Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway. My co host Joe Wisenthal. Is a
Speaker 1: way which means I get a chance to talk about
Speaker 1: one of my all time favorite topics, which has to
Speaker 1: be bond market structure um and particularly the evolution or
Speaker 1: sometimes lack thereof, of that structure and the way that
Speaker 1: a massive, massive market is actually traded. So when people
Speaker 1: think about the corporate bond market, I think there's a
Speaker 1: tendency to think way back to sort of liars poker
Speaker 1: era corporate bond trading, like this was the big business
Speaker 1: on Wall Street. People made lots of money from it,
Speaker 1: You had certain personalities that were tied to it, and
Speaker 1: it was sort of old fashioned the way bonds were traded.
Speaker 1: And then fast forward to you know, post financial crisis,
Speaker 1: the two thousand tens, and surprisingly, even as the stock
Speaker 1: market had largely electronified, the corporate bond market was still
Speaker 1: pretty much operating like it had in even the nine eighties.
Speaker 1: You know, trades done by phone, some trades done by facts,
Speaker 1: kind of amazingly, and then if you fast forward to
Speaker 1: one We've spoken a lot on the show about the
Speaker 1: idea of the pandemic forcing or increasing the rate of
Speaker 1: digitalization in the broader economy, the idea of everyone ordering
Speaker 1: stuff online and more things just moving to the cloud
Speaker 1: and computerized processes. Interestingly, it seems like the pandemic has
Speaker 1: had a little bit of that effect on the corporate
Speaker 1: bond market as well. So we've actually seen the proportion
Speaker 1: of corporate bond trades that are electronic go up. The
Speaker 1: most recent research I saw, I think it was from
Speaker 1: Greenwich Associates, had electronic trading as a proportion of overall
Speaker 1: investment grade corporate bond trading at about forty of the
Speaker 1: total UH. That is up from I think at the
Speaker 1: beginning of and up from a minuscule one tenth of
Speaker 1: total trading in eleven. So that tells you how far
Speaker 1: we've come, But of course there is much further to go,
Speaker 1: and there have been efforts to reform corporate bond trading
Speaker 1: the way it's done for many, many years now, and
Speaker 1: one of the most interesting developments in that space has
Speaker 1: been the establishment of the Fixed Income Market Structure Advisory
Speaker 1: Committee by the SEC. This was created back in with
Speaker 1: the intention of improving the fixed income market and encouraging
Speaker 1: its development So today I'm very pleased to say that
Speaker 1: we are going to be checking in on what's going
Speaker 1: on with the corporate bond market, whether or not Fim
Speaker 1: Sack has been able to fix it or you know,
Speaker 1: at least improve it moderately. We're gonna be doing that
Speaker 1: with the perfect person. We're going to be speaking with
Speaker 1: Larry Harris, who was on film Sack so on the
Speaker 1: SEC committee. He's also the former chief economist at the SEC.
Speaker 1: He was there from two thousand two to two thousand
Speaker 1: four and he is currently the Fred V. Keenan Chair
Speaker 1: in Finance at the USC Marshall School of Business. So, Larry,
Speaker 1: thanks so much for coming on the show. Oh, it's
Speaker 1: a pleasure to be here. So maybe just a first question.
Speaker 1: I mean, it sounds like you have been in these
Speaker 1: sort of trading and market micro structure space for a
Speaker 1: very long time. Is this something that you've always been following. Yes,
Speaker 1: I've been working in market microstructure pretty much from the
Speaker 1: beginning of the academic field now probably forty years. So
Speaker 1: given your expertise, I have to ask what that about
Speaker 1: corporate bonds that seems to make them a little bit
Speaker 1: more stubborn when it comes to things like electronic trading standardization,
Speaker 1: uh other efforts to improve liquidity. It feels like the
Speaker 1: corporate bond space, despite people trying to evolve it for
Speaker 1: i mean decades now, it feels like it's definitely an
Speaker 1: uphill battle. Tracy, that's a great question. If you listen
Speaker 1: to the vested interests in the bond market, they'll tell
Speaker 1: you that bonds are just simply different. They're different from equities,
Speaker 1: they're different from options, they're different from futures, and they
Speaker 1: say that the differences are what makes the market structure different.
Speaker 1: Of course, they don't often articulate exactly what those differences are.
Speaker 1: So often they'll tell you that they're different because there
Speaker 1: are so many bonds, but there are even more options
Speaker 1: that trade, and they trade in exchange markets and they
Speaker 1: trade pretty well. They'll tell you that they're because they're
Speaker 1: so risky. Although equities are more risky per dollar of
Speaker 1: principle than our bonds. So it's a it's a little
Speaker 1: hard to understand this question on its face. We're gonna
Speaker 1: have to dig deeper. But as long as we're starting
Speaker 1: with some history. As you started history, um, you started
Speaker 1: around the eighties. I'd like to push it back much further. UH,
Speaker 1: to share with you and our audience some very interesting
Speaker 1: things that many people don't know. Bonds used to trade
Speaker 1: almost exclusively in exchange markets at the New York Stock
Speaker 1: Exchange and at the American Stock Exchange. Corporate bonds stopped
Speaker 1: trading on the exchange markets in the mid forties, UH,
Speaker 1: and an interesting paper was done by two academics, Bruno
Speaker 1: Bier and Rick Green. And what they did is they
Speaker 1: looked to see how those bonds traded in the forties
Speaker 1: and in the late thirties and compared that trading to
Speaker 1: how they presently trade now. And when I say how
Speaker 1: they trade, I'm really referring to how expensive was it
Speaker 1: to trade the bonds. And when I speak about expense,
Speaker 1: I don't call I'm not speaking about the price. I'm
Speaker 1: talking about the transaction costs of trading. So if you
Speaker 1: buy a bond that's worth a hundred but you pay
Speaker 1: a hundred one, then your cost was was one point
Speaker 1: of par value. So these bonds that traded New York
Speaker 1: Stock Exchange. I'll save the result for a moment, but
Speaker 1: you can all anticipate what it's going to be. Let's
Speaker 1: talk about how they traded. So they traded in order books,
Speaker 1: just like the stocks trade, but because there were so
Speaker 1: many bonds, they had to put the order books in
Speaker 1: filing cabinets. And so these order books, these databases were
Speaker 1: contained in filing cabinets. If you wanted to trade a bond,
Speaker 1: you went to the bond specialist post and you mentioned,
Speaker 1: you know, he said what bond you wanted to trade,
Speaker 1: and the clerk would go. The specialists go and look
Speaker 1: up the bond in the filing cabinet, find out who
Speaker 1: had left orders for it. And so now the punchline,
Speaker 1: of course, it is one that everybody's expecting in those
Speaker 1: non electronic but order driven markets. So order driven means
Speaker 1: exchange markets in which you have rules that match buyers
Speaker 1: to sellers. So the most aggressive buyer, the one is
Speaker 1: willing to pay the most gets matched to the most
Speaker 1: aggressive seller, the one who's offering the lowest price. In
Speaker 1: those order driven markets, bonds traded at lower transaction costs
Speaker 1: ages ago. Then they were trading until just a few
Speaker 1: years ago. So so that leaves us with the interesting
Speaker 1: question why why did the markets move away from the
Speaker 1: stock exchange where the stock exchanges Because the AMAX bonds
Speaker 1: were also important. Why did they move away from the
Speaker 1: stock exchanges and into the investment banks and the dealers
Speaker 1: and brokers, So somehow they captured it. And this is
Speaker 1: not really well understood. Bruno Bier and Rick Green speculate
Speaker 1: about it. It's hard to imagine that it made sense
Speaker 1: for the buy side, UH, the investors, because in the
Speaker 1: end they did worse. But um I think it's just
Speaker 1: because the investment banks probably controlled much of the supply
Speaker 1: of bonds. They were buying and selling them. They were dealers,
Speaker 1: and they preferred to trade as dealers then as some
Speaker 1: dealers operating in exchange markets. Of course, dealers always operate
Speaker 1: in exchange markets. There's nothing new there, but they're more
Speaker 1: powerful when they trade in a dark environment where you
Speaker 1: don't see the trade prices and you don't see the quotes.
