Speaker 1 (00:00):
Welcome to another edition of ETF Central. I'm your host, Pilal Little. My next guest is Reggie Brown. He is a pioneer in the ETF landscape. Most importantly, he is a principal at GTS. He is known as the godfather of ETFs and I'm excited about this discussion. And with that, welcome to the show.
Speaker 2 (00:15):
Thanks for having me.
Speaker 1 (00:16):
It's good to see you.
Speaker 2 (00:17):
As well.
Speaker 1 (00:18):
<laugh> <laugh> So Reggie, um, you're often here, you're a pillar here. Uh, when was the last time you were at the Exchange?
Speaker 2 (00:27):
You know what? I started my career on the floors of exchanges, uh, notably in Philadelphia at the Phil X, the Philadelphia Stock Exchange. Um, I came to the New York Stock Exchange. I called to New York. I think it was 1993, my first visit to the floor as an employee of a member firm. But I was here Thursday speaking to a bunch of kids on financial literacy and, uh, careers on Wall Street. And using the backdrop of New York Stock Exchange, it's always fun coming here. It's a powerful institution that conveys the message of what's America all about, which is best ideas, capitalism, raising capital, and pursuit of just greatness.
Speaker 1 (01:15):
I think it's, uh, it's not lost on me that I get to come here every day and to sort of witness that experience every day. It's, it's somewhat magical because it's not like a typical office. Sure. You know, anybody can be here at any given day. Uh, this morning, an F1 team was actually doing the opening bell, so it's pretty neat.
Speaker 2 (01:33):
Oh, I got some great stories.
Speaker 1 (01:34):
I mean - What's, what's your, what's your fondest memory of being at the exchange?
Speaker 2 (01:39):
There's so many. I mean, from Senator John McClain walking around saying, "Nice seeing you again." <laugh> Once I met him. Uh, Jesse Jackson, Keep Hope Alive, um, to various sports stars, um, to a president of the United States. You know, this institution, this place is pretty powerful that conveys the bedrock of who we are. I mean, think about it. Look, the New York Stock Exchange was pounded in 19 - in 1792. Yeah. Capitalism and a framework around nation building was instituted from the Dutch starting in 1602 but brought to this land five years later, 1607. And the United States was built on the framework of capitalism. It's who we are. Absolutely. And so this is the symbolism for that.
Speaker 1 (02:29):
I love that. Reggie, you are known as the godfather of ETFs and I think it's important, uh, for you to level set and tell your own background. Um, and let me just kind of preference it with this. Uh, you often move behind the scenes. Sure. And, uh, I think it's good to have some representation in the leadership space given where you sit and obviously the entire spectrum of what you just talked about in the early 90s, uh, to being here today. So I'll let you tell your background and share a little bit about who Reggie Brown is.
Speaker 2 (02:59):
Well, I think, look, everyone has a story about, you know, how they started their career. Uh, mine is well chronicled where I was influenced by my family, uh, to buy stocks at 11 or 12. Oh, I was like 11 I was given Money Magazine to say, "Hey, you know, the way to save money is through, uh, investing." My grandmother was an art and investor, uh, watching public television, Louis Rukaiser on, uh, PBS and, you know, that is now replaced by influencers and people who talk about wealth building across different mediums, but that was my entry and I was fortunate like many, uh, to start early where a summer job at 15 on the floor of the stock exchange turned into a career that has spanned 40 years, uh, working for the exchanges and member firms and now, you know, doing what I do, uh, being an ETF educator, um, to the masses, um, I think that I've been fortunate.
Speaker 1 (04:07):
Mm-hmm.
Speaker 2 (04:08):
Starting so young, uh, went to school full-time, worked, uh, worked full-time at the same time. I think that there was clearly, uh, unbridled ambition, uh, for the exposure and I grew up in the market so it's like, it's not really a job, it's part of me and it's very difficult to beat someone where you're trying to beat something to the part of a person.
Speaker 1 (04:33):
Man, I love that. I, I love how cool and calm you are, uh, about that, uh, beautiful background. So, uh, for me, I think it's important that you level set, um, your current role and what you're doing and - Sure. Who you work
Speaker 2 (04:48):
For. Well, I won't say, I won't characterize it in that matter. Okay. Uh, my business partners, uh, Darren Taub, Eric Lickenstein, we've been, uh, business partners for 20 years, um, in the way that we've organized our business, like... So first of all, I'm ETF market maker. I launched ETFs, exchange traded funds, um, of IT capital and think over the last call it, I don't know, 30 years, call it 27 years, I was the first full-time s- second market maker trading SPY when it was trading in 30 seconds and 64ths, it was trading 50,000 shares a day. The first person was a friend of mine named Todd Hollander. Uh, we both worked for the same firm at that time, Susquehanna, uh, International Group, what they're called now. And I walked in, you know, trying to capitalize on what Spy was yielding, uh, making markets. It was a few thousand dollars a day.
Speaker 2 (05:53):
Mm-hmm. Uh, but I persisted and over the last, call it, nearly 30 years, been involved with, I don't know, maybe a couple thousand ETF launches, uh, directly. So the firm that I'm a partner of is GTS Securities. Uh, we're a member of a firm here at New York Stock Exchange. You see us through the lens of the CNBC camera wearing blue jackets. Uh, it's cool real estate to have here. I think we have 70 or so ETFs listed on Florida New York, which I am probably, I don't know, two thirds are shepherd by my business. Um, so, uh, what I do and, um, is I launch ETFs and provide, uh, the markets for the public investing to engage directly, but the firm's called GTS.
Speaker 1 (06:43):
I love that. Before we unpack GTFs a little further, um, when did you know, like, ETFs were like a real thing that you needed to pay attention to and lean into?
