1 00:00:00,160 --> 00:00:02,320 Speaker 1: But knowledge to work and grow your business with c 2 00:00:02,520 --> 00:00:06,680 Speaker 1: i T from transportation to healthcare to manufacturing. C i 3 00:00:06,760 --> 00:00:10,520 Speaker 1: T offers commercial lending, leasing, and treasury management services for 4 00:00:10,600 --> 00:00:13,480 Speaker 1: small and middle market businesses. Learn more at c i 5 00:00:13,560 --> 00:00:24,959 Speaker 1: T dot com put Knowledge to Work. Welcome to another 6 00:00:25,120 --> 00:00:27,880 Speaker 1: edition of Odd Lots. I'm Tracy Alloway, executive editor at 7 00:00:27,880 --> 00:00:30,720 Speaker 1: Bloomberg Markets, and I'm Joe wi Isn'tal, Managing editor of 8 00:00:30,760 --> 00:00:34,519 Speaker 1: Bloomberg Markets. So, Joe, when you think about a modern 9 00:00:35,000 --> 00:00:39,720 Speaker 1: market place, what makes it modern? I think about a 10 00:00:39,760 --> 00:00:45,120 Speaker 1: lot of people around computers and data flashing in their eyes. 11 00:00:45,320 --> 00:00:48,240 Speaker 1: And maybe maybe there's not even a person from the computer, 12 00:00:48,400 --> 00:00:52,080 Speaker 1: maybe just some software making decisions, but lots of screens 13 00:00:52,120 --> 00:00:55,160 Speaker 1: and blinking data. Basically, so you're actually thinking about some 14 00:00:55,320 --> 00:00:59,960 Speaker 1: very specific markets, probably the stock market, maybe the currency market. 15 00:01:00,000 --> 00:01:03,600 Speaker 1: It because there is actually one very large market that 16 00:01:03,640 --> 00:01:08,840 Speaker 1: has stubbornly resisted all attempts to electronify itself and to modernize. Yeah, 17 00:01:08,840 --> 00:01:12,640 Speaker 1: I guess I am. I guess I'm probably stocks and currencies, probably, 18 00:01:12,680 --> 00:01:16,680 Speaker 1: that's all right. The one that's been left out is 19 00:01:16,720 --> 00:01:19,360 Speaker 1: basically the bond market. This is the place where people 20 00:01:19,400 --> 00:01:24,840 Speaker 1: trade corporate debt. Uh, securities issued by companies, and a 21 00:01:24,880 --> 00:01:27,039 Speaker 1: lot of that is still taking place over the phone, 22 00:01:27,160 --> 00:01:30,240 Speaker 1: sometimes even by facts, which is kind of insane when 23 00:01:30,280 --> 00:01:32,920 Speaker 1: you think about where we are today in terms of technology, 24 00:01:33,440 --> 00:01:36,080 Speaker 1: that is sort of pretty hard to believe. I mean, 25 00:01:36,319 --> 00:01:40,399 Speaker 1: we've talked about this before, and of course you can 26 00:01:40,480 --> 00:01:43,560 Speaker 1: look up prices of a corporate bond on a terminal 27 00:01:43,560 --> 00:01:45,440 Speaker 1: and you'd think that why not just be able to 28 00:01:45,560 --> 00:01:47,360 Speaker 1: enter in that you want to buy or sell? But 29 00:01:47,960 --> 00:01:50,320 Speaker 1: it's still kind of blows my mind. It's not that 30 00:01:50,400 --> 00:01:52,600 Speaker 1: it's the case that it's not that easy. All right, 31 00:01:52,640 --> 00:01:55,600 Speaker 1: So today we are going to delve into the mystery 32 00:01:55,920 --> 00:02:00,720 Speaker 1: of bond market modernization or lack thereof why it hasn't 33 00:02:00,720 --> 00:02:04,080 Speaker 1: happened before, And I'm pleased to say that we have 34 00:02:04,360 --> 00:02:08,960 Speaker 1: a recurring guest with us today. It's Chris White from Well. 35 00:02:09,160 --> 00:02:11,800 Speaker 1: He's now at Viable Markets, used to be at Goldman 36 00:02:12,000 --> 00:02:15,400 Speaker 1: and was very involved in the bond trading platform they 37 00:02:15,440 --> 00:02:19,360 Speaker 1: built there called g Sessions. And to make things extra special, 38 00:02:19,440 --> 00:02:23,600 Speaker 1: Chris has brought along his former boss, it's les sef. 39 00:02:23,639 --> 00:02:26,760 Speaker 1: He has a very long history not only in bond 40 00:02:26,800 --> 00:02:30,040 Speaker 1: market structure but also in stocks and he's currently at 41 00:02:30,080 --> 00:02:34,080 Speaker 1: a software firm called a pass. I'm really excited about 42 00:02:34,120 --> 00:02:37,160 Speaker 1: this because the last time we talked about market structure 43 00:02:37,160 --> 00:02:39,120 Speaker 1: with Chris, I think was one of my favorite episodes. 44 00:02:39,160 --> 00:02:42,119 Speaker 1: So I'm glad we're returning to the well and going 45 00:02:42,240 --> 00:02:45,679 Speaker 1: deeper on this subject, which is fascinating. So let's let's 46 00:02:45,680 --> 00:02:58,640 Speaker 1: get gone, let's dig deep. Chris and Lez thank you 47 00:02:58,680 --> 00:03:01,240 Speaker 1: so much for joining us today. Uh, my pleasure to 48 00:03:01,240 --> 00:03:03,720 Speaker 1: be back, Tracy. Um, you know, just having listened to 49 00:03:03,800 --> 00:03:06,400 Speaker 1: a lot of the other odd lots podcasts, I'm just 50 00:03:06,440 --> 00:03:09,359 Speaker 1: happy to be a part of some of the original. Uh. 51 00:03:11,440 --> 00:03:15,120 Speaker 1: The exact thing to say to get you on again, Well, no, 52 00:03:15,320 --> 00:03:17,640 Speaker 1: I really do enjoy it. That's that's an honest statement. 