WEBVTT - 48: The Lost History of Financial Market Modernization 0:00:00.160 --> 0:00:02.320 But knowledge to work and grow your business with c 0:00:02.520 --> 0:00:06.680 i T from transportation to healthcare to manufacturing. C i 0:00:06.760 --> 0:00:10.520 T offers commercial lending, leasing, and treasury management services for 0:00:10.600 --> 0:00:13.480 small and middle market businesses. Learn more at c i 0:00:13.560 --> 0:00:24.959 T dot com put Knowledge to Work. Welcome to another 0:00:25.120 --> 0:00:27.880 edition of Odd Lots. I'm Tracy Alloway, executive editor at 0:00:27.880 --> 0:00:30.720 Bloomberg Markets, and I'm Joe wi Isn'tal, Managing editor of 0:00:30.760 --> 0:00:34.519 Bloomberg Markets. So, Joe, when you think about a modern 0:00:35.000 --> 0:00:39.720 market place, what makes it modern? I think about a 0:00:39.760 --> 0:00:45.120 lot of people around computers and data flashing in their eyes. 0:00:45.320 --> 0:00:48.240 And maybe maybe there's not even a person from the computer, 0:00:48.400 --> 0:00:52.080 maybe just some software making decisions, but lots of screens 0:00:52.120 --> 0:00:55.160 and blinking data. Basically, so you're actually thinking about some 0:00:55.320 --> 0:00:59.960 very specific markets, probably the stock market, maybe the currency market. 0:01:00.000 --> 0:01:03.600 It because there is actually one very large market that 0:01:03.640 --> 0:01:08.840 has stubbornly resisted all attempts to electronify itself and to modernize. Yeah, 0:01:08.840 --> 0:01:12.640 I guess I am. I guess I'm probably stocks and currencies, probably, 0:01:12.680 --> 0:01:16.680 that's all right. The one that's been left out is 0:01:16.720 --> 0:01:19.360 basically the bond market. This is the place where people 0:01:19.400 --> 0:01:24.840 trade corporate debt. Uh, securities issued by companies, and a 0:01:24.880 --> 0:01:27.039 lot of that is still taking place over the phone, 0:01:27.160 --> 0:01:30.240 sometimes even by facts, which is kind of insane when 0:01:30.280 --> 0:01:32.920 you think about where we are today in terms of technology, 0:01:33.440 --> 0:01:36.080 that is sort of pretty hard to believe. I mean, 0:01:36.319 --> 0:01:40.399 we've talked about this before, and of course you can 0:01:40.480 --> 0:01:43.560 look up prices of a corporate bond on a terminal 0:01:43.560 --> 0:01:45.440 and you'd think that why not just be able to 0:01:45.560 --> 0:01:47.360 enter in that you want to buy or sell? But 0:01:47.960 --> 0:01:50.320 it's still kind of blows my mind. It's not that 0:01:50.400 --> 0:01:52.600 it's the case that it's not that easy. All right, 0:01:52.640 --> 0:01:55.600 So today we are going to delve into the mystery 0:01:55.920 --> 0:02:00.720 of bond market modernization or lack thereof why it hasn't 0:02:00.720 --> 0:02:04.080 happened before, And I'm pleased to say that we have 0:02:04.360 --> 0:02:08.960 a recurring guest with us today. It's Chris White from Well. 0:02:09.160 --> 0:02:11.800 He's now at Viable Markets, used to be at Goldman 0:02:12.000 --> 0:02:15.400 and was very involved in the bond trading platform they 0:02:15.440 --> 0:02:19.360 built there called g Sessions. And to make things extra special, 0:02:19.440 --> 0:02:23.600 Chris has brought along his former boss, it's les sef. 0:02:23.639 --> 0:02:26.760 He has a very long history not only in bond 0:02:26.800 --> 0:02:30.040 market structure but also in stocks and he's currently at 0:02:30.080 --> 0:02:34.080 a software firm called a pass. I'm really excited about 0:02:34.120 --> 0:02:37.160 this because the last time we talked about market structure 0:02:37.160 --> 0:02:39.120 with Chris, I think was one of my favorite episodes. 0:02:39.160 --> 0:02:42.119 So I'm glad we're returning to the well and going 0:02:42.240 --> 0:02:45.679 deeper on this subject, which is fascinating. So let's let's 0:02:45.680 --> 0:02:58.640 get gone, let's dig deep. Chris and Lez thank you 0:02:58.680 --> 0:03:01.240 so much for joining us today. Uh, my pleasure to 0:03:01.240 --> 0:03:03.720 be back, Tracy. Um, you know, just having listened to 0:03:03.800 --> 0:03:06.400 a lot of the other odd lots podcasts, I'm just 0:03:06.440 --> 0:03:09.359 happy to be a part of some of the original. Uh. 0:03:11.440 --> 0:03:15.120 The exact thing to say to get you on again, Well, no, 0:03:15.320 --> 0:03:17.640 I really do enjoy it. That's that's an honest statement. 