Speaker 1: Now fast forward and UH two thousand and two to
Speaker 1: oh four or so. At the time I was chief economist,
Speaker 1: the sec FINRA started the Trace bond price reporting project,
Speaker 1: and the dealers were very opposed to having those trade
Speaker 1: prices reported, even with a fifteen minute lag, which is
Speaker 1: what was finally determined. Um I was privileged, along with
Speaker 1: some others to engage in research that showed that making
Speaker 1: those bond prices public information would lower investor transaction costs
Speaker 1: by about a billion dollars per year. So the opposition
Speaker 1: to the dealers to making the prices public kind of
Speaker 1: withered away in the face of those empirical results. I'll
Speaker 1: tell you two fund stories. There's somewhat self serving, but
Speaker 1: does make the point about this story. Yeah. So the
Speaker 1: first one is that, um, so the SEC did indeed
Speaker 1: mandate that the bond trade prices be made public, and
Speaker 1: now trace prices are available on the Internet and everybody
Speaker 1: can see them. So the two stories are. First, um,
Speaker 1: somebody came along, I forget the fellow's name, might have
Speaker 1: been a woman and replicated the study in which I
Speaker 1: participated and discovered that indeed investors were saving billion dollars.
Speaker 1: So my study had been based on just a trial
Speaker 1: of trace and from the bonds that were public, and
Speaker 1: we compared them to the bonds that weren't public publicly
Speaker 1: where the information wasn't publicly available to trade price information.
Speaker 1: From doing the comparison, were able to determine what we
Speaker 1: thought the savings would be. The way we did the study,
Speaker 1: we compared how the bonds that were trading in more
Speaker 1: transparent markets, the initial trace transparent bonds. We compared how
Speaker 1: they traded to the ones that had not yet been converted,
Speaker 1: and we we found that about a billion dollars would
Speaker 1: be saved by investors. And so the first story is that, uh, indeed,
Speaker 1: somebody looked at it a few years later and determined
Speaker 1: that our estimate was was on target. So I I say,
Speaker 1: somewhat immodestly that we did well. But the important point
Speaker 1: is that not only on a prospective basis, but on
Speaker 1: a retrospective basis, it appears that that bond price transparency
Speaker 1: substantially lower transaction costs. So that's the first story. The
Speaker 1: second story is a little bit more fun. And Nette Nazareth,
Speaker 1: who was then the director of what was then called
Speaker 1: the Division of Trading and Markets, who was a big
Speaker 1: proponent of making the bond prices transparent. She kept asking me, Larry,
Speaker 1: how come you're not done with that study? How come
Speaker 1: night you're done done with the study? Because they needed
Speaker 1: that study to build the political wherewithal to get the
Speaker 1: capital to to get this done. And I kept telling her,
Speaker 1: listen and that I'd like to have it done yesterday,
Speaker 1: but we're going to be super careful because the dealers
Speaker 1: are going to criticize this study. So fast forward about
Speaker 1: ten years. I'm at some conference. I'm talking to somebody,
Speaker 1: you know, an academic conference, and uh and this guy
Speaker 1: sort of drops uh. He says, um, you know you
Speaker 1: did that bond study about transaction costs to the initial
Speaker 1: trace down And I said yeah. He says, uh says,
Speaker 1: I know, I know a backstory about that. I'm going yeah,
Speaker 1: he says, he says, the dealers, Uh sent it to
Speaker 1: a colleague of mine at the university. I won't say
Speaker 1: which one, but it was a strong, reputable university, asking
Speaker 1: is there anything wrong with the study? Uh, you know,
Speaker 1: can you find econometric problems or something like that? And Uh.
Speaker 1: The response was apparently no, you're gonna have to live
Speaker 1: with it. It was well done. So again a pat
Speaker 1: on my back. But also also there's a more important point,
Speaker 1: which is that there's a role for academic work. Rigorous
Speaker 1: work didn't have to be done by academic can be
Speaker 1: done by practitioners as well, and by the economists at
Speaker 1: the SEC. There's a role for rigorous work for trying
Speaker 1: to understand how things could be different. I mean, that
Speaker 1: is such a fascinating um insight into the way the
Speaker 1: SEC works and also the way it's various stakeholders um
Speaker 1: sort of interact with it. There's one thing I wanted
Speaker 1: to ask you before we sort of move on to
Speaker 1: what happened next, But can we just can we focus
Speaker 1: in on on the dealers here a little bit more so?
Speaker 1: You know, you you kind of touched on this, this
Speaker 1: idea that the dealers have vested interest in the way
Speaker 1: that the current system works. So I brought up liars
Speaker 1: Poker at the beginning. You know, this is the idea
Speaker 1: of people sitting at the big dealer banks who are
Speaker 1: taking calls from investors who want to buy or sell
Speaker 1: certain bonds. They're basically the middleman who are holding the
Speaker 1: informational power and who can say like, well, I have
Speaker 1: a quote on this one or I have a quote
Speaker 1: on that one, and no one really is quite clear
Speaker 1: what the actual price of these bonds are. They're sitting
Speaker 1: in the middle. It's a very intransparent process. Now, in
Speaker 1: the years since then, we have had these new electronic
Speaker 1: trading venues set up, and here I have to do
Speaker 1: a massive disclosure and say that Bloomberg has one UM,
Speaker 1: so we have Bloomberg Trade Web and market Access, and
Speaker 1: my understanding of those is that basically they've made dealing
Speaker 1: with dealers potentially more efficient. So you can do a
Speaker 1: request for a quote with just you know, a click
Speaker 1: of a button and you can get one very very quickly.
