1 00:00:04,360 --> 00:00:07,960 Speaker 1: Welcome to this week's Odd Blots. I'm Tracy Alloway, Executive 2 00:00:08,039 --> 00:00:10,239 Speaker 1: editor of Bloomberg Markets, and I'm Joe Why isn't the 3 00:00:10,240 --> 00:00:12,720 Speaker 1: all managing editor of Bloomberg Markets and the co host 4 00:00:12,800 --> 00:00:16,480 Speaker 1: of What You Missed. It's Monday, November six, and I 5 00:00:16,520 --> 00:00:19,720 Speaker 1: want to talk about bonds, corporate bonds to be specific. 6 00:00:20,120 --> 00:00:23,400 Speaker 1: So I'm really excited about this episode because I basically 7 00:00:23,600 --> 00:00:26,400 Speaker 1: know nothing about bonds. I know that when bond prices 8 00:00:26,440 --> 00:00:29,400 Speaker 1: go down, yields go up and vice versa. And I 9 00:00:29,480 --> 00:00:33,080 Speaker 1: know sometimes credit quality as a factor in interest rates 10 00:00:33,080 --> 00:00:36,199 Speaker 1: affect bonds, But beyond that, I'm a complete novice and 11 00:00:36,200 --> 00:00:39,760 Speaker 1: I can't wait to just sit and learn from this discussion. 12 00:00:40,040 --> 00:00:42,159 Speaker 1: All Right, but you know, bonds are the things that 13 00:00:42,240 --> 00:00:45,800 Speaker 1: companies sell to investors to fund their businesses, right this 14 00:00:45,920 --> 00:00:47,920 Speaker 1: I also know. Do you know it's an eight trillion 15 00:00:47,920 --> 00:00:49,960 Speaker 1: dollar market in the U S Alone? I knew it 16 00:00:50,000 --> 00:00:53,720 Speaker 1: was gigantic. Do you know how bonds trade? I knew 17 00:00:53,720 --> 00:00:56,120 Speaker 1: a little bit, but mostly what I know is what 18 00:00:56,160 --> 00:00:58,640 Speaker 1: you told me the other day. Okay, so what I 19 00:00:58,680 --> 00:01:02,240 Speaker 1: told Joe the other day is that bonds are traded 20 00:01:02,280 --> 00:01:05,480 Speaker 1: in a really old fashioned way. Still, So when you 21 00:01:05,520 --> 00:01:08,759 Speaker 1: think of buying and selling stocks, for instance, it's usually 22 00:01:08,800 --> 00:01:11,440 Speaker 1: pretty easy to do it. Investors large and small can 23 00:01:11,480 --> 00:01:13,759 Speaker 1: do it just with the click of a button. When 24 00:01:13,800 --> 00:01:16,920 Speaker 1: it comes to buying and selling bonds, it's much more difficult. 25 00:01:16,959 --> 00:01:19,920 Speaker 1: You actually have to pick up the phone, call a 26 00:01:19,959 --> 00:01:24,280 Speaker 1: dealer at a big dealer bank, figure out price size, 27 00:01:24,720 --> 00:01:27,920 Speaker 1: and do the transaction. That way. It's much less electronified. 28 00:01:28,000 --> 00:01:30,679 Speaker 1: And part of the issue too, is that everybody knows 29 00:01:30,760 --> 00:01:33,200 Speaker 1: what a share of Microsoft is. There's one share of 30 00:01:33,240 --> 00:01:36,240 Speaker 1: Microsoft common stock. But on the other hand, a company 31 00:01:36,280 --> 00:01:40,720 Speaker 1: like Microsoft could have numerous different flavors of bonds, different years, 32 00:01:40,760 --> 00:01:43,320 Speaker 1: when they mature and stuff like that. So there isn't 33 00:01:43,360 --> 00:01:45,520 Speaker 1: like a single Microsoft bond that you could just trade. 34 00:01:45,640 --> 00:01:49,000 Speaker 1: It makes trading much much more complicated. But there are 35 00:01:49,120 --> 00:01:53,960 Speaker 1: other factors underlying the bond markets resistance to change, and 36 00:01:54,000 --> 00:01:56,680 Speaker 1: we're going to talk about those factors today. And here 37 00:01:56,720 --> 00:01:59,280 Speaker 1: to talk with us about them is Chris White, a 38 00:01:59,360 --> 00:02:02,560 Speaker 1: former vice president at Goldman Sachs and someone who is 39 00:02:02,560 --> 00:02:05,240 Speaker 1: we're about to learn, has had a lot of firsthand 40 00:02:05,240 --> 00:02:08,760 Speaker 1: experience with the bond market and forcing through change on 41 00:02:08,800 --> 00:02:12,440 Speaker 1: the market, trying to bring it into the modern era. Exactly. So, Joe, 42 00:02:12,480 --> 00:02:15,239 Speaker 1: I want you to sit back, relax, and try to 43 00:02:15,360 --> 00:02:19,400 Speaker 1: learn something. So Chris, tell us about your background in 44 00:02:19,400 --> 00:02:22,840 Speaker 1: this space. So I've been working in electronic fixed income 45 00:02:22,880 --> 00:02:26,600 Speaker 1: business development for about thirteen years. I used to be 46 00:02:26,639 --> 00:02:29,880 Speaker 1: a bond salesman and then I was an equity arbitrage trader. 