WEBVTT - The End of An Era for Odd Lots 0:00:11.160 --> 0:00:14.560 Hello, and welcome to another episode of the Odd Loots Podcast. 0:00:14.640 --> 0:00:19.080 I'm Tracy Alloway and I'm Joe Wisenthal. Joe, the day 0:00:19.239 --> 0:00:24.040 has come. I know, I know where you're going with this. 0:00:25.040 --> 0:00:28.840 I'm excited, are you? Are you? It's the end of 0:00:28.960 --> 0:00:34.160 odd Lots odd Lots. Wait, the end of odd Lots 0:00:34.280 --> 0:00:36.800 odd Lots, or another way of looking at it is 0:00:36.960 --> 0:00:40.120 it's the odd Lots odd Lots. It's add thoughts all 0:00:40.159 --> 0:00:43.400 the way down, just before we freak everyone out. Is 0:00:43.440 --> 0:00:47.240 odd Lots coming to an end? I'm not no, Okay, 0:00:47.760 --> 0:00:50.599 this is not the end of the Odd Loots Podcast 0:00:50.800 --> 0:00:55.320 as we know it. It is, however, I'm relieved. Yes, 0:00:55.480 --> 0:00:58.040 it's good for both of us. It is, however, the 0:00:58.120 --> 0:01:02.760 episode in which we just gus the possible end of 0:01:02.920 --> 0:01:08.039 odd Lots trading as we know it. Yeah. So this 0:01:08.120 --> 0:01:10.919 is something we've never really talked about, I don't think, 0:01:11.240 --> 0:01:14.200 which is where our name of the podcast comes from. 0:01:14.280 --> 0:01:16.360 I'm not sure if we've ever even really approached that, 0:01:16.400 --> 0:01:19.120 have we No? I think we just sort of threw 0:01:19.120 --> 0:01:21.880 it out there and started recording. But for those people 0:01:22.120 --> 0:01:26.080 that don't know, odd thoughts, it's basically a term that 0:01:26.200 --> 0:01:33.440 describes a order for stocks or bonds of an unusual size. 0:01:33.520 --> 0:01:37.920 Basically often it's it's small orders of bonds or stocks. 0:01:37.959 --> 0:01:40.000 So it's like, if you were to place an order 0:01:40.040 --> 0:01:44.399 for I don't know, seven shares of a company or 0:01:44.400 --> 0:01:48.000 something like that, something weird, that's not the normal increment, 0:01:48.440 --> 0:01:51.840 that would be an odd lot, something irregular. Yeah, exactly. 0:01:52.200 --> 0:01:54.559 And from what I remember, we chose the name, well, 0:01:55.080 --> 0:01:57.600 we're looking for something catchy, and I thought Odd Thoughts 0:01:57.720 --> 0:02:00.960 also sort of described the ethos of the podcast in 0:02:01.000 --> 0:02:04.320 the sense that we cover a lot of slightly random 0:02:04.560 --> 0:02:09.040 ground sometimes right stories that don't typically quite fit perfectly 0:02:09.320 --> 0:02:13.840 into the overall market themes. Because of course, stories that 0:02:13.919 --> 0:02:17.280 fit uh nicely into the overall market stories are covered 0:02:17.320 --> 0:02:20.440 in pretty uh pretty nice depth anywhere. I'm thinking, you know, 0:02:20.720 --> 0:02:23.200 back to our old days of like studying the talking 0:02:23.240 --> 0:02:26.120 about the cattle market, for example. You know, it doesn't 0:02:26.160 --> 0:02:30.560 quite a fit into the typical markets reporting. No, there's 0:02:30.600 --> 0:02:33.600 not enough cattle market coverage, that's for sure. Fish bubble, 0:02:34.320 --> 0:02:38.320 that's right. But the reason we are actually finally talking 0:02:38.360 --> 0:02:41.720 about Oddoughts themselves is because there's been a little bit 0:02:41.720 --> 0:02:44.760 of news on this front. A few weeks ago Bloomberg 0:02:44.800 --> 0:02:47.880 actually reported that I think it was JP Morgan and 0:02:48.040 --> 0:02:52.800 City Group were shutting down their odd Lots trading desks forever. 0:02:53.080 --> 0:02:56.320 So a big, big change for the odd Thoughts market, 0:02:56.480 --> 0:03:01.720 so to speak. Right, so capital oh odd Lots is staying, 0:03:01.919 --> 0:03:05.760 but lower ks oh odd Lots appear to be on 0:03:05.800 --> 0:03:07.880 their way out, or at least, you know, people are 0:03:07.919 --> 0:03:11.040 still going to be making purchases in random increments, but 0:03:11.120 --> 0:03:14.839 the idea of a specific desk devoted to them, those 0:03:14.880 --> 0:03:18.000 seemed to be on the way out. And we want 0:03:18.040 --> 0:03:21.359 to know why exactly, And we actually have the perfect 0:03:21.520 --> 0:03:25.480 guest to explain exactly what is happening. He's a recurring 0:03:25.760 --> 0:03:29.840 Odd Thoughts guest. Uh, formerly at Goldman Sachs. Mr Chris 0:03:29.840 --> 0:03:34.160 White now CEO at Bond Click and Viable Markets. Thank 0:03:34.160 --> 0:03:37.920 you so much for coming on again. Well, it's my pleasure. 