Speaker 1: But they still preserve some of the power of the
Speaker 1: dealers in that process. You can't do a deal directly
Speaker 1: with another buy side participants for instance. Is that right?
Speaker 1: Is that the right way to think about it? Yes,
Speaker 1: that's generally correct. And though they would like to create
Speaker 1: exchange type markets, uh, they know that they still need
Speaker 1: the dealers to provide the liquidity and so that the
Speaker 1: dealers call the shots. Tracy, you're, you're. You use the
Speaker 1: word um informational power. You could not be more on
Speaker 1: target with that phrase. So, just so that everybody listening
Speaker 1: has a clear understanding of how powerful information is, let's
Speaker 1: discuss a simple example of where that everybody can relate to.
Speaker 1: Suppose you need to buy a say a used car
Speaker 1: or could be a new car, uh, and you go
Speaker 1: to the dealer and you find what you want to buy,
Speaker 1: and you you then make a bid. Okay, now, they
Speaker 1: two mistakes that you can make. You can underbid or
Speaker 1: you can overbid. Now, if you underbid, here's what happens.
Speaker 1: So the salesman says, say, Larry, I'd really love to
Speaker 1: sell you that car at that price, but if we
Speaker 1: do that, we just can't stay in business. The price
Speaker 1: is simply too low. So, um, you don't do the deal.
Speaker 1: Now suppose that you overbid. What does the salesman say.
Speaker 1: Salesman says, hey, Larry, I'd really like to sell you
Speaker 1: that car, but if I do so at that price,
Speaker 1: we're going to go out of business. But hang on
Speaker 1: a minute, let me see what my sales manager says.
Speaker 1: And of course he comes back and sells you the
Speaker 1: car at the price that's uh, that's too high. So
Speaker 1: what's going on here? Obviously you can make two mistakes.
Speaker 1: But because the dealer knows values better than you do,
Speaker 1: the dealer isn't gonna sell it for undervalue, but it'd
Speaker 1: be more than happy to sell it for overvalue. And
Speaker 1: so this is the story. This is why information about
Speaker 1: values is so incredibly important. Unfortunately, we only have half
Speaker 1: the story on price values. We've got now the trace
Speaker 1: data that we just talked about which tells you the
Speaker 1: prices at which bonds traded. By and large, we don't
Speaker 1: have very much quotation data, although it's increasing substantially, we
Speaker 1: don't have much quotation data where the dealers are telling
Speaker 1: the public the prices which they're willing to trade. So
Speaker 1: if you want to go buy a bond and you're smart,
Speaker 1: what you do is you you you go and call
Speaker 1: up a dealer and say what's your offer, and then
Speaker 1: you call another dealer and ask for what your offer,
Speaker 1: and you call another dealer and you can sort of
Speaker 1: make them all know that you're doing this, or you
Speaker 1: can do a request for quote, which is essentially the
Speaker 1: same thing, and you try to get them to compete
Speaker 1: with each other. But it's an expensive process and um,
Speaker 1: they're only volunteering information to you, not to the public,
Speaker 1: so it's not quite as effective as the competition we
Speaker 1: see every single day for even a liquid securities at
Speaker 1: the various stock exchange is or the options exchanges. So
Speaker 1: when pricing data became available on trades, you're getting the
Speaker 1: specific points, the specific prices at what which bonds are
Speaker 1: being traded, but you're not getting potential quotes from a
Speaker 1: bunch of dealers about like where they could buy or
Speaker 1: seldom you're getting the actual transaction data. How did that
Speaker 1: change the market or change behavior of participants. Well sophisticated
Speaker 1: people and even some less sophisticated who know enough to
Speaker 1: look up bond prices can find out where the bonds
Speaker 1: recently traded. And if a bond recently traded, you know,
Speaker 1: just minutes ago, then you have a good point of
Speaker 1: reference to what the value that bond is, especially if
Speaker 1: it's a very large trade. The large trades tend to
Speaker 1: be more informative than the smaller trades because the smaller traders, frankly,
Speaker 1: you know, they just don't know as much. They don't
Speaker 1: know how to they don't know how to control the
Speaker 1: information environment. They trade through brokers who aren't particularly how full,
Speaker 1: and so the smaller trade prices aren't so important. But
Speaker 1: if you want to trade a bond, say you're trying
Speaker 1: to sell a bond, is a more typical story than
Speaker 1: wanting to buy one. Uh, you want to sell a
Speaker 1: bond that you need that you need to generate some liquidity.
Speaker 1: Maybe that bond didn't trade yesterday or today, Um, that
Speaker 1: would be ideal. Say it traded last Um, you know
Speaker 1: a month ago or perhaps a year ago. Uh, there
Speaker 1: are a lot of bonding issues out there, and some
Speaker 1: of them, they we say they trade only by appointment,
Speaker 1: which is kind of funny. Okay, so you've got a
Speaker 1: bond trade from ages ago, and now all the question
Speaker 1: is what's the thing worth? And you know there are
Speaker 1: bond pricing services that can give you some sense of
Speaker 1: what the bond is worth. That's very important because mutual
Speaker 1: funds that hold bonds have to value their bonds and
Speaker 1: if they don't trade, well, I mean, what's the bond worth?
Speaker 1: They've got to know every day. So these pricing services
Speaker 1: what they do is they say, okay, this bond didn't trade,
Speaker 1: but it looks a lot like these other bonds, maybe
Speaker 1: bonds by the same issuer, or maybe be bonds with
Speaker 1: the same cupon rate, the same maturity, the same the
Speaker 1: same preference in liquidation, stuff like that. And so they say, okay,
Speaker 1: we got a model that says if if these other
Speaker 1: bonds are sort of recently traded and we see their prices,
Speaker 1: we can infer what this thing is probably worth. Of course,
Speaker 1: you know, the small trader, the guy who's trading odd lots.
Speaker 1: You're on the right show. I know. That's that's why
Speaker 1: I laughed here. Uh. Yeah, they don't get that information
Speaker 1: and it's expensive. And in any event, though, um, what
Speaker 1: the pricing services say is not necessarily true either. It's
Speaker 1: just their best estament. Real truth comes when people are
Speaker 1: ready to put their money on the on the table
Speaker 1: and trade and actually negotiate prices. So it's good to
Speaker 1: have those trace prices, but it would be even better
Speaker 1: if we had perspective prices, pre trade prices. The quotes,
Speaker 1: there are a lot of them out now out there now,
Speaker 1: and uh, entities like bond to click are starting to
Speaker 1: aggregate them from dealers. The dealers are willing to share
Speaker 1: with bond click because they want to see what the
Speaker 1: other dealers are saying. The dealers aren't They're not They're
Speaker 1: not dummies. Uh, they're very very sharp people, of course.