47 00:02:30,360 --> 00:02:31,840 Speaker 1: For the past ten years, I've been working on the 48 00:02:31,840 --> 00:02:36,359 Speaker 1: dealer side. I would say, Um, the general responsibilities for 49 00:02:36,480 --> 00:02:40,320 Speaker 1: my role were to help the credit market making businesses modernized. 50 00:02:40,440 --> 00:02:42,959 Speaker 1: So I did that for Barkley's and and Lehman Brothers 51 00:02:42,960 --> 00:02:46,000 Speaker 1: when we integrated, and then Goldman for the past five years, 52 00:02:46,040 --> 00:02:49,880 Speaker 1: and I just recently left. So let's talk about modernizing 53 00:02:49,960 --> 00:02:52,640 Speaker 1: the corporate bond market. Walk us through the way that 54 00:02:52,680 --> 00:02:57,000 Speaker 1: the bond market trades now or has traded historically. Is 55 00:02:57,000 --> 00:03:00,519 Speaker 1: it fair to call it old fashioned? Uh? Oh, it's 56 00:03:00,560 --> 00:03:03,040 Speaker 1: just it's it's set a stage that I think all 57 00:03:03,160 --> 00:03:06,560 Speaker 1: markets go through. There are three major stages to markets. 58 00:03:07,200 --> 00:03:10,440 Speaker 1: The first stage is um a physical market in which 59 00:03:10,960 --> 00:03:14,200 Speaker 1: human beings are directly interacting with each other in order 60 00:03:14,200 --> 00:03:16,519 Speaker 1: for the market to work. And then what we're seeing 61 00:03:16,520 --> 00:03:18,160 Speaker 1: in a lot of financial markets is what I call 62 00:03:18,200 --> 00:03:21,959 Speaker 1: the hybrid stage. Which is human beings interacting with each 63 00:03:22,000 --> 00:03:25,880 Speaker 1: other through screens. And that's really where some of or 64 00:03:26,000 --> 00:03:28,760 Speaker 1: or a lot of the UM fixed income markets are 65 00:03:28,760 --> 00:03:31,600 Speaker 1: going right now. And then you have the final stage 66 00:03:31,600 --> 00:03:35,840 Speaker 1: that we're seeing in UM more electronically traded markets. I 67 00:03:35,920 --> 00:03:39,160 Speaker 1: call them automated markets, where you're really having algorithms interact 68 00:03:39,200 --> 00:03:41,760 Speaker 1: with algorithms, and that's where you get high frequency trading 69 00:03:41,800 --> 00:03:44,840 Speaker 1: in ffcs and rates and futures. But where we are 70 00:03:44,880 --> 00:03:46,640 Speaker 1: from the bond market standpoint is, I think we're really 71 00:03:46,640 --> 00:03:50,240 Speaker 1: transitioning from stage one to stage two. So something like 72 00:03:50,280 --> 00:03:53,240 Speaker 1: the stock market would be probably at stage three in 73 00:03:53,280 --> 00:03:56,520 Speaker 1: your mind. UM, there are areas of the stock market 74 00:03:56,560 --> 00:03:58,640 Speaker 1: that's at stage three. And I think that what gets 75 00:03:58,640 --> 00:04:00,920 Speaker 1: confusing for a lot of people king at markets is 76 00:04:01,560 --> 00:04:04,280 Speaker 1: they tend to look at them with a sort of 77 00:04:04,320 --> 00:04:07,880 Speaker 1: a one size fits all and an inevitability around where 78 00:04:07,920 --> 00:04:10,440 Speaker 1: the markets are going. That I would say, I call 79 00:04:10,520 --> 00:04:12,800 Speaker 1: it sort of like a sky net sort of view 80 00:04:12,840 --> 00:04:17,160 Speaker 1: that eventually will the machines will run everything. And UM, 81 00:04:17,240 --> 00:04:20,479 Speaker 1: I find this fascinating because we have I think a 82 00:04:20,560 --> 00:04:24,359 Speaker 1: great case study in the Internet, and we look at 83 00:04:24,400 --> 00:04:26,560 Speaker 1: the Internet right now and we see that not everything 84 00:04:26,600 --> 00:04:29,400 Speaker 1: has gone to a fully automated solution. It's not because 85 00:04:29,400 --> 00:04:31,719 Speaker 1: of regulation. It's not because of some sort of laws 86 00:04:31,720 --> 00:04:34,520 Speaker 1: around it, except for I believe the science around how 87 00:04:34,560 --> 00:04:37,080 Speaker 1: markets work all right now on bonds. Even if you 88 00:04:37,120 --> 00:04:40,240 Speaker 1: don't think the market is old fashioned, it's difficult to 89 00:04:40,360 --> 00:04:42,839 Speaker 1: argue that it's not at a later stage in its 90 00:04:42,880 --> 00:04:46,520 Speaker 1: development than the stock market in terms of electronification. Why 91 00:04:46,720 --> 00:04:50,400 Speaker 1: is that, Well, I believe in a theory around size. 92 00:04:50,680 --> 00:04:53,760 Speaker 1: I think that size has a really huge impact in 93 00:04:53,800 --> 00:04:56,359 Speaker 1: the way systems work. And the best analogy that I 94 00:04:56,400 --> 00:04:59,080 Speaker 1: can make is um in the island of Manhattan and 95 00:04:59,240 --> 00:05:02,320 Speaker 1: eighteen fifty you had about half a million people living here, 96 00:05:02,760 --> 00:05:06,400 Speaker 1: but over the next fifty years the population tripled, so 97 00:05:06,960 --> 00:05:09,640 Speaker 1: by the end of the nineteenth century you had one 98 00:05:09,640 --> 00:05:11,880 Speaker 1: and a half million people living on the same space, 99 00:05:12,480 --> 00:05:15,560 Speaker 1: and that necessitated the development of a subway system. So 100 00:05:15,600 --> 00:05:18,760 Speaker 1: in eighteen fifty we don't need a subway system, but 101 00:05:19,200 --> 00:05:21,800 Speaker 1: you can see, with more people in a condensed space, 102 00:05:22,040 --> 00:05:25,080 Speaker 1: you need a piece of architecture that's going to allow 103 00:05:25,160 --> 00:05:28,960 Speaker 1: the city to function more optimally. UM what we've seen 104 00:05:29,200 --> 00:05:32,920 Speaker 1: in the equity markets, FX markets, futures markets has been 105 00:05:32,960 --> 00:05:35,279 Speaker 1: massive growth in terms of the outstanding size of the 106 00:05:35,320 --> 00:05:39,320 Speaker 1: market necessitating the delivery of architecture in the form of technology. 107 00:05:39,839 --> 00:05:42,640 Speaker 1: We have not seen that growth until the past really 108 00:05:43,240 --> 00:05:46,240 Speaker 1: six or seven years post two thousand and eight in 109 00:05:46,279 --> 00:05:49,000 Speaker 1: the bond market. And so now what you're getting is 110 00:05:49,440 --> 00:05:52,760 Speaker 1: a market that's exploded in size without modernizing. Now, this 111 00:05:52,839 --> 00:05:56,080 Speaker 1: brings us seamlessly to our next point, which is that 112 00:05:56,480 --> 00:05:59,360 Speaker 1: in addition to worries over the way bonds have historically 113 00:05:59,400 --> 00:06:04,080 Speaker 1: been traded, that has fed into worries about liquidity in 114 00:06:04,120 --> 00:06:07,320 Speaker 1: the market. And this is basically the ease of trading bonds. 115 00:06:07,360 --> 00:06:10,440 Speaker 1: And the idea here is that liquidity is low. You 116 00:06:10,480 --> 00:06:13,680 Speaker 1: can't buy or sell bonds without heavily impacting the price. 117 00:06:14,120 --> 00:06:16,359 Speaker 1: And that could be a problem because we've seen the 118 00:06:16,360 --> 00:06:19,200 Speaker 1: market explode in size and so many people buy these things. 119 00:06:19,480 --> 00:06:22,120 Speaker 1: If everyone decides to head for the exits all at once, 120 00:06:22,560 --> 00:06:25,920 Speaker 1: we could have a liquidity crisis. Basically, I think that 121 00:06:26,520 --> 00:06:30,680 Speaker 1: there's a huge misunderstanding around what liquidity really is. I 122 00:06:30,680 --> 00:06:34,039 Speaker 1: think this misunderstanding is pervasive across almost all conversations that 123 00:06:34,080 --> 00:06:37,240 Speaker 1: I hear about it. Um It starts really at the beginning, 124 00:06:37,279 --> 00:06:40,760 Speaker 1: what do you believe liquidity is and liquidity is subjective. 125 00:06:40,760 --> 00:06:44,440 Speaker 1: It's like beauty, so you can't really define it, though 126 00:06:44,480 --> 00:06:46,880 Speaker 1: I think there are some metrics we could probably use 127 00:06:47,440 --> 00:06:49,440 Speaker 1: UM where you could at least get close to it. 128 00:06:49,960 --> 00:06:53,120 Speaker 1: Where I think the liquidity debate starts is do you 129 00:06:53,200 --> 00:06:57,479 Speaker 1: believe that liquidity is a naturally occurring resource that can 130 00:06:57,560 --> 00:07:01,200 Speaker 1: be harvested if you network a market, or do you 131 00:07:01,240 --> 00:07:05,440 Speaker 1: believe that liquidity is an unnatural resource and a service 132 00:07:05,480 --> 00:07:08,599 Speaker 1: that must be provided by someone. So basically the idea 133 00:07:08,600 --> 00:07:11,680 Speaker 1: of whether or not you should pay for your liquidity, well, 134 00:07:11,720 --> 00:07:13,680 Speaker 1: if you think it's a natural resource that you can 135 00:07:13,720 --> 00:07:15,840 Speaker 1: just harvest if you network the market, then you're going 136 00:07:15,880 --> 00:07:18,960 Speaker 1: to believe that if you use technology in the right way, 137 00:07:19,040 --> 00:07:23,160 Speaker 1: liquidity will just show up and UM. What's what I 138 00:07:23,200 --> 00:07:28,600 Speaker 1: find fascinating about this is that theory has never been 139 00:07:28,640 --> 00:07:32,480 Speaker 1: proven in not only UM, any of the financial markets. 