0:03:17.639 --> 0:03:19.960 And I think that you're in for a really special 0:03:20.000 --> 0:03:23.519 treat today because um less CEF can talk about an 0:03:23.560 --> 0:03:26.639 area of equity market structure history that I think is 0:03:26.680 --> 0:03:30.080 really pertinent today. It was the formation of a piece 0:03:30.120 --> 0:03:33.600 of architecture that if you look through history, um, the 0:03:33.720 --> 0:03:39.080 Nasadack system is something that's been mimicked throughout other market 0:03:39.160 --> 0:03:42.600 systems in terms of being a critical piece of architecture 0:03:42.600 --> 0:03:44.880 on their way to modernization. So I think it's going 0:03:44.920 --> 0:03:46.560 to be very interesting to hear what Less has to 0:03:46.600 --> 0:03:50.080 say about the before and after picture in the equity markets. UM. 0:03:50.560 --> 0:03:53.360 In nineteen one, that's when Nasdaq was introduced, and that's 0:03:53.360 --> 0:03:55.720 when Less arrived on the scene. Well, Less, why don't 0:03:55.760 --> 0:03:57.760 we start with you then? UM, you've said you've been 0:03:58.040 --> 0:04:01.160 in trading in some way or another. Is the nineteen seventies? 0:04:01.200 --> 0:04:06.680 Tell us what the stock market was like back then? Sure, Well, 0:04:06.760 --> 0:04:11.520 let's start with nineteen seventy one, which is when I started. UM. 0:04:11.560 --> 0:04:15.600 At that time, not only was the more the market 0:04:15.680 --> 0:04:19.200 not connected by computer, or the equity market not connected 0:04:19.200 --> 0:04:24.359 by computer, but the people that comprised the trading departments 0:04:24.360 --> 0:04:28.120 were very different as well. Uh, today you've got m 0:04:28.200 --> 0:04:31.320 B a's from M I T sitting on the desk. 0:04:31.680 --> 0:04:35.480 Then basically we were a bunch of street fighters, UM. 0:04:35.520 --> 0:04:41.320 And the connection between UH one firm and another, or 0:04:42.040 --> 0:04:46.159 the connection was something called the pink sheets. If you 0:04:46.240 --> 0:04:49.200 wanted to know the price of a stock in those 0:04:49.279 --> 0:04:53.400 years pre NASDAC, that is, UH, if you wanted to 0:04:53.440 --> 0:04:55.600 know the price of an over the counter stock was 0:04:55.640 --> 0:04:59.120 called over the counter at that time, you would get 0:04:59.120 --> 0:05:01.760 a copy of the pink she eats, open it up 0:05:02.320 --> 0:05:07.000 to the alphabetical listing of the stock, and there'd be 0:05:07.200 --> 0:05:11.560 a list of five or any number of market makers 0:05:11.600 --> 0:05:14.839 that traded the stock with their name and their phone number, 0:05:15.400 --> 0:05:17.840 and you would simply call them up and ask them 0:05:17.839 --> 0:05:21.360 for the market in X, y z, and you you 0:05:21.400 --> 0:05:23.839 were obligated to make three phone calls that may have 0:05:23.839 --> 0:05:26.960 been ten market makers. You were obligated if you were 0:05:27.000 --> 0:05:30.919 executing a client order, you were obligated to get three quotes, 0:05:31.400 --> 0:05:36.200 which left seven out potentially. So even with pink sheets, 0:05:36.240 --> 0:05:41.520 you had best execution requirements. Best execution was really if 0:05:41.560 --> 0:05:45.280 it's a fuzzy concept now, it was even fuzzier than 0:05:46.600 --> 0:05:51.520 because the markets were very, very thin, so an execution 0:05:51.600 --> 0:05:55.840 of a thousand shares could have been at multiple markets, 0:05:56.600 --> 0:05:59.520 and the uh, the guy on the desk who was 0:05:59.600 --> 0:06:02.760 executing getting on behalf of the client would basically stay 0:06:02.800 --> 0:06:07.920 with one firm MHM. So obviously, these days with electronic trading, 0:06:07.920 --> 0:06:11.200 there's so much talk about collapsing margins of trading and 0:06:11.320 --> 0:06:14.279 you know, people making fractions of a penny here and there, 0:06:14.680 --> 