Speaker 1: But the consequence, though, is that increasingly this data is
Speaker 1: becoming more public and you know, bond click is uh
Speaker 1: appears to be leading here, but I suspect I believe
Speaker 1: that there's some others as well. The dealers aren't entirely
Speaker 1: happy about it. So it's not an easy proposition. As
Speaker 1: long as you're speaking about a little bit of history.
Speaker 1: Cannor Fitzgerald ran a open outcry sort of brokered bond
Speaker 1: market and treasuries, and through their E Trade subsidiary since
Speaker 1: spun out, they wanted to get the bonds into an
Speaker 1: electronic trading system and they had had a terribly difficult
Speaker 1: time doing that. The dealers basically boycotted the system for
Speaker 1: a while, but they persevered. They managed to get it done,
Speaker 1: but it's not easy. The big challenge that these systems
Speaker 1: face creating an exchange like system is that when somebody
Speaker 1: needs to trade, they usually need to trade right now,
Speaker 1: and they look at a system they say, wow, that
Speaker 1: is a cracker jack system. That's beautiful. I'd love to
Speaker 1: trade there, but right now, I got to get my
Speaker 1: order done and there's nobody else there, so I'm gonna
Speaker 1: get my order done. And when when that market becomes looking,
Speaker 1: you give me a call and I'll definitely send my
Speaker 1: orders there. So it's a chicken and egg problem here.
Speaker 1: Only the problem is it's not which came first, is
Speaker 1: that neither comes first because people need to get their
Speaker 1: business done and so that's that's the force that keeps
Speaker 1: change from happening too quickly. But On the flip side,
Speaker 1: these electronics systems have vastly decreased the cost of dealing,
Speaker 1: and now you have lots of proprietary traders who are
Speaker 1: willing to deal bonds like they deal stocks. The deal
Speaker 1: odd lots, but they're willing to come back over and
Speaker 1: over again, and so increasingly you're gonna start seeing, and
Speaker 1: we've already seen it, are algorithms used by institutions to
Speaker 1: fill large orders in odd lots, and they'll they'll do
Speaker 1: that because there are dealers who are well dealers are
Speaker 1: proprietary traders, but let's call them proprietary traders are essentially using,
Speaker 1: you know, some crude version of the high frequency trading
Speaker 1: methods that they use in the stock markets to deal.
Speaker 1: We should be clear about what bonds are. So here's
Speaker 1: a fun way of thinking about a bond. People tell
Speaker 1: you that bonds are something special, but from this point
Speaker 1: of view, there perhaps not so special bonds if you
Speaker 1: think about their risk. There are a package of two
Speaker 1: types of risk. There's interest rate risk and it's bundled
Speaker 1: with credit risk. So credit risk is the risk that
Speaker 1: the company that's promised to pay off its bonds goes
Speaker 1: bankrupt and you don't get paid. An interest rate risk
Speaker 1: is the risk that, say you bought a bond and
Speaker 1: then interest rates rise in the price of your bond drops.
Speaker 1: So that's not comfortable. So think about this risk. What
Speaker 1: is there about putting both risks into a single instrument
Speaker 1: and tying them together with an invisible string. The string
Speaker 1: is actually called the bond covenant, the contract that sets
Speaker 1: up the bond. What is there about doing that that
Speaker 1: makes the bond something different from the risk that trades elsewhere.
Speaker 1: So the interest rate risk trades in highly liquid treasury
Speaker 1: bond markets. They are also in the futures markets. They
Speaker 1: are whether they are cash or in the futures. They
Speaker 1: trade in these order driven exchange like systems, and the
Speaker 1: credit risk, as we mentioned earlier, the credit risk of
Speaker 1: bonds is even as much less than the credit risk
Speaker 1: of the associated stocks. So the credit risk is being
Speaker 1: traded in again order driven markets, the stock exchanges and
Speaker 1: the similar systems, and they're both highly liquid markets with
Speaker 1: lots and lots of pre trade and post trade order exposure.
Speaker 1: So pre traders, the quotes and post trade or the
Speaker 1: trade prices, and those markets function really well. So what
Speaker 1: is there about that magic string that connects those two
Speaker 1: risks into a single bond that somehow makes it necessary
Speaker 1: to trade it in the dark. And if you've got
Speaker 1: a good answer, I I'd love to hear it, because
Speaker 1: I've heard lots of people try to explain it, but
Speaker 1: nobody has convinced me. And I'll remind you again one
Speaker 1: final reminder before we turn to another topic. That explanation,
Speaker 1: the magical explanation, also has to explain why it didn't
Speaker 1: operate in the nineties when these markets were trading in
Speaker 1: ex anti and ex post transparent markets at the exchanges.
Speaker 1: So there's anybody wants to explain this one is going
Speaker 1: to have to work really hard to be very creative. Well,
Speaker 1: I think that brings us up to modern times very
Speaker 1: very well. So you know, we have some progress when
Speaker 1: it comes to pricing transparency, notably the trace data which
Speaker 1: is now being produced based on actual bond trades but
Speaker 1: not potential quotes. You have the electronic trading venues that
Speaker 1: are mostly operating on a request for quote basis and
Speaker 1: are mostly preserving some of the informational power of the dealers.
Speaker 1: And you have some venues that are trying to aggregate
Speaker 1: prices um and quotes for bond trades like bond click,
Speaker 1: which you mentioned, but sort of improvements on the edges,
Speaker 1: nothing massively fundamental. And yet this is something that you know,
Speaker 1: you laid it out very clearly earlier. This is something
Speaker 1: that has been of concern to the SEC for a
Speaker 1: long time now, and I personally remember speaking to think
Speaker 1: it was Dan Gallagher back in and he was saying,
Speaker 1: you know, it's time to address the liars poker dynamics
Speaker 1: embedded in the corporate bond market system. And yet here
Speaker 1: we are years later, still talking about potential fixes or
Speaker 1: improvements that could be made. So I want to talk
Speaker 1: to you specifically about one of the big SEC projects
Speaker 1: to try to fix all of this, which is the
Speaker 1: establishment of film SACK, the Fixed Income Market Structure Advisory Committee.
Speaker 1: In this was supposed to be. My understanding is it
Speaker 1: was supposed to be the big effort by the SEC
Speaker 1: to try to come to a consensus on what needs
Speaker 1: to be done and then actually implement it. And you
Speaker 1: are on the committee, So maybe maybe you could give
Speaker 1: us your perspective of what exactly the goals were when
Speaker 1: it was established. Well, I suppose it depends who you
Speaker 1: ask and how Canada, they will be when they respond.
Speaker 1: When I went into it, I thought this was a
Speaker 1: great opportunity to modernize the markets. Um I had been
Speaker 1: instrumental with the net Nazareth and many others. Remember every
Speaker 1: success has lots and lots of grandparents and parents and
Speaker 1: godfathers and god mothers and so forth. We have been
Speaker 1: instrumental in moving the stock markets from open outcry floor
Speaker 1: based systems into electronic systems that are incredibly efficient now.