0:03:38.360 --> 0:03:40.280 I want to ask though before we get started. Now, 0:03:40.320 --> 0:03:45.280 my the first three time Odd Lots guest. Uh. Yeah, 0:03:45.360 --> 0:03:47.720 We've had a number of two time guests. I think 0:03:47.720 --> 0:03:49.480 you are the first three time. Well I was told 0:03:49.480 --> 0:03:52.000 by your producers that there would be something for me, 0:03:52.080 --> 0:03:54.880 so I'll be waiting after the show. I think it's 0:03:54.920 --> 0:03:59.200 called the Steve Martin Award a special jacket. Maybe exactly. Well, 0:03:59.680 --> 0:04:01.960 I'm world to be here. I'm actually a true fan 0:04:02.120 --> 0:04:04.560 of the Odd Lots podcast. Um, you've got a couple 0:04:04.600 --> 0:04:08.280 of of my all time favorite podcasts in your catalog, 0:04:08.480 --> 0:04:11.960 particularly the one that you did with Uh Andrew Lowe. 0:04:12.400 --> 0:04:16.640 I think the Adaptive Markets podcast was awesome and then, um, 0:04:16.680 --> 0:04:18.680 just so listening to the origin story of how you 0:04:18.720 --> 0:04:21.159 came up with the name was fascinating for me as 0:04:21.200 --> 0:04:24.440 a true fan. But I'm happy to do what I 0:04:24.480 --> 0:04:26.919 think I've been brought in. I'm sort of the designated 0:04:26.960 --> 0:04:29.119 hitter when it comes to talking about innovation and credit. 0:04:29.320 --> 0:04:32.080 Did you think that when you were invited on today's 0:04:32.240 --> 0:04:34.159 episode to talk about the end of Odd Lodge that 0:04:34.160 --> 0:04:36.120 we were going to be doing some sort of retrospective 0:04:36.200 --> 0:04:37.719 and yet you were actually gonna talk about the end 0:04:37.720 --> 0:04:40.920 of the podcast. Okay, so absolutely, and I'm not embarrassed 0:04:40.960 --> 0:04:42.960 to say that. But I received an email from your 0:04:42.960 --> 0:04:44.760 producer saying we want you to talk about the end 0:04:44.800 --> 0:04:46.880 of Odd Lots. And I replied and I said, I'm 0:04:46.920 --> 0:04:50.000 really sorry that the show is going away, thanks for 0:04:50.040 --> 0:04:52.800 having me on the farewell and Uh he was like, 0:04:52.920 --> 0:04:54.800 I don't know what you're talking about, but as you 0:04:54.839 --> 0:04:57.760 can you can see the title end of odd lots 0:04:57.800 --> 0:04:59.800 for this for this one does sound like you guys 0:04:59.839 --> 0:05:01.480 are closing up shop. But I'm so glad to hear 0:05:01.480 --> 0:05:03.800 that it's still going on. And I'm also glad to 0:05:04.240 --> 0:05:07.040 clear up what I think is a misconception about what's 0:05:07.080 --> 0:05:09.200 happening with odd lots. So let me know when you 0:05:09.200 --> 0:05:12.279 guys want to get into it, let's do it. Okay. 0:05:12.400 --> 0:05:15.800 So the art, the articles or the the recent news 0:05:15.880 --> 0:05:19.440 items around the closing up of desks at JP Morgan 0:05:19.520 --> 0:05:21.880 and City are not that they're they're going to stop 0:05:21.880 --> 0:05:25.000 trading odd lots anymore. They're actually doing something that Goldman 0:05:25.520 --> 0:05:27.560 did I think probably about two or three years ago, 0:05:27.880 --> 0:05:31.200 which is really take the human element out of odd 0:05:31.240 --> 0:05:35.520 lots trading in the corporate bond space. And to further 0:05:35.839 --> 0:05:39.000 add to your description, Tracy, an odd lot, I would 0:05:39.000 --> 0:05:42.160 say in the corporate bond market, not all lot odd 0:05:42.160 --> 0:05:45.360 lots are created equal. We would consider there to be 0:05:45.920 --> 0:05:48.799 odd lots and then micro lots, which would be really 0:05:48.839 --> 0:05:53.920 anything below let's call uh two hundred um bonds or 0:05:53.960 --> 0:05:57.039 two hundred thousand notional. So there's sort of an in between. 