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Aine O’Flynn at the 2020 Global Milken Conference

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The Future of Market Structure

With the return of volatility, investors once again have raised concerns about the fairness, orderliness, and efficiency of equity markets.

Aine O’Flynn, Head, Global Equity Products and Research, BMO Capital Markets, joined a panel at the Milken Global Institute Conference to discuss how markets have fared amid the pandemic and massive government support.

The panel, called The Future of Market Structure, was moderated by Jared Carney, founder and CEO of Lightdale, LLC, and also featured Annette Nazareth, Partner at Davis Polk & Wardwell LLP and Former Commissioner at the US Securities and Exchange Commission, Rick McVey, CEO of MarketAxess, and Kym Arnone, Managing Director and Joint Head of Municipal Finance at Jefferies.

Video credit: Milken Institute

The panel opened with a look at how markets have weathered the impact of the COVID-19 pandemic, increasing investor appetite for automation, and even how climate change will impact market functioning into the future.

Participants all pointed to the resiliency and ability of the markets to behave in a rational way amid unprecedented volatility.

“Some of the rules that have been put in place since the crisis in 08/09 and the flash crash in 2010, really helped the markets be more efficient,” said BMO’s Aine O’Flynn, pointing at the shift to traders moving to work-from-home environments. “I don’t think we would have been able to do this 10 years ago, really I think speaks to the resiliency that has been built by the entire industry to be able to weather such a storm that was just truly something that was unprecedented in terms of volumes, fluctuations and the volatility.”

Panelists also agreed that market automation will continue to grow into the future, both in markets where it has a solid foothold in Europe and North America, as well as in emerging markets in Asia and then in Latin America, as investors continue to be drawn to efficiencies and lower transaction costs.

“I think the direction of travel is pretty clear: the demands for automation from both the dealer community and the investor community have never been higher,” said McVey, CEO of MarketAxess. “And for good reason – it's driving down the cost of trading for both dealers and investors and importantly, there is finally significant growth and also altering in fixed income markets.”

O’Flynn noted BMO’s acquisition of Clearpool Group, Inc., a New York-based provider of holistic electronic trading solutions and an independent agency broker-dealer operating in the U.S. and Canada, as an example of how the firm is following where clients want to go. 

“We are looking at where our clients are going and what our clients need … We saw the opportunity there to leapfrog other players who had perhaps more cumbersome, more legacy systems,” she said, “that we were really able to use this cloud-based system that really powers the customization, execution, analysis, optimization of all their algorithmic trading strategies.”

Also looking toward the future, panelists discussed the impact of government stimulus amid the pandemic, and whether it might see the line between good and bad credit start to blur.

“That does start to worry me a little bit, because when you need that level of central bank support, and the market starts to rely on it,” said McVey. “I don't think it's endless what kind of support we can count on from the central bank, so I do worry a little bit that that could end badly as you don't have the normal market discipline for companies or countries that are operating with very high levels of leverage in their cost of borrowing compared to better credits.”


Jared Carney: Hello, my name is Jared Carney, Founder and CEO of Lightdale, LLC. Welcome to the Future of Market Structure Panel at the 2020 Milken Institute Global Conference. The Milken Global Conference this year is obviously a bit different in the sense that we're not together physically, but we still count ourselves extremely fortunate in this panel in that we are active participants in the marketplace of ideas. And this panel is extremely important in the marketplace of ideas because it describes not only the future of market structure, but really the interaction and interplay between technology regulation, market demand and flexibility. The hallmarks we hope as a former executive of the Milken Institute, myself, hallmarks we hope that are held in high esteem by not only the panelists and viewers of this panel, but by all the people who will be watching this panel worldwide. 

With that, I want to welcome my esteemed fellow panelists to the virtual dais. First, if you're looking at the screen, upper right is Annette Nazareth, Partner, Davis Polk & Wardwell, and also a former U.S. Securities and Exchange Commission Commissioner. Welcome, Annette. 

I also want to then welcome, lower left Aine O'Flynn, who's the head of Global Equity Products and Research at BMO Capital Markets, zooming in from Canada. Aine, I think, correct, is that right? 

Aine O'Flynn: That is correct. 

Jared Carney: Great to have you of the global flavour. Lower right-hand you can see Rick McVey. Rick is Chairman and CEO of MarketAxess, a $20 billion market cap company that we'll hear more about what they're doing in terms of innovation in the fixed income market globally, and not just in the United States and Western Europe. He also sits on the Securities and Exchange Commission's Fixed Income Structure Advisory Committee with the inaugural such body. Welcome, Rick. Good to see you. 

Rick McVey: Thanks, Jared. 