Speaker 2 (06:52):
You know, I, I, you know, I saw... So ETFs, um, were thought of as a solution to the October 19th, uh, 1987 crash. Yeah. Scholars came in through the SEC and said, "What happened?" Mm-hmm. "Why did the market go down, you know, 20%?" And it was program trading that forced, um, the markets down and there was no exhaust valve. And ETFs were like, "Hey, let's create a basket of securities that, uh, the, the market can sell short to arbitrage." Mm-hmm. And, um, the first iteration was SIPs on the PhilX, which I was there. Uh, they were called Certificate Index Participation Receipts and the American Stock Exchange had their own version. I wanna say this is probably 89 or so, 80, 89, 1988, 18, 189, 1988 or 1989. And McGraw Hill owned the trademark of the SB 500 and they sued to stop innovation in the United States.
Speaker 1 (08:01):
Mm-hmm.
Speaker 2 (08:02):
So it went to Canada in 1990. So the first ETF was launched, um, in Toronto. Mm-hmm. And then SPY, um, mitigation of legal roadblocks came to the United States in 1993. Um, and so I saw the first iteration on the Philadelphia Stock Exchange called SIPs. I was a kid walking around, uh, working for at that time a spear leads in Kellogg, now Goldman Sachs subsidiary and it was interesting. Um, I wasn't ready to trade - Yeah. At that time period. But I was there to see that. And then a lot of people I'm friends with were part of the initial, uh, creating team that are still in the business today.
Speaker 1 (08:48):
That's insane. <laugh>
Speaker 2 (08:49):
Yeah.
Speaker 1 (08:50):
That's insane.
Speaker 2 (08:51):
It's cool to, to see it from the very beginning -
Speaker 1 (08:54):
Yeah.
Speaker 2 (08:54):
And to see where it is today. I mean, I had no idea -
Speaker 1 (08:58):
Yeah.
Speaker 2 (08:59):
Um, around the innovation and where we'll lead to. I kinda knew when I was trading spiders when it went from 50,000 shares today to 500 to a million to five million and we were competing at some point to against the futures, SP 500 futures trading in Chicago. We wanted to bring futures trading to the floor of the Amex, uh - Wow. Through Spy. And I was the largest liquidity divider as a market maker. I was five million up, you know, call it at that time, I don't know, probably 50 million dollars up in notional value that you can buy and sell. Uh, but also note, the spreads were wide, right? Yeah. So you made a spread. <laugh> You know, that - You're
Speaker 1 (09:47):
Making good money. The
Speaker 2 (09:48):
Business was.
Speaker 1 (09:49):
Yeah. That does,
Speaker 2 (09:50):
That doesn't necessarily happen today. But I think that what ETFs have done, um, is bring lots of different, uh, stakeholders in the community to use these portfolios and to recognize it early, uh, when we're launching QQQ - mm-hmm. Launching all these new ETFs and one after another, you started to see the momentum, like where it was going.
Speaker 1 (10:13):
Yeah.
Speaker 2 (10:13):
And being a part of that was kind of cool at that time.
Speaker 1 (10:16):
Yeah. I, I, I imagine. Yeah. I imagine. So now you talked about, okay, where the ETF business has come to. Sure. Um, let's talk about the role of GTS as the market maker.
Speaker 2 (10:26):
Sure.
Speaker 1 (10:26):
Um, how long have you been there?
Speaker 2 (10:29):
So we ported our business, uh, I bought my business out of Karen Fitzgerald -
Speaker 1 (10:35):
Okay.
Speaker 2 (10:35):
Uh, seven years ago, so May of 2019 -
Speaker 1 (10:40):
Okay.
Speaker 2 (10:40):
I think it was. Um, and what we needed at that time, we needed a technology partner and GTS, uh, is a high frequency market maker. They have a lot of technology. I needed tech. They wanted clients and we traded.
Speaker 1 (10:54):
Okay.
Speaker 2 (10:55):
And so it's been a seven year relationship that, um, that is now perpetual lifetime.
Speaker 1 (11:02):
Yeah.
Speaker 2 (11:02):
And, um, you know, look at the firm where we started, um, they were the first to have, uh, microwave tower, towers using high frequency strategies, and they're one of the speed boys.
Speaker 1 (11:14):
Okay. Um,
Speaker 2 (11:16):
And now we just optimize what is best about GTS, which is tech, tech leadership into a client business that, um, the market is now automated. Mm. You know, we're now talking about 24 hour trading around the world and in order to have, um, a footprint in all those markets, it's really a technology play.
Speaker 1 (11:39):
Yeah, for sure. For sure. I mean, that's all efficiency, right? It's technology.
Speaker 2 (11:43):
The markets are connected. Um, I think over the years I've been part of just various committees that the commission, um, that studies what works well, what doesn't - mm-hmm. Uh, harmonizing rules for retail investors and making sure investment protections are in place. Um, and so what I do for a living is that, you know, I provide the initial markets for all ETFs. Uh, when you wanna buy an ETF, you're buying it from a market maker through a retail, uh, house. So whether you're using Fidelity or Schwab - mm-hmm. Or any other broker dealers out there, they're generally dealing with a wholesaler like GTS, um, where we're the market maker for the retail houses and so we're the infrastructure inside of the mechanics of the stock market.
Speaker 1 (12:31):
Yeah.
Speaker 2 (12:31):
You know, so I think largely, um, the way that investors engage ETFs, it's really through a very broad ecosystem that I'm a part of.
Speaker 1 (12:42):
Mm-hmm.
Speaker 2 (12:44):
I helped build.
Speaker 1 (12:44):
Yeah.
Speaker 2 (12:45):
Um, and invariably, investment protection start here.
Speaker 1 (12:48):
You can tell, uh, you're very proud of that and you should be.
Speaker 2 (12:52):
It's been an interesting journey.
Speaker 1 (12:53):
Yeah, yeah. Um, do me a favor, uh, simplify the message because, uh, the audience that listens to this podcast is broad, right? Sure. So we, we have asset managers, we have retail investors - Sure. Uh, and we also just have people who are just trying to learn. Um, talk a litle bit about the role of a market maker.
