The market has been going up for a while. Nothing goes up forever. If you have been away from your television set and haven't heard about the stock market, this was it. The market declined to practice. It was probably the scariest time of when in my sixteen years to the SEC that Monday and into Tuesday. But the idea
was to create a factual reconstruction of what happened. Meanwhile, in downtown New York you had the American Stock Exchange and that's where Nate Most and Steve Bloom we're working together. These are market nerds. So we were hoping that day would take debate, so to speak, and the m X did.
This is Tralians Presents. I'm Joel Weber. Over the course of this podcast, we're going to be sharing the story behind the e t F. In our first episode, we got into what happened on October nineteenth, or Black Monday, when the stock market crash. Every American at this day of the game needs to get the house in order and also the response of the federal government and regulators.
I'd say for the next three months through early January, a bunch of us had two jobs, which was, you know, investigating what happened and writing the report up and doing our day job. So the FEDS want to make sure this never happens again, and the SEC starts digging to find answers and a way to prevent another crash like this one, which brings us back to these two guys, Nathan Most and Stephen Bloom. Nate Most was in his seventies with the background in physics and commodities trading, among
other things. And then there's Stephen Bloom who at twenty seven was fresh out of Harvard with the PhD in economics, and the two of them were teamed up at AMS to create innovative products for the exchange. They had just read the SEC Market break Report, and we're beginning to toy with an idea for a new financial tool, one modeled after a section that they'd read in the report. What the SEC effectively did was to provide the sketch, right, It's almost like drawing on paper of what they would
envision as a market basket instrument. So what Most in Bloom did was to take this sketch and fill out all the colors, make it into sort of a full blown painting, if you will. But instead of a painting. It was a legit product that was given back to the SEC that was above and beyond what they initially put down in their sketch. And here's that initial sketch read by one of its artists who you'll remember from episode one, the secs, Howard Kramer. We suggest that an
alternative approach be examined. Presently, program trades must be broken up and distributed around the stock floor, with the resulting substantial transaction costs and effects discussed above. The creation, however, of one or more posts where the actual market baskets could be traded, might alter the dynamics of program trading. The availability of basket trading on the n y C would in effect restore program trades two more traditional block
trading techniques. The basket specialists would be able to identify the nature of each trade. We are hopeful that this would encourage block positioners to again become active in providing capital to position the program blocks, while arbitrage would continue to flow directly to the individual stocks to maintain their
pricing efficiency. Other institutional trades could be focused on the basket posts, where the specialists and trade and crowd could provide an additional layer of liquidity to the system and cushioned somewhat the individual stocks from the intra day volatility caused by program activity. Okay, that was a little dense, Eric, Can you help us make sense of what that means.
What they're basically outlining here is, Look, you're gonna have a product that represents a bunch of stocks, it's gonna be traded by market makers, and it's gonna be physically backed after the SEC publishes this thing. Grammer says he remembers getting a slew of phone calls about the report. The report came out with some time in early eighty eight, so I'm guessing, you know, just just a guess, you know, six months later, eight months later or something like that.
Then he hears from most in Bloom and they're like, hey, you know, we we noticed that you have this suggestion in the report, and we'd like to hear a little bit more about it. And there are some discussions back and forth. I highly respected name Moos and Steve Bloom. They were rocket scientists at that time and in that sense of the word, and they were really good at
and adapted developing the products. Myself and others in the division had some discussions, and at some point, I don't remember when, they probably sent in a draft prototype and or draft of what they were talking about. Creamer and the others at the SEC are not the only ones with whom they share this prototype. Most took the idea to Jack Bogel, who was running Vanguard at the time. Bogel says he gets a cold call from Nate Most.