0:05:57.080 --> 0:05:59.280 And also it's sort of changes depending on what you're trading, 0:05:59.279 --> 0:06:02.400 and and really what you look at is the trade 0:06:02.480 --> 0:06:05.720 size relative to the outstanding size of the bond is 0:06:05.760 --> 0:06:08.760 going to determine whether it's an odd lot. So anything 0:06:08.800 --> 0:06:11.839 below a million in investment grade is generally considered an 0:06:11.880 --> 0:06:14.880 odd lot, but anything below five hundred thousand in high 0:06:14.960 --> 0:06:18.039 yield is generally considered an odd lot. So before we 0:06:18.120 --> 0:06:19.560 jump into this, I want to make sure that there's 0:06:19.560 --> 0:06:22.920 a level setting. So Chris, just on that note, before 0:06:22.920 --> 0:06:25.279 we talk about what is changing when it comes to 0:06:25.360 --> 0:06:29.760 trading of odd lots. Who would be trading odd lots currently? 0:06:29.839 --> 0:06:33.600 Like what type of investors are demanding these sort of 0:06:33.640 --> 0:06:38.320 smaller or irregular size trades. Sure, so, pure retail investors 0:06:38.360 --> 0:06:42.120 in the corporate bond space probably account for less than 0:06:42.160 --> 0:06:45.200 half of a percent of average daily volume. They are 0:06:45.240 --> 0:06:48.480 not like the equities market, and actually the equities market 0:06:48.520 --> 0:06:50.800 of old um I would say anything prior to the 0:06:50.839 --> 0:06:55.240 nineteen sixties was really dominated by the retail investor. That 0:06:55.360 --> 0:06:57.440 is not the way the bond market works. What we're 0:06:57.480 --> 0:07:00.440 talking about is something I would call institutional odd lots, 0:07:00.440 --> 0:07:04.360 and these are really the rebalancing trades. I would say 0:07:04.400 --> 0:07:07.120 that occur in the marketplace where you know, we have 0:07:07.240 --> 0:07:12.480 a hundred and fifty million dollar portfolio, uh, somebody tries 0:07:12.520 --> 0:07:16.040 to sell thousand dollars of it, and so what do 0:07:16.120 --> 0:07:18.320 we have to do. We've got to slice away a 0:07:18.320 --> 0:07:22.040 piece of that portfolio and liquidated. And therefore, you know, 0:07:22.080 --> 0:07:25.640 that creates smaller sized trades in the marketplace. And just 0:07:25.720 --> 0:07:28.080 to give you a sense of the magnitude of this 0:07:28.280 --> 0:07:31.640 activity or odd lots if we call them, uh in 0:07:31.840 --> 0:07:36.119 um the corporate bond space, you know, typically eighty five 0:07:36.240 --> 0:07:40.080 to of the total trades that occur in the market 0:07:40.120 --> 0:07:44.720 on an average daily basis are in sizes less than 0:07:44.760 --> 0:07:48.400 one million. But those trades only account for about fift 0:07:49.440 --> 0:07:51.960 of the volume. So it's a lot of activity, but 0:07:52.040 --> 0:07:55.720 it's it's not a lot of volume. What is it? 0:07:55.840 --> 0:07:59.680 So before we could talk about why it's changing or 0:07:59.680 --> 0:08:02.280 why the market structure around the trading of odd loves 0:08:02.360 --> 0:08:05.440 is changing, let's talk about why it exists in the 0:08:05.480 --> 0:08:08.520 way it currently is. Why would a bank have had 0:08:08.600 --> 0:08:12.120 to have had a dedicated desk to trade these such 0:08:12.160 --> 0:08:14.400 that they couldn't just be traded through the normal route. 