Speaker 1: Welcome giants. I'm Joel Weber and I'm Eric. We're coming
Speaker 1: up on our one year anniversary. It's crazy a year. Yeah,
Speaker 1: I know. How are we going to celebrate a little
Speaker 1: date night movie? Yeah? Yeah, eighties movie, some dinner maybe,
Speaker 1: I don't know, who knows where it might go? Okay, whoa,
Speaker 1: that got weird before we before we celebrate that though,
Speaker 1: I feel like we've talked a lot about a lot
Speaker 1: of corners of the et F world except for one. Yeah,
Speaker 1: we are squeezing in the one thing we haven't talked
Speaker 1: about just in the nick of time for this whole year.
Speaker 1: And yeah, but and then we will have I think
Speaker 1: officially officially covered everything at least once. And this is
Speaker 1: market making? What is that so market making? You know?
Speaker 1: I equate market making too sort of the oil, the
Speaker 1: oil that keeps the whole machine running. Or to to
Speaker 1: bring it to a much more broader references mcdonne donolds,
Speaker 1: market makers are basically providing happy meals all day long.
Speaker 1: They are just churning out customers. In fact, if you
Speaker 1: look at the total amount of et F trading over
Speaker 1: twenty five years since they came out, it's about two
Speaker 1: hundred trillion dollars worth of trades. The average trade size
Speaker 1: is about twenty dollars. That means there's been ten billion
Speaker 1: at F trades, and that ten billion trades is countered
Speaker 1: with maybe thirty forty thou sort of issues where there
Speaker 1: was a problem with the trade. So you compare those
Speaker 1: two numbers. That's why I think these market makers and
Speaker 1: how they give everyone a happy meal. Everybody's happy, is
Speaker 1: why I think ETFs are largely immune from the attacks,
Speaker 1: the criticism and the worries. Is because the customers come
Speaker 1: in get their happy meal. That like, that was fine
Speaker 1: with me. But the happy meal actually was all about
Speaker 1: the toy. Well, I don't know. My son loves the nuggets, Yeah,
Speaker 1: he likes that now that Yeah, and my wife makes
Speaker 1: them get the apples and she does not eat not
Speaker 1: so happy. Joining us on this episode any Massa, who's
Speaker 1: a reporter with the Bloomberg News investing team. She just
Speaker 1: wrote a story called Raising the Stakes in the latest
Speaker 1: issue of Bloomberg Markets. That's about one of the most
Speaker 1: famous market makers, which we'll get into. And also Chris Hinstead,
Speaker 1: who's the head of e t F sales at this
Speaker 1: week on trillions, let's make a market Annie Chris, thanks
Speaker 1: for joining us and raising the stakes. What's this story about.
Speaker 1: The story is about a firm called Susquehanna and it's
Speaker 1: been around in the e t F market making ecosystem
Speaker 1: for a really long time. And um, well, the firm
Speaker 1: was founded in seven so that was before you even
Speaker 1: had ETFs in the U S. And they were founded
Speaker 1: as an options trading firm and they're still huge in options,
Speaker 1: but very early on in the timeline of e t
Speaker 1: F they got into e t F trading before it
Speaker 1: was even a thing. Yeah, exactly before it was cool.
Speaker 1: And they've really survived as an dependent proprietary market maker
Speaker 1: um closely held, closely held, yep, and very secretive for
Speaker 1: for all these years. And they've really become one of
Speaker 1: the biggest market makers of e t F s in
Speaker 1: the U S and in the world. And let me
Speaker 1: just jump in here, Susquehan A lot of people may
Speaker 1: not have even heard of them. Jane Street is another
Speaker 1: one you added up, and a good chunk of all
Speaker 1: the e t F market making, which is you know,
Speaker 1: matching buyers and sellers and whatnot, happens through companies that
Speaker 1: are not large investment banks, some investment banks do it,
Speaker 1: but I think that's interesting. Did you how did you
Speaker 1: look into that? Yeah? I wanted to address that in
Speaker 1: the story because investment banks, especially since the two Crisis,
Speaker 1: have kind of stepped back from playing some of these
Speaker 1: key roles in the E T F ecosystem. And since then, um,
Speaker 1: there's been even more runway for these smaller prop firms
Speaker 1: to get involved, and and they've stepped in to fill
Speaker 1: the void in some way. And when you say what
Speaker 1: does that mean, Um, they're they're trading with their own capital, right,
Speaker 1: which is something that banks used to be able to
Speaker 1: do and came no longer. And that's one of the
Speaker 1: reasons that they fill this void so well. Exactly. So,
Speaker 1: there's a certain game that people who work in market
Speaker 1: making are very good at, and you learned a little
Speaker 1: bit more about that. What's what's the game? Yes, it
Speaker 1: is poker, And especially at Susquehanna, this has always been true. Um,
Speaker 1: they love Texas Hold Him. They have an annual no
Speaker 1: limit Texas Hold Him championship basically every year. Their traders
Speaker 1: are trained in poker. And the idea is that they
Speaker 1: wanted first of all, the founders all like met in
Speaker 1: college at Sunny Binghamton, and they all like to play
Speaker 1: cards together, but they quickly found out that they could
Speaker 1: apply some of the same skills to financial markets. It
Speaker 1: almost sounds like a dream where we're going to go
Speaker 1: to college, play poker all the time and then say like, okay,
Speaker 1: how do we take our poker skills and get a
Speaker 1: job I know, and and found a that will go
Speaker 1: on to be very successful, you know, make millions and
Speaker 1: millions of dollars exactly. So, I mean it's it's pretty
Speaker 1: remarkable and um. And so they've kept this program of
Speaker 1: training their traders with poker and other kinds of games too.
