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Speaker 1: Welkno Trillions. I'm Joel Weber and I'm Eric belchionis Eric.

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Speaker 1: Five years ago you and I made an audio documentary

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Speaker 1: called the e t F Story. It's actually never been

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Speaker 1: in the Trillions feed. And here we are today January

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Speaker 1: and we're gonna bring that audio documentary into the main

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Speaker 1: Trillions feed for the first time. And why today today

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Speaker 1: is the first day that spy the first et F

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Speaker 1: started trading lotter years ago, thirty years ago exactly A

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Speaker 1: lot of people will go to January two, but that's

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Speaker 1: when it was seated. It started trading on the twenty nine,

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Speaker 1: and so that's exactly thirty years to the day today.

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Speaker 1: And so we made this really good documentary. Of all

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Speaker 1: the things I've done in my career, this is in

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Speaker 1: the top ten um. This will be something people can

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Speaker 1: go to over and over. Some of the people we

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Speaker 1: interviewed are no longer with us, and we really went

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Speaker 1: all out, got the right people trace the story of

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Speaker 1: the e t F and the evolution, and I think

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Speaker 1: fossilized uh this situation so that over the next for

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Speaker 1: posterity the next you know, five fifteen years, people who

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Speaker 1: want to just kind of get a quick briefer of

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Speaker 1: the e t F market. Can come listen to this

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Speaker 1: sort of Ken Burns esque documentary on it, especially if

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Speaker 1: you know people are would rather listen than read. Uh,

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Speaker 1: this will do the trick. One thing we should mention

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Speaker 1: is that we have not touched these episodes for five years,

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Speaker 1: so you're gonna hear some numbers that are no longer accurate.

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Speaker 1: At the time that we did the recording, SPY had

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Speaker 1: about two seventy billion in assets. What's it up to now,

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Speaker 1: eric three hundred and seventy five billion, and that includes

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Speaker 1: outflows that the e t F has seen. And what

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Speaker 1: about the e t F industry overall? At the time

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Speaker 1: that we did the recording, I had about three trillion

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Speaker 1: in assets, more than double today six point eight trillion. Okay,

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Speaker 1: so just incredible. The story of the e t F

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Speaker 1: can gen used to grow, uh, as you're about to

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Speaker 1: find out, it begins with Black Monday and goes so

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Speaker 1: much farther than that. One thing I think we're both

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Speaker 1: really proud of. Here are all the names that we

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Speaker 1: got to speak to about the e t F and

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Speaker 1: its history. Who are some of the ones If you

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Speaker 1: want to rattle through the big names eric that we

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Speaker 1: we spoke with. Yeah, sure, this is this is the

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Speaker 1: hard part. You gotta go track these people down. I

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Speaker 1: remember recording some of them in like different studios all

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Speaker 1: over Bloomberg. Um, in some cases we went to see them.

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Speaker 1: Um here's some of the names we have. I'll start

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Speaker 1: with two that are no longer with us, Jack Bogel

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Speaker 1: of Vanguard and Kathleen Moriarty, both of which who had

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Speaker 1: a profound impact on the spy and the E t

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Speaker 1: F industry. Some other ones are Bob Toll, who was

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Speaker 1: Morgan Stanley back in the day. UM, Gary Eisenich was

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Speaker 1: the first market maker on spy. Dave Ritter was the

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Speaker 1: SEC chairman in who was sort of uh overseeing the

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Speaker 1: SEC as the spy documents got filed. And also here

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Speaker 1: over so the eight seven crash. Dave not Egg E

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Speaker 1: t F guru analysts, sort of like the Yoda of

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Speaker 1: E t F analysts. John O'Brien who worked with some

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Speaker 1: competing product to spy back then. Reggie Brown, Mr E

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Speaker 1: t F, Bruce Levine who was early at with Bond ETFs,

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Speaker 1: Bruce Bond who started really Smart Beta. I think he

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Speaker 1: brought power shares a smart Beta, Robert not also. So

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Speaker 1: some of those names are people who uh sort of

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Speaker 1: took the e t F and evolved it and put

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Speaker 1: all these different things in it. So we don't just

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Speaker 1: track spy, we track the evolution. There's one name I

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Speaker 1: want to end on here that I am most proud of.

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Speaker 1: When you and I teamed up with Bloomberg Markets to

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Speaker 1: rate sort of the story of the e t F

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Speaker 1: in a written form, what we What we found is

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Speaker 1: that Nate Most and Steve Bloom, who were at the

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Speaker 1: American Stock Exchange, they got the idea or the spark

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Speaker 1: for the idea of the of the first e t

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Speaker 1: F from an SEC report. The SEC report was a

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Speaker 1: post mortem on Black Monday. So we went and found

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Speaker 1: the guy at the SEC who wrote the section of

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Speaker 1: that report that gave Steve Bloom and Nate Most the idea.

