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Speaker 1: Welcome giants. I'm Joel Weber and I'm Eric. We're coming

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Speaker 1: up on our one year anniversary. It's crazy a year. Yeah,

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Speaker 1: I know. How are we going to celebrate a little

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Speaker 1: date night movie? Yeah? Yeah, eighties movie, some dinner maybe,

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Speaker 1: I don't know, who knows where it might go? Okay, whoa,

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Speaker 1: that got weird before we before we celebrate that though,

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Speaker 1: I feel like we've talked a lot about a lot

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Speaker 1: of corners of the et F world except for one. Yeah,

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Speaker 1: we are squeezing in the one thing we haven't talked

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Speaker 1: about just in the nick of time for this whole year.

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Speaker 1: And yeah, but and then we will have I think

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Speaker 1: officially officially covered everything at least once. And this is

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Speaker 1: market making? What is that so market making? You know?

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Speaker 1: I equate market making too sort of the oil, the

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Speaker 1: oil that keeps the whole machine running. Or to to

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Speaker 1: bring it to a much more broader references mcdonne donolds,

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Speaker 1: market makers are basically providing happy meals all day long.

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Speaker 1: They are just churning out customers. In fact, if you

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Speaker 1: look at the total amount of et F trading over

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Speaker 1: twenty five years since they came out, it's about two

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Speaker 1: hundred trillion dollars worth of trades. The average trade size

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Speaker 1: is about twenty dollars. That means there's been ten billion

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Speaker 1: at F trades, and that ten billion trades is countered

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Speaker 1: with maybe thirty forty thou sort of issues where there

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Speaker 1: was a problem with the trade. So you compare those

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Speaker 1: two numbers. That's why I think these market makers and

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Speaker 1: how they give everyone a happy meal. Everybody's happy, is

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Speaker 1: why I think ETFs are largely immune from the attacks,

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Speaker 1: the criticism and the worries. Is because the customers come

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Speaker 1: in get their happy meal. That like, that was fine

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Speaker 1: with me. But the happy meal actually was all about

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Speaker 1: the toy. Well, I don't know. My son loves the nuggets, Yeah,

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Speaker 1: he likes that now that Yeah, and my wife makes

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Speaker 1: them get the apples and she does not eat not

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Speaker 1: so happy. Joining us on this episode any Massa, who's

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Speaker 1: a reporter with the Bloomberg News investing team. She just

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Speaker 1: wrote a story called Raising the Stakes in the latest

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Speaker 1: issue of Bloomberg Markets. That's about one of the most

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Speaker 1: famous market makers, which we'll get into. And also Chris Hinstead,

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Speaker 1: who's the head of e t F sales at this

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Speaker 1: week on trillions, let's make a market Annie Chris, thanks

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Speaker 1: for joining us and raising the stakes. What's this story about.

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Speaker 1: The story is about a firm called Susquehanna and it's

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Speaker 1: been around in the e t F market making ecosystem

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Speaker 1: for a really long time. And um, well, the firm

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Speaker 1: was founded in seven so that was before you even

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Speaker 1: had ETFs in the U S. And they were founded

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Speaker 1: as an options trading firm and they're still huge in options,

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Speaker 1: but very early on in the timeline of e t

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Speaker 1: F they got into e t F trading before it

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Speaker 1: was even a thing. Yeah, exactly before it was cool.

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Speaker 1: And they've really survived as an dependent proprietary market maker

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Speaker 1: um closely held, closely held, yep, and very secretive for

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Speaker 1: for all these years. And they've really become one of

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Speaker 1: the biggest market makers of e t F s in

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Speaker 1: the U S and in the world. And let me

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Speaker 1: just jump in here, Susquehan A lot of people may

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Speaker 1: not have even heard of them. Jane Street is another

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Speaker 1: one you added up, and a good chunk of all

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Speaker 1: the e t F market making, which is you know,

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Speaker 1: matching buyers and sellers and whatnot, happens through companies that

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Speaker 1: are not large investment banks, some investment banks do it,

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Speaker 1: but I think that's interesting. Did you how did you

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Speaker 1: look into that? Yeah? I wanted to address that in

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Speaker 1: the story because investment banks, especially since the two Crisis,

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Speaker 1: have kind of stepped back from playing some of these

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Speaker 1: key roles in the E T F ecosystem. And since then, um,

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Speaker 1: there's been even more runway for these smaller prop firms

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Speaker 1: to get involved, and and they've stepped in to fill

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Speaker 1: the void in some way. And when you say what

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Speaker 1: does that mean, Um, they're they're trading with their own capital, right,

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Speaker 1: which is something that banks used to be able to

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Speaker 1: do and came no longer. And that's one of the

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Speaker 1: reasons that they fill this void so well. Exactly. So,

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Speaker 1: there's a certain game that people who work in market

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Speaker 1: making are very good at, and you learned a little

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Speaker 1: bit more about that. What's what's the game? Yes, it

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Speaker 1: is poker, And especially at Susquehanna, this has always been true. Um,

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Speaker 1: they love Texas Hold Him. They have an annual no

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Speaker 1: limit Texas Hold Him championship basically every year. Their traders

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Speaker 1: are trained in poker. And the idea is that they

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Speaker 1: wanted first of all, the founders all like met in

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Speaker 1: college at Sunny Binghamton, and they all like to play

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Speaker 1: cards together, but they quickly found out that they could

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Speaker 1: apply some of the same skills to financial markets. It

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Speaker 1: almost sounds like a dream where we're going to go

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Speaker 1: to college, play poker all the time and then say like, okay,

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Speaker 1: how do we take our poker skills and get a

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Speaker 1: job I know, and and found a that will go

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Speaker 1: on to be very successful, you know, make millions and

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Speaker 1: millions of dollars exactly. So, I mean it's it's pretty

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Speaker 1: remarkable and um. And so they've kept this program of

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Speaker 1: training their traders with poker and other kinds of games too.