Speaker 2 (13:10):
Sure. So in the context of an ETF -
Speaker 1 (13:14):
Yeah.
Speaker 2 (13:15):
Where a new ETF is being launched, uh, an authorized participant or a market maker provide the initial seed capital or the initial funding for an ETF. Mm-hmm. And so we'll belong, you know, a couple hundred thousand shares. Mm-hmm. And then we make the initial market bid ask where you can buy or sell. So it's a brand new ETF, generally it's only buyers. Mm-hmm. Um, and then we base our markets based on the fair value of the underlying basket. Mm-hmm. And so whether there's all equities or futures or some other asset class, we're looking at the, at the asset class inside how to, uh, replicate and price the basket. Okay. And we come up with a two-sided market. And that two-sided market generally is just a little wider than where the basket's trading. And then what we do is that we will sell you the ETF in the public market and then turn around and buy the basket and make a small, tiny spread.
Speaker 2 (14:10):
Okay. And so, um, the role of a market maker is one to give continuous, uh, markets throughout the day - mm-hmm. Starting at 9:30 to 4:00. <laugh> Those are either market maker quotes or that is retail or other market makers outside the official market maker. So we have the responsibility -
Speaker 1 (14:30):
Yeah.
Speaker 2 (14:30):
Uh, based on your stock exchange rules to be always quoting in the marketplace. Uh, and so GTS is one of the participants in the market. Uh, we are the official market maker for 600 and, uh, plus ETFs. I don't give you the, the wrong number.
Speaker 1 (14:48):
Yeah.
Speaker 2 (14:48):
I'll just say plus.
Speaker 1 (14:49):
Yeah, yeah.
Speaker 2 (14:49):
About small percent of the United States, uh, market share. And then, um, as ETFs have launched, we're the official person, we have all the initial float, you wanna buy it from a market maker, you're buying it from GTS or Reggie Brown.
Speaker 1 (15:03):
Beautiful. I love that. So, uh, and well, that was very succinct, by the way. So that was actually, uh, uh, a fleshed out answer. I wanna talk a little bit about your role in working directly with asset managers or ETF creators or issuers.
Speaker 2 (15:18):
Yeah. So, um, ETFs, uh, have gone from simple benchmarks, cheap beta - mm-hmm. To now complex vehicles.
Speaker 1 (15:28):
Yeah. <laugh> Uh - Extremely.
Speaker 2 (15:30):
Extremely context, right? And then, you know, when I look at some of the innovation, one, I am just amazed that we're putting this technology or this strategy inside of a, you know, a portfolio that can be accessed by any retail investor around the world.
Speaker 1 (15:49):
Yeah.
Speaker 2 (15:49):
This, these markets are global. I do trading for folks in the Middle East, uh, in Europe and then, uh, South America, clearly - mm-hmm. And then Asia overnight. And so you're, you're talking about a worldwide market. Mm-hmm. And so when you're building an ETF, uh, generally most people think of thematic stuff here in the United States, but you have ETFs with, uh, with the options inside of it - Yeah. With futures. Yeah. Um, with structured products. Yeah. And so every exchange traded product is not an ETF. And so there is an array of products out there. And so our first approach is, what do you wanna do? Mr. Asset Manager. <laugh>
Speaker 1 (16:32):
Yeah.
Speaker 2 (16:32):
Uh, and we've heard ideas from an ETF on Turkish bonds. <laugh> Um, I brought out the ETF for the Peruvian, uh, stock market, EPU by iShares. That was maybe 10 years ago, maybe 12 by now. Um, and so there had been fascinating problem solving inside the ETF structure. Mm-hmm. And so first thing we think about what's in the basket, how do we price it?
Speaker 1 (16:58):
Yeah.
Speaker 2 (16:59):
And then what's the cost of getting that data in order to price the basket?
Speaker 1 (17:03):
Yeah.
Speaker 2 (17:03):
And so a lot of asset managers wanna launch now ETFs on custom indexes. Mm-hmm. And generally the cost to get to that custom index, there's a fee for that - mm-hmm. To replicate. And so what asset managers need to understand is like, okay, you're launching something unique, uh, how can it be replicated in real time? Mm-hmm. Are there any roadblocks to getting that data? Mm-hmm. Uh, are there fees associated? Are you putting international securities inside of it? Mm-hmm. And so what asset managers, but also retail investors need to know is that the quoted price of ETF will reflect the true cost of ownership inside the structure. Mm-hmm. So it is, call it international. You'll have international securities that may close at 11:30 New York Times. Mm-hmm. Then you have, uh, inherent stamp ta - uh, s- stamp taxes, uh, that are levied by the local exchange, call it London or Hong Kong that's all passed back.
Speaker 2 (18:03):
And then you have FX. Uh, if I have to trade FX in order to hedge - mm-hmm. The cost of trading FX is also inside the, the ETF price. Um, it's fascinating. The Mexican peso, I was just in Mexico over the weekend, um, that currency is volatile.
Speaker 1 (18:21):
Yeah.
Speaker 2 (18:22):
It's thin, where it's hard to buy big size - mm-hmm. And it moves around quite a bit. And so all that is replicated. So when I'm thinking about launching an ETF, I look at what's in the basket, how do I price it, how to replicate it, what's the true cost? And all that's put back. If there's too much complexity, um, structured products - mm-hmm. Or something else, we'll ask a lot of questions. Mm-hmm. Uh, we're looking at the mechanism to create, how to create new shares. Yeah. And then what's the mechanism to redeem to give you back shares, get back a basket real time? Mm-hmm. And if that process is wonky, I'll use the word wonky. Yeah, yeah, yeah, yeah. Um, there'll be additional questions and then if the, that asset class is too esoteric or too thinly traded -
Speaker 1 (19:06):
Mm-hmm.