0:06:18.040 but this sounds like, you know, the extreme opposite end 0:06:18.040 --> 0:06:22.520 of that, where lots of lots of opportunity to make 0:06:22.560 --> 0:06:25.840 money in the human interaction and the fact you only 0:06:25.880 --> 0:06:27.880 had to call three out of ten people and so forth, 0:06:28.040 --> 0:06:30.920 spreads that you could drive a bus, Yes, exactly. Yeah, 0:06:30.960 --> 0:06:34.359 well that was that was very true. I mean markets 0:06:34.560 --> 0:06:38.920 have collapsed, uh in recent years, primarily as a result 0:06:38.960 --> 0:06:43.080 of increased volument as a result of decimalization back you know, 0:06:43.360 --> 0:06:49.839 almost fifteen sixteen years ago. But in those years there 0:06:49.920 --> 0:06:53.880 was no such thing as decimalization. Stocks are traded with 0:06:54.360 --> 0:06:58.360 very often a point spread. Uh, a half a point 0:06:58.400 --> 0:07:01.359 spread was not unusual, and stocks under a dollar was 0:07:01.400 --> 0:07:05.120 sometimes traded with three eighths to a half a point 0:07:05.120 --> 0:07:08.320 spread as well. So the difference between the bidden offer 0:07:08.520 --> 0:07:10.880 was you know, as you said, you could drive a 0:07:10.880 --> 0:07:14.360 truck through it. So market makers could essentially pocket the 0:07:14.400 --> 0:07:17.680 difference between the spreads on the buy and sell orders. 0:07:18.800 --> 0:07:22.000 What made that change, Like, what was the impetus for 0:07:22.040 --> 0:07:25.400 the stock market to start modernizing and to head towards 0:07:25.520 --> 0:07:32.080 things like decimalization. Well, uh, there were a number of reasons. Firstly, Um, 0:07:32.200 --> 0:07:36.200 while the spreads were substantial and the likelihood of making 0:07:36.240 --> 0:07:40.480 money on a trade was pretty substantial, Um, the volume 0:07:40.560 --> 0:07:46.760 just wasn't there. I remember a big trader in NT 0:07:47.520 --> 0:07:50.720 which is before I'm thankful to say, before I started, 0:07:51.480 --> 0:07:58.320 UM was making somewhere around a hundred thousand dollars UM 0:07:58.360 --> 0:08:01.800 and his profitability was there for like maybe two fifty 0:08:01.960 --> 0:08:07.600 and that was that was huge at that time. UM. 0:08:07.640 --> 0:08:11.559 But as I said, the volume was just wasn't there. Uh. 0:08:11.720 --> 0:08:16.600 Subsequent to that, uh that period uh in nineteen seventy 0:08:16.840 --> 0:08:19.640 late seventy yearly seventy one, I believe it was NASDAK 0:08:19.720 --> 0:08:27.080 started and NASDAK was a more transparent view of of 0:08:27.160 --> 0:08:31.360 the markets. Now during the pain sheet environment, as I said, 0:08:32.160 --> 0:08:37.160 prior to NASDAK, the client or the trader at another 0:08:37.160 --> 0:08:39.719 firm would call up the market maker and asked for 0:08:39.760 --> 0:08:43.960 a quote. As a result, market makers would give different 0:08:44.000 --> 0:08:47.960 quotes to different folks. UM. If they sense that you 0:08:47.960 --> 0:08:49.800 were a buyer, you might have gotten one quote. If 0:08:49.800 --> 0:08:51.480 they sensed you were a seller, you might have gotten 0:08:51.520 --> 0:08:54.400 another quote. And if they sensed that you were calling 0:08:54.400 --> 0:08:57.640 on behalf of a competitor competitor, then you've got a 0:08:57.679 --> 0:09:02.280 really strange quote. So actually less This is one of 0:09:02.280 --> 0:09:04.199 the things that I think is most fascinating is that 0:09:04.480 --> 0:09:07.360 you're talking about a period in time that was almost 0:09:07.400 --> 0:09:11.000 fifty years ago, but in terms of the cultural practices 0:09:11.120 --> 0:09:14.760 and the infrastructure, it's not that far away from where 0:09:14.760 --> 0:09:16.760 we are in terms of the modern day corporate bond 0:09:16.760 --> 0:09:20.800 market UM today. There there really isn't a facility that 0:09:21.360 --> 0:09:25.040 organizes all of the quotes the way that NASDAC organized 0:09:25.080 --> 0:09:28.640 the quotes UM. And also what you describe in terms 0:09:28.679 --> 0:09:33.440 of different prices for different people is absolutely function of 0:09:33.480 --> 