03.480 large bank that you would know that as a market 0:13:03.520 --> 0:13:07.720 making armor or capital markets arm. First of all, we're 0:13:07.760 --> 0:13:10.720 no longer in a world where these are investment banks 0:13:11.040 --> 0:13:16.880 versus commercial banks or retail banks. These are large diversified organizations. 0:13:17.480 --> 0:13:20.840 So when the head of trading says, I need to 0:13:20.840 --> 0:13:24.840 go buy a new connectivity line between here in Chicago, 0:13:25.160 --> 0:13:29.360 or between New York and Singapore, or New York and London, 0:13:29.520 --> 0:13:33.040 or Singapore and Tokyo or whatever. The head of the 0:13:33.080 --> 0:13:36.200 bank has to say, Okay, well they have to justify 0:13:36.240 --> 0:13:38.679 that expense. You know, should I give the money to 0:13:38.720 --> 0:13:41.280 the guy who just wants to buy a faster communications 0:13:41.320 --> 0:13:45.160 line that's going to buy me three milliseconds maybe? Or 0:13:45.160 --> 0:13:47.680 do I really want to buy new ATMs for the company, 0:13:47.800 --> 0:13:50.640 or do I want to enhance my credit card business, 0:13:50.720 --> 0:13:53.079 or do I want to put that to make more loans. 0:13:53.840 --> 0:13:56.120 So right off the bat, you know, in these banks 0:13:56.160 --> 0:13:59.240 there's a capital allocation process that takes time. 0:14:00.120 --> 0:14:01.960 It's not like you know, someone with. 0:14:02.679 --> 0:14:04.760 In the trading arm a Bank of American can just 0:14:04.840 --> 0:14:07.160 go buy a million dollars worth of servers and have 0:14:07.280 --> 0:14:10.480 them delivered in a week or even a month. This 0:14:10.640 --> 0:14:14.120 process can take six months to a year just to 0:14:14.200 --> 0:14:18.280 deploy a single server. And so these trading firms, on 0:14:18.320 --> 0:14:21.920 the other hand, they allocate capital very quickly, and they 0:14:21.960 --> 0:14:27.080 know that these investments make or break their businesses, so 0:14:27.600 --> 0:14:30.960 they tend to be much more agile and invest in 0:14:30.960 --> 0:14:34.560 this technology much faster than what the traditional bank would do. 0:14:34.960 --> 0:14:38.120 If you think about the technology investment and jp work, 0:14:38.160 --> 0:14:40.720 and I think they said there were five to ten 0:14:40.880 --> 0:14:44.320 billion dollars a year on tech. That completely towards any 0:14:44.360 --> 0:14:47.480 of these guys, all of these guys combined, but they're 0:14:47.480 --> 0:14:50.480 allocating it over such wide you know your raise. They're 0:14:50.520 --> 0:14:52.720 not paying their stabs the kind of money you know, 0:14:53.360 --> 0:14:56.200 consider an l and those guys are paying guys coming 0:14:56.200 --> 0:14:58.320 out of school almost a half a million dollars a 0:14:58.400 --> 0:15:02.400 year with no work exp sperience. I wish Bloomber paid 0:15:02.400 --> 0:15:04.040 that kind of salary. 0:15:05.280 --> 0:15:06.280 This is an assign. 0:15:06.440 --> 0:15:09.520 During my last business trip from Singapore to Hong Kong, 0:15:09.560 --> 0:15:11.520 when I landed at Hong Kong Airport and I was 0:15:11.560 --> 0:15:15.520 walking through the airport gates, I literally saw a hotel 0:15:15.640 --> 0:15:19.360 chauffeur have a sign and it said Jane Street Intern. 