Speaker 2 (19:07):
We may pass. Yeah. And it may, you may have difficulty finding a market maker to take that on. Um, and so a lot of it is that you gotta make sure that your ideas fit the liquidity landscape that you can actually move 100 million dollars at a clip without too many issues. Yeah, of course. Or very thinly, "What's my cost of ownership? I'm looking to move $200,000 worth." <laugh> Just that simple. Yeah. Um, so I gave you a long answer, but, um, that's the psychology of an ETF market maker.
Speaker 1 (19:40):
That's a, that's a really good, uh, good breakdown because it seems as though, uh, look, you have to manage your own business risk, right? Sure. Uh, with taking on some of these clients, what are some of the questions that these asset managers, uh, may have for you, uh, when selecting a market maker?
Speaker 2 (20:02):
It depends on, on the skill and depth of the asset manager.
Speaker 1 (20:07):
Okay.
Speaker 2 (20:08):
So if you're going to, um, you know, someone who's been ETF market since the beginning -
Speaker 1 (20:13):
Yeah.
Speaker 2 (20:14):
Call it, uh, BlackRock, Vanguard, State Street. Yeah. Um, they'll have certain require- requirements, um, around the market maker they're using. Mm-hmm. Um, and that's just, that's, that's, that's a pattern that's, it's a mold. Yeah. So call them out of the way. Um, a new asset manager -
Speaker 1 (20:31):
Who's never launched.
Speaker 2 (20:32):
Who's never launched. Our first question to them is, what is it? Our second question to you or to the asset manager is, what's your plan for distribution? How do you plan to get it to the marketplace? Yeah. Um, and with the marketplace becoming so, uh, uh, you know, growing so rapidly, we have to make sure that the plan for distribution is sound.
Speaker 1 (20:58):
Yeah.
Speaker 2 (20:58):
Uh, particularly on the retail platforms, Schwab, for example, Fidelity is another Morgan Stanley, Merrill Lynch, and et cetera. Mm-hmm. And if there's not a sound plan, um, there may be a lot of additional questions and then some pushback. Mm-hmm. Or we will deploy the best of us and help you get approved at those platforms, um, initially to help you grow and think about
Speaker 1 (21:25):
It. Mm. Let's stay on that for a minute. Let's talk about this basket of issuers who have never launched a product before. Sure. Um, there seems to be a lot of education that still needs to be had upfront, uh, to your point about some of the nuances of the products that they wanna launch. What are some of the surprises that you see with these conversations?
Speaker 2 (21:43):
Well, I can tell you, um, I am always taken aback by asset managers to absolutely just nail it out of the gate. <laugh> <laugh> I mean, boom, here's a billion dollars of new assets within two weeks. Yeah. I mean, there are prime examples of that, that you have a star manager with a strong following -
Speaker 1 (22:03):
Yeah.
Speaker 2 (22:04):
Putting, uh, their best ideas, um, inside of a ETF and a way to engage. I mean, Kathy Woods is a friend of mine. Uh, and early on when she, uh, left Alliance Bernstein, she came to my office and I was very helpful to her and I, and I tell her, I was like, "You are... " And I'm dating myself. I use the analogy, you are the new Fair Faucet where 13-year-old boys have your poster on the side of their bedroom - Yeah. Idolizing you.
Speaker 1 (22:34):
Yeah.
Speaker 2 (22:35):
Because, um, they're following your, your stock advice.
Speaker 1 (22:38):
Yeah.
Speaker 2 (22:39):
And so a lot of people, uh, are following these managers now in ETF format. So what I would say, um, is having a plan, having idea - mm-hmm. Uh, to the marketplace, I just wanna hear it. I wanna believe it.
Speaker 1 (22:54):
Yep.
Speaker 2 (22:54):
You gotta sell it to me.
Speaker 1 (22:56):
Yeah, absolutely.
Speaker 2 (22:56):
'Cause
Speaker 1 (22:57):
Also - 'Cause you guys are going into business together.
Speaker 2 (22:59):
We're partners. Yeah. We're gonna give you C capital, we'll give you initial, uh, market, uh, initial capital for markets and your success is my success. And then ultimately, I wanna make sure the investors who are using your products are successful too. Yep. So we're looking for products to generate alpha -
Speaker 1 (23:18):
Yep.
Speaker 2 (23:19):
Um, that are safe from a product standpoint, nothing too crazy. Mm-hmm. Uh, and we wanna make sure there's no reputation risk. So like if you wanna launch an ETF on Mexican marijuana dealers - <laugh>... I probably will not put my name next to that. <laugh> I mean, you'll be surprised - Yeah, yeah, yeah. Of some of the naming conventions that are out there. Yeah. Um, but more importantly, some of the banks won't approve you Because they have business risk.
Speaker 1 (23:48):
Absolutely.
Speaker 2 (23:49):
And they have banking rules.
Speaker 1 (23:50):
And reputation risks. And
Speaker 2 (23:51):
Reputation risk.
Speaker 1 (23:52):
Yeah.
Speaker 2 (23:52):
And so it's not just the market makers, it's the trust banks behind the ETF community. It's the whole ecosystem that you have to, um, give best practices to and understand. And so I say that, um, the ETFs are now, what, 5,100 ETFs in the United
Speaker 1 (24:08):
States?
Speaker 2 (24:09):
Yeah. <laugh> I think that's the last stack. I've, I lost
Speaker 1 (24:11):
Track. It's, it's, it's right, it's right.
Speaker 2 (24:13):
You know, it's insane. Um, and I feel as though that we're gonna have another 10,000 ETFs, um, within the next three years.
Speaker 1 (24:21):
You know, launches haven't slowed down, uh, this year, so they're on pace to mirror what they did last year, which was over 1,100 ETFs launched. With,
Speaker 2 (24:30):
Uh, with mutual funds collapsing ETF format - Yep. It's happening.