53 00:03:17,639 --> 00:03:19,960 Speaker 1: And I think that you're in for a really special 54 00:03:20,000 --> 00:03:23,519 Speaker 1: treat today because um less CEF can talk about an 55 00:03:23,560 --> 00:03:26,639 Speaker 1: area of equity market structure history that I think is 56 00:03:26,680 --> 00:03:30,080 Speaker 1: really pertinent today. It was the formation of a piece 57 00:03:30,120 --> 00:03:33,600 Speaker 1: of architecture that if you look through history, um, the 58 00:03:33,720 --> 00:03:39,080 Speaker 1: Nasadack system is something that's been mimicked throughout other market 59 00:03:39,160 --> 00:03:42,600 Speaker 1: systems in terms of being a critical piece of architecture 60 00:03:42,600 --> 00:03:44,880 Speaker 1: on their way to modernization. So I think it's going 61 00:03:44,920 --> 00:03:46,560 Speaker 1: to be very interesting to hear what Less has to 62 00:03:46,600 --> 00:03:50,080 Speaker 1: say about the before and after picture in the equity markets. UM. 63 00:03:50,560 --> 00:03:53,360 Speaker 1: In nineteen one, that's when Nasdaq was introduced, and that's 64 00:03:53,360 --> 00:03:55,720 Speaker 1: when Less arrived on the scene. Well, Less, why don't 65 00:03:55,760 --> 00:03:57,760 Speaker 1: we start with you then? UM, you've said you've been 66 00:03:58,040 --> 00:04:01,160 Speaker 1: in trading in some way or another. Is the nineteen seventies? 67 00:04:01,200 --> 00:04:06,680 Speaker 1: Tell us what the stock market was like back then? Sure, Well, 68 00:04:06,760 --> 00:04:11,520 Speaker 1: let's start with nineteen seventy one, which is when I started. UM. 69 00:04:11,560 --> 00:04:15,600 Speaker 1: At that time, not only was the more the market 70 00:04:15,680 --> 00:04:19,200 Speaker 1: not connected by computer, or the equity market not connected 71 00:04:19,200 --> 00:04:24,359 Speaker 1: by computer, but the people that comprised the trading departments 72 00:04:24,360 --> 00:04:28,120 Speaker 1: were very different as well. Uh, today you've got m 73 00:04:28,200 --> 00:04:31,320 Speaker 1: B a's from M I T sitting on the desk. 74 00:04:31,680 --> 00:04:35,480 Speaker 1: Then basically we were a bunch of street fighters, UM. 75 00:04:35,520 --> 00:04:41,320 Speaker 1: And the connection between UH one firm and another, or 76 00:04:42,040 --> 00:04:46,159 Speaker 1: the connection was something called the pink sheets. If you 77 00:04:46,240 --> 00:04:49,200 Speaker 1: wanted to know the price of a stock in those 78 00:04:49,279 --> 00:04:53,400 Speaker 1: years pre NASDAC, that is, UH, if you wanted to 79 00:04:53,440 --> 00:04:55,600 Speaker 1: know the price of an over the counter stock was 80 00:04:55,640 --> 00:04:59,120 Speaker 1: called over the counter at that time, you would get 81 00:04:59,120 --> 00:05:01,760 Speaker 1: a copy of the pink she eats, open it up 82 00:05:02,320 --> 00:05:07,000 Speaker 1: to the alphabetical listing of the stock, and there'd be 83 00:05:07,200 --> 00:05:11,560 Speaker 1: a list of five or any number of market makers 84 00:05:11,600 --> 00:05:14,839 Speaker 1: that traded the stock with their name and their phone number, 85 00:05:15,400 --> 00:05:17,840 Speaker 1: and you would simply call them up and ask them 86 00:05:17,839 --> 00:05:21,360 Speaker 1: for the market in X, y z, and you you 87 00:05:21,400 --> 00:05:23,839 Speaker 1: were obligated to make three phone calls that may have 88 00:05:23,839 --> 00:05:26,960 Speaker 1: been ten market makers. You were obligated if you were 89 00:05:27,000 --> 00:05:30,919 Speaker 1: executing a client order, you were obligated to get three quotes, 90 00:05:31,400 --> 00:05:36,200 Speaker 1: which left seven out potentially. So even with pink sheets, 91 00:05:36,240 --> 00:05:41,520 Speaker 1: you had best execution requirements. Best execution was really if 92 00:05:41,560 --> 00:05:45,280 Speaker 1: it's a fuzzy concept now, it was even fuzzier than 93 00:05:46,600 --> 00:05:51,520 Speaker 1: because the markets were very, very thin, so an execution 94 00:05:51,600 --> 00:05:55,840 Speaker 1: of a thousand shares could have been at multiple markets, 95 00:05:56,600 --> 00:05:59,520 Speaker 1: and the uh, the guy on the desk who was 96 00:05:59,600 --> 00:06:02,760 Speaker 1: executing getting on behalf of the client would basically stay 97 00:06:02,800 --> 00:06:07,920 Speaker 1: with one firm MHM. So obviously, these days with electronic trading, 98 00:06:07,920 --> 00:06:11,200 Speaker 1: there's so much talk about collapsing margins of trading and 99 00:06:11,320 --> 00:06:14,279 Speaker 1: you know, people making fractions of a penny here and there, 100 00:06:14,680 --> 00:06:18,040 Speaker 1: but this sounds like, you know, the extreme opposite end 101 00:06:18,040 --> 00:06:22,520 Speaker 1: of that, where lots of lots of opportunity to make 102 00:06:22,560 --> 00:06:25,840 Speaker 1: money in the human interaction and the fact you only 103 00:06:25,880 --> 00:06:27,880 Speaker 1: had to call three out of ten people and so forth, 104 00:06:28,040 --> 00:06:30,920 Speaker 1: spreads that you could drive a bus, Yes, exactly. Yeah, 105 00:06:30,960 --> 00:06:34,359 Speaker 1: well that was that was very true. I mean markets 106 00:06:34,560 --> 00:06:38,920 Speaker 1: have collapsed, uh in recent years, primarily as a result 107 00:06:38,960 --> 00:06:43,080 Speaker 1: of increased volument as a result of decimalization back you know, 108 00:06:43,360 --> 00:06:49,839 Speaker 1: almost fifteen sixteen years ago. But in those years there 109 00:06:49,920 --> 00:06:53,880 Speaker 1: was no such thing as decimalization. Stocks are traded with 110 00:06:54,360 --> 00:06:58,360 Speaker 1: very often a point spread. Uh, a half a point 111 00:06:58,400 --> 00:07:01,359 Speaker 1: spread was not unusual, and stocks under a dollar was 112 00:07:01,400 --> 00:07:05,120 Speaker 1: sometimes traded with three eighths to a half a point 113 00:07:05,120 --> 00:07:08,320 Speaker 1: spread as well. So the difference between the bidden offer 114 00:07:08,520 --> 00:07:10,880 Speaker 1: was you know, as you said, you could drive a 115 00:07:10,880 --> 00:07:14,360 Speaker 1: truck through it. So market makers could essentially pocket the 116 00:07:14,400 --> 00:07:17,680 Speaker 1: difference between the spreads on the buy and sell orders. 