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Speaker 1: They even have like they have a gaming blog like

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Speaker 1: on Strategy for everything from like scrabble to you know,

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Speaker 1: any kind of game that you can imagine. So they yeah,

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Speaker 1: they love gaming there, but especially poker. Why is poker

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Speaker 1: a significant game and how does it relate to E

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Speaker 1: T F S. So the idea is they they see

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Speaker 1: poker as a great game that allows you to kind

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Speaker 1: of practice making decisions in uncertain circumstances, probability based decisions

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Speaker 1: and uncertain circumstances, and that mindset applies to financial markets too,

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Speaker 1: because you know, obviously you don't have control over all

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Speaker 1: the other whims of the market, but you can make

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Speaker 1: these like probability based decisions in those kind of uncertain circumstances.

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Speaker 1: And Susquehanna particularly is the sort of original firm, and

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Speaker 1: it's kind of been like a farm a farm league

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Speaker 1: for superstars that have gone off and gone to other

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Speaker 1: firms in the in the market making business, right, it's

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Speaker 1: sort of like black Rock is like that. On the

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Speaker 1: issuere side. You go to a lot of e T

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Speaker 1: f firms, issuers, a lot of them are like, yeah,

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Speaker 1: I used to work at black Rock, and Susquehanna is

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Speaker 1: kind of like that for the market making side. Is

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Speaker 1: that right? Yeah. The way I was thinking about it

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Speaker 1: is it's almost like a diaspora of people who would

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Speaker 1: just have spread out from Susquehanna is their home base.

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Speaker 1: And by the way, people stay there for a long

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Speaker 1: time too typically and they really cut their teeth there

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Speaker 1: and then the people who have left have risen to

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Speaker 1: the top at other notable market making firms. And and

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Speaker 1: one of the ones that I mentioned in the story

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Speaker 1: is Jane Street, which is now a very I mean

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Speaker 1: a very fierce rival of Susquehanna's was founded by three

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Speaker 1: ex Susquehanna guys and another ex Susquehanna guys sitting right here,

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Speaker 1: those in there are not. My opening question for you,

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Speaker 1: Chris is how good at poker are you? I am not.

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Speaker 1: I am not necessarily a good poker player. How did

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Speaker 1: we get through the system? But I would sit in

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Speaker 1: that tournament every year. You know, every employee plays at

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Speaker 1: least one hand, and I would certainly try to compete

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Speaker 1: with the with the brightest of the firm and and

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Speaker 1: last as long as I could. But easier said than done.

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Speaker 1: So you started at Susquehanna, right, So I'm myself and

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Speaker 1: and others like me when we came into Susquehanna were

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Speaker 1: brought into the firm because they started to trade more

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Speaker 1: e t f s, which were different than their core

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Speaker 1: business prior to that, which was options trading. ETFs trade

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Speaker 1: more like a stock but their derivative in nature, and

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Speaker 1: so operators like myself, uh in the equity world would

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Speaker 1: come up and apply some of our equity trading background

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Speaker 1: to this derivatively backed equity like product on the American

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Speaker 1: Stock Exchange. And we were originally like kind of hired clerks,

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Speaker 1: hired guns in a sense to operate the display book,

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Speaker 1: which not many people know what that is, but it's

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Speaker 1: back when the trading was done on the floor of

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Speaker 1: the Stock Exchange, and like mid nineties, this is mid

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Speaker 1: and late nineties, um is when that sort of started

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Speaker 1: to to really pick up, especially in the late nineties

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Speaker 1: with the listing of the q q Q on the

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Speaker 1: American Stock Exchange in March and after that it was

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Speaker 1: pretty much hockey stick growth and activity, and we were

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Speaker 1: very lucky. I think a lot of the folks in

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Speaker 1: in in the role that I was in a lot

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Speaker 1: of my peers at Susquehanna and other firms like Spear

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Speaker 1: Leads and Kellogg which was later acquired by Goldman sachs Um,

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Speaker 1: and there's there's several firms from the American Stock Exchange

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Speaker 1: era that did these kind of et F and option

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Speaker 1: trading market making operations. They all needed operators and our

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Speaker 1: job was very unique and very different, and most of

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Speaker 1: us survived the post stock market, you know, the post

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Speaker 1: stock exchange trading world, and we're able to take what

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Speaker 1: we learned from working with with really bright people at

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Speaker 1: SIG and Spear leads and other places and apply that

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Speaker 1: in other places. Because the et F industry was growing

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Speaker 1: so fast, you know, as the market structure changed, there

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Speaker 1: was a there was a significant need for people who

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Speaker 1: understood the product and understood the math behind it. And

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Speaker 1: if you could go somewhere and apply that there was

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Speaker 1: there was a job for you. So Eric says, making

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Speaker 1: markets is like serving happy meals. How would you describe it? Um, Well,

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Speaker 1: it depends on it depends on where we're where we're cooking,

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Speaker 1: I guess, or where we're serving. So, you know, we

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Speaker 1: we always make it a point to differentiate between the

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Speaker 1: most widely held and most widely trafficked in products. So

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Speaker 1: you think s P Y E M, I w M.

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Speaker 1: There's the g l D. These are the most active

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Speaker 1: by notional volume, the most active by trading volume in

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Speaker 1: many cases UM, and the most widely held across the

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Speaker 1: you know, across the investment universe. Those products. The the

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Speaker 1: third the term market making is not is applicable to

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Speaker 1: those It's not something that a traditional market maker would

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Speaker 1: need to step in and say, on the absence of buyers,

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Speaker 1: I can be a seller, and the absence of sellers,

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Speaker 1: I can be a buyer or something along those. When

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Speaker 1: we flip that and the absence of sellers, I can sell,

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Speaker 1: and in the absence of buyers, I can buy. That's

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Speaker 1: traditionally what a market maker does. A market maker UH

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Speaker 1: injects liquidity into the market when it's needed and sits

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Speaker 1: on the sideline when it's not needed. When it's not

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Speaker 1: needed as when buyers and sellers meet naturally in the market.

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Speaker 1: The thing about e t S it's unique is that

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Speaker 1: there's what Eric, there's two thousand, two hundred thirty something

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Speaker 1: ets today in the US, so it's something right around there,

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Speaker 1: and that super liquid widely held or a high volume

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Speaker 1: and widely trafficked to an ETF list is really only

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Speaker 1: like a hundred sometimes two hundred names on any given day.

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Speaker 1: That means there's a better part of two thousand products

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Speaker 1: that don't trade buyer to seller now actually in the market.

