The Competition

don't see it. This is Dave Noddi. He's the managing director of e t F dot Com. The comparison to what happened with the pala Alto Research Center, the Park Labs having the the gooey for what became the mac uh and that sort of that idea, whether it's stolen or borrowed or whatever, it's very apt for the e t F for number of reasons. It's it's apt because you can argue about the intellectual property and is it theft or is it you know, people just recognizing greatness

and building on it. But it's also relevant because it was that big a phase shift in how people thought about investing. Naught has been around E t F pretty much since the beginning, and he says that, yes, the Market Break Report is largely credited as the genesis of the E t F, as that's where Nate Most and Steve Bloom got their idea for spot success has a

thousand fathers. So everybody tries to claim on a given day that they were the father of the E t F. It's really whatever unnamed person probably slid that into the report. But I will say this that once that idea was planted in that you know, SEC report, the idea was in the air. Bob Tole is president of his own E t F consulting company, but was with Morgan Stanley in the nineteen eighties, and he says nothing is right about there being something in the air after the seven

Market Break Report was published. He says people were trying to come up with something like a collective investment, but that treated like a stock. Meanwhile, Leland O'Brien and Ruberstein are really trying to redeem themselves in the financial community, and they start working on a product called super shares up in Canada, the Canadian Stock Exchanges, working on a thing called tips. All of these became the precursors to

both securities. Remember John O'Brien from episode one, who, along with a team at Leland O'Brien Rubinstein, created portfolio insurance, but most people in Wall Street didn't understand what that was. Some big asset managers did, some big focal dealers did, and they realized when the market went down, portfolio insurance required selling stock and buying bonds. As Toll says, O'Brien and his firm were working to redeem themselves because their

portfolio insurance was largely credited to stock market crash. O'Brien says that what they were working on was the first TTF. Yeah, well, I think we were the creator of the t F all it wasn't called any TF back then. He says. They were communicating with folks at the am X at the time, and we have a handshake agreement they would not copy our products and they would benefit from the

trading of it. O'Brien says the AMEX didn't hold up their end of the deal, so they undercut us, you know, maybe not so intentionally, but maybe intentionally, and came out with the spies exactly one month and one day after the super Trust began trading on November five, and when I called him up, they said, well, the handshake agreement is good for a month. Meanwhile, up in Canada, a spy is waiting for SEC approval. A team from the Toronto Stock Exchange managed to get their version of a

market basket product approved within a year. It was called the Toronto Index Participation shares or tips and attract the Toronto Stock Exchange Index. And this was an e t F launched. Now, if you go around to conferences like I do, there's a general view amongst the analysts that Canada came out with the first TTF. However, when I talked with people from that time, even from Canada, and they admitted that what happened was the Toronto Stock Exchange had come down and met with AMEX and just I

guess they just you know, we're friends, buddies. They took the spy idea and basically resketched it up there. And the Canadian regulatory body is much more liberal than the US. We've seen that time and time again. Since then, they were in and out of approval process within a year. Dave Nodding says he's not proving to all those details about how TIPS came about, but one thing was for sure, Yeah,

the am X was driving it. And whether or not, you know, Nate showed the idea to somebody over a T s X or Toronto at that time, um, and they stole the idea, launched it there. To some extent. It's a little bit of I don't know who really cares, I mean exposed in retrospect. You can make a good, you know, thriller movie out of it. Somebody running the briefcase across the tracks kind of thing. We spoke with Peter Haynes, who began his career on the Toronto Stock

Exchange as an intern. I came back work full time in eighty nine and Tips from launched and nineties saw as part of the launch team for TIPS, so I do have that on my resume. TIPS Toronto Index Participation Units is what they were called. The symbol was t I P listed on the Toronto Stock Exchange on March nine, and probably the most interesting factoid of all is that

there was zero feet. Haynes says there was no management expense ratio or mirror at the time, and that the exchange ran as a way to give retail investors access to the market with just one trading vehicle. The hundred and fifty million dollars that were seated at the original launch of TIPS all one million institutional investors, so that

was a bit of a surprise in the shock. Haynes says that yes, there were conversations with Nate Most and Stephen Bloom at the time, but that the most significant influence on their product was not the AMMYX the Philadelphia Exchange as they were attempting to launch something called SIPs cash Index Participation securities and they struggled to get that product through the sec And this was in the late eighties early nineties that they were trying this, and our

management at the time had spent some time with the Philly guys and said, hey, let's try this in Canada. And where we were lucky and I think forward thinking in terms of our regulators was the time from the time the obviously was approached to the time was approved was I believe less than six months, So it was

late at the end of the day. A lucky thing that the Toronto Exchange happened to be the first market in the world to launch an e t F but you know, sometimes it's better to be lucky than good.