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Speaker 1: His name is Howard Kramer, and he was a young

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Speaker 1: lawyer working at the SEC. Had he not written that,

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Speaker 1: it's it's possible Nate Mos and Steve Bloom do not

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Speaker 1: have that spark of inspiration. Will never know. But we

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Speaker 1: got him too, and that's pretty cool. I also want

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Speaker 1: to give a special shout out to Jordan's Bell, who

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Speaker 1: produced this special series. So this is going to lead

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Speaker 1: straight into the first episode of the E t F Story,

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Speaker 1: and you'll find the rest after that in your feet

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Speaker 1: this time mon Trillions the E t F Story. One

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Speaker 1: of the things we all love about business stories are

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Speaker 1: the humble beginnings, like when two buddies go from tinkering

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Speaker 1: in their Palo Alto garage to creating the world's most

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Speaker 1: valuable company Apple. Sometimes everyday events even inspire something remarkable,

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Speaker 1: like when a Swiss engineer takes a walk in the woods,

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Speaker 1: marvels at the seeds that stick to his clothes, and

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Speaker 1: ends up inventing velcro. The story we're about to tell

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Speaker 1: you is a little bit like those, and it culminates

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Speaker 1: with a three trillion dollar industry that's still growing. What's

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Speaker 1: this We're talking about the exchange traded fund. We're going

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Speaker 1: to trace how it came to be with some of

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Speaker 1: the people who made it happen. We'll look at the

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Speaker 1: state of things before it existed, find out where the

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Speaker 1: spark came from, learn why the idea worked, and what

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Speaker 1: it actually took for this financial tool to get where

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Speaker 1: it is today. This is Trillions presents the e t

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Speaker 1: F Story. I'm Joe Weber, and I'm the editor of

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Speaker 1: Bloomberg Business Week. Over the course of the next six episodes,

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Speaker 1: with the help of Eric Baltunas, who's an e t

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Speaker 1: F expert and an analyst with Bloomberg Intelligence, we're going

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Speaker 1: to document the story of the ETF. We'll hear from

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Speaker 1: people who were there at the beginning. Will also take

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Speaker 1: you on a few fuel trips, but mostly we'll be

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Speaker 1: sharing the human stories behind an industry that's hoovering up

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Speaker 1: trillions of dollars every year. So this all really begins

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Speaker 1: when the stuck market crushes on October nine, Black Monday.

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Speaker 1: If you have been away from your television set and

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Speaker 1: haven't heard about the stock market, this was it. The

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Speaker 1: market declined to Practimately, I think that everyone, every American

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Speaker 1: at this stage of the game, needs to get their

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Speaker 1: house in order. I'm ready to jump out of a window.

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Speaker 1: And it was a pretty pretty sickening experience, almost like

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Speaker 1: are we at the Apocalypse? O Precipice right now? Good evening,

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Speaker 1: I'm Tom Brokaw. Black Monday is now in the book.

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Speaker 1: Then the question is what will happen Tuesday and beyond?

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Speaker 1: Even got a term black Monday. I mean that sounds

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Speaker 1: like a horror movie. This, of course is our resident

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Speaker 1: et F analyst, and for the purposes of the show

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Speaker 1: are historian Eric Faltu Nous. The nine eighties were a

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Speaker 1: great decade for the American economy. Modern finance was coming

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Speaker 1: into its own. Two cities were especially interesting Chicago, where

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Speaker 1: people were trading futures contracts of commodities like corn or oil.

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Speaker 1: In New York, where you've got the stock exchanges and

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Speaker 1: people trading equities. Well, the market had been going up

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Speaker 1: for a while, nothing goes up forever. There was probably

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Speaker 1: a sell off that was gonna happen anyway, So the

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Speaker 1: conditions were ripe for a sell off. And at the

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Speaker 1: same time you had a build up of this hot

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Speaker 1: thing called portfolio insurance, which was to use futures in

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Speaker 1: order to hedge your stock position. This portfolio insurance was

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Speaker 1: created by the firm Leland O'Brien Rubinstein to deal with

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Speaker 1: the big crash of the nineteen seventies. John O'Brien, who

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Speaker 1: was part of the team that developed it, says portfolio

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Speaker 1: insurance really started to take off once JP Morgan started

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Speaker 1: doing it, but most people in the Wall Street didn't