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Speaker 1: In most cases, the further down that list you go,

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Speaker 1: the more like it is that any transaction in the market,

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Speaker 1: a buy or a cell is most likely more likely

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Speaker 1: than not going to transact with a market maker. Because

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Speaker 1: the odds of the four of us sitting at this

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Speaker 1: table as retail investors trading with one another in e

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Speaker 1: t F ranked number one thousand, whatever product that is

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Speaker 1: is so low that the quote you see on the

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Speaker 1: screen on whatever exchange, or on all the exchanges is

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Speaker 1: probably being provided by a market maker in anticipation of

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Speaker 1: potentially someone buying or selling that product. So let's just

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Speaker 1: try to visualize this. On any given day, people are

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Speaker 1: putting in orders for s P Y or I VV

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Speaker 1: or h y G, and that order is being matched

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Speaker 1: electronically on the exchange for the most part, and market

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Speaker 1: makers are not needed for those transactions. They you put it,

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Speaker 1: you can put in a market order, right, just give

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Speaker 1: me the this e t F at the best available

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Speaker 1: price for the top hundred then below that is when

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Speaker 1: you know the spreads are a little wider, meaning the

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Speaker 1: price that someone would it four versus sell it, right,

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Speaker 1: And that's when a market maker might step in and

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Speaker 1: make a market in those products. Yeah, I mean, I

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Speaker 1: wouldn't necessarily say that the spread widens out, although you

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Speaker 1: can definitely make the argument that the less active a

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Speaker 1: name is and the less um the less the people

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Speaker 1: are using it, that would it would seem to indicate

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Speaker 1: it would be a wider spread, but not always the case.

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Speaker 1: I think it's it's more it's the increased likelihood that

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Speaker 1: you're not going to be transacting with somebody natural, with

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Speaker 1: somebody who happens to be selling when you're buying or buying.

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Speaker 1: When you call those natural, right, yes, that's when the

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Speaker 1: buyer seller matches and you're you're not involved, and that's

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Speaker 1: just a natural don't need for us. In the real

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Speaker 1: estate market, imagine if you're in a grocery store and

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Speaker 1: the buyer of a house and the seller of a

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Speaker 1: house just meeting the broker's stand there saying what the

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Speaker 1: hell happened? What percent of the daily trading volume in

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Speaker 1: et F, which is about let's say fifty billion or something,

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Speaker 1: it's even it's I think it's been north of the

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Speaker 1: October we were seeing a hundred billion dollars. That was

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Speaker 1: volatile times they definitely, but on average, let's say fifty,

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Speaker 1: say what percentage of that is naturals versus market makers?

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Speaker 1: It's it's probably gonna be north um naturals in other words,

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Speaker 1: And and by the way, that does not mean that

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Speaker 1: in that natural all right, that's going to include some

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Speaker 1: high frequency traders, right, because they're not really market making,

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Speaker 1: they're just you know, they're they're trading, they have strategies

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Speaker 1: and algorithms. Other hedge funds and institutions might use these

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Speaker 1: products as hedges their naturals um even though it might

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Speaker 1: not be part of their investment philosophy, they're using the

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Speaker 1: product in a natural way. For for what we're talking

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Speaker 1: about today, market making is more in the traditional sense, Hey,

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Speaker 1: can I come to you and ask you for a

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Speaker 1: bid or an offer at any time of the day

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Speaker 1: and you'll make one for me. That's the more traditional sense,

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Speaker 1: and yet I would guess it's way under of the

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Speaker 1: of the volume on any given day. Is is that

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Speaker 1: at UM. Now there's something that's changed also in the

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Speaker 1: last couple of years, and there's there's new technologies that

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Speaker 1: these trading firms that we all our orders eventually at

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Speaker 1: at Schwab or TV or wherever, might wind up on

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Speaker 1: a trading desk somewhere if it if it meets some

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Speaker 1: metric and that's going to go out into what we

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Speaker 1: call r f Q. You know, Bloomberg has an r

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Speaker 1: f QUE technology that's request for quote, right, and that's

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Speaker 1: just where you go out there requests for quote and

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Speaker 1: it goes out and finds complete. It surveys all the

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Speaker 1: market makers to get the best price. Right, That's right,

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Speaker 1: and that's well the ones that are enabled, right is it?

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Speaker 1: So it's it's that you know, look, I mean there's

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Speaker 1: there's probably little less than ten market making firms that

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Speaker 1: are in in most of the RFQ wheels. So it's

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Speaker 1: not a wildly competitive market in terms of the numbers,

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Speaker 1: but it is incredibly competitive in terms of the margins um.

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Speaker 1: The pricing today and ets has never been better in

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Speaker 1: terms of the efficient you know, pricing that people are

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Speaker 1: getting in the secondary market. But when they go out

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Speaker 1: and do this, that's so if they if someone was

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Speaker 1: to transact in a block of an e t F

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Speaker 1: that trades once a week, that's probably going to be

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Speaker 1: a market maker providing liquidity um those volumes because their

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Speaker 1: blocks can can be a little bit higher, and that

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Speaker 1: might be where most of that market maker activity in

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Speaker 1: terms of notional volume exists. When I talk about that,

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Speaker 1: you know what doesn't go natural natural um is probably

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Speaker 1: in block liquidity. Those margins though, being as thin as

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Speaker 1: they are, brings it back to poker a little bit,

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Speaker 1: because the strategy at sus Quahana, at least it seems

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Speaker 1: is rather than trying to get these big one time payouts,

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Speaker 1: it's just like eke out the pennies and then the

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Speaker 1: pile of pennies happens to actually be worth a lot

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Speaker 1: of money. Yeah, I mean, I don't want to answer,

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Speaker 1: you know, for what what's it does you know for

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Speaker 1: their strategies. But I can tell you that what's great

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Speaker 1: about e t S and what the world needs to

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Speaker 1: continually be reminded of is these are transparent rappers. These

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Speaker 1: are transparent vehicles. They on a daily basis provide us

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Speaker 1: with what their holdings file, uh is, what what's in

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Speaker 1: their holdings file, and also what's needed for creation and redemption.