140 00:07:32,720 --> 00:07:35,120 Speaker 1: It's never been proven in any market ever in the 141 00:07:35,200 --> 00:07:39,040 Speaker 1: history of markets. I recently was participating in a discussion 142 00:07:39,360 --> 00:07:43,720 Speaker 1: around this and somebody said, when talking about liquidity that 143 00:07:43,880 --> 00:07:46,920 Speaker 1: the bond market, once technology hits, is going to function 144 00:07:46,920 --> 00:07:50,480 Speaker 1: more like Uber. And what I found really interesting about 145 00:07:50,520 --> 00:07:55,240 Speaker 1: that is Uber doesn't eliminate the you know, necessity for 146 00:07:55,320 --> 00:07:58,440 Speaker 1: the person wanting transportation to pay for the ride. It 147 00:07:58,520 --> 00:08:02,240 Speaker 1: just makes it easier. So we're not uberizing any of 148 00:08:02,280 --> 00:08:05,480 Speaker 1: these markets per se, and and and moving to a 149 00:08:05,520 --> 00:08:09,720 Speaker 1: world in which you don't need a transportation provider because hey, 150 00:08:09,920 --> 00:08:12,160 Speaker 1: I just am able to communicate with other people who 151 00:08:12,200 --> 00:08:14,280 Speaker 1: happen to be going the same way as me, and 152 00:08:14,640 --> 00:08:18,280 Speaker 1: therefore my transportation needs are met. I think the perfect 153 00:08:18,480 --> 00:08:23,280 Speaker 1: analogy for the networked liquidity theory is what you're really 154 00:08:23,320 --> 00:08:26,200 Speaker 1: saying is, um, if I had to go somewhere, I'm 155 00:08:26,240 --> 00:08:29,360 Speaker 1: going to rely on hitchhiking as the vehicle. What do 156 00:08:29,400 --> 00:08:32,640 Speaker 1: you think about liquidity concerns in general? Though? Do you 157 00:08:32,800 --> 00:08:35,880 Speaker 1: fear that sort of worst case scenario where interest rate 158 00:08:36,040 --> 00:08:38,720 Speaker 1: rise and everyone tries to head for the exits at 159 00:08:38,720 --> 00:08:42,280 Speaker 1: the same time? Not necessarily that's actually the heart effect 160 00:08:42,320 --> 00:08:45,240 Speaker 1: has never been proven in markets. I think that what 161 00:08:45,280 --> 00:08:47,679 Speaker 1: we're really dealing with, and with most markets deal with, 162 00:08:47,880 --> 00:08:51,440 Speaker 1: is a perception problem, and and perception has led to 163 00:08:51,480 --> 00:08:55,960 Speaker 1: stampedes before, so um, we haven't put in the fixed 164 00:08:56,000 --> 00:08:59,800 Speaker 1: income markets. I think things that would reduce the perception 165 00:09:00,040 --> 00:09:02,840 Speaker 1: that there could be a massive run for the exits. 166 00:09:03,200 --> 00:09:05,680 Speaker 1: One of the things that was discussed recently and dismissed 167 00:09:05,679 --> 00:09:08,360 Speaker 1: by a lot of large asset managers is a provision 168 00:09:08,400 --> 00:09:09,760 Speaker 1: that would be put in where they would have to 169 00:09:09,800 --> 00:09:13,280 Speaker 1: hold extra cash. And what that would do is if 170 00:09:13,280 --> 00:09:15,200 Speaker 1: they had a lot of redemptions people wanting to get 171 00:09:15,240 --> 00:09:17,840 Speaker 1: out of their funds, instead of them having to actually 172 00:09:17,880 --> 00:09:21,400 Speaker 1: sell bonds and create this mass effect that everyone's worried about, 173 00:09:21,720 --> 00:09:26,280 Speaker 1: they could just respond to those redemptions with cash on hand. Right. Um, 174 00:09:26,360 --> 00:09:29,800 Speaker 1: but that hasn't been enacted as a policy. Um, but 175 00:09:29,840 --> 00:09:32,079 Speaker 1: I think just putting something in like that may just 176 00:09:32,480 --> 00:09:36,760 Speaker 1: um make people feel more at ease that this theory 177 00:09:37,360 --> 00:09:40,240 Speaker 1: might not come to pass. Now, when you were at Goldman, 178 00:09:40,640 --> 00:09:44,359 Speaker 1: you started something in the bond market space called G Sessions, 179 00:09:44,600 --> 00:09:49,120 Speaker 1: an electronic bond trading platform. Nowadays we've seen dozens of 180 00:09:49,160 --> 00:09:52,720 Speaker 1: these things come to market. Bloomberg also has electronic bond 181 00:09:52,720 --> 00:09:57,600 Speaker 1: trading capabilities. What was the idea behind it and would 182 00:09:57,600 --> 00:10:03,160 Speaker 1: you call it successful? Yeah? Well, the the G Sessions platform, Um, 183 00:10:03,200 --> 00:10:05,480 Speaker 1: you know, I thought about it and and created a 184 00:10:05,520 --> 00:10:08,840 Speaker 1: Goldman because I've been looking at the liquidity issue in 185 00:10:08,880 --> 00:10:11,439 Speaker 1: the bond market for quite some time. I know it's 186 00:10:11,440 --> 