0:09:36.640 the market. UM. What sort of drove the idea that 0:09:37.080 --> 0:09:39.280 you need to get out of the pink sheets and 0:09:39.360 --> 0:09:43.240 into UM something that was a bit more centralized and 0:09:43.280 --> 0:09:48.839 focused around pricing, Well, it was it was driven uh 0:09:49.360 --> 0:09:54.160 partially by the retail firms. I don't remember now the 0:09:54.280 --> 0:09:57.800 name of the guy who started uh NASDAK, but I 0:09:57.800 --> 0:10:00.719 believe that it was sponsored by the n s D 0:10:01.600 --> 0:10:05.280 and UH I believe that Reynolds, which was one of 0:10:05.320 --> 0:10:10.040 the larger retail firms. One of the executives at Reynolds 0:10:10.280 --> 0:10:14.600 was the guy who was tasked with, uh, you know, 0:10:14.640 --> 0:10:20.360 starting the NASDACK UH the NASTAC system and basically it 0:10:20.440 --> 0:10:25.160 was kind of rolled out over time and the functionality 0:10:25.600 --> 0:10:30.080 changed over time. Initially it was simply a presentation of 0:10:30.120 --> 0:10:34.000 the median market, which is the most repeated market. UH 0:10:34.080 --> 0:10:37.720 so if they were make an easy example, if there 0:10:37.760 --> 0:10:44.080 were four traders trading stock. One was ten eleven, another 0:10:44.080 --> 0:10:47.480 one tenant a quarter eleven and a quarter, third one 0:10:47.559 --> 0:10:49.760 was tenant a quarter eleven a quarter, and the fourth 0:10:49.760 --> 0:10:53.720 one was nine and three quarters tenant three quarters. The 0:10:53.760 --> 0:10:56.360 inside market was tenant a quarter a three quarters. The 0:10:56.440 --> 0:11:01.960 market that was visible UH to level one was tenant 0:11:01.960 --> 0:11:05.559 a quarter, eleven and a quarter. It was the most 0:11:05.600 --> 0:11:09.720 repeated market. So they didn't see the inside market. The salesman, 0:11:09.920 --> 0:11:13.240 for example, at Merrill Lynch didn't see you know, just 0:11:14.160 --> 0:11:16.560 not not to single them out, but the salesman at 0:11:16.720 --> 0:11:20.000 UH the brokerage firms didn't see the inside market at 0:11:20.000 --> 0:11:22.360 the time, and they weren't aware of what the volume 0:11:22.400 --> 0:11:25.319 was day one. So how did the market makers actually 0:11:25.400 --> 0:11:27.840 feel about those changes? That was exactly what I was 0:11:27.840 --> 0:11:30.600 gonna ask, Like who, yeah, like who who fought it? 0:11:30.720 --> 0:11:33.320 Or these changes happened? And so how do they feel? 0:11:33.400 --> 0:11:37.079 And were there any people right from the beginning resisting 0:11:37.120 --> 0:11:42.000 the changes? Try? Everyone was resisting the changes. Um, the 0:11:42.080 --> 0:11:48.319 market makers were shaking in their boots because they were 0:11:48.360 --> 0:11:50.720 in their minds making a living and this was going 0:11:50.760 --> 0:11:54.199 to destroy their living because you didn't want your competition 0:11:54.240 --> 0:11:57.080 to know your market. And this was going to making 0:11:57.200 --> 0:12:02.080 market very transparent. Uh. Plus you had to honor your market, 0:12:03.000 --> 0:12:08.440 which prior to actually divulging what your market was. Um. 0:12:08.480 --> 0:12:11.480 You know, in a NASDAC environment, you had to honor 0:12:11.520 --> 0:12:14.320 what the market said you were on NASDAC. And that 0:12:14.400 --> 0:12:17.360 was kind of a new concept to say, try to 0:12:17.400 --> 0:12:21.200 stop it or yeah, all the soldiers tried to stop it. 0:12:21.679 --> 0:12:24.840 The generals thought it was a good idea and and 0:12:25.040 --> 0:12:29.920 basically it was an amazing idea. It was it was 0:12:30.040 --> 0:12:35.160 right for the client. Being right for the client, uh 0:12:35.440 --> 0:12:42.679 meant that a volume exploded over time, but really just exploded. 