Jared Carney: We will have, hopefully calling, in a fourth panelist, Kym Arnone, from Jefferies, who is Managing Director and Joint Head of their Municipal Finance practice. There are some technical challenges for us all in this. And of course, what the COVID-19 pandemic has shown all of us is that we have to maintain extreme flexibility in the face of whatever challenges come our way. And perhaps that's a really good place to start, flexibility and here in this pandemic. 

Annette, I wonder if you could do us a favour and just give us a quick overview from your perspective, having been a long-time market participant, advisor and regulator, on the state of health of market structures right now in the United States, at least, and whether you think we have seen our market structures behave in a resilient and productive fashion during what has been one of the most extraordinary economic disruptions of our time? 

Annette Nazareth: Well, thanks for that question, and thanks so much for having me join the panel. Look, I think that the U.S. markets have functioned extraordinarily well. I found it really quite unnerving right after the pandemic hit when there were calls for closing the market. It made absolutely no sense. I mean, markets go up and markets go down, but if markets function, that's one of the most important things in a developed economy. I believe the markets have functioned extraordinarily well, and perhaps they've been a little more robust than we expected. I don't think anybody would have thought, for instance, that we would see such a phenomenal amount of new people, particularly young people, entering the markets through online brokerage and the like.  But the fact of the matter is that when we talk about market structure, a lot of that focus is on the infrastructure, and I think that it's, as I said, it's worked remarkably well and I think that there is an important confidence in the markets that has remained throughout this very challenging period. 

Jared Carney: But, really, if we had to look at the big stories so far this year, it's equities, right? I mean, it has been a very, very, very, for some, exciting and for some counter-intuitive time. Aine, from your seat, running the equities business for BMO Capital Markets, have the markets performed well? And let's sort of dovetail off your answer into rational. 

Aine O'Flynn: Well, you know, I think I have to agree with everyone so far in that they really have performed really well. I mean, the resiliency, the ability for the markets to behave in a rational way, they have been efficient, they've been transparent. I mean, and some of the rules that have been put in place since, be it the crisis in '08-'09, or the flash crash in 2010, really helped the markets be more efficient. For example, the limit up/limit down, or the market-wide crash protection where it was, if that had been in place in the modified version it is today, the market probably would have been triggered about five days in October '08. And really, I think, it was only triggered once. And so there's a lot of things that have taken place that really made these markets operate in an orderly fashion. And, sure, was there volatility? Unequivocally. 

With of VIX hitting 82, sure, that gave a lot of people lot of indigestion. But really, I think the regulators and the market participants, I think, everything that has really taken place in the evolution – and they were nimble in terms of if you think about it allowing us to work from home, and that kind of seamless – I mean it might not have been perfectly seamless, and from a lot of people's perspective at times it didn't seem that way, but really, I don't think I ever would have said when people would have asked: can you send all your traders home to work from home, I would have just laughed. And the fact that it has worked to the extensive has, obviously in large part due to technology, which has obviously given us a huge leg up – I don't think we would have been able to do this 10 years ago – really, I think, speaks to the resiliency that's been built by the entire industry to be able to weather such a storm that was just truly something that was unprecedented in terms of volumes, fluctuations and the volatility. 

So, I'd have to agree. I mean, is there more work to be done? Which I'm sure will get into as we move forward, but yes. 

Jared Carney: Thank you. So, Kym, we'll use this as a way to dovetail the conversation also into the role of government. Kym Arnone: I mean, I think I'll really echo a lot of the comments that were already made. You know, look, I think March and April were pretty ugly months, right? We would we would all agree that is a pretty desperate time in the muni market in particular in March and April really felt it on the short end of the market, so it was it was really a floating rate product that went nuts first and we had basically overnight daily rates spiking as high as 10% in certain instances. And that was the first obvious clue that the feds needed to do something that the muni market wasn't able to do and had seized from a liquidity perspective. 

Certainly, they came in and quickly, I think, added that stability in the form of the MLS. And while the MLS has not been utilized as a major barring vehicle, I think it did exactly what it was intended to do, which was to create a sense of calm and stability and that there was a sort of lender of last resorts, if you will, and we certainly saw those floating rates come down precipitously as a result. And then I would say by the end of April, May, the muni market was functioning once again. It seems to be by appointment and was once again open for business, and we have, right now, you know, to fast forward to September, October, where we have record volume coming through the system right now. In part that's because a lot of issuers are trying to get through the door before election time. You know, there is probably more uncertainty for the muni market surrounding the election and perhaps some of the equity names that you might think of, and so we are seeing issuers rush to market, but it is 100% functioning. Everybody used the term resilient; I think it certainly showed that it is resilient and very much open for business. 