00:10:15,160 Speaker 1: in vogue now. But UM back in two thousand and nine, 187 00:10:15,280 --> 00:10:18,000 Speaker 1: I was really looking at this and I stumbled across 188 00:10:18,320 --> 00:10:20,800 Speaker 1: UM a piece of market structure history. When they were 189 00:10:21,040 --> 00:10:23,319 Speaker 1: dealing with a similar liquidity issue in equities, there was 190 00:10:23,320 --> 00:10:26,760 Speaker 1: a really fantastic platform created. It was the first dark pool, 191 00:10:26,920 --> 00:10:31,000 Speaker 1: something called I T G posit And what it, what 192 00:10:31,160 --> 00:10:34,920 Speaker 1: basically G sessions comes from, is that philosophy. And what 193 00:10:35,000 --> 00:10:37,600 Speaker 1: the philosophy is is that you can create a more 194 00:10:37,600 --> 00:10:41,200 Speaker 1: efficient market if you actually slow things down. And it's 195 00:10:41,240 --> 00:10:45,160 Speaker 1: something called periodic trading or point in time trading. And 196 00:10:45,400 --> 00:10:47,560 Speaker 1: we see this a lot in systems that are only 197 00:10:47,559 --> 00:10:50,320 Speaker 1: in financial markets. We also see it in systems outside 198 00:10:50,320 --> 00:10:54,160 Speaker 1: of financial markets. If if you've ever used the the 199 00:10:54,280 --> 00:10:56,680 Speaker 1: guilt shopping site, Tracy, I don't know if you ever have. 200 00:10:56,920 --> 00:10:59,800 Speaker 1: Unfortunately for my credit card balance I have, right, So 201 00:11:00,080 --> 00:11:03,240 Speaker 1: does that site work? That site works. They have periodic 202 00:11:03,360 --> 00:11:06,440 Speaker 1: sales of designers and you kind of get an advanced 203 00:11:06,440 --> 00:11:08,680 Speaker 1: notice of what sales are coming on and then you 204 00:11:08,720 --> 00:11:11,760 Speaker 1: can be there when the sale happens and hopefully snap 205 00:11:11,840 --> 00:11:16,720 Speaker 1: up a pair of shoes or something. Yeah or ten. Uh. 206 00:11:17,000 --> 00:11:19,920 Speaker 1: So you know guilt if you know the origin of it, 207 00:11:19,760 --> 00:11:22,360 Speaker 1: it started in response to the two thousand and eight 208 00:11:22,400 --> 00:11:24,640 Speaker 1: sort of economic crisis where you had all these high 209 00:11:24,760 --> 00:11:28,160 Speaker 1: end designers who had a tremendous amount of inventory. And 210 00:11:28,200 --> 00:11:31,400 Speaker 1: as you know, with fashion, you're always building new things 211 00:11:31,440 --> 00:11:33,760 Speaker 1: that you want people to buy. So if your old 212 00:11:33,800 --> 00:11:35,640 Speaker 1: line is sitting on the shelves, how do you get 213 00:11:35,720 --> 00:11:37,440 Speaker 1: rid of it? But how did you get rid of 214 00:11:37,440 --> 00:11:40,720 Speaker 1: it in a way that doesn't hurt your brand? So 215 00:11:41,040 --> 00:11:45,240 Speaker 1: Guilt really addressed that with a periodic flash sale that 216 00:11:45,600 --> 00:11:49,280 Speaker 1: preserved the brand, made it very lucrative not only for 217 00:11:49,360 --> 00:11:52,200 Speaker 1: the people looking to get these these items, but also 218 00:11:52,240 --> 00:11:55,800 Speaker 1: made it really lucrative for the designers themselves because they 219 00:11:55,800 --> 00:11:58,360 Speaker 1: were able to control the amount of inventory that they're 220 00:11:58,400 --> 00:12:01,640 Speaker 1: selling in these slash cells each time. UM. I say 221 00:12:01,679 --> 00:12:04,240 Speaker 1: that to say that there is a science behind how 222 00:12:04,320 --> 00:12:08,360 Speaker 1: markets work, and you can see it both in financial 223 00:12:08,360 --> 00:12:11,400 Speaker 1: markets and outside of them. So with g sessions, we 224 00:12:11,400 --> 00:12:15,400 Speaker 1: were trying to harness that science, UM by basically creating 225 00:12:15,440 --> 00:12:18,800 Speaker 1: what's called temporal consolidation, or that's a fancy way of 226 00:12:18,800 --> 00:12:22,000 Speaker 1: saying everybody doing everything at the same time. There could 227 00:12:22,000 --> 00:12:25,480 Speaker 1: be benefits to trading, both on the people seeking liquidity 228 00:12:25,600 --> 00:12:28,760 Speaker 1: and us as a liquidity provider, right, So I remember 229 00:12:29,120 --> 00:12:32,280 Speaker 1: you would essentially have sort of sales of bonds that 230 00:12:32,320 --> 00:12:34,640 Speaker 1: were pre advertised, and then people would know what was 231 00:12:34,640 --> 00:12:36,400 Speaker 1: going to kind of come on the platform and they 232 00:12:36,400 --> 00:12:38,600 Speaker 1: could be there at the same time, and you