Speaker 1: So that was neat, and so I thought, gee, this
Speaker 1: would be a really great time to see what we
Speaker 1: can do to to solve some of these problems. They're
Speaker 1: not really problems, but just to make the markets better.
Speaker 1: And so some things that I was hoping we'd be
Speaker 1: able to do is that we could, you know, call
Speaker 1: for the formation of a national best bitter offer, or
Speaker 1: have Finra do like NASDAC did, or have NASDAC and
Speaker 1: the nas d do this create a a nasdak. The
Speaker 1: original nasdack for bonds. The original naz Back was just
Speaker 1: a quotation system where he showed everybody's quotes, all the
Speaker 1: dealer quotes. It's called a quote tableau, so it just
Speaker 1: seeing the quotes. Ex Anti gets people to compete more
Speaker 1: and makes the markets better. And then they ultimately evolved
Speaker 1: into the NASDAC stock market, which is a full blown
Speaker 1: exchange and and regulated as such. Now, so I thought,
Speaker 1: you know, at a minimum we could try to ask
Speaker 1: for that. There was almost no support for that. There
Speaker 1: were a few people who were in the boat, but
Speaker 1: the vast majority of the members of FIM SACH were
Speaker 1: opposed to any change so radical. Who were the other members? Well,
Speaker 1: we'll talk about that, But so we weren't calling you
Speaker 1: know this what this proposal was not a call for,
Speaker 1: you know, a trade through rule, which would be pretty radical.
Speaker 1: We're just saying, you know, let people, let's collect all
Speaker 1: the ex anti data that the quote data. So who
Speaker 1: were the people on FIM SACK. Well, by law, these
Speaker 1: advisory committees have to be representative of sort of everybody
Speaker 1: who has an interest in the issue. Everybody has to
Speaker 1: be the at the table. But the law doesn't tell
Speaker 1: you how the table should be weighted. You know, how
Speaker 1: many people of each type. And so you had the
Speaker 1: bond dealers, you had the bond issuers, you had a
Speaker 1: few academics, you had a few investor advocates, you had
Speaker 1: the alternative trading systems. You had some dealers, I think
Speaker 1: I mentioned them as well, issuers and large institutional investors.
Speaker 1: So I think it pretty well covers the gamut, but
Speaker 1: it was weighted heavily towards people who were either vested
Speaker 1: in the status quo or who we're dependent on people
Speaker 1: who are vested in the status quo. So if you're
Speaker 1: an issuer, you don't want to go out and piss
Speaker 1: off your investment bank because because you've got to do
Speaker 1: business with them, and so basically you just go along
Speaker 1: and uh, you know, I would make in passion speeches
Speaker 1: about how we should be doing what's best for the
Speaker 1: country and stuff like that, and they all, in their
Speaker 1: own way, thought that they were doing what's best for
Speaker 1: the country. But I think that perhaps there are points
Speaker 1: of view might have been partially compromised or at least
Speaker 1: subtly influenced by their self interest. So I'm trying to
Speaker 1: be polite, but you know exactly what I've said, and
Speaker 1: it's not surprising. There's a lot of fear that if
Speaker 1: we made any changes, we'd screw things up. And so
Speaker 1: the problem to getting changed is that our bond markets
Speaker 1: are for all their awards the best bond markets in
Speaker 1: the world. They could be a whole lot better. I
Speaker 1: know that from my experience, and uh, a lot of
Speaker 1: other people know it, but getting it there is really difficult,
Speaker 1: and so it's very challenging and disappointing. My understanding was,
Speaker 1: I mean, this can have come as a surprise to
Speaker 1: anyone who created this committee, Like if you get a
Speaker 1: bunch of varying interests together in the room, they might
Speaker 1: not be able to agree on fixing the market or
Speaker 1: improving the market, especially given that they haven't really agreed
Speaker 1: on how to do that, you know, for many, many
Speaker 1: years previously. And I always thought the idea of getting
Speaker 1: the SEC involved was that you would have an independent
Speaker 1: arbiter who could look at this information and try to,
Speaker 1: you know, come up with a solution that might be
Speaker 1: independent of the individual interests of people in the market currently.
Speaker 1: But that doesn't seem to have happened, judging by the
Speaker 1: lack of news that I've seen on you know, stuff
Speaker 1: being proposed or coming out of the committee. Well, there's
Speaker 1: a lot, there's a lot in that. So I mentioned
Speaker 1: that the composition of film Sack basically established what they
Speaker 1: were going to do, and what they were not willing
Speaker 1: to do. It's instructive that the very first thing that
Speaker 1: they proposed was to the a the reporting of of
Speaker 1: super large bond trades. Right now, their prices are reported
Speaker 1: within fifteen minutes with the marker saying that the trade
Speaker 1: is if it's an investment grade bond, it's more than
Speaker 1: five million dollars, and then six months later you can
Speaker 1: find out the full size. But who cares at that
Speaker 1: point and five million dollar trade is plenty big enough,
Speaker 1: you know, it's big. So they proposed that that we
Speaker 1: should delay reporting those trade prices and sizes for I
Speaker 1: think three days or something like that, but then we'll
Speaker 1: report the whole thing. So there was like, well, we'll
Speaker 1: give you something. But what they were taking away was
Speaker 1: really really meaningful, and this is the first thing they proposed.
Speaker 1: So that was like a shock to me. It's like
Speaker 1: we're going backwards. Uh, it's just crazy. Okay, So the
Speaker 1: SEC appoints all these people and they according to how
Speaker 1: they do the waiting, they can determine the outcome. So
Speaker 1: let's be generous to the SEC and say that there
Speaker 1: are a couple of different ways that change can take place,
Speaker 1: and how you feel about these ways depends on how
Speaker 1: you feel about uninformed investors and how you feel about
Speaker 1: political economy or your political philosophy. So one way is
Speaker 1: for the SEC to mandate change. So we did this
Speaker 1: when we were making changes to equity market structure to
Speaker 1: make the markets electronic. That was reag MS and it
Speaker 1: was extraordinarily successful. So the SEC has the power to
Speaker 1: regulate markets, and it gets challenged by the incumbents, but
Speaker 1: in the end, if they do their work properly, they
Speaker 1: can get what they want and done. The argument for
Speaker 1: the SEC doing this is that somebody has to represent
Speaker 1: the interests of uninformed investors who will never be able
Speaker 1: to do this by themselves. Okay, so that's an argument.
Speaker 1: The counter argument, which is also respectful, is that listen,
Speaker 1: f the markets would be better in a changed state.