0:08:14.560 --> 0:08:18.160 Great questions. So if you look at the actual behavior 0:08:18.240 --> 0:08:21.920 of electronic trading in the corporate bond space, the dominant 0:08:21.960 --> 0:08:24.960 protocol is something called an RFQ, which I would best 0:08:25.000 --> 0:08:27.560 describe to your listeners is it's an electronic phone call, 0:08:27.960 --> 0:08:30.640 and it's you, as a as a by side asset 0:08:30.680 --> 0:08:33.280 manager being able to say to the market, Hey, I'm 0:08:33.320 --> 0:08:37.120 looking for a bid on IBM five year bonds. Who's 0:08:37.160 --> 0:08:40.040 out there interested in giving me a bid? And so 0:08:40.240 --> 0:08:45.480 making that electronic phone call to ten dealers twenty uh 0:08:46.240 --> 0:08:48.480 nine d dealers. At some at some point in time, 0:08:48.760 --> 0:08:51.840 that became the way to trade a certain type of 0:08:52.559 --> 0:08:54.560 or or to way to execute certain types of trade 0:08:54.559 --> 0:08:57.000 in the corporate bond market. But if you look a 0:08:57.040 --> 0:09:01.400 little bit further, the most uh the most popular way 0:09:01.440 --> 0:09:04.439 to trade odd lots in through something called a list form, 0:09:04.480 --> 0:09:07.640 which would be a bid wanted in competition list or 0:09:07.679 --> 0:09:09.839 an offer wanted in competition list. We call it b 0:09:09.920 --> 0:09:12.600 wicks and oh wicks in the business. And what that is, 0:09:12.679 --> 0:09:17.120 it's a list of individual accusips that you want to trade. 0:09:17.400 --> 0:09:21.040 And typically these lists, the individual line items are pretty small. 0:09:21.280 --> 0:09:24.760 You know, five bonds here, twenty bonds there. Now, these 0:09:24.840 --> 0:09:28.480 lists used to be processed manually, and typically a list 0:09:28.640 --> 0:09:31.720 would take I would say maybe three to four hours 0:09:31.800 --> 0:09:35.880 to process from front to back. And the dominant electronic 0:09:35.880 --> 0:09:38.560 trading system and credit uh place I worked for called 0:09:38.600 --> 0:09:42.120 market Access. Their their claim to fame, they're They're. What 0:09:42.160 --> 0:09:47.040 they solved was turning that process, the list trading process, 0:09:47.120 --> 0:09:51.240 into something that was leveraging technology. And nobody could deny 0:09:51.320 --> 0:09:54.560 the efficiency of turning something that took four hours into 0:09:54.559 --> 0:09:57.280 ten minutes. Nobody could deny the benefits of it. So 0:09:57.360 --> 0:09:59.600 imagine you're an asset manager. You need to buy your 0:09:59.600 --> 0:10:02.480 sell a group of bonds. An electronic system is the 0:10:02.480 --> 0:10:04.440 best way to do it because you can tell a 0:10:04.440 --> 0:10:06.559 bunch of people these are the bonds I'm interested in trading, 0:10:06.800 --> 0:10:08.840 and the system will then take all of the best 0:10:08.840 --> 0:10:11.200 bids and offers and present them back to you within 0:10:11.240 --> 0:10:13.080 a ten minute period and then you can just say 0:10:13.360 --> 0:10:16.240 trade them all and you go about your day. So 0:10:16.520 --> 0:10:20.040 I think the last time I heard it about of 0:10:20.080 --> 0:10:23.320 the volume on market Access was comprised of these lists. 0:10:24.440 --> 0:10:27.720 So talk to us then about the decision by JP 0:10:27.840 --> 0:10:30.600 Morgan and City Group to disband the actual odd lots 0:10:30.640 --> 0:10:32.920 trading desk. What do you think is going on there 0:10:33.080 --> 0:10:38.439 and what are they eventually moving towards. So uh markets 0:10:38.440 --> 0:10:42.120 are adapting and changing, and so the the environment for 0:10:42.240 --> 0:10:46.559 trading electronically has had some radical shifts in the corporate 0:10:46.559 --> 0:10:50.800 bond space or meaningful shifts permanent ones, and those shifts 0:10:50.800 --> 0:10:55.280 are now changing the validity of having human beings actually 0:10:55.480 --> 0:10:59.000 performed the odd lot trading function on the cell side, 0:10:59.320 --> 0:11:02.920 because it's a big coming less profitable. I believe one 0:11:02.960 --> 0:11:05.959 of the biggest changes to the biggest changes actually would 0:11:05.960 --> 0:11:09.840 be the just growth in in in passive funds. You know, 0:11:09.880 --> 0:11:14.120 so e t fs are huge component of electronic trading, 0:11:14.120 --> 0:11:17.079 and they've been growing. I think that the fixed income 0:11:17.120 --> 0:11:20.800 et F a u UM just surpassed one trillion recently 0:11:20.840 --> 0:11:23.280 I saw, so you know, it's it's still not as 0:11:23.360 --> 0:11:27.079 big as the actively managed funds that are out there, 0:11:27.160 --> 0:11:29.960 not even