create 233 00:12:38,760 --> 00:12:43,760 Speaker 1: a sort of point of liquidity. However, Goldman kind of 234 00:12:43,880 --> 00:12:47,240 Speaker 1: backed away from the platform, right. Can you kind of 235 00:12:47,280 --> 00:12:50,680 Speaker 1: explain what happened there and maybe walk us through how 236 00:12:50,720 --> 00:12:54,480 Speaker 1: investment banks are dealing with changes to the bond market 237 00:12:54,520 --> 00:12:57,640 Speaker 1: in general. You described it pretty well. I mean, I 238 00:12:57,640 --> 00:13:00,360 Speaker 1: think it's we could call it the guilt for behind trading, 239 00:13:00,360 --> 00:13:02,240 Speaker 1: where we we would pre announce when a bond was 240 00:13:02,280 --> 00:13:03,880 Speaker 1: going to trade and then see how many buyers and 241 00:13:03,880 --> 00:13:07,280 Speaker 1: sellers we could get to participate in the session, what 242 00:13:07,320 --> 00:13:10,400 Speaker 1: we were calling it. I think the the issue that 243 00:13:10,720 --> 00:13:14,160 Speaker 1: UM Goldman was having with g sessions as a platform 244 00:13:14,160 --> 00:13:17,760 Speaker 1: in general was actually pretty commonplace, you know, for many 245 00:13:17,800 --> 00:13:19,840 Speaker 1: of the investment banks, especially the ones that are well 246 00:13:19,960 --> 00:13:24,520 Speaker 1: established and very successful like Goldman, where the benefits associated 247 00:13:24,559 --> 00:13:29,080 Speaker 1: with change do not necessarily outweigh In fact, in no 248 00:13:29,200 --> 00:13:33,160 Speaker 1: way outweigh the benefits associated with remaining the status quo 249 00:13:33,480 --> 00:13:37,559 Speaker 1: on big successful businesses. So I felt as the inventor 250 00:13:37,600 --> 00:13:39,920 Speaker 1: of the system. I was constantly having to defend the 251 00:13:39,960 --> 00:13:43,160 Speaker 1: purpose of the system to people who had built careers 252 00:13:43,200 --> 00:13:47,120 Speaker 1: and had made far more money than the system was making. UM, 253 00:13:47,160 --> 00:13:50,360 Speaker 1: which is totally understandable. I'd say that the best way 254 00:13:50,400 --> 00:13:53,720 Speaker 1: I can describe what happened is similar to what happened 255 00:13:53,720 --> 00:13:57,080 Speaker 1: to Kodak when the digital camera was introduced. Um, they 256 00:13:57,120 --> 00:13:59,240 Speaker 1: still hang hung on to a business model in which 257 00:13:59,240 --> 00:14:02,800 Speaker 1: they would be processed film. However, Kodak now doesn't exist 258 00:14:02,840 --> 00:14:04,840 Speaker 1: anymore because they didn't see where the world was going. 259 00:14:05,120 --> 00:14:08,040 Speaker 1: So this is the idea that banks have bond traders 260 00:14:08,080 --> 00:14:09,679 Speaker 1: who make a lot of money for the bank by 261 00:14:09,760 --> 00:14:13,200 Speaker 1: essentially acting as middlemen for bond trades. So why would 262 00:14:13,240 --> 00:14:16,400 Speaker 1: they want to give up that business? Well, I think that, Um, 263 00:14:16,440 --> 00:14:19,440 Speaker 1: it's the it's it's really I think an easier way 264 00:14:19,480 --> 00:14:22,080 Speaker 1: for people to think about markets is not to think 265 00:14:22,120 --> 00:14:25,000 Speaker 1: of markets as systems of information, but to think of 266 00:14:25,040 --> 00:14:29,600 Speaker 1: markets as cultural institutions. And they become cultural institutions because 267 00:14:29,680 --> 00:14:34,120 Speaker 1: behaviors are institutionalized by the repetitive nature of actions. So 268 00:14:34,400 --> 00:14:38,000 Speaker 1: then you start to believe that the market works this way, 269 00:14:38,040 --> 00:14:41,080 Speaker 1: and that's your belief system around how things should go. 270 00:14:41,160 --> 00:14:43,960 Speaker 1: And so the belief system for many of the existing 271 00:14:44,040 --> 00:14:47,000 Speaker 1: bond traders is that the way that this market functions 272 00:14:47,040 --> 00:14:50,040 Speaker 1: best is if UM for every trade, I'm on the 273 00:14:50,080 --> 00:14:53,600 Speaker 1: phone with a customer and I'm providing them liquidity directly 274 00:14:53,640 --> 00:14:57,000 Speaker 1: in a bilateral fashion. The problem, now, though, to go 275 00:14:57,040 --> 00:14:59,560 Speaker 1: back to what we're talking about earlier, is that that 276 00:14:59,720 --> 00:15:04,560 Speaker 1: sort of um, you know, cultural belief system can service 277 00:15:04,600 --> 00:15:08,040 Speaker 1: a market that's maybe two trillion to three trillion in size, 278 00:15:08,080 --> 00:15:11,400 Speaker 1: which is where we were back in two thousand and three. 