0:12:42.840 --> 0:12:47.679 And and uh from seventy one to you know today, 0:12:47.760 --> 0:12:50.959 I mean, volume is just so different than it was then. 0:12:51.720 --> 0:12:56.600 And um, in addition to the volume exploding, the profitability 0:12:57.640 --> 0:13:01.200 of the market maker exploded with it may not have 0:13:01.280 --> 0:13:08.880 made as much money her trade, but but the spreads 0:13:09.360 --> 0:13:14.360 ultimately tightened a little bit. They didn't really change until 0:13:15.040 --> 0:13:20.920 years later when uh, in in the mid nineties, when 0:13:21.360 --> 0:13:25.800 the dealers were accused of collusion. So were they eventually 0:13:25.840 --> 0:13:28.600 able to make up the tighter spreads and volume? In 0:13:28.600 --> 0:13:35.239 other words, yes, by far? Okay, well, let's fast forward 0:13:36.080 --> 0:13:39.760 many decades to the bond market, because Chris, as we've 0:13:39.800 --> 0:13:42.960 all discussed before, in many ways, the bond market is 0:13:43.040 --> 0:13:45.880 where the stock market was many years ago. In fact, 0:13:46.160 --> 0:13:48.960 I remember talking to one bond dealer who said it 0:13:49.000 --> 0:13:52.040 was like the last ages of the Roman Empire, and 0:13:52.080 --> 0:13:56.000 the dealers are essentially trying to protect the profits that 0:13:56.040 --> 0:13:59.679 they can make from bond trading. Well, I think that 0:14:00.200 --> 0:14:03.480 similar to the fall of the Roman Empire, when finally 0:14:03.559 --> 0:14:06.160 I think it was the it was the Goths or 0:14:06.240 --> 0:14:09.680 some tribe of barbarians that stormed the walls. Um there 0:14:09.720 --> 0:14:12.280 was deterioration for some time, and I think if you 0:14:12.360 --> 0:14:15.000 just look at even how the top five dealers have 0:14:15.080 --> 0:14:19.280 been performing in market making for corporate bonds. Uh Ever, 0:14:19.320 --> 0:14:22.160 since two thousand and nine, they've seen declining results year 0:14:22.240 --> 0:14:24.280 over year. So I think a lot of people are 0:14:24.280 --> 0:14:29.160 starting to question the efficacy of the traditional model. One 0:14:29.200 --> 0:14:32.160 of the things that's fascinating about the way Less talks 0:14:32.200 --> 0:14:36.360 about the fears of the market makers in unlisted stocks 0:14:36.760 --> 0:14:39.760 prior in Nazdac as they say sound very similar to 0:14:39.840 --> 0:14:42.440 a lot of the fears that we're hearing when we 0:14:42.440 --> 0:14:46.240 talk about transparency in the bond market, we're having issues 0:14:46.240 --> 0:14:49.040 around secondary trading, and yet there are some people in 0:14:49.080 --> 0:14:52.600 the market who are actually saying that less information in 0:14:52.640 --> 0:14:55.600 the form of delaying the post trade tape would bring 0:14:55.640 --> 0:14:58.600 market makers back into the market, which I think that 0:14:58.840 --> 0:15:01.240 we've looked at all the other markets that have modernized, 0:15:01.240 --> 0:15:06.280 and they've done so by actually adding more information, not less. 0:15:06.880 --> 0:15:09.800 So I think that culturally we're at the same inflection 0:15:09.840 --> 0:15:11.920 point that the equity market was in almost forty six 0:15:12.000 --> 0:15:15.160 years ago. So how do we get over that hump then, 0:15:15.280 --> 0:15:18.360 because it seems like it's it's not only a business 0:15:18.360 --> 0:15:20.920 model change, it's also a cultural change, and there are 0:15:20.920 --> 0:15:23.880 people who will fight it every step of the way. Well, 0:15:23.920 --> 0:15:26.760 I think it's really good to understand history and really 0:15:26.800 --> 0:15:29.320 what happens. I mean, what Less is telling you is true. 0:15:29.400 --> 0:15:31.920 Anyone who was trading NASDACK stocks and who went through 0:15:31.920 --> 0:15:35.760 the change of the actual NASDAC platform, which is stands 0:15:35.760 --> 0:15:41.080 for National Association Securities Dealers Automated Quotation System, at first 0:15:41.080 --> 0:15:43.400 they were afraid, but then they found that it was 0:15:43.560 --> 0:15:45.920 beneficial not only to the customers but to the market 0:15:45.920 --> 0:15:49.360 makers as well. So I think that if you look 0:15:49.400 --> 0:15:52.280 at the history of other markets. For example, UM the 0:15:52.400 --> 0:15:55.400 FX market started with a consolidated quote board and something 0:15:55.440 --> 0:15:59.920 called the Reuter's Market Data service. In the listed market 0:16:00.040 --> 0:16:04.240 had to organize into its consolidated quote service. In four 0:16:05.960 --> 0:16:09.440 the treasury market, after recovering from the Solomon Brothers government 0:16:09.440 --> 0:16:14.080 bond scandal, had to produce a consolidated quote system something 0:16:14.120 --> 0:16:17.640 called gov picks. So it seems to me and the 0:16:17.680 --> 0:16:19.320 more I talked to Less and other people who have 0:16:19.360 --> 0:16:24.280 worked in those markets, that organization around pre trade information 0:16:25.360 --> 0:16:29.840 is a key piece of architecture for UM modernizing market. 