Speaker 1 (24:35):
Yep.
Speaker 2 (24:36):
Um, with option strategies being launched in different series, that's another driver.
Speaker 1 (24:42):
Mm-hmm.
Speaker 2 (24:43):
Uh, and I feel as though that with, um, insurance like ETFs coming into marketplace, that reduces costs - mm-hmm. Of ownership and competition bringing down costs. Mm-hmm. Um, those are the drivers that are gonna launch, uh, listings and then new users. Look, I think 62%, I'm a person of stats of Americans have, uh, exposure to, uh, the stock market -
Speaker 1 (25:13):
Yeah.
Speaker 2 (25:14):
Broadly, whether direct or indirect through retirements or whatever and the other 38 are not here yet. And so ETFs -
Speaker 1 (25:23):
Mm-hmm.
Speaker 2 (25:24):
Um, and the way they're designed really competitively priced is, is an entry point for those additional new Americans. Yeah. And, uh, or those households - Yeah. Represented here in the United States. And so as we're manufacturing all these core ideas, I think we gotta separate from investing tools to trading tools.
Speaker 1 (25:46):
Okay.
Speaker 2 (25:47):
Investing tools are long term. Trading tools are probably meant for the next hour.
Speaker 1 (25:51):
Yeah.
Speaker 2 (25:52):
And so there's a classification for that. Yeah. And I'm no ETF moralist where I would say don't bring it out. I'm, I'm asking for efficiency. ETFs. I mean, I used to be ETF moralists. ETS moral lists. <laugh> Well, I mean, the ETF community wore a, a white hat. Like we were the good guys.
Speaker 1 (26:08):
Yeah, yeah, yeah.
Speaker 2 (26:09):
Going after evil. Yeah.
Speaker 1 (26:10):
Don't, people
Speaker 2 (26:10):
Are doing bad. Yeah,
Speaker 1 (26:11):
Yeah,
Speaker 2 (26:12):
Yeah. Uh, but now innovation is blending into the complex and not really here for grandma. Mm-hmm. So my grandma should not invest in some of these ETFs because of suitability for her and then for her to understand what's, what's inside of it. And so there needs to be, I think, uh, a fine line around investing tools and trading tools. Yeah. Tools for the average retail investor, tools for really smart people who should know what they're doing.
Speaker 1 (26:43):
You know, I wanna stay on that for a minute. Um, the ETF wrapper is so unique and I don't think we stress this enough that anybody can purchase it. Yep. This is a very salient point that I don't think the industry has leaned into from a marketing and distribution perspective. And it's been my job to, like, champion this conversation that, uh, you know, retail investors make up 25% of equity trading volume or - Sure. 20, 20, 19, 20. And since COVID with access to all of these different trading venues and platforms, they're much more excited to participate in the market. The ETF wrapper, however, and the asset managers are issuers, we call them, I come from the asset management world, so I say asset management. Sure. They historically wanna continue to market to the advisor community, which is totally fine, but that is an expensive distribution platform that you have to pursue.
Speaker 1 (27:39):
The retail audience is highly engaged and some of these star managers like Kathy Wood, I think she had some exposure to the advisor community, but a lot of her followers and supporters were retail investors. And today we have now more issuers that are raising capital and growing their businesses through the retail channel. Do you guys think about that at all when you're having conversations with them around distribution?
Speaker 2 (28:05):
Oh, absolutely. Um, you know, first of all, I think the way of the start manager, um, I think there are a lot -
Speaker 1 (28:13):
There's a few popping up now.
Speaker 2 (28:15):
Well, I think there are levels. <laugh> Yeah.
Speaker 1 (28:16):
Yeah. Yeah.
Speaker 2 (28:17):
There are stars -
Speaker 1 (28:18):
Yep.
Speaker 2 (28:19):
That absolutely nail it and have a good read in the marketplace. Mm-hmm. And, and just have a good sense about what's happening next.
Speaker 1 (28:26):
Yeah.
Speaker 2 (28:27):
And then there are systematic managers that have good rule-based strategies that they can clearly communicate to the marketplace that work well.
Speaker 1 (28:37):
Yeah.
Speaker 2 (28:37):
And so I think it depends on just, like, where you're, where you're playing at around the table -
Speaker 1 (28:42):
Okay.
Speaker 2 (28:43):
Uh, around that. But I will tell you, um, the ETF market is global.
Speaker 1 (28:48):
Yeah.
Speaker 2 (28:48):
Uh, we partnered with New York Stock Exchange in December where we cross listed two ETFs by crane shares, uh, onto the Abu Dhabi Stock Exchange. Yeah. The CEO of Crane Shares, we all flew out. We were in Abu Dhabi, uh, ringing the, the bell, had the Falcon on the, uh, on, on the, uh, on the arm there. It was kinda cool. Yeah. The drums all stuff. Most of my
Speaker 1 (29:10):
Colleague, Jamie Patarelli was with you.
Speaker 2 (29:12):
Yeah. It was kinda cool. Um, but what we're saying is that the best in the United States can be transported to other countries
Speaker 2 (29:20):
And then can be utilized locally by local investors. So the bet is that we can convince local investors to stay local if there's deep pools of capital locally in your time zone to ex - uh, to use ETFs and don't have to necessarily come to the United States. Look, the United States has the deepest markets in the world, right? Yeah, yeah. We are the deepest markets possible. <laugh> Yeah. But market makers and my competitors, we're everywhere. Yeah. So wherever you wanna engage us at the line of scrimmage - Yeah. We'll play. Yeah. But sometimes it's better to find, uh, the marketplace that is most efficient. Mm. And sometimes for some investors staying local What's most efficient for them?