Speaker 1: They even have like they have a gaming blog like
Speaker 1: on Strategy for everything from like scrabble to you know,
Speaker 1: any kind of game that you can imagine. So they yeah,
Speaker 1: they love gaming there, but especially poker. Why is poker
Speaker 1: a significant game and how does it relate to E
Speaker 1: T F S. So the idea is they they see
Speaker 1: poker as a great game that allows you to kind
Speaker 1: of practice making decisions in uncertain circumstances, probability based decisions
Speaker 1: and uncertain circumstances, and that mindset applies to financial markets too,
Speaker 1: because you know, obviously you don't have control over all
Speaker 1: the other whims of the market, but you can make
Speaker 1: these like probability based decisions in those kind of uncertain circumstances.
Speaker 1: And Susquehanna particularly is the sort of original firm, and
Speaker 1: it's kind of been like a farm a farm league
Speaker 1: for superstars that have gone off and gone to other
Speaker 1: firms in the in the market making business, right, it's
Speaker 1: sort of like black Rock is like that. On the
Speaker 1: issuere side. You go to a lot of e T
Speaker 1: f firms, issuers, a lot of them are like, yeah,
Speaker 1: I used to work at black Rock, and Susquehanna is
Speaker 1: kind of like that for the market making side. Is
Speaker 1: that right? Yeah. The way I was thinking about it
Speaker 1: is it's almost like a diaspora of people who would
Speaker 1: just have spread out from Susquehanna is their home base.
Speaker 1: And by the way, people stay there for a long
Speaker 1: time too typically and they really cut their teeth there
Speaker 1: and then the people who have left have risen to
Speaker 1: the top at other notable market making firms. And and
Speaker 1: one of the ones that I mentioned in the story
Speaker 1: is Jane Street, which is now a very I mean
Speaker 1: a very fierce rival of Susquehanna's was founded by three
Speaker 1: ex Susquehanna guys and another ex Susquehanna guys sitting right here,
Speaker 1: those in there are not. My opening question for you,
Speaker 1: Chris is how good at poker are you? I am not.
Speaker 1: I am not necessarily a good poker player. How did
Speaker 1: we get through the system? But I would sit in
Speaker 1: that tournament every year. You know, every employee plays at
Speaker 1: least one hand, and I would certainly try to compete
Speaker 1: with the with the brightest of the firm and and
Speaker 1: last as long as I could. But easier said than done.
Speaker 1: So you started at Susquehanna, right, So I'm myself and
Speaker 1: and others like me when we came into Susquehanna were
Speaker 1: brought into the firm because they started to trade more
Speaker 1: e t f s, which were different than their core
Speaker 1: business prior to that, which was options trading. ETFs trade
Speaker 1: more like a stock but their derivative in nature, and
Speaker 1: so operators like myself, uh in the equity world would
Speaker 1: come up and apply some of our equity trading background
Speaker 1: to this derivatively backed equity like product on the American
Speaker 1: Stock Exchange. And we were originally like kind of hired clerks,
Speaker 1: hired guns in a sense to operate the display book,
Speaker 1: which not many people know what that is, but it's
Speaker 1: back when the trading was done on the floor of
Speaker 1: the Stock Exchange, and like mid nineties, this is mid
Speaker 1: and late nineties, um is when that sort of started
Speaker 1: to to really pick up, especially in the late nineties
Speaker 1: with the listing of the q q Q on the
Speaker 1: American Stock Exchange in March and after that it was
Speaker 1: pretty much hockey stick growth and activity, and we were
Speaker 1: very lucky. I think a lot of the folks in
Speaker 1: in in the role that I was in a lot
Speaker 1: of my peers at Susquehanna and other firms like Spear
Speaker 1: Leads and Kellogg which was later acquired by Goldman sachs Um,
Speaker 1: and there's there's several firms from the American Stock Exchange
Speaker 1: era that did these kind of et F and option
Speaker 1: trading market making operations. They all needed operators and our
Speaker 1: job was very unique and very different, and most of
Speaker 1: us survived the post stock market, you know, the post
Speaker 1: stock exchange trading world, and we're able to take what
Speaker 1: we learned from working with with really bright people at
Speaker 1: SIG and Spear leads and other places and apply that
Speaker 1: in other places. Because the et F industry was growing
Speaker 1: so fast, you know, as the market structure changed, there
Speaker 1: was a there was a significant need for people who
Speaker 1: understood the product and understood the math behind it. And
Speaker 1: if you could go somewhere and apply that there was
Speaker 1: there was a job for you. So Eric says, making
Speaker 1: markets is like serving happy meals. How would you describe it? Um, Well,
Speaker 1: it depends on it depends on where we're where we're cooking,
Speaker 1: I guess, or where we're serving. So, you know, we
Speaker 1: we always make it a point to differentiate between the
Speaker 1: most widely held and most widely trafficked in products. So
Speaker 1: you think s P Y E M, I w M.