0:16:30.480 --> 0:16:32.920 Let's take a quick break for work from a sponsor, 0:16:37.200 --> 0:16:39.400 but knowledge to work and grow your business with c 0:16:39.600 --> 0:16:43.760 I T from transportation to healthcare to manufacturing. C i 0:16:43.840 --> 0:16:47.600 T offers commercial lending, leasing, and treasury management services for 0:16:47.680 --> 0:16:50.560 small and middle market businesses. Learn more at c i 0:16:50.640 --> 0:16:56.560 T dot com put knowledge to Work. We're talking to 0:16:56.800 --> 0:17:01.000 Chris White and Liz Sef about mark a structure and 0:17:01.120 --> 0:17:05.520 how the bond market is arguably decades behind where the 0:17:05.840 --> 0:17:08.600 stock market is in terms of getting into the modern era. 0:17:09.280 --> 0:17:11.199 So Chris, I want to return to the point that 0:17:11.240 --> 0:17:15.840 you made before the break. Your basic argument is that 0:17:16.920 --> 0:17:21.800 sure bond market participants, like stock market participants decades ago, 0:17:22.400 --> 0:17:25.439 are resistant to change. But that from your perspective, the 0:17:25.560 --> 0:17:29.760 current model is already broken. It's sort of already Um, 0:17:29.800 --> 0:17:32.359 it's already not working for them as it was several 0:17:32.440 --> 0:17:37.879 years ago, So they should see the benefit to modernizing. Essentially. Well, 0:17:37.920 --> 0:17:42.720 I think that there there's universal acceptance within the institutional 0:17:42.840 --> 0:17:46.040 market that something needs to change. I think the way 0:17:46.080 --> 0:17:49.080 that we're trying to change the market is missing a step. 0:17:49.520 --> 0:17:53.040 Just to to ask you less, when the NASTAC board 0:17:53.240 --> 0:17:55.840 was put into place in seventy one, was it a 0:17:55.840 --> 0:17:59.760 trading system or a bulletin board? Like could you actually 0:18:00.000 --> 0:18:02.960 complete a trade by pressing a button on the screen. No, no, 0:18:03.200 --> 0:18:07.320 it wasn't interactive. It wasn't until after the eight seven 0:18:07.320 --> 0:18:12.200 crash that there was any electronic interface where you could 0:18:13.359 --> 0:18:16.160 press a button and get an execution through the NASDACK 0:18:16.240 --> 0:18:20.000 system that was called the SOL system Small Order Execution System. 0:18:20.080 --> 0:18:22.560 So explain how the process of trade worked. You then 0:18:22.760 --> 0:18:27.080 you got your quote through the NASTAC system, but then 0:18:27.200 --> 0:18:30.240 went back directly to the market maker for the actual 0:18:30.320 --> 0:18:33.359 call in the trade. You were back to uh calling 0:18:33.440 --> 0:18:36.320 him up on his phone. Um. And if you were 0:18:36.440 --> 0:18:38.760 and if you were lucky, you had a direct wire 0:18:38.840 --> 0:18:41.399 to him, in which case you flicked the switch and 0:18:41.480 --> 0:18:45.880 you were into him, and and you saved five seconds. 0:18:46.040 --> 0:18:49.040 So I bring this up because let's just told you 0:18:49.080 --> 0:18:52.520 that there was a sixteen year gap between the introduction 0:18:52.560 --> 0:18:57.000 of NASDAC and actual robust electronic trading in the equity markets. 