Speaker 1: There will be people who will provide those changes, and
Speaker 1: though it might be difficult, uh, it's not impossible, and
Speaker 1: in US it's impossible, we shouldn't regulate. So, for instance,
Speaker 1: there are private entities who are now aggregating best bids
Speaker 1: and offers. We talked about bond click. There are brokers
Speaker 1: who are doing it as well. So interactive brokers will
Speaker 1: allow its clients to trade on bond markets where Interactive
Speaker 1: is collected quotes from a multitude of dealers. And more interestingly,
Speaker 1: Interactive will allow their clients to post their offers to trade,
Speaker 1: so they can post bids and offers just like you
Speaker 1: can in the stock market, and uh they post them
Speaker 1: at venues where they actually might get hit. And so
Speaker 1: instead of always buying at the ask price, you might
Speaker 1: be able to buy at the bid price if you
Speaker 1: trade through Interactive. Now, in the interest of full disclosure,
Speaker 1: I have to tell everybody that I am a director.
Speaker 1: I'm actually the lead independent director of Interactive, and so um,
Speaker 1: you should recognize that that. Uh, I have an interest
Speaker 1: in letting people know about this. But they're innovative and
Speaker 1: that's in things. So going back to political philosophy, clients
Speaker 1: want this, they can go trade through Interactive brokers, and
Speaker 1: if SWAB sees that they're losing clients or e Trade
Speaker 1: or you know, merrit Trader, they can start offering the
Speaker 1: same services. So the premise here, of course is that
Speaker 1: ultimately the uninformed and unknowledgeable trader will benefit because there
Speaker 1: are knowledgeable traders who put significant demands on the system
Speaker 1: and cause the system to change that may take twenty
Speaker 1: or thirty years, or may never happen. It may only
Speaker 1: happen for the informed traders, and everybody else sort of
Speaker 1: gets left behind because people never know any better. And
Speaker 1: if that bothers you, then you're back into the first
Speaker 1: camp that says maybe the SEC should do something. So
Speaker 1: from my point of view, I think that the SEC
Speaker 1: should exercise a little bit more power. I don't like
Speaker 1: to see them do too much regulation, but they should
Speaker 1: exercise power when you have certain problems in the market
Speaker 1: that make competitive solutions difficult, and those problems are agency
Speaker 1: problems where people are represented by people who have conflicts
Speaker 1: of interest. The people who are doing the representation, like
Speaker 1: the brokers, they don't have a strong interest in serving
Speaker 1: their clients. Well, if the client doesn't know that, they're
Speaker 1: getting screwed. I believe that's the technical term in the market.
Speaker 1: So I hope nobody takes any offense. It wouldn't be
Speaker 1: the first time it was said on all lots. Yeah,
Speaker 1: I'll be more careful about some of the other technical
Speaker 1: terms that are often bandied about in the markets. So
Speaker 1: when the broker has a conflict of interest and the
Speaker 1: client doesn't even recognize it, the broker is not going
Speaker 1: to be too eager to change it because the broker
Speaker 1: is going to act in their self interest, and their
Speaker 1: self interest is usually too to go along and keep
Speaker 1: things simple. And in some cases they even get paid
Speaker 1: for order flow. But I don't think that happens in
Speaker 1: the bond markets. That may be misinformed. So that's a
Speaker 1: that's a potential problem. And then another potential problem was
Speaker 1: this um uh. Economists call it the order flow problem,
Speaker 1: but if you're just a regular person, you just know
Speaker 1: it as a notion that liquidity attracts liquidity. And we
Speaker 1: discussed it earlier when we talked about how difficult it
Speaker 1: is to start a new market. You got a new
Speaker 1: market exactly. It's a cracker jack market. But the problem
Speaker 1: is is that it never gets off the ground until
Speaker 1: people are willing to trade there. And they're not willing
Speaker 1: to trade there because I've got to get their stuff
Speaker 1: done right away. So that's it. That's a problem that
Speaker 1: inhibits competition. We all may be better off with that
Speaker 1: cracker jack market. You know, maybe it's an order driven
Speaker 1: market with all the bells and whistles that will make
Speaker 1: trading super efficient, like we see in the equity markets,
Speaker 1: and then to a lesser extent in the options markets,
Speaker 1: and certainly in the futures markets. We we may want
Speaker 1: that and it could be better, but we may never
Speaker 1: get there without the assistance of a regulator. So these problems,
Speaker 1: agency problems and externalities see the fan see words that
Speaker 1: economists know and use. These problems ensure that that free
Speaker 1: markets don't often don't always produce competitive markets. And so
Speaker 1: this is where political fossiphy can diverge. I am a
Speaker 1: hundred percent in favor of free market, of free markets
Speaker 1: when free markets produce competitive markets. But if a free
Speaker 1: market is got problems like agency problems or externalities that
Speaker 1: ensure that we don't get to the competitive solution, then
Speaker 1: we need to have a very light hand that will
Speaker 1: give a nudge. I'm avoiding the word that that nasty
Speaker 1: word regulation, but to give a nudge to get us
Speaker 1: to the right equilium, to get a structure that benefits everybody.
Speaker 1: We should talk for a moment why we care about this.
Speaker 1: Even though we have the very best markets in the
Speaker 1: world in the bonds, they could still be substantially better,
Speaker 1: and if they were better, we would all benefit. So
Speaker 1: volumes would increase substantially, which ironically would benefit the dealers.
Speaker 1: Transaction costs would drop, and uh we would you know,
Speaker 1: people who are saving for the retirement would be able
Speaker 1: to save more efficiently, and issuers would see lower issuance
Speaker 1: costs because the cost of issuing a bond depends on
Speaker 1: how liquid the market's going to be after you've issued
Speaker 1: the bond. People don't want to pay so much for
Speaker 1: a bond that will be locked up forever if they
Speaker 1: need the money out, they don't want to lose a
Speaker 1: lot trying to sell it. But if the bond looks
Speaker 1: like it's going to trade in a highly liquid market,
Speaker 1: they'll pay more for the bond. And when people pay
Speaker 1: more for initial public offerings to bonds, when the corporations
Speaker 1: are funding, it means they're funding costs are lower and
Speaker 1: so that's good for them as well. So there are
Speaker 1: a lot of really important and very valuable benefits that
Speaker 1: are associated with making these markets that are markets. But
Speaker 1: there are some strong vested interests. Give you a note
Speaker 1: on a story about vested interests. So the SEC adopted trace,
Speaker 1: we talked about it at length. At the same time,
Speaker 1: the Canadian markets were faced with the same proposal and
Speaker 1: they didn't do it. They since have adopted post trade transparency,
Speaker 1: you know, to show you what the trade prices were,
Speaker 1: but it took them ten fifteen years to do it.