Speaker 1 (30:01):
Yeah. Actually, let's stay out, let's stay on this global conversation. Now we're, now we're getting to the fun part. So let's just say there are 25, 30 really high quality exchanges globally. Um, you may say there are more, but there's really big ones. Yep. You talked about, uh, FX risk earlier. Is that not one of the main challenges for some of these markets, uh, to embrace ETFs?
Speaker 2 (30:25):
No, it's regulatory framework.
Speaker 1 (30:27):
Okay.
Speaker 2 (30:28):
It's the rule set, um, to launch an ETF, the rules for market participants to participate in, in that market. Okay. And then the rules, um, that permit local investors to use the ETFs. Hmm. South Korea, for example, um, the, the South Korean authorities don't allow gambling in their country. Uh, or you have to have a certain stamp, uh, in order to gamble in the casinos.
Speaker 1 (30:52):
Okay.
Speaker 2 (30:53):
So what do people do? They use ETFs.
Speaker 1 (30:54):
Yeah.
Speaker 2 (30:55):
Levered ETFs. Right or wrong, right? It's just an outcome.
Speaker 1 (30:59):
Yeah, yeah, yeah.
Speaker 2 (30:59):
It's an outlet.
Speaker 1 (31:00):
Yeah.
Speaker 2 (31:01):
And so I think that understanding global marketplace -
Speaker 1 (31:05):
Okay.
Speaker 2 (31:05):
Uh, in Mexico, uh, they just changed the rules to allow for active ETFs in their country for pension fund use only. Really? Why? Because they don't want the ETF community to destroy the retail markets. Hmm. Because retail markets are charging 3%. <laugh> Um, well, the, all these countries - So
Speaker 1 (31:24):
They're still 15, 20 years behind us.
Speaker 2 (31:26):
No, it's just the way it is.
Speaker 1 (31:28):
Okay.
Speaker 2 (31:29):
I don't judge, but if local markets wanna pay 3%, uh, uh, in average fees for asset management, God bless them, uh, where an E- ETF portfolio is probably charging 40 basis points.
Speaker 1 (31:42):
Right, right.
Speaker 2 (31:42):
And so you have countries, uh, Chile, Peru, Columbia, for example, Mexico, um, all use ETFs and pension plans.
Speaker 1 (31:52):
Okay.
Speaker 2 (31:53):
And every worker, every citizen is covered by a pension plan. Yeah. And so this has been framework going on, I wanna say for at least 20 years.
Speaker 1 (32:03):
Okay.
Speaker 2 (32:04):
Um, and so what they need, they, the pension plans is efficiency of use and now they're being proved for, uh, pension fund use only. The pension plans need to have access to European listed ETFs - mm-hmm. With good liquidity around it. Mm-hmm. That market structure in Europe is very difficult and patchy. Mm-hmm. Different countries, different rules, different liquidity services, and in the United States, um, you know, just how to access here.
Speaker 1 (32:34):
You have a global perspective - Sure. And I love that about you. Um, what markets are you most excited about?
Speaker 2 (32:41):
Um, I don't want to tell my competitors, uh, because
Speaker 1 (32:44):
It's being
Speaker 2 (32:45):
Taped.
Speaker 1 (32:45):
Okay. Fair.
Speaker 2 (32:46):
My business philosophy always have been, I'd rather be the second guy in Lithuania than the 10th guy in Paris.
Speaker 1 (32:52):
Okay.
Speaker 2 (32:53):
So, um, we've, uh, h- historically have been first to identify new opportunities. Okay. Markets that are yet to be discovered, uh, from an asset management perspective, ETF uses just innascent, starting to trickle. Mm-hmm. But if you look at some of the, my peers, they will tell you there's ETFs listed in Iran, for example, and there's ETFs listed in Abu Dhabi. And so I am a fan of travel. You tell me a city, I'll tell you a story. <laugh> Uh, it's true. You are the,
Speaker 1 (33:29):
You are the Renaissance, man. Absolutely. But,
Speaker 2 (33:32):
Uh, but I'll, I'll tell you this. Um, I'm really excited about what's happening in South America - mm-hmm. Because I know it so well. Uh, and then if you look at just the household inclusion is nearly, it's very high, don't know the true number, but very high. Mm-hmm. Everyone is covered statutorily. I think there's rules or there's lessons to learn for our social security system. Can you imagine if the US Social Security system had competing market makers, uh, offering, or competing asset managers offering best returns for our US s- social security system and crushing down the cost and then where would we be as a nation if our, our blanket of coverage for all Americans was in the stock market, uh, and we wouldn't have this deficit, this gap of where we need to fund versus what our ability to, to, to, to, to pay.
Speaker 1 (34:33):
Yeah.
Speaker 2 (34:34):
And so, um, and I think we're in a right regulatory environment, uh, in this current administration to actually break eggs - mm-hmm. And to have this conversation. Um, the social security system is ripe for innovation, right for change. Mm-hmm. ETFs can be a solution - mm-hmm. Uh, to cover all Americans - mm-hmm. Through, uh, competing asset managers managing the funds of the US government.
Speaker 1 (34:58):
You know, I'm, uh, I'm glad you brought that up and before we transition, uh, I, I just had another question for you, uh, on this because, um, you know, we spend a lot of time just thinking about ETF education. Sure. Um, to your point about the nuance of the structure and some of the complexities that are coming out and we're talking about, uh, a significant silver wave of people who are retiring and getting ready to, uh, try to s - um, get themselves set up for retirement. Um, my question to you is fixed income seems to be w - the biggest area for continued innovation in the ETF landscape. Um, how does your, because how does your team think about, uh, providing education or the industry providing education to help with that conversation? Because you're talking about significant cash drag and tax drag in a mutual fund structure versus the ETF structure.
Speaker 1 (35:54):
How do you guys think about that?
Speaker 2 (35:56):
It's funny you say that. I have a friend, uh, he's a market participant, Chris White. Uh, he has a business where he's one -
Speaker 1 (36:03):
I know Chris White. Do you
Speaker 2 (36:04):
Know Chris?