117 00:07:18,800 --> 00:07:22,000 Speaker 1: What made that change, Like, what was the impetus for 118 00:07:22,040 --> 00:07:25,400 Speaker 1: the stock market to start modernizing and to head towards 119 00:07:25,520 --> 00:07:32,080 Speaker 1: things like decimalization. Well, uh, there were a number of reasons. Firstly, Um, 120 00:07:32,200 --> 00:07:36,200 Speaker 1: while the spreads were substantial and the likelihood of making 121 00:07:36,240 --> 00:07:40,480 Speaker 1: money on a trade was pretty substantial, Um, the volume 122 00:07:40,560 --> 00:07:46,760 Speaker 1: just wasn't there. I remember a big trader in NT 123 00:07:47,520 --> 00:07:50,720 Speaker 1: which is before I'm thankful to say, before I started, 124 00:07:51,480 --> 00:07:58,320 Speaker 1: UM was making somewhere around a hundred thousand dollars UM 125 00:07:58,360 --> 00:08:01,800 Speaker 1: and his profitability was there for like maybe two fifty 126 00:08:01,960 --> 00:08:07,600 Speaker 1: and that was that was huge at that time. UM. 127 00:08:07,640 --> 00:08:11,559 Speaker 1: But as I said, the volume was just wasn't there. Uh. 128 00:08:11,720 --> 00:08:16,600 Speaker 1: Subsequent to that, uh that period uh in nineteen seventy 129 00:08:16,840 --> 00:08:19,640 Speaker 1: late seventy yearly seventy one, I believe it was NASDAK 130 00:08:19,720 --> 00:08:27,080 Speaker 1: started and NASDAK was a more transparent view of of 131 00:08:27,160 --> 00:08:31,360 Speaker 1: the markets. Now during the pain sheet environment, as I said, 132 00:08:32,160 --> 00:08:37,160 Speaker 1: prior to NASDAK, the client or the trader at another 133 00:08:37,160 --> 00:08:39,719 Speaker 1: firm would call up the market maker and asked for 134 00:08:39,760 --> 00:08:43,960 Speaker 1: a quote. As a result, market makers would give different 135 00:08:44,000 --> 00:08:47,960 Speaker 1: quotes to different folks. UM. If they sense that you 136 00:08:47,960 --> 00:08:49,800 Speaker 1: were a buyer, you might have gotten one quote. If 137 00:08:49,800 --> 00:08:51,480 Speaker 1: they sensed you were a seller, you might have gotten 138 00:08:51,520 --> 00:08:54,400 Speaker 1: another quote. And if they sensed that you were calling 139 00:08:54,400 --> 00:08:57,640 Speaker 1: on behalf of a competitor competitor, then you've got a 140 00:08:57,679 --> 00:09:02,280 Speaker 1: really strange quote. So actually less This is one of 141 00:09:02,280 --> 00:09:04,199 Speaker 1: the things that I think is most fascinating is that 142 00:09:04,480 --> 00:09:07,360 Speaker 1: you're talking about a period in time that was almost 143 00:09:07,400 --> 00:09:11,000 Speaker 1: fifty years ago, but in terms of the cultural practices 144 00:09:11,120 --> 00:09:14,760 Speaker 1: and the infrastructure, it's not that far away from where 145 00:09:14,760 --> 00:09:16,760 Speaker 1: we are in terms of the modern day corporate bond 146 00:09:16,760 --> 00:09:20,800 Speaker 1: market UM today. There there really isn't a facility that 147 00:09:21,360 --> 00:09:25,040 Speaker 1: organizes all of the quotes the way that NASDAC organized 148 00:09:25,080 --> 00:09:28,640 Speaker 1: the quotes UM. And also what you describe in terms 149 00:09:28,679 --> 00:09:33,440 Speaker 1: of different prices for different people is absolutely function of 150 00:09:33,480 --> 00:09:36,640 Speaker 1: the market. UM. What sort of drove the idea that 151 00:09:37,080 --> 00:09:39,280 Speaker 1: you need to get out of the pink sheets and 152 00:09:39,360 --> 00:09:43,240 Speaker 1: into UM something that was a bit more centralized and 153 00:09:43,280 --> 00:09:48,839 Speaker 1: focused around pricing, Well, it was it was driven uh 154 00:09:49,360 --> 00:09:54,160 Speaker 1: partially by the retail firms. I don't remember now the 155 00:09:54,280 --> 00:09:57,800 Speaker 1: name of the guy who started uh NASDAK, but I 156 00:09:57,800 --> 00:10:00,719 Speaker 1: believe that it was sponsored by the n s D 157 00:10:01,600 --> 00:10:05,280 Speaker 1: and UH I believe that Reynolds, which was one of 158 00:10:05,320 --> 00:10:10,040 Speaker 1: the larger retail firms. One of the executives at Reynolds 159 00:10:10,280 --> 00:10:14,600 Speaker 1: was the guy who was tasked with, uh, you know, 160 00:10:14,640 --> 00:10:20,360 Speaker 1: starting the NASDACK UH the NASTAC system and basically it 161 00:10:20,440 --> 00:10:25,160 Speaker 1: was kind of rolled out over time and the functionality 162 00:10:25,600 --> 00:10:30,080 Speaker 1: changed over time. Initially it was simply a presentation of 163 00:10:30,120 --> 00:10:34,000 Speaker 1: the median market, which is the most repeated market. UH 164 00:10:34,080 --> 00:10:37,720 Speaker 1: so if they were make an easy example, if there 165 00:10:37,760 --> 00:10:44,080 Speaker 1: were four traders trading stock. One was ten eleven, another 166 00:10:44,080 --> 00:10:47,480 Speaker 1: one tenant a quarter eleven and a quarter, third one 167 00:10:47,559 --> 00:10:49,760 Speaker 1: was tenant a quarter eleven a quarter, and the fourth 168 00:10:49,760 --> 00:10:53,720 Speaker 1: one was nine and three quarters tenant three quarters. The 169 00:10:53,760 --> 00:10:56,360 Speaker 1: inside market was tenant a quarter a three quarters. The 170 00:10:56,440 --> 00:11:01,960 Speaker 1: market that was visible UH to level one was tenant 