close, but it is becoming significant. And if 0:11:29.960 --> 0:11:32.040 you think about what is an e t F, it's 0:11:32.080 --> 0:11:34.640 people trading these baskets of bonds that are supposed to 0:11:34.720 --> 0:11:38.199 represent an index. So that's been driving the activity, it's 0:11:38.200 --> 0:11:40.600 really been pushing it. And then the other thing that's 0:11:40.640 --> 0:11:44.080 happened is the systems used to be set so that 0:11:44.960 --> 0:11:48.880 you know, a bye side asset manager could send inquiries 0:11:48.880 --> 0:11:52.320 out only to the cell side, so only two dealers, 0:11:53.080 --> 0:11:54.600 and so those are the people you could make your 0:11:54.600 --> 0:11:56.160 phone calls to and say, hey, do you have a bid? 0:11:56.640 --> 0:12:00.199 But now these systems have started creating what's called all 0:12:00.200 --> 0:12:03.000 to all our few trading, which is I'm black Rock 0:12:03.120 --> 0:12:05.320 and I could send an inquiry that could show up 0:12:05.320 --> 0:12:10.679 on pimco's desk. And the impact of that is obviously 0:12:10.800 --> 0:12:15.040 greater competition. And so you're going from from particularly with 0:12:15.080 --> 0:12:17.520 market Access, a system that probably had about eighty dealers 0:12:17.559 --> 0:12:19.200 on it that could respond to your inquiry if your 0:12:19.200 --> 0:12:22.280 black Rock, to a system that now has seven people 0:12:22.280 --> 0:12:24.720 on it that could potentially respond to your inquiry. Now, 0:12:24.800 --> 0:12:28.080 what this does for just odd lot trading or really 0:12:28.080 --> 0:12:30.160 any market is more people are in the market, it's 0:12:30.160 --> 0:12:33.160 going to become more competitive, and certain trading styles are 0:12:33.160 --> 0:12:35.040 going to go away. And I think that's where we 0:12:35.360 --> 0:12:37.400 get to this question as to whether or not human 0:12:37.440 --> 0:12:41.079 beings on the seal side should be handling odd lot 0:12:41.120 --> 0:13:01.959 trading in a manual fashion. Chris, you mentioned the notion 0:13:02.160 --> 0:13:06.200 of basically by side players getting in on these platforms 0:13:06.240 --> 0:13:10.240 and being able to deal with other by side players. 0:13:10.320 --> 0:13:13.480 And this is probably I would say the biggest difference 0:13:13.679 --> 0:13:16.520 in the past three years or so since you first 0:13:16.520 --> 0:13:20.000 started coming onto odd Lots. The episode is that we 0:13:20.040 --> 0:13:22.800 do have this all to all participation when it comes 0:13:22.840 --> 0:13:25.720 to corporate bond dealing, and a lot of people expected 0:13:25.960 --> 0:13:29.880 that would never happen because dealer banks basically wouldn't want 0:13:29.920 --> 0:13:33.920 to give up a really lucrative business i e. Facilitating 0:13:33.960 --> 0:13:37.160 all these bond trades. How did it come to pass? Like, 0:13:37.320 --> 0:13:40.760 what was the breakthrough moment here? Well? I think the 0:13:40.800 --> 0:13:44.320 first thing is you is it really lucrative. It's on 0:13:44.320 --> 0:13:49.280 a relative basis market making and odd lots is not uh, 0:13:49.360 --> 0:13:53.560 something that major banks can can really you know, profit 0:13:53.600 --> 0:13:56.280 from in the same way they would from from institutional trading, 0:13:56.880 --> 0:14:01.200 so you know bespoke or or by lateral trades of 0:14:01.280 --> 0:14:05.440 significant size. That's the engine that drives profit profitability. The 0:14:05.480 --> 0:14:07.480 other thing is you have to look at the quality 0:14:07.760 --> 0:14:11.920 of h order flow that you're seeing on these platforms. 