Speaker 1 (36:05):
I know Chris White.
Speaker 2 (36:06):
You need to bring him here. Yeah. Chris has, um, old school ideas to bring, uh, the fixed income market forward and really is transparency of price. What is the best price for that corporate bond? Yes. What's that best price around trading fixed income securities? Um, market structure around the fixed income marketplace is being transformed by innovation and ETF landscape. So there are bonds, corporate bonds that are index eligible that are now trading, call it 30 times a day, where the average bond may trade once a week.
Speaker 2 (36:44):
And so you're being, you're looking at transparency and also the cost of trading corporate bonds and ETF format, I mean, you can move a billion dollars within like 15 basis points of impact if that. Wow. You know, and so before it used to be like 50 basis points of impact. Yeah. So the cost of ownership has come down because of arbitrage of the corporate bonds. Yeah. And so when you bring in systematic trading, not only in corporate bonds, but in options, like we're, we're doing this now, we're throwing systematic trading and flex options - Got it. Execution for the marketplace where it's wonky, spreadsheet driven, it's slow, non-transparent. Anytime that there is an inefficient marketplace, the ETF industry tends to understand that and looks to solve it. And so for fixed income, uh, securities, uh, in a tradable instrument called an ETF, uh, we have brought the cost down considerably because of automation - Yeah.
Speaker 2 (37:41):
And systematic trading. And then we have brought transparency of the true price. And so it's really difficult to, uh, evade the innovators, uh, coming through the night over the hill carrying a torch because we're the good guys.
Speaker 1 (37:58):
Yeah. You know, Reggie, you have a moral compass as you, uh, as you pointed, alluded to earlier, um, that seems to be more than just, um, ETF based and industry based. Um, you care, it sounds like, and I, from what I know of you, you care about the financial wellbeing of the populace and the general public. And the ETF wrapper is a phenomenal investment vehicle. It's great innovation, uh, as we've transitioned from the defined contribution plan to define, well, define benefits to now and define - Sure. Contributions. My question to you is America's turned into 50. It's a big conversation, big question, um, as we continue to come together. Yep. I want you to just talk about your thoughts broadly because you're participating and you're active, uh, in a lot of these conversations. Just give me your general thoughts right now on where we are.
Speaker 2 (38:51):
Well, um, I'm a federal commissioner. I am on the, uh, America 250 Commission. Uh, go to America250.org, you'll find all the program that we're doing. Um, I was appointed by the Democrats. Um, there's eight Democrat, eight Republican. And I say all that as that I'm one of the planners. Yeah. And this is an opportunity, I think, to bring all Americans together, um, through, uh, centralized, uh, celebrations - Yeah. Around the United States. Um, we are, uh, polarized as a nation - mm-hmm. Currently, and we don't have to be. Um, there are central tenets of who we are. We believe in hard work, best ideas win and there's no cap in, in the reward. Mm-hmm. And I think that allowing all Americans to participate there, uh, that no cap of upside rewards and letting all Americans feel that, I think we're in this transition phase. Mm-hmm. And so in this particular moment, um, you know, of listening to one another, um, you know, I think now over the next 70 days into I think July 4th to now is like 70 days or so as we roll out the programming, there's an opportunity for us to come together, um, to celebrate what's best about us as a nation.
Speaker 2 (40:18):
So I talked about capital markets. Uh, we think about all that we've accomplished as a nation and all the innovation that we've, that we've shepherd over the years, over the last 250 years, it's just getting started again with AI - mm-hmm. And all these new innovations that's gona bring wealth to individuals and households. And so, um, I am uniquely, uh, optimistic about the opportunity set and where we're at. I think that, um, where we're currently at is that there's so much that we agree on and there's so much that makes us unite it that we tend to not focus on what we corely believe -
Speaker 1 (41:06):
Mm-hmm.
Speaker 2 (41:06):
And we focus on things we don't believe in.
Speaker 1 (41:09):
And we don't agree on.
Speaker 2 (41:10):
Yeah. And I think there's more things we agree on - <laugh>... Than more things we disagree upon. Yeah. And, uh, this moment in time, I think that it's an opportunity to talk about the things that we do really well. This place is one of them.
Speaker 1 (41:24):
Yeah.
Speaker 2 (41:25):
Uh -
Speaker 1 (41:25):
But Reggie, you, you're, you're a board member, right? Uh, for several boards and you have a very important seat, um - Sure. Um, um, from up high. Yep. What role do, uh firms play - Sure. Driving some of this stuff?
Speaker 2 (41:40):
Sure. I mean, corporates have a civic responsibility, um, to want to participate in America 250. Please write a check. <laugh> <laugh> Call us, uh, looking for your partnership. No, but I say that. Um, corporates have a responsibility, uh, in civic life.
Speaker 1 (41:56):
Yep.
Speaker 2 (41:57):
And being a responsible corporate citizen starts there. Yeah. And I think that I've seen great examples of that, um, through Walmart and through Target and all the volunteer hours that they, uh, participate on an employee level out to their community. Mm-hmm. Um, and - Well,
Speaker 1 (42:16):
Even us, even us recently, right?
Speaker 2 (42:17):
Yeah.
Speaker 2 (42:18):
Yeah. Yep. I mean, you guys came in and rung the bell for us and are demonstrating what's best about what America's all about. And so in civic life from a corporate perspective, obviously corporates, they just care about the bottom line. Yeah. How much money you're making. Yeah. But in that drive to making the highest amount of profits possible for your shareholders, it's also being a responsible citizen doing the right thing. And so as we transition, I think, uh, sharing your gifts, uh, with your neighbor, and I say that from corporate neighbor to a corporate neighbor - Yeah. Um, to bring everyone along - Yeah. Um, and so that we get there together. I'm not talking about some socialistic thing. Yeah. I'm a capitalist by heart. I want the best, I want, I wanna make the most money as possible. <laugh> However, um, do it in a way that's fair and free.