171 00:11:01,960 --> 00:11:05,559 Speaker 1: a quarter, eleven and a quarter. It was the most 172 00:11:05,600 --> 00:11:09,720 Speaker 1: repeated market. So they didn't see the inside market. The salesman, 173 00:11:09,920 --> 00:11:13,240 Speaker 1: for example, at Merrill Lynch didn't see you know, just 174 00:11:14,160 --> 00:11:16,560 Speaker 1: not not to single them out, but the salesman at 175 00:11:16,720 --> 00:11:20,000 Speaker 1: UH the brokerage firms didn't see the inside market at 176 00:11:20,000 --> 00:11:22,360 Speaker 1: the time, and they weren't aware of what the volume 177 00:11:22,400 --> 00:11:25,319 Speaker 1: was day one. So how did the market makers actually 178 00:11:25,400 --> 00:11:27,840 Speaker 1: feel about those changes? That was exactly what I was 179 00:11:27,840 --> 00:11:30,600 Speaker 1: gonna ask, Like who, yeah, like who who fought it? 180 00:11:30,720 --> 00:11:33,320 Speaker 1: Or these changes happened? And so how do they feel? 181 00:11:33,400 --> 00:11:37,079 Speaker 1: And were there any people right from the beginning resisting 182 00:11:37,120 --> 00:11:42,000 Speaker 1: the changes? Try? Everyone was resisting the changes. Um, the 183 00:11:42,080 --> 00:11:48,319 Speaker 1: market makers were shaking in their boots because they were 184 00:11:48,360 --> 00:11:50,720 Speaker 1: in their minds making a living and this was going 185 00:11:50,760 --> 00:11:54,199 Speaker 1: to destroy their living because you didn't want your competition 186 00:11:54,240 --> 00:11:57,080 Speaker 1: to know your market. And this was going to making 187 00:11:57,200 --> 00:12:02,080 Speaker 1: market very transparent. Uh. Plus you had to honor your market, 188 00:12:03,000 --> 00:12:08,440 Speaker 1: which prior to actually divulging what your market was. Um. 189 00:12:08,480 --> 00:12:11,480 Speaker 1: You know, in a NASDAC environment, you had to honor 190 00:12:11,520 --> 00:12:14,320 Speaker 1: what the market said you were on NASDAC. And that 191 00:12:14,400 --> 00:12:17,360 Speaker 1: was kind of a new concept to say, try to 192 00:12:17,400 --> 00:12:21,200 Speaker 1: stop it or yeah, all the soldiers tried to stop it. 193 00:12:21,679 --> 00:12:24,840 Speaker 1: The generals thought it was a good idea and and 194 00:12:25,040 --> 00:12:29,920 Speaker 1: basically it was an amazing idea. It was it was 195 00:12:30,040 --> 00:12:35,160 Speaker 1: right for the client. Being right for the client, uh 196 00:12:35,440 --> 00:12:42,679 Speaker 1: meant that a volume exploded over time, but really just exploded. 197 00:12:42,840 --> 00:12:47,679 Speaker 1: And and uh from seventy one to you know today, 198 00:12:47,760 --> 00:12:50,959 Speaker 1: I mean, volume is just so different than it was then. 199 00:12:51,720 --> 00:12:56,600 Speaker 1: And um, in addition to the volume exploding, the profitability 200 00:12:57,640 --> 00:13:01,200 Speaker 1: of the market maker exploded with it may not have 201 00:13:01,280 --> 00:13:08,880 Speaker 1: made as much money her trade, but but the spreads 202 00:13:09,360 --> 00:13:14,360 Speaker 1: ultimately tightened a little bit. They didn't really change until 203 00:13:15,040 --> 00:13:20,920 Speaker 1: years later when uh, in in the mid nineties, when 204 00:13:21,360 --> 00:13:25,800 Speaker 1: the dealers were accused of collusion. So were they eventually 205 00:13:25,840 --> 00:13:28,600 Speaker 1: able to make up the tighter spreads and volume? In 206 00:13:28,600 --> 00:13:35,239 Speaker 1: other words, yes, by far? Okay, well, let's fast forward 207 00:13:36,080 --> 00:13:39,760 Speaker 1: many decades to the bond market, because Chris, as we've 208 00:13:39,800 --> 00:13:42,960 Speaker 1: all discussed before, in many ways, the bond market is 209 00:13:43,040 --> 00:13:45,880 Speaker 1: where the stock market was many years ago. In fact, 210 00:13:46,160 --> 00:13:48,960 Speaker 1: I remember talking to one bond dealer who said it 211 00:13:49,000 --> 00:13:52,040 Speaker 1: was like the last ages of the Roman Empire, and 212 00:13:52,080 --> 00:13:56,000 Speaker 1: the dealers are essentially trying to protect the profits that 213 00:13:56,040 --> 00:13:59,679 Speaker 1: they can make from bond trading. Well, I think that 214 00:14:00,200 --> 00:14:03,480 Speaker 1: similar to the fall of the Roman Empire, when finally 215 00:14:03,559 --> 00:14:06,160 Speaker 1: I think it was the it was the Goths or 216 00:14:06,240 --> 00:14:09,680 Speaker 1: some tribe of barbarians that stormed the walls. Um there 217 00:14:09,720 --> 00:14:12,280 Speaker 1: was deterioration for some time, and I think if you 218 00:14:12,360 --> 00:14:15,000 Speaker 1: just look at even how the top five dealers have 219 00:14:15,080 --> 00:14:19,280 Speaker 1: been performing in market making for corporate bonds. Uh Ever, 220 00:14:19,320 --> 00:14:22,160 Speaker 1: since two thousand and nine, they've seen declining results year 221 00:14:22,240 --> 00:14:24,280 Speaker 1: over year. So I think a lot of people are 222 00:14:24,280 --> 00:14:29,160 Speaker 1: starting to question the efficacy of the traditional model. One 223 00:14:29,200 --> 00:14:32,160 Speaker 1: of the things that's fascinating about the way Less talks 224 00:14:32,200 --> 00:14:36,360 Speaker 1: about the fears of the market makers in unlisted stocks 225 00:14:36,760 --> 00:14:39,760 Speaker 1: prior in Nazdac as they say sound very similar to 226 00:14:39,840 --> 00:14:42,440 Speaker 1: a lot of the fears that we're hearing when we 227 00:14:42,440 --> 00:14:46,240 Speaker 1: talk about transparency in the bond market, we're having