Jared Carney: Thank you, Kym. So, the government, and not just government markets, but the role of government, it seems to me that we haven't really fully gotten our arms around the ramifications and consequences of government support. But let me position the question this way. Do we need to worry? Are the regulations that are in place and that are evolving flexible enough so that the market can actually meet the repayment demands, essentially, that government may or may not have in the short- to medium-term, but at the same time lay groundwork for greater access to capital, greater liquidity, less volatility and more stability? Annette, you want to take the first crack at that question? 

Annette Nazareth: That's a tricky one. Look, I think that we do have relatively flexible regulations that have served us well. That has not always been the case. I think the SEC over the last 15-20 years spent a good deal of time bringing the regulations into the 20th century, and closer to the 21st century by basically changing a lot of the rules that were very focused on sort of floor-based lesser technology models. And, you know, what we had in the late 90s and early 2000s were, we had all this innovation in the markets and all of this use of technology to make many things possible in the markets, that the rules did not accommodate. And I do think that a lot of the benefits that we're seeing today, the fact that, you know, as Aine said, the fact that you can, you know, everybody is able to continue to operate directly with markets from their homes and the fact that we have all of these competing markets where you have lots of liquidity, active markets, but also the fact that they themselves can function without necessarily having people on floors. That's a tremendous accomplishment. That was a very big effort on that, it didn't happen by accident. That was something that regulators focused very, very hard on. And I think, you know, is there more to be done? I'm sure, much more to be done. But at least it got us to a very stable place where I think we can continue. 

Jared Carney: Can you tell us and can you give us an example of the regulators thinking very carefully and being intentional in your memory in the way to which you refer, and perhaps what that has given us today in terms of market flexibility and structure? 

Annette Nazareth: Well, I think one example is Reg ATS. I mean, you know, we had these brokers that because of technology they were able to really act like exchanges. They could bring buyers and sellers together in ways that look like technology versions of exchanges, and it made no sense to say, well, we've all got to register as exchanges. We came up with at the SEC a sort of alternative registration regime that sort of regulated these market places in ways that were sort of exchange light . And I think that we've got a lot of very vibrant pools of liquidity with lots of different bells and whistles and, you know, if you build it and investors come, all the better. So I think it's made for a very vibrant and competitive marketplace. 

Jared Carney: Rick, you know, are you a direct beneficiary of this type of enlightened regulatory innovation? Can you give us a kind of a window into how you formed your company, what you were thinking and how you think about market structure and government's role in formulating it? 

Rick McVey: Sure, happy to. And we were fortunate to have the backing of my former firm, J.P. Morgan, and a number of other large banks and broker dealers to start market access, which not only gave us the capital that we needed to get going, but committed market-making on the platform and attractive liquidity for investors. We knew that we wanted to be independent at some point in time, which we accomplished through our IPO at the end of 2004. And that makes a good point that I think ATS for the equity markets is a great example of flexible regulation to allow for innovation within the electronic trading space. And funny enough, here in 2020, we're talking again about ATS regulations and how they could work better for fixed income markets, because we today are regulated primarily as a broker-dealer because the ATS rules were really written for equity trading and much of the electronic fixed income business is conducted in completely different protocols because of the fragmentation in the market. They don't really fit with today's ATS rules. You have a small piece of fixed income e-trading that's regulated as ATS, and the institutional market is regulated primarily as broker-dealers. And so the government's very first recommendation to the SEC was that they really revisit a common regulatory framework for all fixed income e-trading platforms. And I suspected that will land with some modifications within the ATS rules that will then accommodate electronic trading and fixed income in a better way. 

Going back to your first question, Jared, about government involvement in the markets and is there is there anything to worry about, you know, we've come to rely on quantitative easing and it started with government bond markets throughout the financial crisis and beyond driving interest rates much lower through quantitative easing in government bond markets, which resulted in negative yields in many parts of the world. It's now moved into corporate bond markets, which was part of the liquidity program for the fed, and it has been for the ECB for a while. And that does start to worry me a little bit because when you need that level of central bank support and the market starts to rely on it, I think you see less differentiation from good credits to bad credits, and you see many examples where credits that would not normally be in portfolios work their way in because of the assumption of central bank backstopping and support. And I don't think it's endless what kind of support we can count on from the central bank, so I do worry a little bit that that could end badly, is that you don't have the normal market discipline for companies that are operating with very – or countries -- that are operating with very high levels of leverage in their cost of borrowing compared to better credits. 

Aine O'Flynn: You know what, maybe I'll add in here from the equity perspective. One of the things I think that the government regulation, really, it focuses around the client and the client for us is at the centre of everything we do. And so what are they? They're getting far more sophisticated, they can measure far more than they could before, quicker than before and they want to know everything from the all-in cost of execution beyond just commission and price, the real post-trade impact, for example. So, all of those things, a lot of this regulation truly is helping us deliver. For example, the amended 606, which the basis is in transparency and being able to see exactly where orders were routed and such. Obviously, that's a huge benefit to the client, and if our clients are happy, then clearly, we are too. 