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Speaker 1: So most of the time, the products, the kind of

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Speaker 1: products that are within an et F whether it's whether

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Speaker 1: it's futures, whether it's swap, whether it's equities or bonds,

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Speaker 1: there's price discovery mechanisms for market makers to go and

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Speaker 1: figure out what the ingredients are worth. So Eric talks

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Speaker 1: about making a happy meal. Well, imagine if McDonald's had

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Speaker 1: two thousand different kinds of happy meals. But I work

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Speaker 1: in the kitchen and I have all the ingredients that

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Speaker 1: I need, and so when you order Happy Meal number

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Speaker 1: sevent thirty two. I simply pull up the recipe the

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Speaker 1: holdings file and I look and I say, well, how

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Speaker 1: much is it gonna cost me to buy these ingredients

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Speaker 1: and put it in the happy meal box and deliver

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Speaker 1: it back to you? So if I look and I

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Speaker 1: get my computer, it's all preloaded. Every night. We have

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Speaker 1: really sharp people that download that stuff. And I put

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Speaker 1: it up sevent whatever and it says, oh, okay, I'm

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Speaker 1: gonna need these thirty different ingredients and it's gonna cost

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Speaker 1: me five dollars to make this happy meal. Well that's

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Speaker 1: my break even price, right, So I'm probably going to

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Speaker 1: offer you the happy meal and a penny, right. And

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Speaker 1: this is just for example purposes only, but that's that's

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Speaker 1: the mentality behind market making expensive happy Yeah, well that

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Speaker 1: that toy better be illegal. That one had caviar and saffron,

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Speaker 1: so you know, um, and this is a really I

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Speaker 1: just want to stop here for a second because what

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Speaker 1: you're tapping into is something we've built a lot in

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Speaker 1: the terminal, which is implied liquidity, which is when you

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Speaker 1: talk about the top uh fifteen most traded ETFs account

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Speaker 1: for half of all volume. Then the other and fifty

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Speaker 1: or whatever are fighting over the rest, and a lot

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Speaker 1: of them get ignored because people are used to stocks

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Speaker 1: where the volume on the screen is all there is.

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Speaker 1: But with an E t F, you can punch up

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Speaker 1: the recipe. In other words, you can use the volume

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Speaker 1: of the underlying stocks. So example, if we pull up

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Speaker 1: something like the Power Shares S and p high quality

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Speaker 1: E t F, which isn't one of the more popular

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Speaker 1: quality factory t s, I think it might trade shares

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Speaker 1: a day, right, But the imply liquidity says fifty one

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Speaker 1: million shares could be created on the spot because that

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Speaker 1: recipe is liquid. Is that essentially the key to unlocking

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Speaker 1: the toolbox and using some of these lesser uh, lesser

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Speaker 1: traded products that might be a better fit because people

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Speaker 1: do tend to lean on these ones that came out

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Speaker 1: in the nineties that trade a lot. Yeah, I mean,

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Speaker 1: it's it is it. Just remember if you're a user

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Speaker 1: of E t S, you don't have to worry so

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Speaker 1: much about having the toolbox or the key. It's it's

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Speaker 1: more important for you to trust that you're broker and

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Speaker 1: the person you're working with for these executions in the investo.

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Speaker 1: You know, high quality uh, index that they have the

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Speaker 1: key in the toolbox. And basically what we're going to

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Speaker 1: be looking at is maybe we're not going to do

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Speaker 1: a forty million share trade. We'd love to do that, right,

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Speaker 1: but if someone goes in and says, hey, there's forty

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Speaker 1: thousand shares that trade on a daily basis and we

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Speaker 1: want to buy a million years, well, we're looking at

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Speaker 1: as a market maker, as a liquidity providers, we're looking at,

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Speaker 1: can I access the ingredients of that fund without moving

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Speaker 1: the market? Am I? Am I going to be able

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Speaker 1: to reasonably obtain all the ingredients that I need at

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Speaker 1: a reasonable or at least some sort of a confident

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Speaker 1: price level. Anything outside of that we would call in

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Speaker 1: the old world, we'd call that slippage. I thought I

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Speaker 1: could buy it for twenty five, and when I went

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Speaker 1: to actually buy all the ingredients, the price moved. I

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Speaker 1: actually impacted the market and it came out to five.

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Speaker 1: And I would say to my boss, look, I thought

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Speaker 1: I could buy the ingredients for twenty five. It wind

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Speaker 1: up crossing me five. And he'd say, well, where do

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Speaker 1: you sell the happy meal? And I'd say, one, I

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Speaker 1: guess what I lost? Right, That's where the betting and

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Speaker 1: gambling kind of mentality will be associated with market making.

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Speaker 1: So market makers generally don't make that mistake. Okay, they're

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Speaker 1: they're actually doing you know, pre trade analytics, and they

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Speaker 1: they have a very good high confidence in and how

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Speaker 1: much they can buy at at what price level, how

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Speaker 1: much they think they're going to move the market given

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Speaker 1: a certain size. Well, you love to talk about, imply liquidity.

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Speaker 1: We love to talk about if I was to do

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Speaker 1: a million shares of the ETF, it could be ten

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Speaker 1: thousand percent of a day's volume of the e t

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Speaker 1: F itself, but it can be one tenth of one

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Speaker 1: percent of the underlying portfolio. And that's what we want

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Speaker 1: people to remember. If you're a broker and your and

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Speaker 1: your trading partner has the tools and the toolbox to

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Speaker 1: to view that as one tenth of one percent of

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Speaker 1: the underlying liquidity, well then you should expect you know,

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Speaker 1: pricing that's reflective of that. What does it take to

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Speaker 1: be good at that? Because it strikes me that there

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Speaker 1: are a very few E t F market making firms

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Speaker 1: that that are actually really good. Like one thing that

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Speaker 1: I heard when I was reporting on that story is,

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Speaker 1: you know, the volume of E t F trading and

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Speaker 1: the number of E t F s has has just

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Speaker 1: gone up and up and up, and the number of

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Speaker 1: really strong et F market makers has stayed small. So

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Speaker 1: what does it take to be like a good E

399
00:20:58,840 --> 00:21:04,000
Speaker 1: t F marketing? I mean there are when you talk

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Speaker 1: about the spies and the w m s and the

401
00:21:05,880 --> 00:21:09,080
Speaker 1: q k c is, it's different. It's a different trading strategy,