issues 228 00:14:46,240 --> 00:14:49,040 Speaker 1: around secondary trading, and yet there are some people in 229 00:14:49,080 --> 00:14:52,600 Speaker 1: the market who are actually saying that less information in 230 00:14:52,640 --> 00:14:55,600 Speaker 1: the form of delaying the post trade tape would bring 231 00:14:55,640 --> 00:14:58,600 Speaker 1: market makers back into the market, which I think that 232 00:14:58,840 --> 00:15:01,240 Speaker 1: we've looked at all the other markets that have modernized, 233 00:15:01,240 --> 00:15:06,280 Speaker 1: and they've done so by actually adding more information, not less. 234 00:15:06,880 --> 00:15:09,800 Speaker 1: So I think that culturally we're at the same inflection 235 00:15:09,840 --> 00:15:11,920 Speaker 1: point that the equity market was in almost forty six 236 00:15:12,000 --> 00:15:15,160 Speaker 1: years ago. So how do we get over that hump then, 237 00:15:15,280 --> 00:15:18,360 Speaker 1: because it seems like it's it's not only a business 238 00:15:18,360 --> 00:15:20,920 Speaker 1: model change, it's also a cultural change, and there are 239 00:15:20,920 --> 00:15:23,880 Speaker 1: people who will fight it every step of the way. Well, 240 00:15:23,920 --> 00:15:26,760 Speaker 1: I think it's really good to understand history and really 241 00:15:26,800 --> 00:15:29,320 Speaker 1: what happens. I mean, what Less is telling you is true. 242 00:15:29,400 --> 00:15:31,920 Speaker 1: Anyone who was trading NASDACK stocks and who went through 243 00:15:31,920 --> 00:15:35,760 Speaker 1: the change of the actual NASDAC platform, which is stands 244 00:15:35,760 --> 00:15:41,080 Speaker 1: for National Association Securities Dealers Automated Quotation System, at first 245 00:15:41,080 --> 00:15:43,400 Speaker 1: they were afraid, but then they found that it was 246 00:15:43,560 --> 00:15:45,920 Speaker 1: beneficial not only to the customers but to the market 247 00:15:45,920 --> 00:15:49,360 Speaker 1: makers as well. So I think that if you look 248 00:15:49,400 --> 00:15:52,280 Speaker 1: at the history of other markets. For example, UM the 249 00:15:52,400 --> 00:15:55,400 Speaker 1: FX market started with a consolidated quote board and something 250 00:15:55,440 --> 00:15:59,920 Speaker 1: called the Reuter's Market Data service. In the listed market 251 00:16:00,040 --> 00:16:04,240 Speaker 1: had to organize into its consolidated quote service. In four 252 00:16:05,960 --> 00:16:09,440 Speaker 1: the treasury market, after recovering from the Solomon Brothers government 253 00:16:09,440 --> 00:16:14,080 Speaker 1: bond scandal, had to produce a consolidated quote system something 254 00:16:14,120 --> 00:16:17,640 Speaker 1: called gov picks. So it seems to me and the 255 00:16:17,680 --> 00:16:19,320 Speaker 1: more I talked to Less and other people who have 256 00:16:19,360 --> 00:16:24,280 Speaker 1: worked in those markets, that organization around pre trade information 257 00:16:25,360 --> 00:16:29,840 Speaker 1: is a key piece of architecture for UM modernizing market. 258 00:16:30,480 --> 00:16:32,920 Speaker 1: Let's take a quick break for work from a sponsor, 259 00:16:37,200 --> 00:16:39,400 Speaker 1: but knowledge to work and grow your business with c 260 00:16:39,600 --> 00:16:43,760 Speaker 1: I T from transportation to healthcare to manufacturing. C i 261 00:16:43,840 --> 00:16:47,600 Speaker 1: T offers commercial lending, leasing, and treasury management services for 262 00:16:47,680 --> 00:16:50,560 Speaker 1: small and middle market businesses. Learn more at c i 263 00:16:50,640 --> 00:16:56,560 Speaker 1: T dot com put knowledge to Work. We're talking to 264 00:16:56,800 --> 00:17:01,000 Speaker 1: Chris White and Liz Sef about mark a structure and 265 00:17:01,120 --> 00:17:05,520 Speaker 1: how the bond market is arguably decades behind where the 266 00:17:05,840 --> 00:17:08,600 Speaker 1: stock market is in terms of getting into the modern era. 267 00:17:09,280 --> 00:17:11,199 Speaker 1: So Chris, I want to return to the point that 268 00:17:11,240 --> 00:17:15,840 Speaker 1: you made before the break. Your basic argument is that 269 00:17:16,920 --> 00:17:21,800 Speaker 1: sure bond market participants, like stock market participants decades ago, 270 00:17:22,400 --> 00:17:25,439 Speaker 1: are resistant to change. But that from your perspective, the 271 00:17:25,560 --> 00:17:29,760 Speaker 1: current model is already broken. It's sort of already Um, 272 00:17:29,800 --> 00:17:32,359 Speaker 1: it's already not working for them as it was several 273 00:17:32,440 --> 00:17:37,879 Speaker 1: years ago, So they should see the benefit to modernizing. Essentially. Well, 274 00:17:37,920 --> 00:17:42,720 Speaker 1: I think that there there's universal acceptance within the institutional 275 00:17:42,840 --> 00:17:46,040 Speaker 1: market that something needs to change. I think the way 276 00:17:46,080 --> 00:17:49,080 Speaker 1: that we're trying to change the market is missing a step. 277 00:17:49,520 --> 00:17:53,040 Speaker 1: Just to to ask you less, when the NASTAC board 278 00:17:53,240 --> 00:17:55,840 Speaker 1: was put into place in seventy one, was it a 279 00:17:55,840 --> 00:17:59,760 Speaker 1: trading system or a bulletin board? Like could you actually 280 00:18:00,000 --> 00:18:02,960 Speaker 1: complete a trade by pressing a button on the screen. No, no, 281 00:18:03,200 --> 00:18:07,320 Speaker 1: it wasn't interactive. It wasn't until after the eight seven 282 00:18:07,320 --> 00:18:12,200 Speaker 1: crash that there was any electronic interface where you could 283 00:18:13,359 --> 00:18:16,160 Speaker 1: press a button and get an execution through the NASDACK 284 00:18:16,240 --> 00:18:20,000 Speaker 1: system that was called the SOL system Small Order Execution System. 