0:15:20.480 --> 0:15:24.120 I was like, and I was like, well, these interns 0:15:24.160 --> 0:15:27.240 have hotel chauffeurs. I went straight to the train by the. 0:15:27.160 --> 0:15:29.640 Way, right right, I go, and I got a London 0:15:30.120 --> 0:15:32.480 I'm gone to he Throw Express and I don't have 0:15:33.000 --> 0:15:36.280 a Bloomberg show for picking me up. But it's crazy 0:15:36.360 --> 0:15:39.600 that they're paying these people. And these people are really talented, 0:15:39.640 --> 0:15:41.600 and that's why there's a bidding war for them. So 0:15:42.440 --> 0:15:46.680 all through the value chain as well as the regulatory side, 0:15:46.880 --> 0:15:52.080 you know, before the crisis, Morgan, Stanley, Goldman, Zachs, Merrill, Lynch, 0:15:52.880 --> 0:15:56.320 these guys were regulated as non bank broker dealers and 0:15:56.440 --> 0:15:59.560 they didn't have to deal with the regulatory burden of 0:15:59.560 --> 0:16:03.840 being a bit. After the crisis, they all became banks. 0:16:04.040 --> 0:16:06.600 They were kind of forced to become banks. That comes 0:16:06.600 --> 0:16:10.880 with a much larger regulatory burden. And actually, if you 0:16:10.920 --> 0:16:12.600 look at some of the Dodd Frank stuff and a 0:16:12.600 --> 0:16:16.080 lot of the Basil three stuff, the regulators didn't want 0:16:16.080 --> 0:16:18.600 them to take trading risks. And so you think that 0:16:18.680 --> 0:16:22.680 these guys get boxed out of the business. Not really so, 0:16:23.240 --> 0:16:27.000 James Street, Citadel revert to a lot of these guys 0:16:27.120 --> 0:16:30.360 prime with the big banks. That's where they get their 0:16:30.400 --> 0:16:34.440 credit from. So now a Bank of America and we're 0:16:34.680 --> 0:16:39.520 Stanley taking the trading risks. They're taking the risks on 0:16:39.560 --> 0:16:44.200 the back end, on the lending custody, the banking relationship, 0:16:44.560 --> 0:16:48.000 from holding all the securities in cash that is being 0:16:48.080 --> 0:16:49.960 used to do a lot of this trading. So they've 0:16:49.960 --> 0:16:51.800 gone from the front of the line, you know, in 0:16:51.880 --> 0:16:54.320 terms of trading, to kind of the back of the 0:16:54.320 --> 0:16:56.640 line where they're making a lot of their money, you know, 0:16:56.760 --> 0:16:59.000 lending and doing securities lending. 0:17:00.080 --> 0:17:02.280 So would it be a simplification to say that on 0:17:02.360 --> 0:17:06.920 one end, like these electronic market makers HFTs competitors to 0:17:07.040 --> 0:17:09.560 Wall Street banks on the trading side, absolutely, but they're 0:17:09.560 --> 0:17:12.280 also customers on the prime side as well as you know, 0:17:12.320 --> 0:17:13.600 the commission revenue. 0:17:13.280 --> 0:17:14.119 Big customers. 0:17:14.520 --> 0:17:19.080 Not necessarily the commission side. It's more the financing side. 0:17:19.280 --> 0:17:22.000 It's more on the back end. It's more you know, 0:17:22.840 --> 0:17:24.040 they're they're clearing banks. 0:17:25.040 --> 0:17:28.320 Since we're talking about that, I wonder what could go 0:17:28.680 --> 0:17:32.280 wrong in that situation. You know the regulatory risk, of course, 0:17:33.280 --> 0:17:35.520 but when you're borrowing so much from banks and you're 0:17:35.600 --> 0:17:38.000 using it to make these trades, I mean, what are 0:17:38.000 --> 0:17:41.480 some of the issues that regulators where folks like Elizabeth 0:17:41.480 --> 0:17:43.600 Warren might be particularly worried about. 