402
00:21:09,119 --> 00:21:12,160
Speaker 1: it's a different sort of mentality. Again, you're not expecting

403
00:21:12,200 --> 00:21:14,640
Speaker 1: to be able to sell k k K and then

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Speaker 1: by the underlying as de one hundred names um at

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Speaker 1: a at a material discount to where you sold the

406
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Speaker 1: t F. That just doesn't happen. Um it's so efficient

407
00:21:23,680 --> 00:21:27,800
Speaker 1: those products. But when you the competitive field that we're

408
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Speaker 1: talking about is what does it take to be competitive

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Speaker 1: in that investco product? What does it take for someone

410
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Speaker 1: to be able to compete with five other market makers

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Speaker 1: and provide the best price at ridiculously low margins. So

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Speaker 1: you know, you're talking about fractions of a penny in

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Speaker 1: many cases, depending on the size of the trade, it

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Speaker 1: takes a lot. Technology is a big part of it,

415
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Speaker 1: and data data within that technology is also a big

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Speaker 1: part of it. So you've got to have access to

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Speaker 1: the to the information of the E T s and

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00:21:57,240 --> 00:22:00,000
Speaker 1: there's two thousand two ts, so it's a lot of information,

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Speaker 1: and you're pulling in every night. You've got to be

420
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Speaker 1: able to apply market data to all of the underlying instruments.

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Speaker 1: And there's you know, gosh knows how many different equities

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Speaker 1: in the E T F universe, and over five thousand

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Speaker 1: and how many different bonds, probably well over ten thousand.

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Speaker 1: I mean, there's so much data, and it has to

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Speaker 1: be constantly updated, and it has to be constantly monitored

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Speaker 1: and maintained. And when you get it all right in

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Speaker 1: a perfect world, right, you've got all the data, and

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Speaker 1: you've got all the recipes, and your computers are humming,

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Speaker 1: and everyone's happy, and everything looks great, all the lights

430
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Speaker 1: are green. It's pretty easy. Actually. You look it up

431
00:22:32,480 --> 00:22:34,359
Speaker 1: and someone pulls up a ticker and they say, can

432
00:22:34,400 --> 00:22:35,720
Speaker 1: I get a price on it? You pull it up

433
00:22:35,760 --> 00:22:38,920
Speaker 1: and you've got your highly confident pricing that you can

434
00:22:39,000 --> 00:22:41,040
Speaker 1: you can provide to your clients and they love your

435
00:22:41,040 --> 00:22:43,960
Speaker 1: pricing and they trade with you. But what happens when

436
00:22:44,960 --> 00:22:47,320
Speaker 1: one of the data feeds goes down? What happens when

437
00:22:48,000 --> 00:22:51,000
Speaker 1: there's a corporate action that didn't get picked up by

438
00:22:51,000 --> 00:22:53,399
Speaker 1: the issue where but did get picked up by the distributor.

439
00:22:53,480 --> 00:22:57,120
Speaker 1: And there's a difference in information because with I don't

440
00:22:57,160 --> 00:23:00,600
Speaker 1: know how many a hundred unique issuers and kashners, how

441
00:23:00,600 --> 00:23:03,919
Speaker 1: many different custodio banks and distributors, We're getting information from

442
00:23:03,960 --> 00:23:07,680
Speaker 1: a lot of different unique sources every single day. Normalizing

443
00:23:07,720 --> 00:23:12,320
Speaker 1: it is a massive task, right, and so it requires investment,

444
00:23:12,560 --> 00:23:15,840
Speaker 1: It requires confidence. It requires really really smart people, you know,

445
00:23:15,840 --> 00:23:18,080
Speaker 1: who know how to code UM so that at any

446
00:23:18,080 --> 00:23:20,240
Speaker 1: given time, when the light goes from green to red

447
00:23:20,480 --> 00:23:23,199
Speaker 1: and says, look here, something's amiss, you can get to

448
00:23:23,240 --> 00:23:27,200
Speaker 1: that very quickly, you know, adjust your formula, adjust whatever

449
00:23:27,200 --> 00:23:30,920
Speaker 1: input is questionable, and get back to business. There really

450
00:23:31,080 --> 00:23:35,119
Speaker 1: a light that goes from green to red. I can

451
00:23:35,640 --> 00:23:42,040
Speaker 1: either confirm light yellow light. I want to ask about

452
00:23:41,880 --> 00:23:44,600
Speaker 1: s PHQ that's that high quality, doesn't trade a lot,

453
00:23:45,160 --> 00:23:47,680
Speaker 1: say an order comes in for this. I've always found

454
00:23:47,720 --> 00:23:49,560
Speaker 1: I found this kind of fascinating when I learned it.

455
00:23:50,280 --> 00:23:53,320
Speaker 1: When when it's not a natural and somebody wants s

456
00:23:53,320 --> 00:23:57,280
Speaker 1: PHQ UM, you cannot find a natural by order or

457
00:23:57,320 --> 00:23:59,560
Speaker 1: to sell order to buy it, right, So you've got

458
00:23:59,640 --> 00:24:02,600
Speaker 1: to look at the recipe, you give them the SPHQ

459
00:24:03,280 --> 00:24:06,800
Speaker 1: immediately for a certain price. Then what happens, Right, you

460
00:24:06,800 --> 00:24:09,119
Speaker 1: don't actually have s PHQ yet you have to go

461
00:24:09,680 --> 00:24:12,800
Speaker 1: take the raw materials the recipe handed into power shares

462
00:24:13,320 --> 00:24:16,280
Speaker 1: or the a P and then get SPHQ to make yourself.