So I think that that is a way that the regulation, I mean, it has to be there, and I think it has been incredibly flexible and I think it also helps the client. 

Mike Piwowar: Kym, can you hear me? 

Kym Arnone: Yes. 

Mike Piwowar: Okay, good. For the audience, Mike Piwowar, I'm the Executive Director of the Centre for the Center for Financial Markets at the Milken Institute. Our moderator is having technical difficulties, so I'm going to substitute in for few minutes here. 

Kym, let me go to you in terms of government support. So Rick mentioned that markets are now sort of relying on QE and it has come into the corporate bond market for the first time. Similarly, the feds stepped in in this recent volatility into the municipal liquidity in the municipal bond market as well. They set up the municipal liquidity facility, had a huge announcement effect. Not much take-up. They've attempted to change the pricing to get more take-up on that. Give us your perspective in terms of how successful that was and are there any concerns that you have? 

Kym Arnone: So, again, you know, I've certainly heard the grumbling about the pricing of the MLF. And we talk about sort of the role of government. I think the fed and treasury were extremely deliberate in relying on the authorization that existed to create the MLF without having to go to Congress for formal approval using the existing authority that existed, and that enabled them really to put this program together swiftly. The negative aspect of that is that the language that enables them to lend does suggest it should be done at a premium to the market rate, which makes it the lender, in theory, of last resort. 

I think it's been hugely successful notwithstanding the fact that we haven't seen a lot of take-up, as you say, Mike. You know, when Illinois needed it, they borrowed through the facility and it served its intended purpose. You know, when the MTA needed to use it, they used it. I'm not aware of very many other issuers that have used the facility, but I think it's certainly been successful for those who borrowed through the facility and I think it created the stability. That's really what its value was. Because, as I said, back in March and April, it was a bit of the sky is falling mentality, and obviously the facility is scheduled to expire at the end of December. We'll see if there's any extension there. I'm not sure what you're hearing, I'm not hearing that there's a thought process right now that it would be extended. And folks, I think, need to let the MLF know if they're going to use it by potentially the end of this month, so we may see some announcements on that yet in short order. But I do think it's been successful because it created a sense of stability. 

Jared Carney: I also want to remind the audience that you do have the ability to ask questions via the question feature either on your app or the website, and those will be fed to me and to the panel. So please feel free to ask questions and we will get to them interspersed between now and the end of the panel. 

I want to move the conversation now from how markets have performed and the role of the different types of government intervention, not just monetary but also fiscal, obviously, to the future. The real thing that a lot of the people on this call and watching this panel care about is where the puck is going. That's what people I think are most focused on. So, Rick, you know, you're actively growing a business that has dominant position right now. So how much bigger can your fixed income liquidity-providing platform get, and what is it going to take for it to get there? I mean, are the United States and Western European markets the end of it and it's just a question of going deeper? Or does one go broader? 

Rick McVey: Well, a little bit of both. We prefer the term strong market position rather than dominant, Jared, but either way we're in a good spot. But, look, I think the direction of travel is pretty clear. The demands for automation from both the borrower and investor community have never been higher, and for good reason, right, is that it's driving down the cost of trading for both dealers and investors. And importantly, there is finally significant growth in all trading in fixed income markets, and that, combined with transparency that when Mike was a Commissioner they worked through with FINRA, which has been a great benefit for U.S. fixed income markets, is creating new market participants at a very rapid pace in U.S. fixed income markets. So, you're seeing really market participant benefiting from lower trading products front to back. You see electronic market places  creating more training opportunities for all participants. The technology networks plus transparency are bringing new capital and new market participants into our markets. And I think that that model is working so well for the industry that there will be another decade of growth ahead. And I looked before the panel today, the Electronics Chair of high-grade and high-yield market this year will be roughly double what it was five years ago. But having said that, the analysts estimate that the share of high-grad corporate bond market that is electronic is about 32%. And if you look at less liquid markets, like high-yield and emerging markets, it's more like 15 or 16%. 

So there's a lot of runway to go and we certainly see our clients embracing the new model but yours have invested very heavily in algos so that they can be at the front of client trades on a regular basis as clients use electronic trading networks more. Those algos are proven to lower their costs and improve their client market share. Investors are investing in auto execution tools so that they can be more efficient. And then there's all changes really bringing much needed new capital into global credit markets because the bank balance sheet has gone the other way because of the new capital rules that were imposed on banks back in 2012 and 2013. So, my view is that this this is a long-term trend and it will allow the markets to grow and allow issuers to continue to issue the the debt that they need around the world. 