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Speaker 1: understand what that was. Some big outset managers did, some

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Speaker 1: big dealers did, and they realized when the market went down,

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Speaker 1: portfolio insurance required selling stock and buying bonds. O'Brien's is

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Speaker 1: on the Friday before Black Monday, the market has his

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Speaker 1: biggest drop since so all of US portfolio insurance folks

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Speaker 1: had difficulty getting off enough sales of futures contracts to

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Speaker 1: get down in the equity exposure to the level we

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Speaker 1: should have had at the close of business on Friday,

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Speaker 1: Act over seventeen. A couple of the big focus recognize this,

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Speaker 1: so over the weekend they went short the US dot

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Speaker 1: market and foreign exchanges and joe in the stock market

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Speaker 1: opened on Monday at over nineteen. There was a big

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Speaker 1: drop and the right away portfolio injurors had to sell

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Speaker 1: more futures contract and more of that got transmitted to

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Speaker 1: the New York Stock Exchange, and they specialists on the

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Speaker 1: exchange saw every major firm spending all of its run,

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Speaker 1: all of the post selling, all of the doctors, and

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Speaker 1: the specialists didn't understand that this was all a mechanical things,

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Speaker 1: and they thought, you know, World War three had broken

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Speaker 1: out somewhere and they didn't know about it, so they

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Speaker 1: just dropped all their bids and went to launch and

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Speaker 1: went to the doctor, went to the bed where basically

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Speaker 1: wouldn't trade. The monke just you know, collapse. Uh. And

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Speaker 1: it was all mistake, a big mistake that now has

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Speaker 1: to be cleaned up. In terms of government official at

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Speaker 1: the time, it was probably the scariest time of than

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Speaker 1: in my sixteen years to the sec that Monday and

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Speaker 1: into Tuesday. This is Howard Kramer. During the crash. He

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Speaker 1: was Assistant Director of the Division of Market Regulation at

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Speaker 1: the U S Securities and Exchange Commission or the sec.

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Speaker 1: I had oversight over all of the nation's securities exchange,

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Speaker 1: so that included both the stock exchanges and the options exchanges.

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Speaker 1: He says he has a few sharp memories from that day.

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Speaker 1: On the afternoon of the crash, Cramer went over to

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Speaker 1: the Commodity Futures Trading Commission to talk about what was

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Speaker 1: going on. Yeah, pretty distinctly remember being in the room

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Speaker 1: and you know, as the stock market was tanking and thinking,

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Speaker 1: you know, these these were commissioners who have experienced mostly

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Speaker 1: in agricultural products and futures and here we are discussing

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Speaker 1: what's happening with the stock market. Another one was being

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Speaker 1: in with some other senior staffers and one of the

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Speaker 1: commissioners coming down and trying to find out what was happening,

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Speaker 1: and then saying that he needed to call the White House.

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Speaker 1: So they needed to call the White House. So they

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Speaker 1: basically asked us to clear out of the room, and

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Speaker 1: I did. It was so bad that the SEC decided

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Speaker 1: to make a task force and immediately for the next

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Speaker 1: few months study what happened. And that's what they do

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Speaker 1: in the form of a massive report called October Market Break.

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Speaker 1: David Ruder, who was the chairman of the SEC at

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Speaker 1: the time, says the goal of the report was factual.

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Speaker 1: The goal was to say what had happened. The goal

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Speaker 1: was not in an advance to plan some result from

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Speaker 1: the report. But the idea was to create a factual

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Speaker 1: reconstruction of what happened and then to make suggestions based

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Speaker 1: upon that report. And it was a long, arduous process.

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Speaker 1: I'd say for the next three months through early January,

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Speaker 1: a bunch of us had two jobs, which was, you know,

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Speaker 1: investigating what happened and writing to report up and doing

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Speaker 1: our day job. Did you get paid double for that. No, no,

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Speaker 1: we didn't get paid double, I said, but from Thanksgiving

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Speaker 1: a New Year is the only day I took off

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Speaker 1: with Christmas. Literally, my life still remembers that. It um No,

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Speaker 1: it was. It was pretty intense period. So this report

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Speaker 1: ends up being eight hundred and forty pages. It was

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Speaker 1: thicker than the Manhattan phone Book, for sure. It was.

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Speaker 1: You know, obviously we we sent a number of copies

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Speaker 1: off the Congress. You know. It was available for a

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Speaker 1: couple more years, and eventually it became a collector's item.

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Speaker 1: I have two in my office. If anybody wants to

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Speaker 1: bid for it, I'm ready to do it on eBay.