Speaker 1: There's the g l D. These are the most active
Speaker 1: by notional volume, the most active by trading volume in
Speaker 1: many cases UM, and the most widely held across the
Speaker 1: you know, across the investment universe. Those products. The the
Speaker 1: third the term market making is not is applicable to
Speaker 1: those It's not something that a traditional market maker would
Speaker 1: need to step in and say, on the absence of buyers,
Speaker 1: I can be a seller, and the absence of sellers,
Speaker 1: I can be a buyer or something along those. When
Speaker 1: we flip that and the absence of sellers, I can sell,
Speaker 1: and in the absence of buyers, I can buy. That's
Speaker 1: traditionally what a market maker does. A market maker UH
Speaker 1: injects liquidity into the market when it's needed and sits
Speaker 1: on the sideline when it's not needed. When it's not
Speaker 1: needed as when buyers and sellers meet naturally in the market.
Speaker 1: The thing about e t S it's unique is that
Speaker 1: there's what Eric, there's two thousand, two hundred thirty something
Speaker 1: ets today in the US, so it's something right around there,
Speaker 1: and that super liquid widely held or a high volume
Speaker 1: and widely trafficked to an ETF list is really only
Speaker 1: like a hundred sometimes two hundred names on any given day.
Speaker 1: That means there's a better part of two thousand products
Speaker 1: that don't trade buyer to seller now actually in the market.
Speaker 1: In most cases, the further down that list you go,
Speaker 1: the more like it is that any transaction in the market,
Speaker 1: a buy or a cell is most likely more likely
Speaker 1: than not going to transact with a market maker. Because
Speaker 1: the odds of the four of us sitting at this
Speaker 1: table as retail investors trading with one another in e
Speaker 1: t F ranked number one thousand, whatever product that is
Speaker 1: is so low that the quote you see on the
Speaker 1: screen on whatever exchange, or on all the exchanges is
Speaker 1: probably being provided by a market maker in anticipation of
Speaker 1: potentially someone buying or selling that product. So let's just
Speaker 1: try to visualize this. On any given day, people are
Speaker 1: putting in orders for s P Y or I VV
Speaker 1: or h y G, and that order is being matched
Speaker 1: electronically on the exchange for the most part, and market
Speaker 1: makers are not needed for those transactions. They you put it,
Speaker 1: you can put in a market order, right, just give
Speaker 1: me the this e t F at the best available
Speaker 1: price for the top hundred then below that is when
Speaker 1: you know the spreads are a little wider, meaning the
Speaker 1: price that someone would it four versus sell it, right,
Speaker 1: And that's when a market maker might step in and
Speaker 1: make a market in those products. Yeah, I mean, I
Speaker 1: wouldn't necessarily say that the spread widens out, although you
Speaker 1: can definitely make the argument that the less active a
Speaker 1: name is and the less um the less the people
Speaker 1: are using it, that would it would seem to indicate
Speaker 1: it would be a wider spread, but not always the case.
Speaker 1: I think it's it's more it's the increased likelihood that
Speaker 1: you're not going to be transacting with somebody natural, with
Speaker 1: somebody who happens to be selling when you're buying or buying.
Speaker 1: When you call those natural, right, yes, that's when the
Speaker 1: buyer seller matches and you're you're not involved, and that's
Speaker 1: just a natural don't need for us. In the real
Speaker 1: estate market, imagine if you're in a grocery store and
Speaker 1: the buyer of a house and the seller of a
Speaker 1: house just meeting the broker's stand there saying what the
Speaker 1: hell happened? What percent of the daily trading volume in
Speaker 1: et F, which is about let's say fifty billion or something,
Speaker 1: it's even it's I think it's been north of the
Speaker 1: October we were seeing a hundred billion dollars. That was
Speaker 1: volatile times they definitely, but on average, let's say fifty,
Speaker 1: say what percentage of that is naturals versus market makers?