Jared Carney: And what about geographies, Rick? What about, you know, where do you see regions or specific countries getting it and sort of opening up and innovating and where do you see sort of slower adoption? 

Rick McVey: Well, so the U.S. and European markets are out ahead of the other regions, but we're starting to see great signs in Asia. The Chinese government bond market is the third largest in the world and it's right now being added to, not only EM indices, but developed government bond indices. And as you probably know, Jared, the PVOC set up a facility called Bond Connect that platforms like ours and connect to in order to provide global investor access into the Chinese government bond market. I would expect that to be a grand success as their markets open up and investors around the world are looking for more exposure. 

Latin America, a little bit further behind, but we see some positive signs there as well. So I just think that the benefits of lower transaction costs and greater trading efficiency will continue to carry the day around the world. 

Jared Carney: Aine, you know, Large Bank, Universal Bank, equities, you know, you see the race to zero transaction cost, certainly in retail on the institutional side. You know, you could make the argument that on a net basis it might be a negative transaction cost, right? So, how does one stay relevant in a world of digitisation and even atomization on a trading execution and clearing basis? 

Aine O'Flynn: Right, I mean, that speaks I think, too, I mean, we closed the acquisition of Clearpool, which some know is the state-of-the-art electronic equities trading platform, and we closed that transaction in the middle of the pandemic in April. And, really, we saw an opportunity there. We are looking where clients are going and what our clients need, as you know, I would say I think the numbers out of Greenwich would tell you that low touch is about 62%. No, 55% now, of people trading and that's moving to 62. And if you're looking at the larger institutions, within three years we expect that to be around 90%. So, clearly, being an expert in that space is absolutely critical, so we saw an opportunity with Clearpool, we had a partnership with them in the U.S. as well as in Canada, and the next obviously logical step was to discuss an acquisition. And, I mean, we saw the opportunity there to leapfrog other players who had perhaps more cumbersome, more legacy systems, that we were really able to use this cloud-based system that really powers a customization, execution analysis, optimization of all the algorithmic trading strategies, and. really. the transparency which we're talking about here on the panel, which is obviously very regulatory related, is really part of the Clearpool DNA. Ever since inception, they're provided clients with real time order routing and performance analytics, and that's something we continue to build on. So, in our view, Clearpool is going to be a big part of our future as we build out the equities globally. And then who knows how we can really change and transform and additive to all the other platforms and all the other asset classes we have here at BMO. And as Rick was saying, as, you know, the electronification of the fixed income market is obviously something very important that we're focused on as well. So, we're following our clients and bringing the technology. 

Jared Carney: Your clients are consolidating. Your clients are consolidating at a record clip. I'm =vice chairman of a $5 billion dollar asset manager, McKinley Capital, in Anchorage, Alaska. You know, we are at the small end of a very, very large pond with some greater and greater growth. 

Aine O'Flynn: So, I think maybe I know where his question is going there. What does that mean for us? I mean, clearly, there's cost pressures everywhere. I mean, consolidation happens for a number of reasons. Scale is obviously very important for a lot of our business and I see buy side and sell side alike. And so scale is important and so the pressures for cost improvement is also very, very high. So, you know, you've seen it already, not just with us buying Clearpool, but I think it was, you saw Virtu ITG, you saw Liquidnet go. I mean, there are benefits to scale. We have to be global, and so in my view we're kind of moving with our clients. They are also demanding more and more from us, and so we have to be able to service them globally on any platform. And so the employees and the talent of the future, I think, is really going to have to look broadly across asset class and you're not just going to be an equity sales person or a bond salesperson. I think you're really going to become in the future that multi-asset technician serving the clients or wherever they want to be and however they want to be serviced. 

Jared Carney: So, Kym, some corners of the market and entire swaths resist technology. Because of their fragmentation, because of their different regulatory matrix, they resist. What's the state of play in the muni markets in terms of catching up with the kind of breathless innovation that we've seen in equities and even fixed income? 

Kym Arnone: Well, we're laggards, not surprisingly. You know, I think Mike could attest to this, that the muni market is quite a fractured market. When you look at the number of individual CUSIPs that exist in the muni market, it's somewhat staggering compared to sort of what the corporate bond market looks like. And so there are so many different issuers, many small issuers, and so the notion that technology is going to catch on in a meaningful way in munis, I think we're just behind the eight-ball, frankly, and I'm not sure we're not always going to be a market that lags. We've certainly seen ETFs pick up in terms of market share, that's definitely sort of an area where we've seen expanded growth. But, you know, when you look at the municipal market with what has historically been a significant retail component, that has even changed sort of over time to the point where mom and pop retail is significantly less relevant post credit crisis. We see the vast majority of the retail buying coming in through SMAs or professionally managed retail. We really don't see widespread application of some of the technologies that, for example, Clearpool has. Electronic trading platforms, you know, tend not to be well suited to munis. We historically had a relationship with Etrade and, candidly, it's not a platform for individual retail investment. It's just not the same as if you pick a stock on an Etrade. And so maybe it's sort of the credit, all the sort of nuanced credits, the magnitude of the credits, but I don't know. I'd be curious if Mike has a different take on this, but I just see munis lagging from a technological standpoint. 