285 00:18:20,080 --> 00:18:22,560 Speaker 1: So explain how the process of trade worked. You then 286 00:18:22,760 --> 00:18:27,080 Speaker 1: you got your quote through the NASTAC system, but then 287 00:18:27,200 --> 00:18:30,240 Speaker 1: went back directly to the market maker for the actual 288 00:18:30,320 --> 00:18:33,359 Speaker 1: call in the trade. You were back to uh calling 289 00:18:33,440 --> 00:18:36,320 Speaker 1: him up on his phone. Um. And if you were 290 00:18:36,440 --> 00:18:38,760 Speaker 1: and if you were lucky, you had a direct wire 291 00:18:38,840 --> 00:18:41,399 Speaker 1: to him, in which case you flicked the switch and 292 00:18:41,480 --> 00:18:45,880 Speaker 1: you were into him, and and you saved five seconds. 293 00:18:46,040 --> 00:18:49,040 Speaker 1: So I bring this up because let's just told you 294 00:18:49,080 --> 00:18:52,520 Speaker 1: that there was a sixteen year gap between the introduction 295 00:18:52,560 --> 00:18:57,000 Speaker 1: of NASDAC and actual robust electronic trading in the equity markets. 296 00:18:57,080 --> 00:18:59,399 Speaker 1: So when you look at a lot of the unstructured 297 00:18:59,440 --> 00:19:03,199 Speaker 1: fixed income markets, people are trying to fix them or 298 00:19:03,240 --> 00:19:08,320 Speaker 1: reform them using modern electronic trading protocols and ideas. But 299 00:19:08,440 --> 00:19:11,480 Speaker 1: I think we've missed something um And I think that 300 00:19:11,560 --> 00:19:13,639 Speaker 1: what illustrates the fact that we've missed this piece of 301 00:19:13,720 --> 00:19:16,320 Speaker 1: architecture is a lot of the attempts to fix the 302 00:19:16,320 --> 00:19:19,440 Speaker 1: market with electronic trading have failed. In the corporate bond 303 00:19:19,440 --> 00:19:23,040 Speaker 1: market and myself, the G session system for Goldman Sachs 304 00:19:23,080 --> 00:19:25,840 Speaker 1: had some fundamental flaws with it, and it's only seeing 305 00:19:25,840 --> 00:19:28,040 Speaker 1: those flaws that I started to think that maybe there 306 00:19:28,119 --> 00:19:31,119 Speaker 1: was something missing. And then when you look back in history, 307 00:19:31,480 --> 00:19:34,240 Speaker 1: there is something missing. Every other market that we consider 308 00:19:34,320 --> 00:19:38,040 Speaker 1: modernized today had to organize their pre trade quote information 309 00:19:38,080 --> 00:19:41,480 Speaker 1: before they started trading electronically. Well, how come we made 310 00:19:41,520 --> 00:19:44,639 Speaker 1: that leap? Then? Why did we avoid the step of 311 00:19:44,760 --> 00:19:48,119 Speaker 1: sort of centralized pricing and just jump straight off to 312 00:19:48,280 --> 00:19:51,320 Speaker 1: pure electronic trading in corporate bonds, which, as you point out, 313 00:19:51,359 --> 00:19:54,280 Speaker 1: doesn't seem to necessarily be working. I think it's a 314 00:19:54,280 --> 00:19:58,600 Speaker 1: combination of two things. One, I think it's a misunderstanding 315 00:19:58,640 --> 00:20:02,480 Speaker 1: of in market struck sure, believing that electronic trading is 316 00:20:02,480 --> 00:20:05,440 Speaker 1: not market structure, it's it's really the result of having 317 00:20:05,520 --> 00:20:08,400 Speaker 1: a good foundation of market structure. And then, quite frankly, 318 00:20:08,520 --> 00:20:10,800 Speaker 1: a lot of the people who saw this history in 319 00:20:10,840 --> 00:20:13,760 Speaker 1: the equity markets, uh, are either no longer on this 320 00:20:13,840 --> 00:20:17,280 Speaker 1: earth or you know, just not available to to help 321 00:20:17,320 --> 00:20:19,840 Speaker 1: people in the bond market. Um. That's why I think 322 00:20:19,840 --> 00:20:22,320 Speaker 1: that you Know Less is a treasure because he can 323 00:20:22,320 --> 00:20:25,959 Speaker 1: actually speak to the before and after of a of 324 00:20:26,040 --> 00:20:29,320 Speaker 1: a key part of the equity market structure history that 325 00:20:29,359 --> 00:20:31,359 Speaker 1: I think just a lot of people are not aware of. 326 00:20:31,480 --> 00:20:34,440 Speaker 1: But you know, at some point in time, equity markets 327 00:20:34,480 --> 00:20:36,959 Speaker 1: traded out of a magazine, and if you look at 328 00:20:36,960 --> 00:20:39,879 Speaker 1: old newspapers, you'll see if you wanted to understand what 329 00:20:40,000 --> 00:20:42,000 Speaker 1: your stock was worth, you were just looking through the 330 00:20:42,080 --> 00:20:45,440 Speaker 1: quote page. Um. Which sounds funny to us now that 331 00:20:45,480 --> 00:20:47,320 Speaker 1: you could pull up anything on a Bloomberg screen and 332 00:20:47,359 --> 00:20:50,520 Speaker 1: see information around it. But it really did function as 333 00:20:50,520 --> 00:20:53,320 Speaker 1: a market back then, but eventually they had to change it, 334 00:20:53,440 --> 00:20:55,840 Speaker 1: and it seems like the path that they created was 335 00:20:55,880 --> 00:20:59,200 Speaker 1: mimicked by other markets. But what about the argument that 336 00:20:59,320 --> 00:21:02,200 Speaker 1: the bond mark kit is in some way fundamentally different 337 00:21:02,320 --> 00:21:04,560 Speaker 1: to the stock market because stocks, you know, you buy 338 00:21:04,560 --> 00:21:06,480 Speaker 1: a share of Apple, it's a share of Apple, but 339 00:21:06,520 --> 00:21:08,000 Speaker 1: if you buy an Apple bond, it could have a 340 00:21:08,040 --> 00:21:11,920 Speaker 1: different maturity, different coupon, whatever. And that's what people say 341 00:21:12,000 --> 00:21:15,480 Speaker 1: is often holding back the bond market from becoming standardized 342 00:21:15,520 --> 00:21:18,479 Speaker 1: in some way. Well, yes, I mean it is different, 343 00:21:18,680 --> 00:21:21,760 Speaker 1: and I think that is a solid argument. But um, 344 00:21:21,760 --> 00:21:26,360 Speaker 1: when we're talking about the sequence to market modernization, it's 345 00:21:26,400 --> 00:21:31,200 Speaker 1: happened in different products but the same way. Meaning that 346 00:21:31,840 --> 00:21:34,760 Speaker 1: you didn't see robust electronic trading in the SPOTFX market 347 00:21:34,840 --> 00:21:37,920 Speaker 1: until they organized their quotes. You certainly did not see 348 00:21:37,920 --> 00:21:41,119 Speaker 1: electronic trading in the U. S. Treasury market before they 349 00:21:41,200 --> 00:21:44,520 Speaker 1: organized their quotes. So I think what we're really arguing 350 00:21:44,560 --> 00:21:47,960 Speaker 1: about is semantics. Nobody is saying that the corporate bond 351 00:21:48,000 --> 00:21:50,199 Speaker 1: market is going to trade in an order book and 352 00:21:50,200 --> 00:21:52,680 Speaker 1: you're going to have high frequency trading coming anytime soon. 353 00:21:53,200 --> 00:21:55,440 Speaker 1: But we do have an issue that those other markets 354 00:21:55,440 --> 00:21:58,480 Speaker 1: faced in which those markets had reached an inflection point 355 00:21:58,480 --> 00:22:00,679 Speaker 1: in terms of the size and pop pularity of the 356 00:22:00,720 --> 00:22:05,359 Speaker 1: market that now necessitated people knowing what something was worth 357 00:22:05,600 --> 00:22:09,760 Speaker 1: on a screen. UM. I think that what we're um 358 00:22:09,800 --> 00:22:12,920 Speaker 1: really looking at is any market that's modernized has done 359 00:22:12,960 --> 00:22:18,840 Speaker 1: so by decreasing ambiguity around the trading process and seeing 360 00:22:18,880 --> 00:22:21,919 Speaker 1: best bid best offer is something that just doesn't exist 361 00:22:22,040 --> 00:22:25,280 Speaker 1: in a lot of the unstructured fixed income markets that 362 00:22:25,280 --> 00:22:29,600 Speaker 1: are now begging to be reformed. Less. When the NAZAC 363 00:22:29,760 --> 00:22:32,360 Speaker 1: first took off and there was this sort of bulletin 364 00:22:32,400 --> 00:22:35,679 Speaker 1: board where you could see all the prices everywhere, was 365 00:22:35,720 --> 00:22:40,040 Speaker 1: it clear that that was a first step towards um 366 00:22:40,080 --> 00:22:42,520 Speaker 1: a new way of trading, or at the time the 367 00:22:42,600 --> 00:22:45,320 Speaker 1: dad seemed like, Okay, this is the new reality, because 368 00:22:45,359 --> 00:22:48,320 Speaker 1: obviously in the telling of history it's a first step. 369 00:22:48,359 --> 00:22:50,240 Speaker 1: But at the time you don't really know which way 370 00:22:50,280 --> 00:22:53,080 Speaker 1: things are going to evolve. We thought that that was 371 00:22:53,400 --> 00:22:58,080 Speaker 1: about as far as things could go, and uh uh, 372 00:22:58,400 --> 00:23:00,920 Speaker 1: months or years later, I don't remember exactly when when 373 00:23:00,920 --> 00:23:05,320 Speaker 1: they started talking about reporting volume. That was another seismic 374 00:23:06,119 --> 00:23:09,560 Speaker 1: shift in the in the marketplace, the fact that now 375 00:23:09,960 --> 00:23:16,560 Speaker 1: your competition could deduct what your volume was was offensive 376 00:23:16,600 --> 00:23:22,240 Speaker 1: to the trader and and scary and ultimately real time reporting. 377 00:23:23,080 --> 00:23:25,960 Speaker 1: Uh that you know, that was also an evolution that 378 00:23:26,000 --> 00:23:30,639 Speaker 1: occurred years later. There was no price reporting at the 379 00:23:30,680 --> 00:23:35,960 Speaker 1: time that the trades were done in the early Nazdak environment. Chris, 380 00:23:36,040 --> 00:23:39,440 Speaker 1: it's been about a year since we last had you on. 381 00:23:40,080 --> 00:23:43,800 Speaker 1: What are the chances that have been almost Yeah, I 382 00:23:43,840 --> 00:23:47,119 Speaker 1: know it's scary, right, What are the chances if we 383 00:23:47,200 --> 00:23:50,000 Speaker 1: had you on again in a year, which I'm sure 384 00:23:50,000 --> 00:23:52,040 Speaker 1: we will, But if we have you on again in 385 00:23:52,040 --> 00:23:54,600 Speaker 1: a year, what are the chances that something will actually 386 00:23:54,640 --> 00:23:57,000 Speaker 1: have changed in the corporate ball market? Because I feel 387 00:23:57,040 --> 00:24:00,280 Speaker 1: like we have this conversation continuously and we're all always 388 00:24:00,280 --> 00:24:03,080 Speaker 1: talking about the inflection point that's coming, and we're inevitably 389 00:24:03,200 --> 00:24:06,800 Speaker 1: left disappointed. Well, I think conversations like this are a 390 00:24:06,840 --> 00:24:09,960 Speaker 1: part of the change. Um. A lot of the times, uh, 391 00:24:10,200 --> 00:24:13,080 Speaker 1: you know, with the exception of of the people that 392 00:24:13,119 --> 00:24:15,240 Speaker 1: I read at Bloomberg and a couple of the other 393 00:24:15,600 --> 00:24:18,440 Speaker 1: publications I read people telling a story about markets, it's 394 00:24:18,480 --> 00:24:22,639 Speaker 1: not exactly exactly accurate in terms of the history and 395 00:24:22,680 --> 00:24:26,160 Speaker 1: sequence