0:18:57.080 --> 0:18:59.399 So when you look at a lot of the unstructured 0:18:59.440 --> 0:19:03.199 fixed income markets, people are trying to fix them or 0:19:03.240 --> 0:19:08.320 reform them using modern electronic trading protocols and ideas. But 0:19:08.440 --> 0:19:11.480 I think we've missed something um And I think that 0:19:11.560 --> 0:19:13.639 what illustrates the fact that we've missed this piece of 0:19:13.720 --> 0:19:16.320 architecture is a lot of the attempts to fix the 0:19:16.320 --> 0:19:19.440 market with electronic trading have failed. In the corporate bond 0:19:19.440 --> 0:19:23.040 market and myself, the G session system for Goldman Sachs 0:19:23.080 --> 0:19:25.840 had some fundamental flaws with it, and it's only seeing 0:19:25.840 --> 0:19:28.040 those flaws that I started to think that maybe there 0:19:28.119 --> 0:19:31.119 was something missing. And then when you look back in history, 0:19:31.480 --> 0:19:34.240 there is something missing. Every other market that we consider 0:19:34.320 --> 0:19:38.040 modernized today had to organize their pre trade quote information 0:19:38.080 --> 0:19:41.480 before they started trading electronically. Well, how come we made 0:19:41.520 --> 0:19:44.639 that leap? Then? Why did we avoid the step of 0:19:44.760 --> 0:19:48.119 sort of centralized pricing and just jump straight off to 0:19:48.280 --> 0:19:51.320 pure electronic trading in corporate bonds, which, as you point out, 0:19:51.359 --> 0:19:54.280 doesn't seem to necessarily be working. I think it's a 0:19:54.280 --> 0:19:58.600 combination of two things. One, I think it's a misunderstanding 0:19:58.640 --> 0:20:02.480 of in market struck sure, believing that electronic trading is 0:20:02.480 --> 0:20:05.440 not market structure, it's it's really the result of having 0:20:05.520 --> 0:20:08.400 a good foundation of market structure. And then, quite frankly, 0:20:08.520 --> 0:20:10.800 a lot of the people who saw this history in 0:20:10.840 --> 0:20:13.760 the equity markets, uh, are either no longer on this 0:20:13.840 --> 0:20:17.280 earth or you know, just not available to to help 0:20:17.320 --> 0:20:19.840 people in the bond market. Um. That's why I think 0:20:19.840 --> 0:20:22.320 that you Know Less is a treasure because he can 0:20:22.320 --> 0:20:25.959 actually speak to the before and after of a of 0:20:26.040 --> 0:20:29.320 a key part of the equity market structure history that 0:20:29.359 --> 0:20:31.359 I think just a lot of people are not aware of. 0:20:31.480 --> 0:20:34.440 But you know, at some point in time, equity markets 0:20:34.480 --> 0:20:36.959 traded out of a magazine, and if you look at 0:20:36.960 --> 0:20:39.879 old newspapers, you'll see if you wanted to understand what 0:20:40.000 --> 0:20:42.000 your stock was worth, you were just looking through the 0:20:42.080 --> 0:20:45.440 quote page. Um. Which sounds funny to us now that 0:20:45.480 --> 0:20:47.320 you could pull up anything on a Bloomberg screen and 0:20:47.359 --> 0:20:50.520 see information around it. But it really did function as 0:20:50.520 --> 0:20:53.320 a market back then, but eventually they had to change it, 0:20:53.440 --> 0:20:55.840 and it seems like the path that they created was 0:20:55.880 --> 0:20:59.200 mimicked by other markets. But what about the argument that 0:20:59.320 --> 0:21:02.200 the bond mark kit is in some way fundamentally different 0:21:02.320 --> 0:21:04.560 to the stock market because stocks, you know, you buy 0:21:04.560 --> 0:21:06.480 a share of Apple, it's a share of Apple, but 0:21:06.520 --> 0:21:08.000 if you buy an Apple bond, it could have a 0:21:08.040 --> 0:21:11.920 different maturity, different coupon, whatever. And that's what people say 0:21:12.000 --> 0:21:15.480 is often holding back the bond market from becoming standardized 0:21:15.520 --> 0:21:18.479 in some way. Well, yes, I mean it is different, 0:21:18.680 --> 0:21:21.760 and I think that is a solid argument. But um, 0:21:21.760 --> 0:21:26.360 when we're talking about the sequence to market modernization, it's 0:21:26.400 --> 0:21:31.200 happened in different products but the same way. Meaning that 0:21:31.840 --> 0:21:34.760 you didn't see robust electronic trading in the SPOTFX market 0:21:34.840 --> 0:21:37.920 until they organized their quotes. You certainly did not see 0:21:37.920 --> 0:21:41.119 electronic trading in the U. S. Treasury market before they 0:21:41.200 --> 0:21:44.520 organized their quotes. So I think what we're really arguing 0:21:44.560 --> 0:21:47.960 about is semantics. Nobody is