Jared Carney: Mike, you're the additional panelist, join in. 

Rick McVey: You're on mute, Mike. 

Jared Carney: Yeah, you're on mute, Mike. 

Mike Piwowar: Oh, sorry. No, I totally agree, munies have been laggard for the exact reason that Kym mentioned, although I will point out that Rick's business is on the platform and they do trade muni on there. And people are getting very, very creative with things like e-trade pricing, where individual bonds may not trade very often, but very similar bonds do trade and you can come up with some very good prices. So, you know, and it speaks to the fact that at the SEC, Chairman Jay Clayton inaugurated the Fixed Income Market StructureAdvisory Committee, Jared, that you mentioned when you introduced Rick at the beginning of the panel. And the fact that for corporate market and the muni market have lagged in terms of regulation, in terms of use of technology and those types of things, yet they have remained focused on that. And to Aine's point, that, you know, when we see in the future on the industry side that folks are going to be multi-asset technicians, and so I think what we're going to see is the convergence of all these asset classes in terms of the way that they're picked. 

Jared Carney: So, before we get to questions, I want to pick up on two themes between Kym and Mike that just came up, which, really, is retail and convergence, because I think we'd be remiss on this panel if we didn't talk about what could be either a bridge or an exacerbation of a divide between institutional retail and let's just call really, let's call it really retail, for lack of a better term. So, in other words, Annette, I'd like you to really give us your perspective on what type of market structure innovation is necessary to increase access to capital in its broadest context, in its broadest sense? So, we understand that we're talking mostly about financial assets and markets here, but, you know, do we have a responsibility when we think about market structures to remember that the vast majority of Americans still don't trade stocks, still don't actually trade fixed income themselves directly. And so is there an opportunity, particularly in this moment of, say, social conversation in this country, for regulators to really think differently on behalf of and bring investors and market participants along with them on behalf of the greater population? 

Annette Nazareth: Well, that's a very good question, Jared, because something that often sort of falls by the wayside is the issue of financial literacy. You know, it's a real problem in this country, and I think the SEC has tried to do what it can, but I think efforts have to really be doubled and tripled. I mean it's a crisis, right, because you've got such an economic divide and there is certainly a large portion of the population who just doesn't understand the importance of savings and investment, and it's going to have implications throughout our economy and throughout our culture as we have an aging population that is not going to have sufficient assets for retirement. So, you know, being able to convey that, whether we start doing it in schools, at young ages or whatever, I mean, when you think about the appropriateness of muni investments or fixed income products or even many equities for investors, I think is something that we need to do a lot more focusing on. 

Jared Carney: Rick, when you hear what Annette is talking about in terms of financial literacy and education, I mean, you're providing liquidity for some very large institutions. You know, I mean, do you think in terms of retail in its broadest context? Is that some place that you think market access in the industry, the electronic trading industry, could go? Or is that a bridge too far? 

Rick McVey: Well, no, I think we're halfway across the bridge now. There have been some tremendous developments to the fixed income markets for retail investors. And I hate to repeat the earlier point, but market transparency is huge for retail investors to be able to trade tape for corporate bonds and muni bonds and understand what a fair price is, what a risk of the principle markup disclosure rule is, then a year-and-a-half ago so that they can see what dealers are charging for their trades. And then market innovations, I think, have really improved access for retail investors to fixed income markets. Kym mentioned the SMA accounts. Sophisticated institutional managers are now building tailored retail portfolios for individual clients through the SMA products, and I'm a big fan of the ETF product for retail investors too, and we're up to $1.4 trillion in U.S. fixed income ETF assets alone and growing very rapidly, which gives retail investors a diversified portfolio at a very low cost. A very easy bill based on their objectives. And, of course, those ETF pools of capital are managed in the institutional space and trade very actively on platforms like ours. 

So I think the market has advanced a very, very long way. And we trade all kinds of different trade sizes, from 10,000 to 100 million on the platform, but you see the online brokers and other retail reps that are able in this all-to-all environment to source bonds and portfolios for their clients. So I do think that there are significant advancements for the retail investors, partly hardly coming through the benefits of electronic trading. 

Jared Carney: Aine, it's this other side of the business, but how do you stay relevant, kind of compression, convergence that we're talking about here? 