463
00:24:16,280 --> 00:24:18,880
Speaker 1: Even walk us through that that process and how long

464
00:24:18,920 --> 00:24:20,679
Speaker 1: it takes. So it's important for everyone to realize that

465
00:24:20,680 --> 00:24:24,440
Speaker 1: you're you're trading counterparties and easy tfs, especially SPHQ, are

466
00:24:24,520 --> 00:24:28,359
Speaker 1: most likely licensed to create or manufacturer shares when they're needed,

467
00:24:29,440 --> 00:24:31,760
Speaker 1: and issuers don't like to hear this, but they're also

468
00:24:31,840 --> 00:24:35,960
Speaker 1: licensed to destroy or redeem okay shares when there's too

469
00:24:36,000 --> 00:24:40,280
Speaker 1: much supply. The ability to create this is the magic

470
00:24:40,400 --> 00:24:43,760
Speaker 1: of the e t F arbitrazed. You do have ecosystem,

471
00:24:43,800 --> 00:24:47,360
Speaker 1: it's called being an authorized participant um whether you're directly

472
00:24:47,359 --> 00:24:50,240
Speaker 1: an authorized participant or indirectly through your clearing bank is

473
00:24:50,320 --> 00:24:53,440
Speaker 1: it's important. But if you have the ability to manufacture

474
00:24:53,520 --> 00:24:56,399
Speaker 1: or destroy, create or redeem et F shares when you

475
00:24:56,480 --> 00:24:58,639
Speaker 1: come in and buy s pH Q from us, and

476
00:24:58,680 --> 00:25:01,119
Speaker 1: we don't have shares and is no borrow But by

477
00:25:01,119 --> 00:25:03,280
Speaker 1: the way, most of the two thousand two change e

478
00:25:03,359 --> 00:25:05,600
Speaker 1: T s. There is no borrow on them, right, So

479
00:25:05,800 --> 00:25:07,840
Speaker 1: most of the time, if you're buying these and in

480
00:25:08,240 --> 00:25:11,400
Speaker 1: a material way, a market maker is going to probably

481
00:25:11,400 --> 00:25:14,200
Speaker 1: have to create shares to settle that trade. So in

482
00:25:14,359 --> 00:25:16,040
Speaker 1: s p h Q, you come in, you buy a

483
00:25:16,040 --> 00:25:18,760
Speaker 1: million shares, and I'm going to turn around by the

484
00:25:18,920 --> 00:25:22,120
Speaker 1: ingredients of the fund. Now, I'm going to take those

485
00:25:22,240 --> 00:25:25,680
Speaker 1: ingredients deliver them to power Shares. Power Shares is going

486
00:25:25,720 --> 00:25:28,080
Speaker 1: to say thank you very much in return for those securities,

487
00:25:28,119 --> 00:25:29,919
Speaker 1: which they're going to put into the et F Trust,

488
00:25:30,440 --> 00:25:33,879
Speaker 1: which is their own unique et F trust protected and

489
00:25:33,880 --> 00:25:36,600
Speaker 1: they're gonna give me back a million e t F

490
00:25:36,680 --> 00:25:38,640
Speaker 1: shares of s pH Q, which I'm going to deliver

491
00:25:38,760 --> 00:25:40,879
Speaker 1: right back to the client. So the round trip is

492
00:25:41,160 --> 00:25:43,080
Speaker 1: what are the ingredients. I go out and get them,

493
00:25:43,280 --> 00:25:44,840
Speaker 1: I put them into the happy meal. You give the

494
00:25:44,840 --> 00:25:46,879
Speaker 1: happy meal to the client. This is happening in second

495
00:25:46,960 --> 00:25:50,320
Speaker 1: like fractions of the second. I mean the process of

496
00:25:50,359 --> 00:25:53,600
Speaker 1: doing the trade with the client and buying the annoying portfolio. Yes,

497
00:25:53,640 --> 00:25:55,240
Speaker 1: it could be a fraction of a second. There may

498
00:25:55,240 --> 00:25:57,720
Speaker 1: be times where we choose to go out and buy

499
00:25:57,720 --> 00:25:59,720
Speaker 1: the ingredients of an et F over a longer period

500
00:25:59,720 --> 00:26:01,640
Speaker 1: of time. When you look at the high old bond

501
00:26:01,680 --> 00:26:04,680
Speaker 1: market or investment grade bonds, or maybe some frontier markets,

502
00:26:04,920 --> 00:26:07,919
Speaker 1: it might take longer to go out and buy the

503
00:26:07,960 --> 00:26:10,280
Speaker 1: actual underlying securities. You might want to be a little

504
00:26:10,280 --> 00:26:12,479
Speaker 1: more thoughtful and how you go about getting it. But

505
00:26:12,480 --> 00:26:15,159
Speaker 1: but essentially, yes, you you trade the e t F

506
00:26:15,600 --> 00:26:18,320
Speaker 1: and then you get the ingredients and then you do

507
00:26:18,359 --> 00:26:23,600
Speaker 1: the creative. So because market making is so secretive, it

508
00:26:23,680 --> 00:26:25,399
Speaker 1: leads me to it leads me to believe that it's

509
00:26:25,480 --> 00:26:29,200
Speaker 1: highly lucrative as well. How lucrative actually is it. I don't.

510
00:26:29,280 --> 00:26:32,640
Speaker 1: I don't think it's secretive. I don't. I anyone can

511
00:26:32,680 --> 00:26:35,639
Speaker 1: go to an issuer's website. A great thing also about

512
00:26:35,720 --> 00:26:37,439
Speaker 1: the U S. E t F marketplace is that to

513
00:26:37,560 --> 00:26:40,240
Speaker 1: be listed on an exchange in the United States with

514
00:26:40,359 --> 00:26:41,800
Speaker 1: it for an e t F, you need to have

515
00:26:41,840 --> 00:26:44,600
Speaker 1: a website. You need to have information available for people

516
00:26:44,600 --> 00:26:46,520
Speaker 1: to go and look. If your website is not available,

517
00:26:46,520 --> 00:26:49,240
Speaker 1: you're not in compliance. UM. On the websites, you'll find

518
00:26:49,240 --> 00:26:52,520
Speaker 1: a holdings file, So anyone can look at the holdings file,

519
00:26:52,680 --> 00:26:54,680
Speaker 1: figure out what's in it, figure out what the weights

520
00:26:54,720 --> 00:26:57,840
Speaker 1: are UM or not even figure it out, just download

521
00:26:57,840 --> 00:27:01,080
Speaker 1: the data and and then figure out what it costs

522
00:27:01,080 --> 00:27:04,400
Speaker 1: to assemble that portfolio, and and and in turn what's

523
00:27:04,400 --> 00:27:08,280
Speaker 1: a fair price for the ETF. That is the secret sauce.