279 00:15:11,840 --> 00:15:14,760 Speaker 1: This market today is over eight trillion in size and 280 00:15:14,880 --> 00:15:18,400 Speaker 1: screaming towards nine trillion. So this sort of old school 281 00:15:18,440 --> 00:15:20,240 Speaker 1: I need to be on the phone all the time 282 00:15:20,280 --> 00:15:23,800 Speaker 1: for every single trade simply cannot service this market the 283 00:15:23,840 --> 00:15:27,360 Speaker 1: same way that a horse and carriage in Manhattan in 284 00:15:28,080 --> 00:15:32,160 Speaker 1: eight was not the preferred method of transportation because there 285 00:15:32,160 --> 00:15:33,880 Speaker 1: were just too many people in the city and you 286 00:15:33,880 --> 00:15:36,760 Speaker 1: couldn't move around. Right, We're going to wrap it up slowly, 287 00:15:36,840 --> 00:15:40,840 Speaker 1: but we've seen a lot of banks, Goldman included, claim 288 00:15:40,920 --> 00:15:43,440 Speaker 1: that there are technology companies. Now we've had Lloyd Blank 289 00:15:43,480 --> 00:15:46,200 Speaker 1: find stand up multiple times and say we're a technology 290 00:15:46,240 --> 00:15:49,240 Speaker 1: firm coming from inside the bank and being on the 291 00:15:49,280 --> 00:15:52,600 Speaker 1: forefront of some of its technological endeavors. What do you 292 00:15:52,600 --> 00:15:55,320 Speaker 1: think about that? I think it's very interesting branding. I mean, 293 00:15:55,720 --> 00:15:59,720 Speaker 1: there's some of these businesses are are making so much 294 00:15:59,800 --> 00:16:02,880 Speaker 1: more have made so much money historically that even the 295 00:16:02,920 --> 00:16:07,080 Speaker 1: best case scenario around a technology solution would never equal 296 00:16:07,360 --> 00:16:10,760 Speaker 1: you know, what these businesses make year over year. So 297 00:16:11,160 --> 00:16:13,960 Speaker 1: I think that a lot of the saber rattling, not 298 00:16:14,000 --> 00:16:16,640 Speaker 1: just from Goldman but from other dealers around being a 299 00:16:16,640 --> 00:16:20,400 Speaker 1: technology company are really designed to make investors feel more 300 00:16:20,440 --> 00:16:23,480 Speaker 1: comfortable with the longer term strategy. Hey, we're not big 301 00:16:23,560 --> 00:16:27,200 Speaker 1: risk takers. We're trying to actually develop solutions that have 302 00:16:27,440 --> 00:16:31,040 Speaker 1: higher margins and are more sustainable. I mean, somebody who's 303 00:16:31,040 --> 00:16:33,600 Speaker 1: actually acting on that instead of just talking about is 304 00:16:33,600 --> 00:16:35,920 Speaker 1: actually eye Cap. Ey Cap as an inter dealer broker. 305 00:16:35,960 --> 00:16:39,680 Speaker 1: They they their business is basically to broker trades between banks, 306 00:16:40,200 --> 00:16:42,520 Speaker 1: and a lot of that business has been going the 307 00:16:42,520 --> 00:16:45,120 Speaker 1: way of electronic systems. An eye Cap has made a 308 00:16:45,200 --> 00:16:49,120 Speaker 1: very large bet that voice negotiation of trades between banks 309 00:16:49,200 --> 00:16:51,600 Speaker 1: is going to become extinct. That's why they've sold it 310 00:16:51,720 --> 00:16:54,240 Speaker 1: to toll It's their arrival and they're putting all of 311 00:16:54,280 --> 00:16:57,680 Speaker 1: their chips on the table and betting on actually electronic 312 00:16:57,760 --> 00:17:01,000 Speaker 1: systems being the future of of d eler to dealer trading. 313 00:17:01,120 --> 00:17:04,879 Speaker 1: All right, speaking of cultural and technological change, Chris, you 314 00:17:04,920 --> 00:17:10,880 Speaker 1: once told me something really interesting about meetings at Goldman. Well, yeah, 315 00:17:11,080 --> 00:17:14,280 Speaker 1: I think it was. What we were talking about was 316 00:17:14,880 --> 00:17:18,840 Speaker 1: just basically how banks were handling innovation. And I think 317 00:17:18,840 --> 00:17:21,800 Speaker 1: what my response to you was, Eventually I stopped calling 318 00:17:21,840 --> 00:17:26,040 Speaker 1: meetings because in terms of talking about innovation and resources 319 00:17:26,040 --> 00:17:29,159 Speaker 1: and strategic planning, I could never go into a meeting 320 00:17:29,280 --> 00:17:32,720 Speaker 1: without knowing exactly what everyone in the meeting was supposed 321 00:17:32,760 --> 00:17:36,680 Speaker 1: to say. And I was, you know, pretty much directed 322 00:17:36,680 --> 00:17:39,200 Speaker 1: to behave this way, which was before you go into 323 00:17:39,200 --> 00:17:43,240 Speaker 1: a meeting, make