Aine O'Flynn: I mean, for the retail investor, I would definitely have to agree with Rick and Annette in terms of education is critical. And, I mean, and the electronic trading has really given, I mean, the zero fees, low interest rates, the real easy access to the technology is a click of a phone from wherever you are. In your barber's chair you can very quickly buy and sell your shares. So I do believe it's incumbent upon all of us to make sure that there is that education, but I think from the literature I read, and from our own retail system, there is a ton of education that is going on, but I think it has to continue. And, I mean, the retail investor is getting more sophisticated, but we have to make sure that that information is available because the trading instruments are also getting a little more sophisticated, as well, and complicated, so I think we have to be sure and be cautious as they become more abundant the marketplace and more freely tradeable, that that education is there, because it's a slippery slope. 

Jared Carney: Many years ago, market innovation was considered to be decimalisation. So, what you've seen is you've seen yet even greater fractionalization in terms of the ability to trade and with the Robin Hoods of the world, etc. So, it seems to be, Aine, that this creates an enormous amount of pressure on dealers. And I guess what I'm wondering is, is that is this really going to lead to rational behaviour on the part of the retail investor, technology platform proliferation, fractionalized opportunities? Or is this actually going to create more herd mentality and we're just going to see huge momentum swings all the time? 

Aine O'Flynn: Right. So, I mean, what we're saying is this basically influence. I mean, retail trading this year is 20 to 25% of volumes. I think last year it was kind of 10. But, is it contributing to increased volatility? I would argue that probably maybe, but it also just contributes to the liquidity. So, I don't necessarily think it's a bad thing, but the increased volumes, it's definitely in a way overall volumes like this decade versus last decade, are actually on average lower, but that pick-up in volume probably bringing us back to where we used to be. But I don't think it's a bad thing, to be honest. But I think a lot of the rules, taking us back to the reason we're on this panel with respect to the regulations, I think as regulations evolve, as we are at the table, as the other market participants in the buy side who are increasingly getting a voice are at the table, I think we can manage the situation and continue to have the markets that are transparent and liquid. And, I mean, volatility is part of the natural equity market phenomenon, and so we just want to make sure that there isn't a kind of unintended or unanticipated volatility that we unnecessarily provoke without knowing it. So, I think we need to just keep an eye on that. 

Jared Carney: You mentioned the buy side getting increasingly seats at the table. So, let's turn to questions from the floor because it feeds right into that. The first one is: Will climate change have an effect on market structure in the future? How are markets making themselves resilient for long-term disruptions or other Black Swan events? I think we got to the second part of that question already, but let's tackle climate change in ESG. You know, we're now seeing almost $2 trillion worth of ESG moving into the market. I guess, Annette, you have clients on both sides here, the buy, the sell side, and also the infrastructure, so three sides. Where do you see the demands right now terms of the ESG from your clients? 

Annette Nazareth: Oh, I think it's ever-increasing. And frankly, I think the focus on climate change is really moving into areas like financial services now. I think you saw the report that Russ Benham just did, the CFTC and the advisory committee they had. Obviously, financial regulators are seriously considering what the impact of climate change is going to be on the financial markets, and likewise, corporations are considering those issues, disclosing those issues, and investors are very interested in ESG issues and could well increase the number of investment decisions based on ESG factors. So, I think it's very much here to stay, and frankly, we haven't gotten to this yet, but to the extent that we might see changes in administration, which could happen, I think if we switch after the election to a Biden administration, I think we'd see a lot more further climate change across the board. So I think there would be a sea change if that happens, so I think that's going to be very interesting to watch, as well. 

Jared Carney: Kym, Annette mentioned the other P, where we started with policy but we're going to, seems like come around inevitably to politics. So, do you see a substantial amount of change happening in the muni market at this point because of climate change interest from investors? And then how would a potential change in administration affect your corner of the market? 

Kym Arnone: Not climate change in and of itself, but certainly the ESG focus has expanded to the muni market and we're increasingly seeing funds create, you know, an ESG-specific fund for muni investment. Breckenridge is a name that comes to mind that sort of was early on in the ESG market for munis. The thing that we have yet to see, and a subset of ESG for munis, is green bonds. And a vast component of the muni market is naturally green, right, you know, sort of wastewater, water transactions by way of examples, state-revolving funds, you know, they're sort of AAA in their investing in water assets. So there's a there's a great deal of sort of natural synergy in terms of the green component or the green subsidiary of ESG, if you will. What we haven't seen yet is a pricing advantage for an ESG label or a third-party certification that bond is a green bond. 