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Speaker 1: Before Kramer could sell anything on eBay, we borrowed one

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Speaker 1: of his copies to see it for ourselves. So it

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Speaker 1: says October market break. It really is like a phone book.

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Speaker 1: I mean it's that's exactly that. The feel, it's just

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Speaker 1: all r Joel. I'm gonna flip through it just so

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Speaker 1: you get an idea of how big this is. Right,

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Speaker 1: So this may take a few seconds hanging there still going.

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Speaker 1: You're like halfway, and it is going. That was not

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Speaker 1: quite halfway. It gets more dramatic as you keep going, wow,

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Speaker 1: I see some charts. Wow, let's hear it. Drop ye,

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Speaker 1: take your pick of Harry Potter books to Harry Potter

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Speaker 1: books side by side. That's about the dimensions. Let me

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Speaker 1: go more highbrow here. This is Warren Pace squared. Oh yeah,

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Speaker 1: nailed it. This thing. Yeah, like my mom's five ft

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Speaker 1: and she has to use this like little thing in

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Speaker 1: the car. This is like what you could use if

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Speaker 1: you were like an eleven year old and you stole

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Speaker 1: your parents car and you need to see you over

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Speaker 1: the steering wheel. I mean it literally could be used.

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Speaker 1: It's like a booster seat. Yeah. Could you imagine reading this?

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Speaker 1: I will say the ends a lot of charts, Like

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Speaker 1: I think the last two is charts and numbers, but

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Speaker 1: I mean there is a lot of stuff, some footnotes,

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Speaker 1: right yeah. And you're saying like one page of this

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Speaker 1: is a huge piece of landscape here, I mean it's

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Speaker 1: a big big I'm also thinking somebody was on a

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Speaker 1: typewriter doing this, Yeah, I mean they had to be

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Speaker 1: What would it take Eric, This is a huge report.

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Speaker 1: I can't imagine how long it would take you to

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Speaker 1: read it, But what would it take you to be

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Speaker 1: able to actually like plat through this. I would probably

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Speaker 1: need illegal substances to get through this thing. If not, okay,

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Speaker 1: on the legal side, a lot of coffee, a latte,

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Speaker 1: and some were very quiet because the littlest distraction hold

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Speaker 1: the milk, anything that a noise in the attic would

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Speaker 1: be like, oh, let me go check that out, because

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Speaker 1: I am not. So what was in this big report

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Speaker 1: we've been talking over. They just broke down what program

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Speaker 1: trading was, They broke down what portfolio insurance was, They

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Speaker 1: broke down what happened that day. That was the first

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Speaker 1: part of the report. The second part gave suggestions about

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Speaker 1: how a future crash could be avoided. But meanwhile, in

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Speaker 1: downtown New York, you had the American Stock Exchange, and

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Speaker 1: this is an exchange that was in third place in trading.

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Speaker 1: It had fallen down. The American Stock Exchange people call

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Speaker 1: AMEX from here on out was basically an exchange that

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Speaker 1: was looking for a winner. And that's where Nate Most

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Speaker 1: and Steve Bloom we're working together. These are market nerds. Okay,

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Speaker 1: These are not like salespeople. They're not. They're not portfolio managers.

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Speaker 1: They are They're into derivatives, they're into data, they're into

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Speaker 1: the Exchange. So these market nerds, Nathan Most and Stephen

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Speaker 1: Bloom are kind of an unusual pair. Most is seventy

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Speaker 1: four years old at the time and he's the vice

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Speaker 1: president of new Development at AMES, and Bloom is just

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Speaker 1: fresh from Harvard with a PhD in economics. Nate died

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Speaker 1: in two thousand four, but we found in our reporting

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Speaker 1: that he made a big impression on those he worked with.

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Speaker 1: Arthur Lovitt, who was running AMS in the nineties, says

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Speaker 1: he was blessed to have inherited Nate Most, who at

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Speaker 1: the time was trying to create products and trading mechanisms

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Speaker 1: that would give AMEX a competitive edge and to the

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Speaker 1: extent to which PHTF became a reality of the credit

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Speaker 1: Tony I can remember saying to him that if this

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Speaker 1: is something he believes and it wants to do, he

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Speaker 1: has my full support to go ahead and do it.

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Speaker 1: And Nate Most had this eclectic background. He'd served in

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Speaker 1: the Navy as a submarine engineer during World War Two.