Speaker 1: And the reason perhaps was that the regulator there was
Speaker 1: the Bank of Canada, and the Bank of Canada has
Speaker 1: a close relationship with the large dealers and as a consequence,
Speaker 1: they just didn't want to rock the boat. This despite
Speaker 1: the fact that there's overwhelming evidence from America that the
Speaker 1: world didn't end as some people suggested with those bond
Speaker 1: prices being made public, and likewise, the world's not going
Speaker 1: to end if bonds were traded in order driven systems,
Speaker 1: because we see order driven systems trading similar instruments all
Speaker 1: the time all throughout the world and in the United
Speaker 1: States as well. So lots of fears about the end
Speaker 1: of the world, but I'm not there. Well, can I
Speaker 1: just ask one devil's advocate point on this idea of
Speaker 1: regulation versus natural market evolution, And it kind of relates
Speaker 1: back to something I said in the intro, which is
Speaker 1: this idea that over the past year or so you
Speaker 1: have seen something of an improvement or a migration in
Speaker 1: the amount of bond trades that are actually electronic UM
Speaker 1: and going through some of those platforms. So I think
Speaker 1: I cited the Greenwich Associates data that had the number
Speaker 1: of i G Investment grade bond transactions UM that were
Speaker 1: electronic at UM currently versus something like less than at
Speaker 1: the beginning of So something happened in UM, you know
Speaker 1: the pandemic. You had the Federal Reserve buying corporate bond
Speaker 1: e t s for the first time. Those two things
Speaker 1: arguably have helped shift the market more than previous regulation
Speaker 1: or some of these previous private efforts have done in
Speaker 1: the past. So is there an argument to be made
Speaker 1: that you could just let the bond market continue its
Speaker 1: natural progression and maybe eventually people will change their behavior. UM.
Speaker 1: Certainly you could make that argument. There's strong evidence that
Speaker 1: this is what's happening, and it may continue to accelerate.
Speaker 1: The two stories that you offered may have contributed. But
Speaker 1: I think there was another story even stronger, which was
Speaker 1: that as a result of Basil three UM, the large
Speaker 1: banks came to be at a disadvantage to proprietary traders
Speaker 1: when dealing bonds. And we can talk about what that
Speaker 1: disadvantage was, but basically, when holding a bond portfolio, UH,
Speaker 1: the banks have to hold more capital against the positions
Speaker 1: than do proprietary traders have to hold. And as a consequence,
Speaker 1: the banks could not compete as effectively as they had
Speaker 1: competed before, which meant that a lot of the personnel
Speaker 1: at those banks left and form their own proprietary trading
Speaker 1: groups or joined other proprietary trading groups. And all of
Speaker 1: a sudden, you have a core of highly skilled dealers
Speaker 1: in a proprietary environment that want to make money, and uh,
Speaker 1: they're electronically sophisticated. And I believe that it was probably
Speaker 1: these guys who have made the electronic venues more liquid
Speaker 1: and has given us that and I expect that that
Speaker 1: will that trend will continue, and I think that's I
Speaker 1: think that's a good thing. And indeed, if you look
Speaker 1: at studies of spreads, we see that spreads have indeed
Speaker 1: dropped in the bond markets because of the more competition
Speaker 1: from these electronic entities. And there's of course two competitions
Speaker 1: here that we want to promote both of them. There's
Speaker 1: the competition for best price, which works best when you
Speaker 1: put everybody in the same place. Best price means that
Speaker 1: buyers looking for the lowest purchase price in the sellers
Speaker 1: looking for the highest sales price. They also have the
Speaker 1: competition to be the venue that hosts that competition, whether
Speaker 1: it's an exchange or a broker, or just a dealer
Speaker 1: who says, I'll take the other side and give you
Speaker 1: the liquidity. So we like to have both competitions, but
Speaker 1: the two competitions don't coexist particularly well with each other,
Speaker 1: and the sec and over time has leaned towards promoting
Speaker 1: one competition versus the other competition. And what's really interesting,
Speaker 1: of course, is that anybody who has a position in
Speaker 1: these markets about my position, I don't mean their bond position,
Speaker 1: but I mean they're their opinion about how they should
Speaker 1: be organized. Anybody has a such an a pain and
Speaker 1: always cites their opinion is being pro competitive. So if
Speaker 1: they want to see more centralization, they say they want
Speaker 1: to see the competition for best price enhance. That's really good.
Speaker 1: And if they want to see more competition among exchange
Speaker 1: venues and so forth, they say, the system as it
Speaker 1: is is really competitive and that's important, and it's created
Speaker 1: the best markets that ever were now until recently, they
Speaker 1: are now the best markets that ever were. But until
Speaker 1: recently before these electronic innovations, those markets back in UH
Speaker 1: in the nineties at the stock exchange, they were better.
Speaker 1: And how much better would they be now that we
Speaker 1: have computers that can handle those filing cabinets. You know,
Speaker 1: it's just a database problem. So it's pretty darn interesting.
Speaker 1: One other issue it love to share with you. Yes,
Speaker 1: ses regulatory framework for small retail traders in the bond
Speaker 1: markets is dealer centric. The assumption is that dealers are
Speaker 1: doing all the trades. In contrast, in the equity mark
Speaker 1: is the regulatory framework is broker centric. It revolves around
Speaker 1: the brokers, and so the difference is that the brokers
Speaker 1: are required to get best execution. And but when the
Speaker 1: the brokers are acting as dealers to you, there's a
Speaker 1: sort of a different relationship. But quite frequently now that
Speaker 1: the markets are electronic and where you have venues where
Speaker 1: quotes are being aggregated, or we have dealers who are
Speaker 1: sharing their quotes directly with brokers. Quite frequently a broker
Speaker 1: dealer who offers bonds to their clients takes no position whatsoever.
Speaker 1: They do what's called a riskless principal trade, which means
Speaker 1: that they buy from a dealer and they immediately sell,
Speaker 1: usually marking it up to their client, and they'll show
Speaker 1: the client what's available because they have a list of
Speaker 1: what the dealers say is available, and the client chooses
Speaker 1: what they want and being of the trade is done okay.