So while we may see an expanded investor universe, that's yet to translate into lower yields for an issuer who is selling an ESG-related or ESG-labelled bond. So, there's a little bit of why would you do it if it's good policy and good government versus some issuers think there's sort of an administrative burden associated with a green bond label and what sort of work do they need to do behind the scenes to either self-certify that it's green or to prove to a third-party certifier that it is green? You know, increasingly the rating agencies are putting an ESG label, albeit not directly impacting ratings, but to put a qualifier on transactions. So it's definitely a current, but it has not yet translated into a price differential in the municipal market. 

Jared Carney: Rick, do you think that this ESG demand is here to stay? Is it hitting market access? If so, how is it? If not, do you think that it does? I wonder from a platform perspective what it looks like, ESG? 

Rick McVey: Yeah, no, I agree with Kym. I think this is a very large trend that will grow substantially in the next decade. I think investors are not only looking for great returns. they're looking for socially responsible investors. And those investors as a result are focusing a lot more on areas where they in ESG where they can have an impact. Green bonds, you know, the market would certainly benefit from a standard definition of green bonds, but we aren't quite there yet. We're trying to promote trading in green bonds, we've started a program to reward investors in green bonds on the platform by planting trees when they do in the Amazon in Australia, because we do think this is just the tip of the iceberg. And if the industry could come together and really get a standard definition of green bond, I think that will be a great catalyst for growth in terms of bond trading and investors knowing exactly where to go when they are looking for a friendly ESG way to build a fixed income portfolio. 

Jared Carney: Aine, from an equities perspective, obviously it's been an avalanche of capital coming through. I guess the question is really then, you know, is there a lot of good money chasing after bad? And what are, you know, what is a dealer's role in, to Kym and Rick's point, what's the BMO and your competitors' role in figuring out certification or playing along with certification from an equities' perspective? 

Aine O'Flynn: That's kind of a loaded question in that it's… 

Jared Carney: Well, at least you're Canadian. 

Aine O'Flynn: No, no, no. From a variety – everyone is approaching this from different angles, I would say. There is not one standard across the board in terms of all of the broker-dealers, all of the banks, how they're approaching this, how they're providing information to our clients. You have all of the third-party services that people use and everyone has their opinions about all of those. And then a lot of places, even the buy side, are developing their own internal rating system. And then you have a bunch of the broker-dealers doing their proprietary rating system. So, I think everyone is approaching it a little differently. And to be honest, I don't think anyone has really figured out the key to success in it yet. I think there's going to be a lot of trial and error, seeing what the clients respond to and not. I think it's not going to be useful for us to come up with yet another rating system, so I think we are going to do what I think the buy side is doing, is integrate it into our research process, because that's very much – and they're all at different degrees on the buy side in terms of where it is in their process. Some it's an overlay, some it's at the very beginning. But for us, it's going to become part of our process and we are in early days of discovering that, and it is going to a number of trial and errors in order to get it right. But I do think, I agree with everyone else, with Kym in that end as well as Rick, that it is here to stay. And as it gets more and more exposure, you have the demands not only coming from the buy side, but also from the clients, who are buying these products. These are the ones saying this is what I want. And as the younger generation becomes more involved in this and cares, I think that demand is only going to get greater. 

Jared Carney: We have very little time left, just a couple of minutes. Rick, we've got one interesting technical question that I want to put to you if you can answer it, speed round, I'd appreciate it. Are multiple platforms equivalent to regulated exchanges? So it's a big question, but I just wanted to get it from the platform operators' perspective, please. 

Rick McVey: Well, in fixed income, no. You know, the regulatory environment, as I mentioned earlier, is much different for electronic trading in fixed income than it is currently in equities and you don't have things like Reg NMS and I personally believe it's much more difficult to impose because the market is so fragmented and liquidity in certain sectors is challenging when you don't have a central equity-like regulated infrastructure. However, when you look at what the industry is doing, investors and dealers are both proceeding with various ways to aggregate different "grading opportunities" from all the platforms. So there are private industry solutions that are aggregating across venues to make sure that investors are able to find the best bond for their portfolio at the best price. 

Kym Arnone: Well, that's going to be the last word. And I think we can boil it down to is efficiency. So, we ended on efficiency and we started with the story of resilience. And I think what we heard from Annette, Kym, Aine and Rick today is that, as a response and outgrowth from a lot of learning and a lot of collaboration between regulators and market participants of all types, that market structures are alive in the future as healthy, particularly as we continue to understand the impacts of the present. 

So I want to thank very much this panel. I want to thank my brother in arms, Mike Piwowar, for his quick sub. And I want to thank the questions that we received from the audience and, of course the Milken Institute, for allowing us to put together what we hope was an interesting, edifying and energizing conversation. Thank you and have a good day. 

<End of recording> 

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Aine O’Flynn Vice Chair, BMO Capital Markets

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