524
00:27:08,320 --> 00:27:13,520
Speaker 1: That's not so secret, right, It never is the competitive edges,

525
00:27:14,000 --> 00:27:16,800
Speaker 1: but it's the hisvenience factor, because you could you could

526
00:27:16,880 --> 00:27:19,080
Speaker 1: basically copy an et F every day and not have

527
00:27:19,119 --> 00:27:22,040
Speaker 1: to pay the issue with the expense ratio or do

528
00:27:22,119 --> 00:27:23,760
Speaker 1: the trade and you have to manage it too though,

529
00:27:24,040 --> 00:27:27,159
Speaker 1: you know, and and look, there's I always like to

530
00:27:27,200 --> 00:27:29,600
Speaker 1: sit sit down with clients, sit down with users, explain

531
00:27:29,640 --> 00:27:31,680
Speaker 1: how it works, show them how to do it. They

532
00:27:31,680 --> 00:27:33,920
Speaker 1: get that moment of clarity, they get that moment, that

533
00:27:34,160 --> 00:27:37,119
Speaker 1: eureka moment like I get it. And then they also

534
00:27:37,160 --> 00:27:39,280
Speaker 1: at the same time realize that's a lot of work.

535
00:27:39,400 --> 00:27:41,600
Speaker 1: I don't want to do that and what they really

536
00:27:41,640 --> 00:27:43,399
Speaker 1: wanted can you do? Do you have a system that

537
00:27:43,440 --> 00:27:45,359
Speaker 1: does that a lot faster and a lot more efficiently.

538
00:27:45,440 --> 00:27:48,240
Speaker 1: And and the you know, the ten marketing firms, you

539
00:27:48,240 --> 00:27:50,199
Speaker 1: you know, you allude to where this the ETF industry

540
00:27:50,200 --> 00:27:53,159
Speaker 1: has grown in the marketing communities has just gotten faster,

541
00:27:53,280 --> 00:27:57,120
Speaker 1: not necessarily bigger. That's ultimately the answer. So, so, while

542
00:27:57,119 --> 00:28:01,000
Speaker 1: the sauce is not so secret, the way that people

543
00:28:01,119 --> 00:28:04,800
Speaker 1: cook things is a little bit proprietary, right. How it

544
00:28:04,840 --> 00:28:07,480
Speaker 1: evolved though, Like where you have some market makers, Like

545
00:28:07,720 --> 00:28:10,399
Speaker 1: if you're just making markets and et fs on exchanges, like,

546
00:28:10,440 --> 00:28:13,160
Speaker 1: you don't really have to tell anybody anything about what

547
00:28:13,200 --> 00:28:14,679
Speaker 1: you're doing or how you're doing it. But if you

548
00:28:14,680 --> 00:28:16,720
Speaker 1: have clients who are coming directly to you and trying

549
00:28:16,720 --> 00:28:18,560
Speaker 1: to do E T F trades, like, then you kind

550
00:28:18,600 --> 00:28:21,160
Speaker 1: of have to open yourself up a little bit more, right, Yeah,

551
00:28:21,200 --> 00:28:25,000
Speaker 1: I mean we me personally, I've I've sort of migrated

552
00:28:25,040 --> 00:28:27,680
Speaker 1: from the trading world into more of an educational, client

553
00:28:27,720 --> 00:28:30,400
Speaker 1: facing world. I love when they ask questions about how

554
00:28:30,440 --> 00:28:32,199
Speaker 1: and why we price things the way we do. I

555
00:28:32,280 --> 00:28:34,159
Speaker 1: love to tell them what we're thinking. I love to

556
00:28:34,200 --> 00:28:35,960
Speaker 1: tell them how much we think we're going to need

557
00:28:36,000 --> 00:28:38,560
Speaker 1: to make or how much we're going to have to

558
00:28:38,640 --> 00:28:41,240
Speaker 1: price things to make it worth our while to do

559
00:28:41,280 --> 00:28:43,840
Speaker 1: the trade or to get into business. Unfortunately, not a

560
00:28:43,840 --> 00:28:46,200
Speaker 1: lot of people ask those questions all the time. There

561
00:28:46,200 --> 00:28:47,720
Speaker 1: are people who come in and just trust you know

562
00:28:47,760 --> 00:28:48,920
Speaker 1: how to do it, and you get the order and

563
00:28:48,920 --> 00:28:51,640
Speaker 1: they move on. If you're always giving them good fair pricing,

564
00:28:51,880 --> 00:28:53,600
Speaker 1: and you continue to get that business. They may not

565
00:28:53,680 --> 00:28:55,760
Speaker 1: ask every time how you came up with the price,

566
00:28:56,160 --> 00:28:59,360
Speaker 1: But I do enjoy when people engage because it gives me,

567
00:28:59,760 --> 00:29:02,720
Speaker 1: it is me hope that because they're asking questions, they're

568
00:29:02,720 --> 00:29:04,760
Speaker 1: probably looking at other products. A lot of people will

569
00:29:04,800 --> 00:29:07,400
Speaker 1: only look at those top fifty, those top hundred products

570
00:29:07,440 --> 00:29:10,040
Speaker 1: because they're easy to trade, but they don't really add

571
00:29:10,080 --> 00:29:12,680
Speaker 1: a whole lot of value in terms of an investment mandate. Right.

572
00:29:12,720 --> 00:29:15,160
Speaker 1: And so when they when they come up with SPHQ

573
00:29:15,320 --> 00:29:16,520
Speaker 1: and they come in and they say, hey, can you

574
00:29:16,560 --> 00:29:18,560
Speaker 1: tell me about this product, I want to get on

575
00:29:18,560 --> 00:29:19,800
Speaker 1: the phone and I want to spend an hour with him.

576
00:29:19,920 --> 00:29:21,920
Speaker 1: Say this is what's cool about this product. This is

577
00:29:21,920 --> 00:29:24,160
Speaker 1: why power Shares loves it, this is why we can

578
00:29:24,200 --> 00:29:26,160
Speaker 1: make a market in it, and others can probably too.

579
00:29:26,320 --> 00:29:29,320
Speaker 1: This is what we would consider a fair level. You

580
00:29:29,320 --> 00:29:33,040
Speaker 1: know for this, you know, transacting within these bands, you

581
00:29:33,080 --> 00:29:36,200
Speaker 1: can never lose to asking questions and and learning more.