Speaker 1: So there's no principal risk involved with that transaction because
Speaker 1: the intermediary, the broker, is literally acting as a broker,
Speaker 1: but is regulated as a dealer. So there's a type
Speaker 1: mismatch here. And uh, if there's a good reason that
Speaker 1: we regulate broker dealers primarily as brokers when doing ristless
Speaker 1: principal trades, which is essentially what they do when clients
Speaker 1: buy stocks or options or futures, why don't we regulate
Speaker 1: them the same way when they're trading bonds. And the
Speaker 1: answer of courses bonds are different, so, but but I
Speaker 1: don't think they really are so different. There's one other
Speaker 1: question that I wanted to ask you, which is about
Speaker 1: Gary Gensler, the new SEC commissioner. And you know, we've
Speaker 1: seen him come in and he's made a lot of
Speaker 1: noise about focusing on things like crypto and payment for
Speaker 1: order flow in the equity market. Um, and you know,
Speaker 1: general retail stock trading issues um seemed to be high
Speaker 1: on his agenda, but he has also spoken quite a
Speaker 1: bit about price transparency in the bond market and maybe
Speaker 1: some other um improvements that you could make to the
Speaker 1: regulatory structure. And I'm aware that we haven't really spoken
Speaker 1: about a t S at all or alternative trading systems,
Speaker 1: But is this something that you would expect Gensler to
Speaker 1: be looking at in the next year or so. Do
Speaker 1: you get the sense that this is high on the
Speaker 1: SEC's priority list given what happened with fim Sak, all
Speaker 1: that happened under Film SAC and most importantly, the constitution
Speaker 1: of the committee itself took place under a SEC that
Speaker 1: was dominated by more conservative political interests. So now we
Speaker 1: have an SEC that's now dominated by somewhat more liberal
Speaker 1: political interests, and as a consequence, there is a potential
Speaker 1: for change here. My impression though, is that this is
Speaker 1: not his hot issue. There's a variety of reasons why,
Speaker 1: but the evidence that it's not a hot issue is
Speaker 1: that he still has not appointed a full time director
Speaker 1: for the Division of Trading and UH. It is now
Speaker 1: called the Division of Trading and Markets. It used to
Speaker 1: be called the division of market Regulation. I misspoke earlier
Speaker 1: when I mentioned that. So he still has an acting
Speaker 1: director who seems quite competent, but a acting director just
Speaker 1: doesn't have the same power as a director. And then
Speaker 1: all of his regulatory people report to a person in
Speaker 1: his office who doesn't have a strong background in market structure.
Speaker 1: She's an attorney. Her last job was a deputy general
Speaker 1: counsel for a f l C. I Oh, I've never
Speaker 1: met her. I'm sure she's a wonderful woman, and I'm
Speaker 1: sure she's a very fast learner, as almost all attorneys are,
Speaker 1: and I can assue every attorney thinks they are. But
Speaker 1: it's not the same thing. And so uh so, just
Speaker 1: from those omissions, if you will, I'd suggest that perhaps
Speaker 1: some market structure issues aren't high on his regulatory agenda. Now,
Speaker 1: all that said, there's a lot of money involved in
Speaker 1: these issues, and when there's a lot of money involved
Speaker 1: in the issues, vested interests will lobby their senators, and
Speaker 1: so they make contributions to senators, and senators look at
Speaker 1: that and say, Hey, the US bond markets are the
Speaker 1: best markets in the world. Why would we ever want
Speaker 1: tom up with them? Because just because some you know,
Speaker 1: academic who thinks he knows something tells us that it
Speaker 1: could be better. Well, you know what, I just don't
Speaker 1: see it. And so you know, if the SEC proposes
Speaker 1: to do something, as senator writes the letters saying not
Speaker 1: an opposition, but can you kindly explain why you're doing
Speaker 1: what you're doing, And then in between the lines, which
Speaker 1: is not written, it's uh oh. And by the way,
Speaker 1: you may recognize that I sit on the the Finance
Speaker 1: Committee and we set your budget. And from the tone
Speaker 1: of let or there's a little bit of skepticism and
Speaker 1: sort of everybody knows, what's what? Why do senators do this? Well,
Speaker 1: they do care about the markets, but it's an abstraction.
Speaker 1: It's far away from them. They can raise capital, which
Speaker 1: is political contributions, cheaply and then spend it where it's
Speaker 1: more dear to them, on the issues that are more
Speaker 1: important to them, whether it be abortion or early childhood
Speaker 1: education or armed forces or who knows what roads doesn't matter.
Speaker 1: And so what you see is senators on both sides
Speaker 1: have this tendency to be co opted by strong interests,
Speaker 1: and so what you need is a very very strong
Speaker 1: SEC that can make the case and explain how much
Speaker 1: better things would be if we do all this, because
Speaker 1: it's going to be painful. The SEC will end up
Speaker 1: being sued. They'll be letters from senators, and at some
Speaker 1: point the letters can be less than subtle. So you
Speaker 1: need you need somebody who's really been empowered. We had that,
Speaker 1: uh under Harvey Pitt, who was actually too outspoken, but
Speaker 1: it continued under Donaldson, and that's when Reagan mis NMS
Speaker 1: was adopted over the objections of the Republicans. And it
Speaker 1: was odd that Donaldson, a Republican, actually voted with the
Speaker 1: two Democrats to adopt Reagan MS, but that was perhaps
Speaker 1: because he said was at the closer to the end
Speaker 1: of his career than to the beginning of his career
Speaker 1: and may have been thinking more as a statesman then
Speaker 1: as somebody with vested interests. He also may not have
Speaker 1: cared very much and just let staff do what they
Speaker 1: wanted to do and they got away with it. But
Speaker 1: it's it's difficult, no question about Yeah, I'm getting that sense, Larry.
Speaker 1: This has been a fascinating conversation and I feel like
Speaker 1: we could probably talk like all day potentially about SEC
Speaker 1: history and some of the political mechanations there. But thank
Speaker 1: you so much, really appreciate you coming on all thoughts,
Speaker 1: Thanks for this opportunity to share some really important insights
Speaker 1: with you and your audience. Figure So clearly I enjoyed
Speaker 1: that conversation. It's always a joy for me to get
Speaker 1: back to talking about corporate bond market structure, And of
Speaker 1: course a couple of the things that stand out is
Speaker 1: that tension between a regulatory push towards fixing these agency
Speaker 1: problems that Larry described versus the natural development of the market.
Speaker 1: And part of me thinks, like, yes, we've seen some
Speaker 1: improvement over the past couple of years or so, but
Speaker 1: there is still so much further to go in what
Speaker 1: is one of the most important markets in the world,
Speaker 1: and it's sort of amazing to me that there isn't
Speaker 1: more of a spotlight shown on this particular issue. But
Speaker 1: on the other hand, I thought Larry did a very
Speaker 1: good job of explaining some of the political considerations that
Speaker 1: going into formulating the SEC's uh sort of agenda under
Speaker 1: various personnel and new commissioners, and so maybe that explains it.
Speaker 1: I can't imagine that telling people that your regulatory focus
Speaker 1: really needs to be on fixing credit markets? Um, is
Speaker 1: that much of a sexy topic for a broader audience,
Speaker 1: Although you know, certainly, on this particular podcast, we try
Speaker 1: to make it one all right. Um. I think I'm
Speaker 1: gonna leave it there because it's weird to talk to
Speaker 1: myself without Joe. This has been another episode of the
Speaker 1: All Thoughts podcast. I'm Tracy Alloway. You can follow me
Speaker 1: on Twitter at Tracy Alloway. You can follow my co
Speaker 1: host Joe Wisenthal. He is at The Stalwart. You can
Speaker 1: follow our producer Laura Carlson. She is at Laura M. Carlson.
Speaker 1: And you should follow Bloomberg Podcasts. They are at podcasts.
Speaker 1: Thanks for listening to