0:14:12.000 --> 0:14:16.000 It's it's particularly low quality these lists for example that 0:14:16.080 --> 0:14:20.240 gets sent out. I mean everything's in competition. A lot 0:14:20.280 --> 0:14:23.520 of times it's in bonds that are actively traded, so 0:14:23.600 --> 0:14:26.880 the spreads have already collapsed. So you know, there's a 0:14:26.920 --> 0:14:30.200 there's a lot of energy that goes into responding to 0:14:30.560 --> 0:14:33.680 trades on these systems, and so you know, you have 0:14:33.760 --> 0:14:36.000 to look at what the output is. The other thing 0:14:36.080 --> 0:14:39.200 that I think people are not aware of is that 0:14:39.240 --> 0:14:42.680 when you think about automated trading or electronic trading and 0:14:42.720 --> 0:14:45.960 other asset classes, especially from a market making standpoint, you 0:14:45.960 --> 0:14:48.120 think of it as being a very low risk endeavor. 0:14:48.720 --> 0:14:49.840 And I can tell you that if you're going to 0:14:49.920 --> 0:14:52.600 run a meaningful odd lock desk in which you're going 0:14:52.640 --> 0:14:56.800 to be responding consistently as a dealer, you're probably gonna 0:14:56.840 --> 0:14:59.240 have to have, you know, a balance sheet anywhere. I 0:14:59.240 --> 0:15:02.680 mean in minimum you know, two million in up is 0:15:02.720 --> 0:15:05.240 what you'd have to have in terms of balance sheet 0:15:05.280 --> 0:15:09.160 set aside, because the bonds don't turn over that quickly. 0:15:09.520 --> 0:15:11.720 So if you're going to be a player, then you've 0:15:11.720 --> 0:15:14.080 got to hold positions and so you know, you've got 0:15:14.200 --> 0:15:15.560 to balance a bunch of things here, like is that 0:15:15.600 --> 0:15:18.680 balance sheet better used in other places? Is this trader 0:15:18.880 --> 0:15:22.720 better and there? And they're sort of human judgment better 0:15:22.760 --> 0:15:24.720 applied to other areas of the market that could make 0:15:24.720 --> 0:15:27.040 more money, And I think that's that's one of the 0:15:27.040 --> 0:15:30.440 things that's sort of driving this decision um is what's 0:15:30.480 --> 0:15:32.880 the best way to deal with low quality order flow? 0:15:33.000 --> 0:15:35.760 And I think it's you know, put a computer around it. 0:15:36.440 --> 0:15:40.240 So you mentioned this rise of all to all trading 0:15:40.280 --> 0:15:43.680 and this idea that a bye side player could put 0:15:43.680 --> 0:15:45.840 out some sort of request and it lands on the 0:15:45.920 --> 0:15:50.400 desk of other by side players, and theoretically someone listens 0:15:50.440 --> 0:15:52.560 to that and like, that's great, cut out the middleman, 0:15:52.800 --> 0:15:55.960 and who wouldn't want that? And tighter spreads and all that. 0:15:56.640 --> 0:16:00.160 It sounds really nice, But what are the drawback x 0:16:00.200 --> 0:16:02.440 to that? And I think one of the first times 0:16:02.480 --> 0:16:05.320 we talked, we were talking about bond market liquidity and 0:16:05.360 --> 0:16:07.920 that was probably from time to time becomes a source 0:16:07.960 --> 0:16:12.240 of concern. And can the all to all environment offer 0:16:12.280 --> 0:16:16.400 as much liquidity as dedicated desks that hold balance sheet 0:16:16.480 --> 0:16:19.440 that are there too. What are the pluses and minuses 0:16:19.520 --> 0:16:22.280 of this new arrangement and how big can it really get? Sure? 0:16:22.600 --> 0:16:26.000 So actually I wrote a blog about this called big 0:16:26.080 --> 0:16:29.800 foot and by side Liquidity, the theme being that these 0:16:29.840 --> 0:16:32.800 are two things that people ardently believe in, but there's 0:16:32.800 --> 0:16:35.920 no physical evidence that either one of them actually exists 0:16:35.920 --> 0:16:39.280 in a meaningful way. So you know, the the market 0:16:39.320 --> 0:16:41.960 Access in particular has been going after this all to 0:16:42.040 --> 0:16:45.840 all protocol for seven years now, and they're the most 0:16:46.040 --> 0:16:51.360 well networked apparatus for facilitating trading amongst customers. I think 0:16:51.680 --> 0:16:55.200 that nobody would disagree with that. However, after seven years 0:16:55.200 --> 0:16:57.360 agoing after it, I think that if you look at 0:16:57.360 --> 0:17:00.400 the pure numbers, it's less than two percent of average 0:17:00.440 --> 0:17:02.240 daily market share is trading on a by side to 0:17:02.280 --> 0:17:04.399 by side basis, and this is based on market access 0:17:04.440 --> 0:17:07.359 is numbers. The other thing