sure you have individual bilateral meetings with 324 00:17:43,359 --> 00:17:46,159 Speaker 1: every person who's coming into that meeting beforehand. And so 325 00:17:46,240 --> 00:17:49,400 Speaker 1: it became really difficult, I would say, to be effective 326 00:17:49,440 --> 00:17:52,880 Speaker 1: in a meeting, because I don't think that they were 327 00:17:52,880 --> 00:17:55,520 Speaker 1: designed to get anything done. They were really designed to 328 00:17:56,200 --> 00:18:00,960 Speaker 1: make sure that, um everyone was protecting their own interests 329 00:18:01,280 --> 00:18:04,040 Speaker 1: and doing it in a formal way. Did anyone notice 330 00:18:04,119 --> 00:18:06,280 Speaker 1: that you weren't calling any meetings? I think they were 331 00:18:06,640 --> 00:18:09,959 Speaker 1: kind of relieved that I wasn't they didn't want to say, hey, 332 00:18:10,000 --> 00:18:12,359 Speaker 1: I want to have another meeting with you, mainly because 333 00:18:12,440 --> 00:18:14,800 Speaker 1: you know, think of what my topic is in a meeting. 334 00:18:14,840 --> 00:18:17,440 Speaker 1: I'm talking about change. I'm talking about something that may 335 00:18:17,560 --> 00:18:20,879 Speaker 1: make someone uncomfortable, something that they may not understand on 336 00:18:20,920 --> 00:18:23,680 Speaker 1: the surface. And I think that some of the best 337 00:18:23,680 --> 00:18:26,240 Speaker 1: advice I ever got from Goldman was when I first 338 00:18:26,320 --> 00:18:29,640 Speaker 1: arrived Um, somebody very senior took me aside and they said, 339 00:18:30,359 --> 00:18:34,280 Speaker 1: there are two minute guys, two year guys, and ten 340 00:18:34,359 --> 00:18:37,240 Speaker 1: year guys. The two minute guys are people who have 341 00:18:37,320 --> 00:18:39,840 Speaker 1: made so much money that they could retire in two 342 00:18:39,880 --> 00:18:42,200 Speaker 1: minutes and it wouldn't make a difference to their bottom line. 343 00:18:42,880 --> 00:18:45,159 Speaker 1: The ten year guys are the people who know that 344 00:18:45,200 --> 00:18:47,639 Speaker 1: they need to make a career out of the future 345 00:18:47,680 --> 00:18:49,760 Speaker 1: of this business, and therefore they're going to be very 346 00:18:49,800 --> 00:18:53,760 Speaker 1: invested in you. But it's the two year guys. It's 347 00:18:53,800 --> 00:18:56,960 Speaker 1: the people who in two years want to retire are 348 00:18:57,000 --> 00:19:00,399 Speaker 1: going to be inertia for you. They're not going to 349 00:19:00,440 --> 00:19:02,480 Speaker 1: want to see innovation because they want to see if 350 00:19:02,520 --> 00:19:05,400 Speaker 1: they can clip a few more coupons before the music stops. 351 00:19:05,560 --> 00:19:07,720 Speaker 1: It's a good way of putting it. Well. It was 352 00:19:07,880 --> 00:19:10,919 Speaker 1: prophetic in terms of the advice it was. It was 353 00:19:11,160 --> 00:19:14,159 Speaker 1: really helpful for me figuring out where do you belong 354 00:19:14,720 --> 00:19:16,800 Speaker 1: two minutes, two years, or ten years, and then I 355 00:19:16,840 --> 00:19:18,600 Speaker 1: was I was able to navigate a little bit easier 356 00:19:18,600 --> 00:19:21,879 Speaker 1: in that way. All right. Since leaving Goldman, Chris White 357 00:19:21,920 --> 00:19:26,640 Speaker 1: has founded his own company, Viable Markets, which is helping many, 358 00:19:26,680 --> 00:19:30,639 Speaker 1: many different types of financial institutions to modernize their fixed 359 00:19:30,680 --> 00:19:33,680 Speaker 1: income structures. Chris, thank you so much for being here, 360 00:19:33,920 --> 00:19:38,280 Speaker 1: my pleasure, Tracy. Alright, Joe, we just heard a whole 361 00:19:38,320 --> 00:19:41,080 Speaker 1: bunch of interesting stuff. What did you learn that was 362 00:19:41,119 --> 00:19:44,280 Speaker 1: totally fascinated. I'm just amazed at the extent of the 363 00:19:44,320 --> 00:19:47,520 Speaker 1: complications of this problem and how difficult it's going to 364 00:19:47,600 --> 00:19:50,600 Speaker 1: be to solve. Also, I'm never going to take another 365 00:19:50,640 --> 00:19:56,240 Speaker 1: meeting again. All right, thanks everyone for listening. I'm Tracy Alloway. 366 00:19:56,320 --> 00:19:59,479 Speaker 1: You can follow me at Tracy Alloway on Twitter, and 367 00:19:59,520 --> 00:20:01,480 Speaker 1: I'm Joe Why is It Thought? Follow me at the 368 00:20:01,480 --> 00:20:04,199 Speaker 1: Stalwart on Twitter, and please join us next week for 369 00:20:04,200 --> 00:20:05,480 Speaker 1: another episode of Odd Lots.