of things. UM. So, I think first there there's 396 00:24:26,160 --> 00:24:27,840 Speaker 1: a bit of knowledge that needs to be built up 397 00:24:27,840 --> 00:24:33,399 Speaker 1: around how do markets reform? Um number one, uh, number two. 398 00:24:33,760 --> 00:24:36,720 Speaker 1: I'm willing to place a bet that people are going 399 00:24:36,760 --> 00:24:39,800 Speaker 1: to push forward with ideas that that may start to 400 00:24:39,880 --> 00:24:42,439 Speaker 1: change the way we're thinking about markets. I think one 401 00:24:42,480 --> 00:24:45,119 Speaker 1: of the main reasons why I feel so confident about 402 00:24:45,160 --> 00:24:47,240 Speaker 1: this is you're seeing a lot of people who have 403 00:24:47,320 --> 00:24:50,720 Speaker 1: been sitting in traditional seats at Wall Street firms UM 404 00:24:50,720 --> 00:24:53,960 Speaker 1: now on the street and trying to become UM innovators 405 00:24:53,960 --> 00:24:56,840 Speaker 1: and entrepreneurs. Most of the people leading new initiatives right 406 00:24:56,840 --> 00:24:59,320 Speaker 1: now are people who are actually were sitting in the seats, 407 00:24:59,320 --> 00:25:00,639 Speaker 1: and I think that that's a step in the right 408 00:25:00,680 --> 00:25:04,480 Speaker 1: direction because obviously they have some experience as to what 409 00:25:04,600 --> 00:25:07,280 Speaker 1: the actual problems are, and therefore they know what solutions 410 00:25:07,280 --> 00:25:10,320 Speaker 1: would be most helpful. All right, well, Chris, we'll have 411 00:25:10,400 --> 00:25:14,800 Speaker 1: to have you on again in a year, hopefully, hopefully 412 00:25:14,800 --> 00:25:17,399 Speaker 1: I will have cash in my bet at that time 413 00:25:17,480 --> 00:25:20,359 Speaker 1: and we can talk about how the bond market is 414 00:25:20,400 --> 00:25:24,000 Speaker 1: actually changing, and I look forward to it. All right, 415 00:25:24,080 --> 00:25:26,280 Speaker 1: Chris and Lez, thank you so much for what's really 416 00:25:26,320 --> 00:25:31,800 Speaker 1: a fascinating dig into the lost history of financial market modernization. 417 00:25:32,000 --> 00:25:44,160 Speaker 1: Thank you, thank you for having well Tracy. I'm really uh. 418 00:25:44,359 --> 00:25:46,800 Speaker 1: I like the idea of doing this episode once a 419 00:25:46,920 --> 00:25:50,760 Speaker 1: year and sort of watching our our annual bond market, 420 00:25:50,840 --> 00:25:53,879 Speaker 1: our annual look to see if anything's changed in the 421 00:25:53,960 --> 00:25:57,040 Speaker 1: bond market. I'm excited about having to be a recurring future. 422 00:25:57,240 --> 00:25:59,920 Speaker 1: I mean, I feel like people are as much hopeful 423 00:26:00,119 --> 00:26:04,200 Speaker 1: about reforming that market as they are also wary. Like 424 00:26:04,359 --> 00:26:06,160 Speaker 1: you talk to the guys on the street, and there's 425 00:26:06,200 --> 00:26:10,800 Speaker 1: still this huge, huge resistance to any form of change, 426 00:26:10,840 --> 00:26:13,080 Speaker 1: which again is kind of amazing because we have seen 427 00:26:13,119 --> 00:26:16,520 Speaker 1: the corporate ball market explode in size. It's something like 428 00:26:16,600 --> 00:26:19,240 Speaker 1: seven or eight trillion dollars now, it's really one of 429 00:26:19,240 --> 00:26:22,720 Speaker 1: the hot areas on Wall Street. Yeah, I get. I mean, ultimately, 430 00:26:22,760 --> 00:26:26,600 Speaker 1: it's sort of understandable that nobody wants change in an industry, 431 00:26:26,640 --> 00:26:29,960 Speaker 1: particularly if they're making money in that industry, though given 432 00:26:30,240 --> 00:26:32,640 Speaker 1: the direction of a lot of things, maybe the lack 433 00:26:32,680 --> 00:26:35,879 Speaker 1: of making money will be an impetus. I thought that 434 00:26:36,280 --> 00:26:40,440 Speaker 1: was just this sort of timeline point that Chris made 435 00:26:40,440 --> 00:26:42,840 Speaker 1: and hearing, let's talk about it, the idea that you 436 00:26:42,920 --> 00:26:44,440 Speaker 1: can't just say all right, we're gonna make it all 437 00:26:44,440 --> 00:26:47,240 Speaker 1: digital now, and everyone put up your bids and asks 438 00:26:47,280 --> 00:26:50,360 Speaker 1: and start trading. And how important it is to first 439 00:26:50,520 --> 00:26:53,320 Speaker 1: um in the history of the stock market. First just 440 00:26:53,440 --> 00:26:56,360 Speaker 1: established that there's a singular place to go and get 441 00:26:56,359 --> 00:26:59,879 Speaker 1: a quote from securities is a fascinating point. Yeah, all right, 442 00:27:00,359 --> 00:27:04,480 Speaker 1: speaking of change, shall we change the topic and say goodbye? 443 00:27:04,680 --> 00:27:08,320 Speaker 1: Sounds good. I'm Tracy Alloway, Executive editor of Bloomberg Markets. 444 00:27:08,359 --> 00:27:10,679 Speaker 1: You can follow me on Twitter at Tracy Alloway. And 445 00:27:10,720 --> 00:27:13,720 Speaker 1: I'm Joe wi isn't All, Managing editor of Bloomberg Markets. 446 00:27:13,720 --> 00:27:26,960 Speaker 1: You can follow me on Twitter at the Stalwart. Put 447 00:27:26,960 --> 00:27:29,199 Speaker 1: knowledge to work and grow your business with c i 448 00:27:29,280 --> 00:27:33,399 Speaker 1: T from transportation to healthcare to manufacturing. C i T 449 00:27:33,560 --> 00:27:37,560 Speaker 1: offers commercial lending, leasing, and treasury management services for small 450 00:27:37,600 --> 00:27:40,200 Speaker 1: and middle market businesses. Learn more at c i T 451 00:27:40,400 --> 00:27:42,280 Speaker 1: dot com. Put Knowledge to Work.