saying that the corporate bond 0:21:48.000 --> 0:21:50.199 market is going to trade in an order book and 0:21:50.200 --> 0:21:52.680 you're going to have high frequency trading coming anytime soon. 0:21:53.200 --> 0:21:55.440 But we do have an issue that those other markets 0:21:55.440 --> 0:21:58.480 faced in which those markets had reached an inflection point 0:21:58.480 --> 0:22:00.679 in terms of the size and pop pularity of the 0:22:00.720 --> 0:22:05.359 market that now necessitated people knowing what something was worth 0:22:05.600 --> 0:22:09.760 on a screen. UM. I think that what we're um 0:22:09.800 --> 0:22:12.920 really looking at is any market that's modernized has done 0:22:12.960 --> 0:22:18.840 so by decreasing ambiguity around the trading process and seeing 0:22:18.880 --> 0:22:21.919 best bid best offer is something that just doesn't exist 0:22:22.040 --> 0:22:25.280 in a lot of the unstructured fixed income markets that 0:22:25.280 --> 0:22:29.600 are now begging to be reformed. Less. When the NAZAC 0:22:29.760 --> 0:22:32.360 first took off and there was this sort of bulletin 0:22:32.400 --> 0:22:35.679 board where you could see all the prices everywhere, was 0:22:35.720 --> 0:22:40.040 it clear that that was a first step towards um 0:22:40.080 --> 0:22:42.520 a new way of trading, or at the time the 0:22:42.600 --> 0:22:45.320 dad seemed like, Okay, this is the new reality, because 0:22:45.359 --> 0:22:48.320 obviously in the telling of history it's a first step. 0:22:48.359 --> 0:22:50.240 But at the time you don't really know which way 0:22:50.280 --> 0:22:53.080 things are going to evolve. We thought that that was 0:22:53.400 --> 0:22:58.080 about as far as things could go, and uh uh, 0:22:58.400 --> 0:23:00.920 months or years later, I don't remember exactly when when 0:23:00.920 --> 0:23:05.320 they started talking about reporting volume. That was another seismic 0:23:06.119 --> 0:23:09.560 shift in the in the marketplace, the fact that now 0:23:09.960 --> 0:23:16.560 your competition could deduct what your volume was was offensive 0:23:16.600 --> 0:23:22.240 to the trader and and scary and ultimately real time reporting. 0:23:23.080 --> 0:23:25.960 Uh that you know, that was also an evolution that 0:23:26.000 --> 0:23:30.639 occurred years later. There was no price reporting at the 0:23:30.680 --> 0:23:35.960 time that the trades were done in the early Nazdak environment. Chris, 0:23:36.040 --> 0:23:39.440 it's been about a year since we last had you on. 0:23:40.080 --> 0:23:43.800 What are the chances that have been almost Yeah, I 0:23:43.840 --> 0:23:47.119 know it's scary, right, What are the chances if we 0:23:47.200 --> 0:23:50.000 had you on again in a year, which I'm sure 0:23:50.000 --> 0:23:52.040 we will, But if we have you on again in 0:23:52.040 --> 0:23:54.600 a year, what are the chances that something will actually 0:23:54.640 --> 0:23:57.000 have changed in the corporate ball market? Because I feel 0:23:57.040 --> 0:24:00.280 like we have this conversation continuously and we're all always 0:24:00.280 --> 0:24:03.080 talking about the inflection point that's coming, and we're inevitably 0:24:03.200 --> 0:24:06.800 left disappointed. Well, I think conversations like this are a 0:24:06.840 --> 0:24:09.960 part of the change. Um. A lot of the times, uh, 0:24:10.200 --> 0:24:13.080 you know, with the exception of of the people that 0:24:13.119 --> 0:24:15.240 I read at Bloomberg and a couple of the other 0:24:15.600 --> 0:24:18.440 publications I read people telling a story about markets, it's 0:24:18.480 --> 0:24:22.639 not exactly exactly accurate in terms of the history and 0:24:22.680 --> 0:24:26.160 sequence of things. UM. So, I think first there there's 0:24:26.160 --> 0:24:27.840 a bit of knowledge that needs to be built up 0:24:27.840 --> 0:24:33.399 around how do markets reform? Um number one, uh, number two. 0:24:33.760 --> 0:24:36.720 I'm willing to place a bet that people are going 0:24:36.760 --> 0:24:39.800 to push forward with ideas that that may start to 0:24:39.880 --> 0:24:42.439 change the way we're thinking about markets. I think one 0:24:42.480 --> 0:24:45.119