0:17:44.640 --> 0:17:47.160 Let's not get into my senator, She's worried about everything. 0:17:47.560 --> 0:17:50.920 So everybody's saying, oh, all these high frequency traders, bad, bad, bad, 0:17:50.960 --> 0:17:53.680 bad bad. All these high frequency market makers are putting 0:17:53.680 --> 0:17:56.600 these wonderful broker dealers out of business. On the other hand, 0:17:56.640 --> 0:18:00.840 we have not seen a marketmaker collapse. If you go 0:18:01.000 --> 0:18:05.000 back fifteen twenty years, every year or two you'd see 0:18:05.040 --> 0:18:08.840 a big Bank, Bearings Bank, Sumi Tomo Trading, and Copper. 0:18:09.720 --> 0:18:15.120 Nick Eaton, he was Bearings, Lahman Brothers best done well. 0:18:15.160 --> 0:18:16.399 Lehman was a little different. 0:18:16.440 --> 0:18:20.760 But you know, with human trading, things are done over 0:18:20.800 --> 0:18:23.800 the phone, and you write tickets and those tickets have 0:18:23.880 --> 0:18:26.359 to be processed and the deals are done by phone. 0:18:27.200 --> 0:18:31.680 So John Arkati, I'm talking with you. I buy a 0:18:31.760 --> 0:18:33.560 bunch of stock, or I buy a bunch of bonds 0:18:33.560 --> 0:18:37.040 from you. Guys, we negotiate a price. You say we're done. 0:18:37.280 --> 0:18:40.240 I say we're done. I'm supposed to write a ticket 0:18:40.840 --> 0:18:43.879 and have that process. What if that ticket sits in 0:18:43.920 --> 0:18:46.719 my drawer because all of a sudden the price has 0:18:46.760 --> 0:18:49.560 gone away from me. You know this trade. My back 0:18:49.600 --> 0:18:52.439 office doesn't know this trade. You try to send me 0:18:52.440 --> 0:18:56.120 securities and get payment. My back office says, we don't 0:18:56.119 --> 0:18:58.879 know this trade. And then the next thing is I 0:18:58.920 --> 0:19:01.679 double down because I'm right, Because I'm a huge trader, 0:19:01.760 --> 0:19:04.600 I can never be wrong. So I do a trade 0:19:04.640 --> 0:19:06.719 instead of with contient, I do it with a John's company. 0:19:07.280 --> 0:19:09.320 And I don't put that trip ticket because that looks 0:19:09.359 --> 0:19:11.119 like it's going south, and I don't put that in 0:19:11.200 --> 0:19:11.840 my system. 0:19:12.000 --> 0:19:12.879 And all of a sudden. 0:19:13.600 --> 0:19:17.560 These positions can get rather large to the tune of 0:19:17.680 --> 0:19:20.000 what used to be human. You know, billions of dollars 0:19:20.000 --> 0:19:23.120 of trading losses. You never see that at these places, 0:19:24.119 --> 0:19:28.480 especially since night blew up, because they had four risk systems. 0:19:29.119 --> 0:19:32.480 Most of these systems are done electronically, they're automatically processed. 0:19:32.520 --> 0:19:34.840 They go through a central risk book. The central risk 0:19:34.920 --> 0:19:39.399 manager looks at the positions constantly and says, hey, Larry, 0:19:39.480 --> 0:19:42.040 you know you're overexposed. I'm going to go sell out 0:19:42.040 --> 0:19:46.760 these positions. So think about trading strategies. If I'm a 0:19:46.760 --> 0:19:49.320 market maker, my job is to buy at the bid 0:19:49.359 --> 0:19:52.120 and sell at the offer. I'm working on a tiny spread, 0:19:52.640 --> 0:19:56.040 especially if the markets that I'm working in are moving 0:19:56.040 --> 0:20:00.240 in you know, milliseconds in microseconds. I am very very 0:20:00.280 --> 0:20:05.119 finely balanced on that knife edge. Okay, So if I 0:20:05.160 --> 0:20:09.520 want to stay fairly risk neutral, whatever I buy, I 0:20:09.520 --> 0:20:11.600 need to get rid of her hedge. Whatever I sell, 0:20:11.680 --> 0:20:15.400 I need to acquire or hedge. And so my position 0:20:15.560 --> 0:20:19.840 needs to be pretty risk monitored or managed all the time. 0:20:20.560 --> 0:20:23.280 And so these guys tend not to take huge positions. 