582
00:29:36,280 --> 00:29:38,400
Speaker 1: I think it gives you the confidence to take that

583
00:29:38,480 --> 00:29:41,040
Speaker 1: next step and buy that product you've never heard of,

584
00:29:41,080 --> 00:29:42,920
Speaker 1: and guess what, you know, you're going to be the

585
00:29:43,000 --> 00:29:44,640
Speaker 1: cool kid on the block who owns the product no

586
00:29:44,640 --> 00:29:48,479
Speaker 1: one else does and based on lucrative I will address

587
00:29:48,520 --> 00:29:50,160
Speaker 1: that a little bit. We've looked into the revenue of

588
00:29:50,640 --> 00:29:53,360
Speaker 1: the e t F world. We track it. Um issuers

589
00:29:53,400 --> 00:29:56,160
Speaker 1: make about seven billion a year. That is not much.

590
00:29:56,240 --> 00:29:58,920
Speaker 1: I mean, that's on the issue side. Active mutual funds

591
00:29:58,960 --> 00:30:01,320
Speaker 1: make you know, or five times that amount on the

592
00:30:01,320 --> 00:30:04,240
Speaker 1: same amount of assets. Market makers make about half of

593
00:30:04,280 --> 00:30:06,520
Speaker 1: the seven billion. We've calculated about three and a half billion,

594
00:30:06,920 --> 00:30:10,360
Speaker 1: and that's on an average spread of point, so we're

595
00:30:10,360 --> 00:30:14,920
Speaker 1: talking razor thin margins. It's actually not that lucrative. Most

596
00:30:14,920 --> 00:30:17,240
Speaker 1: of the e t F industry has to really live

597
00:30:17,360 --> 00:30:20,280
Speaker 1: um frugally and be scrappy. It's not like the old

598
00:30:20,280 --> 00:30:23,040
Speaker 1: Wall Street I find that's why it's so popular, because

599
00:30:23,040 --> 00:30:25,360
Speaker 1: everybody comes in it feels like they've got a good deal. Okay,

600
00:30:25,480 --> 00:30:28,560
Speaker 1: so I have one more question. What's your favorite ticker?

601
00:30:29,280 --> 00:30:34,840
Speaker 1: What's my favorite ticker? Oh? My goodness, oh man, Well,

602
00:30:34,880 --> 00:30:38,040
Speaker 1: I gotta say. I mean two eighteen um, I mean,

603
00:30:38,240 --> 00:30:40,720
Speaker 1: there's a there's a a t F called r VRS

604
00:30:40,840 --> 00:30:45,040
Speaker 1: reverse and uh I actually I just think it's a

605
00:30:45,080 --> 00:30:47,680
Speaker 1: really neat thing. There's what's in that It's well there's

606
00:30:47,760 --> 00:30:52,280
Speaker 1: SMP market spy, and then there's RSP which I loved

607
00:30:52,320 --> 00:30:55,120
Speaker 1: for a long long time. I love equal weight uh

608
00:30:55,240 --> 00:30:58,440
Speaker 1: SMP five hundered I personally, you know, personally from my account,

609
00:30:58,440 --> 00:31:00,160
Speaker 1: I'm like, I like egle waight better than market cap.

610
00:31:00,200 --> 00:31:04,440
Speaker 1: Wait and then, um, these folks invented r VRS and

611
00:31:04,720 --> 00:31:09,000
Speaker 1: it's reverse cap weight and as a triangle, I'm drawing

612
00:31:09,000 --> 00:31:12,240
Speaker 1: a triangle on a pocket is the lowest waiting? Um yeah,

613
00:31:13,000 --> 00:31:16,200
Speaker 1: I like the idea. I just and a ticker, and

614
00:31:16,240 --> 00:31:20,360
Speaker 1: a ticker serves it well. RVRS great. Yeah. I think

615
00:31:20,360 --> 00:31:22,720
Speaker 1: they used the Juno card, the reverse Uno card to

616
00:31:22,800 --> 00:31:25,400
Speaker 1: market the product. It was pretty good. Although they they

617
00:31:25,440 --> 00:31:27,520
Speaker 1: have beer glasses, but they I told him that the

618
00:31:27,560 --> 00:31:29,720
Speaker 1: top should be small and it should wide. Now you're

619
00:31:29,720 --> 00:31:31,400
Speaker 1: gonna get in a ton of trouble with that question,

620
00:31:31,400 --> 00:31:33,240
Speaker 1: because like that was on the spot. I didn't know

621
00:31:33,280 --> 00:31:36,240
Speaker 1: it was coming. And and I'm sure they're gonna be psyched.

622
00:31:36,960 --> 00:31:39,280
Speaker 1: But you know, I'll get one really great phone call

623
00:31:39,360 --> 00:31:41,640
Speaker 1: from that and it'll be like thanks so much saying that,

624
00:31:41,720 --> 00:31:45,720
Speaker 1: And I'm gonna get like, why didn't imagine mine? There's

625
00:31:45,880 --> 00:31:48,520
Speaker 1: so many there's so many good I want to say

626
00:31:48,640 --> 00:31:53,840
Speaker 1: I didn't forget about you. Happy anniversary, Happy anniversary, Jelf, Chris, Annie,

627
00:31:53,880 --> 00:32:00,400
Speaker 1: thanks for joining Central, Thanks for let's in to us

628
00:32:00,400 --> 00:32:02,720
Speaker 1: on Trillions until next time. You can find us on

629
00:32:02,720 --> 00:32:07,400
Speaker 1: the Bloomberg terminal, Bloomberg dot com, Apple Podcast, Spotify, and

630
00:32:07,480 --> 00:32:10,240
Speaker 1: basically anywhere else you want to listen. We'd love to

631
00:32:10,240 --> 00:32:13,720
Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show,

632
00:32:14,080 --> 00:32:19,719
Speaker 1: he's at Eric call Tunis, and he's at Antonia b Massa.

633
00:32:20,480 --> 00:32:24,200
Speaker 1: Trillions is produced by Magnus Hendrickson. Francesca lead is the

634
00:32:24,200 --> 00:32:26,000
Speaker 1: head of Bloomberg Podcast, but