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Speaker 1: Afterward he worked as a trader for Pacific Vegetable Oil

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Speaker 1: and then became president of the Pacific Commodities Exchange for

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Speaker 1: a time. Oh, he was great. He was wonderful. He

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Speaker 1: was a tall man, and he was kind of not

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Speaker 1: very he was kind of all shocks on us. This

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Speaker 1: is Kathleen Moriarty, who played a major role on the

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Speaker 1: legal side of the story and worked quite a bit

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Speaker 1: with Nate most. I remember one time I was at

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Speaker 1: a meeting with him and some Goldmen people, and these

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Speaker 1: guys who were probably like in their thirties looked at

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Speaker 1: Nate and he had thick black glasses and it was

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Speaker 1: clear that they thought he was like somebody who didn't

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Speaker 1: really know much of anything. So he went out to

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Speaker 1: go to the men's room and they looked at each

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Speaker 1: other and they said, oh, he's not a rocket scientist,

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Speaker 1: And I said, actually, he is a rocket scientist. Yeah,

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Speaker 1: he was literally a rocket scientist. The guy had a

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Speaker 1: PhD in physics. And what's more, he's got the help

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Speaker 1: of Stephen Bloom and Steve was his assistant. Steve was much,

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Speaker 1: you know, much younger, he was probably you know, somewhere

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Speaker 1: around my age at the time, and you know, somebody

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Speaker 1: who was, you know, at a very sharp mind for

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Speaker 1: numbers and did a lot of the assistance and kind

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Speaker 1: of secondary lifting for Nate. So they were a good team.

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Speaker 1: They worked very well together. So you've got these two

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Speaker 1: smart guys who have their work cut out for them

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Speaker 1: in their roles at AMEX, which has Levitt puts, it

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Speaker 1: was kind of and had been kind of a backwater exchange,

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Speaker 1: struggling for relevance and gradually losing listings to the New

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Speaker 1: York our stock exchange across the street. And no matter

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Speaker 1: what we tried to do to compete against New York,

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Speaker 1: the stature and status and prestige of New York managed

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Speaker 1: to whittle away the listings that we're the lifeblood of exchange,

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Speaker 1: here's Kramer again. To stay relevant, it had to continue

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Speaker 1: to develop new products, particularly new options products or or

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Speaker 1: options like products. Steve and Nate were behind that development

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Speaker 1: initiative of the AMEX, so let's fit in pretty nicely

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Speaker 1: into their sweet spot. Trying to come up with a

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Speaker 1: product to stay ahead of other competitors that may have

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Speaker 1: some investor appeal. And what Kramer is referring to is

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Speaker 1: a section in chapter three of the Market Breake Report

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Speaker 1: with the suggestion for a market basket trading instrument that

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Speaker 1: could be used instead of the futures to hedge and

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Speaker 1: would be something that the sec could regulate. So the

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Speaker 1: market break report makes its way to amp X, and

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Speaker 1: most in Bloom were through the whole thing. Bloom calls

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Speaker 1: it riveting and one particular part especially caught his eye.

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Speaker 1: When Bloom read that paragraph, you know, it was like

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Speaker 1: a light bulb went off, you know. He told me

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Speaker 1: that he ran into Nate Most office immediately and basically said,

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Speaker 1: here's an opening we could drive a truck throw. We

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Speaker 1: didn't feel like it was a panacea to what we

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Speaker 1: were trying to address, but we felt it was. It

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Speaker 1: was a novel idea, a panacea or not. Most in

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Speaker 1: Bloom go with it, and Kramer says it's best that

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Speaker 1: they or someone in the marketplace would take up the

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Speaker 1: idea because it wasn't a regulatory proposal. So we were

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Speaker 1: hoping that they would take debate, so to speak, and

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Speaker 1: and run with it. And uh, the AMEX did. Next

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Speaker 1: time on Trillions presents, most in Bloom share their idea

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Speaker 1: with maybe the most influential investor of all time, Jack Bogle,

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Speaker 1: and I said to however, Nathan, Mr Moss Nate they

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Speaker 1: proposed you sent me last week doesn't work. It has

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Speaker 1: these three flaws, and you're gonna have to get them

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Speaker 1: fixed before you can never do anything with it. Thanks

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Speaker 1: for listening to Trillions Presents Until next time. You can

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Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts,

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Speaker 1: and whatever else you listen to podcasts. Trillions Presents is

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Speaker 1: produced by Jordan Belle. Francesco Levy is the head of

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Speaker 1: Bloomberg Podcasts. Bye, oh, one more tiny little thing. Here's

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Speaker 1: any strike for you. I have a question when we

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Speaker 1: send this back to him, would you right on e bay?

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Speaker 1: M No, I'm not that I'm in deep, but I'm

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Speaker 1: not that in deep. H