Speaker 1: It's it's probably gonna be north um naturals in other words,
Speaker 1: And and by the way, that does not mean that
Speaker 1: in that natural all right, that's going to include some
Speaker 1: high frequency traders, right, because they're not really market making,
Speaker 1: they're just you know, they're they're trading, they have strategies
Speaker 1: and algorithms. Other hedge funds and institutions might use these
Speaker 1: products as hedges their naturals um even though it might
Speaker 1: not be part of their investment philosophy, they're using the
Speaker 1: product in a natural way. For for what we're talking
Speaker 1: about today, market making is more in the traditional sense, Hey,
Speaker 1: can I come to you and ask you for a
Speaker 1: bid or an offer at any time of the day
Speaker 1: and you'll make one for me. That's the more traditional sense,
Speaker 1: and yet I would guess it's way under of the
Speaker 1: of the volume on any given day. Is is that
Speaker 1: at UM. Now there's something that's changed also in the
Speaker 1: last couple of years, and there's there's new technologies that
Speaker 1: these trading firms that we all our orders eventually at
Speaker 1: at Schwab or TV or wherever, might wind up on
Speaker 1: a trading desk somewhere if it if it meets some
Speaker 1: metric and that's going to go out into what we
Speaker 1: call r f Q. You know, Bloomberg has an r
Speaker 1: f QUE technology that's request for quote, right, and that's
Speaker 1: just where you go out there requests for quote and
Speaker 1: it goes out and finds complete. It surveys all the
Speaker 1: market makers to get the best price. Right, That's right,
Speaker 1: and that's well the ones that are enabled, right is it?
Speaker 1: So it's it's that you know, look, I mean there's
Speaker 1: there's probably little less than ten market making firms that
Speaker 1: are in in most of the RFQ wheels. So it's
Speaker 1: not a wildly competitive market in terms of the numbers,
Speaker 1: but it is incredibly competitive in terms of the margins um.
Speaker 1: The pricing today and ets has never been better in
Speaker 1: terms of the efficient you know, pricing that people are
Speaker 1: getting in the secondary market. But when they go out
Speaker 1: and do this, that's so if they if someone was
Speaker 1: to transact in a block of an e t F
Speaker 1: that trades once a week, that's probably going to be
Speaker 1: a market maker providing liquidity um those volumes because their
Speaker 1: blocks can can be a little bit higher, and that
Speaker 1: might be where most of that market maker activity in
Speaker 1: terms of notional volume exists. When I talk about that,
Speaker 1: you know what doesn't go natural natural um is probably
Speaker 1: in block liquidity. Those margins though, being as thin as
Speaker 1: they are, brings it back to poker a little bit,
Speaker 1: because the strategy at sus Quahana, at least it seems
Speaker 1: is rather than trying to get these big one time payouts,
Speaker 1: it's just like eke out the pennies and then the
Speaker 1: pile of pennies happens to actually be worth a lot
Speaker 1: of money. Yeah, I mean, I don't want to answer,
Speaker 1: you know, for what what's it does you know for
Speaker 1: their strategies. But I can tell you that what's great
Speaker 1: about e t S and what the world needs to
Speaker 1: continually be reminded of is these are transparent rappers. These
Speaker 1: are transparent vehicles. They on a daily basis provide us
Speaker 1: with what their holdings file, uh is, what what's in
Speaker 1: their holdings file, and also what's needed for creation and redemption.
Speaker 1: So most of the time, the products, the kind of
Speaker 1: products that are within an et F whether it's whether
Speaker 1: it's futures, whether it's swap, whether it's equities or bonds,
Speaker 1: there's price discovery mechanisms for market makers to go and
Speaker 1: figure out what the ingredients are worth. So Eric talks
Speaker 1: about making a happy meal. Well, imagine if McDonald's had
Speaker 1: two thousand different kinds of happy meals. But I work
Speaker 1: in the kitchen and I have all the ingredients that
Speaker 1: I need, and so when you order Happy Meal number
Speaker 1: sevent thirty two. I simply pull up the recipe the
Speaker 1: holdings file and I look and I say, well, how
Speaker 1: much is it gonna cost me to buy these ingredients
Speaker 1: and put it in the happy meal box and deliver
Speaker 1: it back to you? So if I look and I
Speaker 1: get my computer, it's all preloaded. Every night. We have
Speaker 1: really sharp people that download that stuff. And I put
Speaker 1: it up sevent whatever and it says, oh, okay, I'm
Speaker 1: gonna need these thirty different ingredients and it's gonna cost
Speaker 1: me five dollars to make this happy meal. Well that's
Speaker 1: my break even price, right, So I'm probably going to
Speaker 1: offer you the happy meal and a penny, right. And
Speaker 1: this is just for example purposes only, but that's that's
Speaker 1: the mentality behind market making expensive happy Yeah, well that
Speaker 1: that toy better be illegal. That one had caviar and saffron,
Speaker 1: so you know, um, and this is a really I
Speaker 1: just want to stop here for a second because what
Speaker 1: you're tapping into is something we've built a lot in
Speaker 1: the terminal, which is implied liquidity, which is when you
Speaker 1: talk about the top uh fifteen most traded ETFs account
Speaker 1: for half of all volume. Then the other and fifty
Speaker 1: or whatever are fighting over the rest, and a lot
Speaker 1: of them get ignored because people are used to stocks
Speaker 1: where the volume on the screen is all there is.