Reggie Brown of Cantor Fitzgerald, whose nickname Mr ETF, was working at the Philadelphia Stock Exchange when the PHILIX developed Certificate Index Participation Shares or SIPs, and I remember uniquely that they were born from the seven Crash and some gurus at the Philipstock Exchange came with an idea based on a report, and I do remember they traded briefly on the phile X, and in my role on the industry, I always recall, Hey, by the way, the Philix had SIPs,

and unfortunately it was overlooked, not well recognized, and they were designed based on the report that came out from the government said there needed to be a vehicle in order to help offset sell in bounce at orders in the marketplace, and the phil X was ahead of their time,

but unfortunately they went away. Brown says there was a legal issue with McGrath hill, who owned a license name of SP five under a standard and Poor's and McGraw hill sued and successfully got in a junction around trademark issues around SIPs and it stopped trading because of that. So the reality is these other products did come to market before Spy. Here's Eric again. So to sum this up, even though you may hear that Canada came out with the first TTF, that is true, but the idea was

in the US. I think that's important. So it's a good footnote to the story. In the end, the fact that Spy is the biggest et F on the planet almost by twofold says all you need to know. And the Tips product has been bought and merged and doesn't even have a ticker anymore, and that kind of also matters to the story. So the fact that Spy outlasted them, outlived them, outgrew them, and is the most trade to security four times over on the planet as to its

so legacy. But some have tried to take away from it by saying, well, actually it wasn't first, and so I would say, well, it depends on how you define it. And I don't blame Toronod for doing it. It It was a heads up play. But the fact that just because they had to wait four years, you can't really blame them for that. They would have been out in one if they could. They have been at nine if they

could have. But why didn't these products that were birth from similar circumstances at the exact same time gained the same success well, as Bob Tole says, there are a few reasons. Well, first of all, you had the most renowned index in the United States, next to the dal Jones Industrial thirty right being the benchmark for it. It was a full replication, so there was no question on the back of the SEC that somebody was managing this asset.

And you had the publications that they required daily of information to provide a level of transparency that was nowhere available in the mutual fund industry, information including the composition the assets, the holdings, and what the waitings were. Also, these similar products hadn't undergone the same level of scrutiny with the U. S. Government as Spy had because Spy, remember was filed under the forty Act. A move toll Fields was worth the weight. Oh absolutely, honestly, I do.

You could have had a structured note, but then you realize you're taking balance sheet risk. At that time, especially after the eight seven crash, nobody wanted balance sheet risk. Okay, then you say, okay, I'm gonna buy a mutual fund. Well, that was what everybody thought was froll to begin with. So now you have to have a new structure, so you have your choices. Right, you can have a closed

end fund which has premiument discounts. Right, you could have a traditional mutual fund, or you could have this new animal called at this time an index share. And the index share was really I mean, it was an epiphany. Dave Not says, a lot of Spy success can be attributed to its no frill structure. If you actually look at the structure of Spy, it was phenomenally simple. A lot of the index participation, securities models and things really

were almost like versions of structured notes, right. They were complex, they had counterparties that people weren't used to dealing with. And I think that the genius of the Spy model and then later the sort of more traditional forti act versions that came after it, where they took really simple existing structures and they used those to create what they needed to create. Um, you know, they used the U I T structure to you know, embed the index into

the product. That I think was a really critical part of getting that approved. But you know, they used that structure that existed already that lawyers were comfortable with. That everybody was comfortable with, and they said, oh great, that's our investment vehicle. And then they took sort of a traditional prime brokerage model of moving large baskets of securities in and out, and they said, hey, we're just going to take what was then the default prime brokerage trading model.

We're going to use that to do these creation redemption baskets. So what they did was take all the pieces that already worked and changed as little as possible to make something new happen. And now spices footprint is enormous as the largest ETF with two dred and seventy billion in assets. For a comparison, the second largest et F has one billion dollars less than assets than SPY. It's really stood

the test of time. Here's not again. But but in the end, all of these things come down to execution. And I think that's actually been the story of ets for twenty five years, is it's always down to execution. Next time on trains presents how the e t F really started to gain steam. It wasn't until I was sitting on a trading desk and all of a sudden, I could like hit a button and get a million dollar, exposure to the cues. That was all in. Thanks for

listening to Trillions Presents until next time. You can find us on the Bloomberg Terminal, bloomberg dot com, Apple Podcasts, and wherever else you want to listen. Trillions Presents is produced by Jordan Bell with production help from Magnus Hendrickson. Francesco Levy is the head of Bloomberg podcast