that we're not seeing is 0:17:07.440 --> 0:17:10.800 the details of what is trading on a by side 0:17:10.800 --> 0:17:14.080 to by side basis. I would imagine that it's the 0:17:14.119 --> 0:17:17.800 bonds that are easiest to trade. So I think where 0:17:17.840 --> 0:17:21.120 the the the sort of misunderstanding comes into places that 0:17:21.520 --> 0:17:25.120 by side to by side trading would somehow improve overall 0:17:25.119 --> 0:17:27.679 liquidity conditions. When I think that by side to by 0:17:27.720 --> 0:17:30.200 side trading has done in not just the corporate bond market, 0:17:30.240 --> 0:17:33.119 but every other market before it, it's just allowed you 0:17:33.160 --> 0:17:36.520 to trade the things that were easier to trade more easily. Now, 0:17:36.640 --> 0:17:40.600 is it helpful, absolutely, um, But is it addressing some 0:17:40.680 --> 0:17:43.000 of the the issues that I see on the horizon 0:17:43.040 --> 0:17:45.000 for this market. I don't think so in any way, 0:17:45.000 --> 0:17:48.200 shape or form, and mainly because the things that are 0:17:48.200 --> 0:17:50.639 people that people are having difficulty trading in this market, 0:17:50.640 --> 0:17:53.280 the liquidity issues have never been in the things that 0:17:53.320 --> 0:17:57.080 I suspect are are trading between customers. The liquidity issues 0:17:57.119 --> 0:17:59.520 are occurring are occurring when you're trying to trade something 0:17:59.720 --> 0:18:01.439 that early trades and you're trying to trade a lot 0:18:01.480 --> 0:18:04.240 of it. And you know, that's where I think there's 0:18:04.240 --> 0:18:06.800 a hole in the reasoning that this has any meaningful 0:18:07.320 --> 0:18:10.680 improvement on the overall state of the market. Yeah, So, Chris, 0:18:10.720 --> 0:18:13.359 I wanted to sort of press you on this point 0:18:13.440 --> 0:18:16.760 because from time to time there is that bond market 0:18:16.800 --> 0:18:19.720 liquidity issue that Joe brought up, and there's also the 0:18:19.760 --> 0:18:24.320 notion that at some point the credit market is going 0:18:24.359 --> 0:18:28.600 to experience some sort of massive sell off event after 0:18:28.760 --> 0:18:31.919 years and years of rallying and arguably seeing you know, 0:18:32.280 --> 0:18:36.680 over inflated valuations and and things like that, and people say, well, 0:18:37.359 --> 0:18:41.280 a lot of the bond trading innovation that we've seen 0:18:41.440 --> 0:18:44.520 is sort of getting ready for that moment. So people 0:18:44.600 --> 0:18:48.040 need any outlet to trade bonds in a crisis that 0:18:48.080 --> 0:18:50.480 they can get their hands on. But when it comes 0:18:50.520 --> 0:18:54.040 to that big event, if it happens, how much are 0:18:54.080 --> 0:18:58.159 those different types of trading platforms available actually going to 0:18:58.400 --> 0:19:03.480 relieve pressure on the market. Yeah, this is we sort 0:19:03.520 --> 0:19:08.240 of have this waiting for Godot approach to electronic trading where, 0:19:09.200 --> 0:19:11.800 thanks to you know, modernized as at classes, people in 0:19:11.840 --> 0:19:14.840 fixed income look at electronic trading as the savior and 0:19:14.920 --> 0:19:17.120 it's going to fix all of the problems, and it's 0:19:17.119 --> 0:19:19.240 just it doesn't really, it doesn't really work that way. 0:19:19.640 --> 0:19:22.720 I don't think that. My person belief is I don't 0:19:22.760 --> 0:19:28.320 think that an electronic trading system addresses the systemic problems 0:19:28.359 --> 0:19:32.399 that are currently present in the corporate bond market, and 0:19:32.400 --> 0:19:35.080 those systemic problems are The market is almost doubled in 0:19:35.119 --> 0:19:37.399 size since two thousand and eight, but the way that 0:19:37.440 --> 0:19:40.880 it's grown, it's gotten a lot riskier. The entire universe 0:19:40.880 --> 0:19:43.919 of triple B credits, which are you know, bonds that 0:19:44.080 --> 0:19:47.719 could be moving into high yield territory very easily. That 0:19:47.840 --> 0:19:50.520 universe is now larger than the entire investment grade market 0:19:50.600 --> 0:19:54.479 was in two thousand and eight. So these you've got 0:19:54.520 --> 0:19:56.439 a bigger market, you've got a riscue market. And the 0:19:56.480 --> 0:19:59.440 other thing that's happened is the length of the market. 