Speaker 1: But with an E t F, you can punch up
Speaker 1: the recipe. In other words, you can use the volume
Speaker 1: of the underlying stocks. So example, if we pull up
Speaker 1: something like the Power Shares S and p high quality
Speaker 1: E t F, which isn't one of the more popular
Speaker 1: quality factory t s, I think it might trade shares
Speaker 1: a day, right, But the imply liquidity says fifty one
Speaker 1: million shares could be created on the spot because that
Speaker 1: recipe is liquid. Is that essentially the key to unlocking
Speaker 1: the toolbox and using some of these lesser uh, lesser
Speaker 1: traded products that might be a better fit because people
Speaker 1: do tend to lean on these ones that came out
Speaker 1: in the nineties that trade a lot. Yeah, I mean,
Speaker 1: it's it is it. Just remember if you're a user
Speaker 1: of E t S, you don't have to worry so
Speaker 1: much about having the toolbox or the key. It's it's
Speaker 1: more important for you to trust that you're broker and
Speaker 1: the person you're working with for these executions in the investo.
Speaker 1: You know, high quality uh, index that they have the
Speaker 1: key in the toolbox. And basically what we're going to
Speaker 1: be looking at is maybe we're not going to do
Speaker 1: a forty million share trade. We'd love to do that, right,
Speaker 1: but if someone goes in and says, hey, there's forty
Speaker 1: thousand shares that trade on a daily basis and we
Speaker 1: want to buy a million years, well, we're looking at
Speaker 1: as a market maker, as a liquidity providers, we're looking at,
Speaker 1: can I access the ingredients of that fund without moving
Speaker 1: the market? Am I? Am I going to be able
Speaker 1: to reasonably obtain all the ingredients that I need at
Speaker 1: a reasonable or at least some sort of a confident
Speaker 1: price level. Anything outside of that we would call in
Speaker 1: the old world, we'd call that slippage. I thought I
Speaker 1: could buy it for twenty five, and when I went
Speaker 1: to actually buy all the ingredients, the price moved. I
Speaker 1: actually impacted the market and it came out to five.
Speaker 1: And I would say to my boss, look, I thought
Speaker 1: I could buy the ingredients for twenty five. It wind
Speaker 1: up crossing me five. And he'd say, well, where do
Speaker 1: you sell the happy meal? And I'd say, one, I
Speaker 1: guess what I lost? Right, That's where the betting and
Speaker 1: gambling kind of mentality will be associated with market making.
Speaker 1: So market makers generally don't make that mistake. Okay, they're
Speaker 1: they're actually doing you know, pre trade analytics, and they
Speaker 1: they have a very good high confidence in and how
Speaker 1: much they can buy at at what price level, how
Speaker 1: much they think they're going to move the market given
Speaker 1: a certain size. Well, you love to talk about, imply liquidity.