Speaker 2 (43:09):
Mm-hmm. And so, um, the civic responsibility of corporates in this particular moment, I think it's backing, um, the rule of law. Mm-hmm. Uh, what makes us, uh, uh, c- competitive, uh, from the United States to our trading partners. Mm-hmm. And then bringing the best innovation as possible, um, as cheap as fast as possible. As long as we're doing that, we'll stay ahead of our competition. Mm-hmm. And the United States is the best country in the United, in the world, just in the world, period. And I say that I travel around the world and I see these countries - mm-hmm. And I've been to China and I've been all over Europe and when you look at the best ideas and innovation and the cheapest way to the marketplace -
Speaker 1 (43:57):
Still comes through us.
Speaker 2 (43:58):
It's right here.
Speaker 1 (43:58):
Yep.
Speaker 2 (43:59):
100%. So all best ideas need to emanate here because the rules and the regulations are competitive enough to allow those ideas to come.
Speaker 1 (44:10):
Reggie, thank you for that thoughtful answer, uh, and response. Uh, another question that I have for you is what, what are you concerned about?
Speaker 2 (44:19):
Um, I mean, there's a whole list of things. I'm, I'm concerned about, uh, my kids and my neighbor's kids.
Speaker 1 (44:27):
Yeah.
Speaker 2 (44:28):
Um, are they prepared for what's coming? Uh, and I think, uh, whole classification of kids will be prepared because their parents are helicopter kids and make sure they're prepared. But there's a whole slew of parents that are not prepared to prepare their children. And I'm concerned that as we transition - mm-hmm. Um, that, that education's not filtering down.
Speaker 1 (44:53):
Mm-hmm.
Speaker 2 (44:54):
I'm also concerned around that everyone doesn't have a fair opportunity through barriers in their own life. I mean, that's kinda how it plays in the United States. Uh, but I'm concerned that there's a whole class of people that are gonna get blindsided - mm-hmm. Around this transition of what the futures or jobs will look like. Mm-hmm. Some jobs will open up, some jobs will go away, but those will go away, um, if you don't have a high school degree. Mm-hmm. Uh, if you don't have some, uh, basic programming skills or know how to use - Not prompting skills
Speaker 1 (45:31):
Now <laugh>.
Speaker 2 (45:31):
Or how to use AI agents. Yeah,
Speaker 1 (45:34):
Yeah.
Speaker 2 (45:34):
Uh, you're gonna be left. However, um, there are great, bright futures in the trades.
Speaker 1 (45:40):
So, so let's stay on that and let's end on a positive note. What's something that you're positive and excited about industry-wise or just, uh, for the nation? Uh,
Speaker 2 (45:50):
I am optimistic on where we'll be in 10 years, um, as a country. I think, um, we'll have energy transition.
Speaker 2 (46:02):
Mm-hmm. Um, I see it. I think we are, we are just holding it back at the gate - <laugh>... But it's here. Uh, when I go around to countries and I see these electric cars, um, it's amazing just how, how well they're built and where we're going. And so I believe that, uh, that the love of country is being, uh, demonstrated by lots of Americans and, you know, I can help promote the love of country - mm-hmm. And everyone is fighting for us to go to the next lake and we're doing it together and I feel there's lots of great tenants out there that says we're doing it, uh, despite, uh, some of the headwinds that are out there. Um, so it's kind of cool.
Speaker 1 (46:50):
It is really cool. So Reggie, we're at the point where I ask you a question that comes from left field, you don't know what the question is. Oh, boy. Um -
Speaker 2 (46:57):
What can it be?
Speaker 1 (47:00):
This question, uh, this is for my own personal edification, but also I think, um, I just wanna hear from you, um, 30 plus years - Yep. You've supported a lot of different initiatives, uh, in the business, in the industry. You've given people jobs, you've created opportunities, you clearly have a thoughtful, uh, vision about, uh, the country and where we should be going. Um, what is Reggie Brown's legacy?
Speaker 2 (47:28):
Yeah, I don't know. Um, geez, you know, I'm 57 years old. I won't - Damn. Yeah, I know. I'm just kidding. <laugh> I know. I tell you, um, you know, I plan to work, um, another 10 years because I really enjoy what I do and it's not a job, it's a part of me. Mm-hmm.
Speaker 2 (47:50):
I would like to think that one, the ETF community, uh, will always have a footprint that I have given over the last 30 years in this business, so that's one of them. Mm-hmm. Uh, I think, uh, I'm a big fan of culture. Um, I, I lead a lot of nonprofit art institutions. I think, um, being a participant in building out American memory, uh, through artistic formats, uh, will definitely be noted by s - my contributions, but more importantly, my children, uh, my children have optimism in their lives and they don't see any barriers. I have a son who wants to help out with the people, and I said, "You're not gonna start about making money." He said, it'll take care of itself. And I said, "I'm gonna stop funding you. " <laugh> But, um, my legacy is my family and all that they've accomplished, uh, and will accomplish and it's through, um, you know, unlimited education, unlimited exposure to what's available from a global perspective.
Speaker 2 (49:03):
Um, I believe that when my time is up on this earth, they will continue in their own fashion, but will be patterned by, um, the things that, uh, I've exposed them to. And then not only that, but my neighbor's kids and my friends' children, an ecosystem that has been, uh, developed around me that I believe that, uh, it's our responsibility to share. And so I think folks will, in the moment that I'm wearing a yellow suit and a blue casket because it's not a moment of pain, it's a moment of joy, that people will say that he shared what he was given and I think that, uh, most would not, uh, disagree with that statement.
Speaker 1 (49:51):
Reggie, thank you for joining ETF Central.
Speaker 2 (49:53):
Thank you. By ETFs.