0:19:59.440 --> 0:20:02.240 The duration of the market has gotten um a lot longer, 0:20:02.680 --> 0:20:08.480 so you know, typical you know, typically between uh, you know, 0:20:08.520 --> 0:20:11.480 a new issue bond was about seven point five years 0:20:11.480 --> 0:20:16.480 in maturity. Now typical typically the maturities are sixteen years. 0:20:16.520 --> 0:20:19.720 So all of that is a big dangerous sign. Now 0:20:19.840 --> 0:20:22.040 we keep on waiting. It's almost like waiting for the flood, 0:20:22.080 --> 0:20:24.040 Like when is when a right credit market is going 0:20:24.040 --> 0:20:28.240 to correct? Well, one thing that you've seen, you've seen 0:20:28.280 --> 0:20:32.879 actually central banks turntail on their de you know, de 0:20:32.960 --> 0:20:35.440 leveraging their balance sheet or the de risking their balance sheet. 0:20:35.720 --> 0:20:37.840 And the reason why is, I think what you're seeing 0:20:37.840 --> 0:20:41.080 now is, you know, the years and years of quantitative 0:20:41.119 --> 0:20:45.920 easing have created an environment where if you start removing 0:20:46.680 --> 0:20:49.480 the sugar from the system of this market, a bunch 0:20:49.520 --> 0:20:53.360 of companies that are really on the edge because they 0:20:53.400 --> 0:20:57.679 rely on really cheap debt that is facilitated by quantitative easing, 0:20:57.960 --> 0:20:59.800 a bunch of those companies are going to have problems 0:20:59.800 --> 0:21:03.720 fine dancing themselves, and that may start the cascading effect 0:21:03.920 --> 0:21:05.920 of what we're looking at in terms of the Great 0:21:05.960 --> 0:21:08.919 Flood So when I look at what's what's happened with 0:21:08.960 --> 0:21:11.600 central banks where they were quite adamant that they were 0:21:11.600 --> 0:21:14.240 going to stop direct bond buying and that that they're 0:21:14.280 --> 0:21:16.640 going to try to return into the Fed funds rate 0:21:16.720 --> 0:21:19.640 to something that resembles what we all grew up with. UM. 0:21:19.760 --> 0:21:21.800 Now you're hearing a lot of caution around that because 0:21:21.840 --> 0:21:26.199 I think that we're seeing such an immediate reaction to UM, 0:21:26.240 --> 0:21:28.560 you know, changes in central bank policy and how it 0:21:28.600 --> 0:21:31.560 affects the overall market. Now, when when it does start 0:21:31.560 --> 0:21:34.200 to happen, when you do see people needing to move 0:21:34.960 --> 0:21:39.200 large positions around UM that are that don't trade that often, 0:21:40.160 --> 0:21:43.040 that that activity is not on any electronic trading platform 0:21:43.119 --> 0:21:44.840 right now. So I don't know why we would assume 0:21:45.160 --> 0:21:47.119 that all of a sudden, the electronic trading platforms are 0:21:47.160 --> 0:21:51.159 going to be the destination of choice for UM. When 0:21:51.200 --> 0:21:56.720 when this UH pronounced volatility starts starts taking form, So Chris, 0:21:56.720 --> 0:21:58.800 just so that we don't leave it on UM a 0:21:58.880 --> 0:22:02.360 sort of does master in the bond market. Note when 0:22:02.400 --> 0:22:09.080 when you survey, when you survey UM the structure of 0:22:09.200 --> 0:22:12.439 corporate bond trading of the market, and you look, you know, 0:22:12.520 --> 0:22:15.080 say five or ten years into the future, what do 0:22:15.080 --> 0:22:17.560 you think it's going to look like. Well, I've made 0:22:17.560 --> 0:22:20.800 a bet that it's going to look a lot more 0:22:21.840 --> 0:22:25.880 reliable from a liquidity standpoint. And you know, I think 0:22:25.880 --> 0:22:28.040 one of the earlier podcasts I had with you guys 0:22:28.240 --> 0:22:31.600 when we talked about the modernization of the market and 0:22:31.840 --> 0:22:34.439 what needs to be built, and I ended up building it. 0:22:34.560 --> 0:22:35.879