Speaker 1: We love to talk about if I was to do
Speaker 1: a million shares of the ETF, it could be ten
Speaker 1: thousand percent of a day's volume of the e t
Speaker 1: F itself, but it can be one tenth of one
Speaker 1: percent of the underlying portfolio. And that's what we want
Speaker 1: people to remember. If you're a broker and your and
Speaker 1: your trading partner has the tools and the toolbox to
Speaker 1: to view that as one tenth of one percent of
Speaker 1: the underlying liquidity, well then you should expect you know,
Speaker 1: pricing that's reflective of that. What does it take to
Speaker 1: be good at that? Because it strikes me that there
Speaker 1: are a very few E t F market making firms
Speaker 1: that that are actually really good. Like one thing that
Speaker 1: I heard when I was reporting on that story is,
Speaker 1: you know, the volume of E t F trading and
Speaker 1: the number of E t F s has has just
Speaker 1: gone up and up and up, and the number of
Speaker 1: really strong et F market makers has stayed small. So
Speaker 1: what does it take to be like a good E
Speaker 1: t F marketing? I mean there are when you talk
Speaker 1: about the spies and the w m s and the
Speaker 1: q k c is, it's different. It's a different trading strategy,
Speaker 1: it's a different sort of mentality. Again, you're not expecting
Speaker 1: to be able to sell k k K and then
Speaker 1: by the underlying as de one hundred names um at
Speaker 1: a at a material discount to where you sold the
Speaker 1: t F. That just doesn't happen. Um it's so efficient
Speaker 1: those products. But when you the competitive field that we're
Speaker 1: talking about is what does it take to be competitive
Speaker 1: in that investco product? What does it take for someone
Speaker 1: to be able to compete with five other market makers
Speaker 1: and provide the best price at ridiculously low margins. So
Speaker 1: you know, you're talking about fractions of a penny in
Speaker 1: many cases, depending on the size of the trade, it
Speaker 1: takes a lot. Technology is a big part of it,
Speaker 1: and data data within that technology is also a big
Speaker 1: part of it. So you've got to have access to
Speaker 1: the to the information of the E T s and
Speaker 1: there's two thousand two ts, so it's a lot of information,
Speaker 1: and you're pulling in every night. You've got to be
Speaker 1: able to apply market data to all of the underlying instruments.
Speaker 1: And there's you know, gosh knows how many different equities
Speaker 1: in the E T F universe, and over five thousand
Speaker 1: and how many different bonds, probably well over ten thousand.
Speaker 1: I mean, there's so much data, and it has to
Speaker 1: be constantly updated, and it has to be constantly monitored
Speaker 1: and maintained. And when you get it all right in
Speaker 1: a perfect world, right, you've got all the data, and
Speaker 1: you've got all the recipes, and your computers are humming,
Speaker 1: and everyone's happy, and everything looks great, all the lights
Speaker 1: are green. It's pretty easy. Actually. You look it up
Speaker 1: and someone pulls up a ticker and they say, can
Speaker 1: I get a price on it? You pull it up
Speaker 1: and you've got your highly confident pricing that you can
Speaker 1: you can provide to your clients and they love your
Speaker 1: pricing and they trade with you. But what happens when
Speaker 1: one of the data feeds goes down? What happens when
Speaker 1: there's a corporate action that didn't get picked up by
Speaker 1: the issue where but did get picked up by the distributor.
Speaker 1: And there's a difference in information because with I don't
Speaker 1: know how many a hundred unique issuers and kashners, how
Speaker 1: many different custodio banks and distributors, We're getting information from
Speaker 1: a lot of different unique sources every single day. Normalizing
Speaker 1: it is a massive task, right, and so it requires investment,
Speaker 1: It requires confidence. It requires really really smart people, you know,
Speaker 1: who know how to code UM so that at any
Speaker 1: given time, when the light goes from green to red
Speaker 1: and says, look here, something's amiss, you can get to
Speaker 1: that very quickly, you know, adjust your formula, adjust whatever
Speaker 1: input is questionable, and get back to business. There really
Speaker 1: a light that goes from green to red. I can
Speaker 1: either confirm light yellow light. I want to ask about
Speaker 1: s PHQ that's that high quality, doesn't trade a lot,
Speaker 1: say an order comes in for this. I've always found
Speaker 1: I found this kind of fascinating when I learned it.
Speaker 1: When when it's not a natural and somebody wants s
Speaker 1: PHQ UM, you cannot find a natural by order or
Speaker 1: to sell order to buy it, right, So you've got
Speaker 1: to look at the recipe, you give them the SPHQ
Speaker 1: immediately for a certain price. Then what happens, Right, you
Speaker 1: don't actually have s PHQ yet you have to go
Speaker 1: take the raw materials the recipe handed into power shares
Speaker 1: or the a P and then get SPHQ to make yourself.