And it's important to note here that Jack Bogel may be the most influential investor of all time, even more so than Warren Buffett. Bogel basically invented indexing and founded the behemoth Vanguard, whose low cost mutual funds have helped millions of Americans retire. So it's a big deal to just cold column. And he has very clear thoughts about Wall Street and investing, namely, watch the fees, diversify, focus
on the long term. But Bogel says Nate was different than all the other cold colors he's had through the years. But he was not a promoter type. You could warm up to Nate Most and maybe he's he more of my type of guy than some flashy US star salesman, if you will. So, Most gives Bogol an outline of his proposal. The proposal was that we would let him use our s and P. Five hundred for his spire as as I guess it was called. Man, anyone who knows Jack Bogel knows that that's like, you know, I'm
gonna say this, that's borderline insulting. I mean, he's so anti trading. He wants you to will win the fund and like never touch it for twenty five years. And he said he wanted to come down and talk to me about and I said, fine. He seemed like a nice person. And he came into my all of a sudden the Monday morning, and he was not a nice person. He was the nicest person I've ever met in my life.
And I said to however, Nathan, Mr mos Nate, they proposing you sent me last week doesn't work, but has these three flaws, and you're gonna have to get them fixed before you can never do anything with it. The way he told me the story later was he got back on the train and fixed the three things and got on the next train to stay stree Bois says
he doesn't remember what those three things were. Wasn't that the big concern was you're gonna just rack up costs for the linehold people if you'd let this thing trade all the time. You know, Eric, I'm sorry, but A just taking his toll. Hey. He remembers the meeting though, but a nice meeting. We parted friends, and I like that. You know, you can have different ideas with people in Jonathan, what our ideas ideas or Diamond doesn't and friends are
much more important. So whether or not it was on that train ride back from meeting with Bogel, Most goes back to the drawing board, or more specifically, back to his days of running the Pacific Commodities Exchange. And there you had these warehouses that would store the commodities. Let's see, you had like soybean oil, and you would take your soybean oil in store it in the locker, and you get a receipt, and the receipt then you could trade
with somebody without having to move merchandise. So Most thought, well, what if we took that model of commodity warehouse receipts and instead of the actual physical commodity, we just made it in the sp So this concept of the receipt trading back and forth, that trading does nothing to the soybean oil sitting in the warehouse or in this case the stocks. That is a way to keep the investors from incurring costs from people who are trading. Most in
Bloom now have their idea. It's been vetted. Now they have to name it, and they go with spider SMP for the snp F and d R for depository receipts. And to me, that is the heartbeat of the e t F and that's what made it a very special product. And you have to know that at this time Nate Most and Steve Bloom aren't the only people thinking about index is being able to be traded like that. There were several other types of versions, but most of them
had a variety of issues. And just like any invention, you know, Steve Jobs and Wozniak weren't the only two guys in a garage. There were plenty of people in Silicon Valley working on things like that. They just happened to just get the right way to do it. And in this case it was the creation redemption mac is. I think that gave spy its edge. That creation redemption mechanism is ultimately what they put into the SPY filing. They followed it with the SEC and then they had
to wait. And this is where a superhero comes in. Spider Woman. I got that nickname right around the time we launched Spiders. You may remember her from episode one. Her name is Kathleen Moriarty. My legal assistant, Debbie Ferraro,
gave me a present. It was a front cover of a comic book with like the Hulk going after some huge monster, and she doctored it all up and she made the Hulk me, and she made the Monster of the SEC, and she changed all the numbers to make SEC things and you know, sort of tongue in cheek, and then she wrote Spider Woman on the top of it, and it's still in my office. Next time on Trillions, we'll hear more from Spider Woman about what it was
like to actually design Spy. People were afraid that a lot of arachnophobes would be turned off and not want to buy the E t F, but we ultimately called it Spider anyway. Oh and in case you are wondering what Jack Bogo thinks of ETS, well, in E t F it is just another form of index fun, a sort of bastardized forum for the one of a better word. Thanks for listening to Trillions Presents until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com,
Apple podcast, and where else you listen to podcasts. Trillions Presents is produced by Jordan Belle. Francesca Levy is the head of Bloomberg Podcast