0:20:23.359 --> 0:20:26.600 They tend to take lots of small positions. And that's 0:20:26.640 --> 0:20:28.880 a certain extent makes them less risky. I also think 0:20:28.880 --> 0:20:31.879 about it, so if I had to make a market 0:20:32.080 --> 0:20:35.240 and the market traded once a day, I got to 0:20:35.280 --> 0:20:37.879 quote very wide prices, and if I want to do 0:20:37.920 --> 0:20:39.439 any type of volume, I have to do it in 0:20:39.480 --> 0:20:43.480 big size. If the market moves faster, then I have 0:20:43.560 --> 0:20:45.800 more chance to get in and get out. And if 0:20:45.840 --> 0:20:48.920 the market moves even faster, I can make tighter prices 0:20:48.960 --> 0:20:52.000 and get in and out quicker. And to a certain extent, 0:20:52.480 --> 0:20:55.399 if I take too large a position, the market can 0:20:55.440 --> 0:20:58.560 move against me pretty quickly if the market moves really fast. 0:20:59.119 --> 0:21:02.840 So these business models really don't support the taking of 0:21:03.000 --> 0:21:07.119 very large positions. That said, some of these entities have 0:21:07.240 --> 0:21:09.960 hedge funds, and those hedge funds work differently. They have 0:21:10.359 --> 0:21:13.119 more capital, they could take longer positions, but the market 0:21:13.119 --> 0:21:16.000 making side generally doesn't. They had to get in and 0:21:16.040 --> 0:21:17.720 get out, or get in and hedge. 0:21:18.320 --> 0:21:20.320 Laurie, I wanted to bring this discussion to Asia. 0:21:20.480 --> 0:21:22.359 Now there's been a lot of news that you know, 0:21:22.400 --> 0:21:25.280 some of these marketmakers are expanding into this region. I 0:21:25.280 --> 0:21:29.800 think Citadel Securities is hiring aggressively in Asia. There's also 0:21:30.040 --> 0:21:32.159 you know, Jane Street Jaane Street's already been here for 0:21:32.200 --> 0:21:35.320 a while and then made a lot of money. Now 0:21:35.359 --> 0:21:39.600 they do have some regulatory risks in India. Yeah, yeah, 0:21:39.640 --> 0:21:43.520 like the regulator is accusing them of market manipulation. And 0:21:43.560 --> 0:21:46.560 by the way, Jane Street's vehemently denying these allegations. I 0:21:46.600 --> 0:21:50.119 think they will find over five hundred million dollars. But 0:21:50.200 --> 0:21:52.040 having said that, the regulator said that they made of 0:21:52.119 --> 0:21:54.320 it as four billion dollars over two years. 0:21:54.400 --> 0:21:57.080 I don't know there was some huge number. Yeah, I 0:21:57.080 --> 0:21:59.560 don't know whether that's true or not. Whether they were 0:21:59.600 --> 0:22:01.000 in a minuteulating the market or not. 0:22:01.320 --> 0:22:01.879 I don't know. 0:22:02.119 --> 0:22:04.800 In a certain extent, they could have been taking large 0:22:04.840 --> 0:22:07.760 positions just because the business model generally doesn't support it. 0:22:08.560 --> 0:22:11.800 If they're making enough money, risk managers tend to look 0:22:11.880 --> 0:22:14.520 the opposite way sometimes. I think we'll have to just 0:22:14.920 --> 0:22:18.240