Speaker 1: Even walk us through that that process and how long
Speaker 1: it takes. So it's important for everyone to realize that
Speaker 1: you're you're trading counterparties and easy tfs, especially SPHQ, are
Speaker 1: most likely licensed to create or manufacturer shares when they're needed,
Speaker 1: and issuers don't like to hear this, but they're also
Speaker 1: licensed to destroy or redeem okay shares when there's too
Speaker 1: much supply. The ability to create this is the magic
Speaker 1: of the e t F arbitrazed. You do have ecosystem,
Speaker 1: it's called being an authorized participant um whether you're directly
Speaker 1: an authorized participant or indirectly through your clearing bank is
Speaker 1: it's important. But if you have the ability to manufacture
Speaker 1: or destroy, create or redeem et F shares when you
Speaker 1: come in and buy s pH Q from us, and
Speaker 1: we don't have shares and is no borrow But by
Speaker 1: the way, most of the two thousand two change e
Speaker 1: T s. There is no borrow on them, right, So
Speaker 1: most of the time, if you're buying these and in
Speaker 1: a material way, a market maker is going to probably
Speaker 1: have to create shares to settle that trade. So in
Speaker 1: s p h Q, you come in, you buy a
Speaker 1: million shares, and I'm going to turn around by the
Speaker 1: ingredients of the fund. Now, I'm going to take those
Speaker 1: ingredients deliver them to power Shares. Power Shares is going
Speaker 1: to say thank you very much in return for those securities,
Speaker 1: which they're going to put into the et F Trust,
Speaker 1: which is their own unique et F trust protected and
Speaker 1: they're gonna give me back a million e t F
Speaker 1: shares of s pH Q, which I'm going to deliver
Speaker 1: right back to the client. So the round trip is
Speaker 1: what are the ingredients. I go out and get them,
Speaker 1: I put them into the happy meal. You give the
Speaker 1: happy meal to the client. This is happening in second
Speaker 1: like fractions of the second. I mean the process of
Speaker 1: doing the trade with the client and buying the annoying portfolio. Yes,
Speaker 1: it could be a fraction of a second. There may
Speaker 1: be times where we choose to go out and buy
Speaker 1: the ingredients of an et F over a longer period
Speaker 1: of time. When you look at the high old bond
Speaker 1: market or investment grade bonds, or maybe some frontier markets,
Speaker 1: it might take longer to go out and buy the
Speaker 1: actual underlying securities. You might want to be a little
Speaker 1: more thoughtful and how you go about getting it. But
Speaker 1: but essentially, yes, you you trade the e t F
Speaker 1: and then you get the ingredients and then you do
Speaker 1: the creative. So because market making is so secretive, it
Speaker 1: leads me to it leads me to believe that it's
Speaker 1: highly lucrative as well. How lucrative actually is it. I don't.
Speaker 1: I don't think it's secretive. I don't. I anyone can
Speaker 1: go to an issuer's website. A great thing also about
Speaker 1: the U S. E t F marketplace is that to
Speaker 1: be listed on an exchange in the United States with
Speaker 1: it for an e t F, you need to have
Speaker 1: a website. You need to have information available for people
Speaker 1: to go and look. If your website is not available,
Speaker 1: you're not in compliance. UM. On the websites, you'll find
Speaker 1: a holdings file, So anyone can look at the holdings file,
Speaker 1: figure out what's in it, figure out what the weights
Speaker 1: are UM or not even figure it out, just download
Speaker 1: the data and and then figure out what it costs
Speaker 1: to assemble that portfolio, and and and in turn what's
Speaker 1: a fair price for the ETF. That is the secret sauce.
Speaker 1: That's not so secret, right, It never is the competitive edges,
Speaker 1: but it's the hisvenience factor, because you could you could
Speaker 1: basically copy an et F every day and not have
Speaker 1: to pay the issue with the expense ratio or do
Speaker 1: the trade and you have to manage it too though,
Speaker 1: you know, and and look, there's I always like to
Speaker 1: sit sit down with clients, sit down with users, explain
Speaker 1: how it works, show them how to do it. They
Speaker 1: get that moment of clarity, they get that moment, that
Speaker 1: eureka moment like I get it. And then they also
Speaker 1: at the same time realize that's a lot of work.
Speaker 1: I don't want to do that and what they really
Speaker 1: wanted can you do? Do you have a system that
Speaker 1: does that a lot faster and a lot more efficiently.
Speaker 1: And and the you know, the ten marketing firms, you
Speaker 1: you know, you allude to where this the ETF industry
Speaker 1: has grown in the marketing communities has just gotten faster,
Speaker 1: not necessarily bigger. That's ultimately the answer. So, so, while
Speaker 1: the sauce is not so secret, the way that people
Speaker 1: cook things is a little bit proprietary, right. How it
Speaker 1: evolved though, Like where you have some market makers, Like
Speaker 1: if you're just making markets and et fs on exchanges, like,
Speaker 1: you don't really have to tell anybody anything about what
Speaker 1: you're doing or how you're doing it. But if you
Speaker 1: have clients who are coming directly to you and trying
Speaker 1: to do E T F trades, like, then you kind
Speaker 1: of have to open yourself up a little bit more, right, Yeah,
Speaker 1: I mean we me personally, I've I've sort of migrated
Speaker 1: from the trading world into more of an educational, client
Speaker 1: facing world. I love when they ask questions about how
Speaker 1: and why we price things the way we do. I
Speaker 1: love to tell them what we're thinking. I love to
Speaker 1: tell them how much we think we're going to need
Speaker 1: to make or how much we're going to have to
Speaker 1: price things to make it worth our while to do
Speaker 1: the trade or to get into business. Unfortunately, not a
Speaker 1: lot of people ask those questions all the time. There
Speaker 1: are people who come in and just trust you know
Speaker 1: how to do it, and you get the order and
Speaker 1: they move on. If you're always giving them good fair pricing,
Speaker 1: and you continue to get that business. They may not
Speaker 1: ask every time how you came up with the price,
Speaker 1: But I do enjoy when people engage because it gives me,
Speaker 1: it is me hope that because they're asking questions, they're
Speaker 1: probably looking at other products. A lot of people will
Speaker 1: only look at those top fifty, those top hundred products
Speaker 1: because they're easy to trade, but they don't really add
Speaker 1: a whole lot of value in terms of an investment mandate. Right.
Speaker 1: And so when they when they come up with SPHQ
Speaker 1: and they come in and they say, hey, can you
Speaker 1: tell me about this product, I want to get on
Speaker 1: the phone and I want to spend an hour with him.
Speaker 1: Say this is what's cool about this product. This is
Speaker 1: why power Shares loves it, this is why we can
Speaker 1: make a market in it, and others can probably too.
Speaker 1: This is what we would consider a fair level. You
Speaker 1: know for this, you know, transacting within these bands, you
Speaker 1: can never lose to asking questions and and learning more.
Speaker 1: I think it gives you the confidence to take that
Speaker 1: next step and buy that product you've never heard of,
Speaker 1: and guess what, you know, you're going to be the
Speaker 1: cool kid on the block who owns the product no
Speaker 1: one else does and based on lucrative I will address
Speaker 1: that a little bit. We've looked into the revenue of
Speaker 1: the e t F world. We track it. Um issuers
Speaker 1: make about seven billion a year. That is not much.
Speaker 1: I mean, that's on the issue side. Active mutual funds
Speaker 1: make you know, or five times that amount on the
Speaker 1: same amount of assets. Market makers make about half of
Speaker 1: the seven billion. We've calculated about three and a half billion,
Speaker 1: and that's on an average spread of point, so we're
Speaker 1: talking razor thin margins. It's actually not that lucrative. Most
Speaker 1: of the e t F industry has to really live
Speaker 1: um frugally and be scrappy. It's not like the old
Speaker 1: Wall Street I find that's why it's so popular, because
Speaker 1: everybody comes in it feels like they've got a good deal. Okay,
Speaker 1: so I have one more question. What's your favorite ticker?
Speaker 1: What's my favorite ticker? Oh? My goodness, oh man, Well,
Speaker 1: I gotta say. I mean two eighteen um, I mean,
Speaker 1: there's a there's a a t F called r VRS
Speaker 1: reverse and uh I actually I just think it's a
Speaker 1: really neat thing. There's what's in that It's well there's
Speaker 1: SMP market spy, and then there's RSP which I loved
Speaker 1: for a long long time. I love equal weight uh
Speaker 1: SMP five hundered I personally, you know, personally from my account,
Speaker 1: I'm like, I like egle waight better than market cap.
Speaker 1: Wait and then, um, these folks invented r VRS and
Speaker 1: it's reverse cap weight and as a triangle, I'm drawing
Speaker 1: a triangle on a pocket is the lowest waiting? Um yeah,
Speaker 1: I like the idea. I just and a ticker, and
Speaker 1: a ticker serves it well. RVRS great. Yeah. I think
Speaker 1: they used the Juno card, the reverse Uno card to
Speaker 1: market the product. It was pretty good. Although they they
Speaker 1: have beer glasses, but they I told him that the
Speaker 1: top should be small and it should wide. Now you're
Speaker 1: gonna get in a ton of trouble with that question,
Speaker 1: because like that was on the spot. I didn't know
Speaker 1: it was coming. And and I'm sure they're gonna be psyched.
Speaker 1: But you know, I'll get one really great phone call
Speaker 1: from that and it'll be like thanks so much saying that,
Speaker 1: And I'm gonna get like, why didn't imagine mine? There's
Speaker 1: so many there's so many good I want to say
Speaker 1: I didn't forget about you. Happy anniversary, Happy anniversary, Jelf, Chris, Annie,
Speaker 1: thanks for joining Central, Thanks for let's in to us
Speaker 1: on Trillions until next time. You can find us on
Speaker 1: the Bloomberg terminal, Bloomberg dot com, Apple Podcast, Spotify, and
Speaker 1: basically anywhere else you want to listen. We'd love to
Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show,
Speaker 1: he's at Eric call Tunis, and he's at Antonia b Massa.
Speaker 1: Trillions is produced by Magnus Hendrickson. Francesca lead is the
Speaker 1: head of Bloomberg Podcast, but