You're listening to the Reversing Climate Change podcast
by the team at NORI, the Carbon Removal Marketplace.
This is a show about the innovators and entrepreneurs
developing solutions to climate change.
Hello and welcome to the Reversing Climate Change podcast
with Nori. I'm Ross Kenyon.
I'm one of the cofounders of Nori and the Head of Creative
and Marketing here. I'm happy to introduce you to
our new CEO, Matt Trudeau. Matt recently joined the
company. Debating about when we should
have Matt on, because then a little bit earlier and had you
been extremely green in the horn mat, we could have waited a
little bit longer. And have you been a seasoned
carbon removal veteran, salty and grizzled?
And I think we we chose somewhere in between.
So I'm liking this exact moment in time to do this on September
12th. Good to finally have you here.
Thanks. It's great to be here.
And after a little more than three months, I do feel kind of
grizzled and seasoned. Already you already have the
1000 yard stare. It's it's it's pretty intense,
both inside and outside. Nori in the industry.
I I when I interview people for for jobs at Nori, the both the
threat and the encouragement to work at Nori's, that is a place
that is intellectually very demanding.
There's a lot of uncertainty to the right kind of person.
That's a lot of fun. It seems like to you that was a
fun offer and now you're you're seeing just how chaotic and
difficult working in a new industry like this is.
Although you've also done that for other industries too, so
maybe maybe you're just used to this and this is just normal.
Well, it's it's too late to go back now, isn't it?
Don't say that, would you? You wouldn't do that though.
No, absolutely not. No, it's been great.
No, it's the the first three months been a tremendous amount
of fun. It's been great getting to know
the team, learning about the industry, fascinating, really
intellectually interesting challenges, opportunity.
And you're right. It is one of the things that
attracted me to Nori into this industry the the the voluntary
carbon markets is that it looks and feels a lot like other
things that I've done in the past in terms of this the state
of the market. And if I reflect back on my
career and look at the the time and places that I've had the
most enjoyment and and probably the most success.
It's in the early stages of the formation of a new market where
things are starting to coalesce. You've you've got some of the
foundational infrastructure in place there.
There's some interesting commercial players and and
things are starting to take shape, but the winners haven't
been decided yet. The market hasn't reached
breakout yet and things are still evolving very quickly.
So you have to be nimble to be able to participate.
And so that's all what attracted me about Nori and the industry.
And in the three months that I've been here, both Nori and
the industry have delivered on, on all of that potential
excitement. What are some of those other
markets that you've interacted with and and helped to develop
and how does that inform your work about choosing to to work
at Nori? Sure.
So I look we'll rewind back about 25 years.
I'll go through the vast version spare you guys the the full 25
year detailed history. But I I got my start in capital
markets and electronic trading about 25 years ago.
I started in in 2000 with a company called Cyber Trader and
it was almost immediately after the company had been acquired by
Charles Schwab. And at that time it was really
the run up to the.com bust. So we're still in the.com boom
and suddenly through a combination of technology
advancements and Internet connectivity, you suddenly had
software in the hands of retail investors that had really up
until very recently been only available to professional
traders and and even recently only been made available to
professional traders. So it was electronic trading was
a pretty new thing both for Wall Street and for Main Street.
And so we built really sophisticated day trading
technology with charting and smart order routing and things
that that really hadn't been seen before.
And in in the context of that environment with the rapid
change in technology and business practices, you then had
regulations that needed to catch up.
And so there was just a lot of change in a very short period of
time and it was really interesting.
So that was my, those are my formative years in electronic
trading. And then through just several
opportunities from that time I was able to participate in other
market transformations. So a lot of what happened in the
US in the late 90s, early 2000s subsequently went on to happen
in other markets as they electronified.
And a good example of that is in Canada.
So I was able to spend 2 years up in Canada, up in Toronto,
launching a marketplace that at the time was called CHI X
Canada, it's now NASDAQ Canada. And it it really is the same
kind of of technology and regulatory changes that unfolded
in the US, unfolded in Canada. But in that instance I had the
benefit of of the hindsight and knowledge and experience of
having participated, albeit as a much more junior guy, but having
participated in that in the US, so had seen to some extent the
movie before. Is this regulation about
protecting retail investors? Is it like what's detailed in
Flash Boys, which you make an appearance in by Michael Lewis,
about high frequency trading and about how disadvantaged retail
people are? Is it something else regulation
primarily related to yes. And and so to answer the second
question for us, some of these, this was the early stages of
some of what was described in terms of the market structure in
the Michael Lewis book Flash Boys.
So so yes, but at the time it was regulation relating to.
So you'll have to indulge me here for for just a couple
moments as I get into a little bit of the wonkish market
microstructure discussion. So prior to you know call it
late 90s, early 2000s, stocks that were companies that were
listed on the New York Stock Exchange or NASDAQ could only
trade really on one market. And I'm oversimplifying it here,
but there's there's too much detail to getting to otherwise.
So it's just for the sake of argument.
If you were a company listed on the New York Stock Exchange,
your shares traded on the New York Stock Exchange.
If you were a company that was listed on NASDAQ, which wasn't
even in exchange at this time, your shares traded on NASDAQ.
In the late 90s, early 2000s, as technology emerged that made it
easier for stocks to be traded on a computer rather than on a
physical exchange floor, you had new businesses that were
launched in the US. They were called electronic
communication Networks or ECN's in in other parts of the world
they're known as alternative trading systems or proprietary
trading systems AT S's or PT S's.
And what happened in the US is there was suddenly just an
explosion of these EC N's that came online to try to compete
with New York and NASDAQ using superior higher performance
technology, lower pricing and direct market access where for
example, retail traders could start to access the market
directly from their desktops. And so with the increase in the
power and capabilities of the technology, the regulations were
were designed for a world in which people were filling out
paper tickets, doing trading over the phone or physically on
the floor of an exchange. And so as shares started to
trade on all these different platforms, new problems emerged
for the market. How do you determine what the
best available prices if the shares are trading across four
or five different platforms versus one?
How do you ensure that brokers are routing their customers
orders to the marketplace that has the best available price?
And so all of the regulatory changes that were happening
around that time were to deal with these new and emergent
competing marketplaces. So you're coming out of a
regulatory environment. I mean obviously the US equities
market is probably the among the more regulated and more I don't
even know how to say it. These are not one of the most
credible financial institutions on the planet, which probably
doesn't bode well since it's had so many problems.
But you've seen it go from being pretty nascent interacting with
the electronic environment to being something that is now
pretty much, I imagine all trading is digital at this
point. So you witnessed the changeover
from 56 K basically to what it is now.
Yeah. Yeah.
Well, I can tell you that there, there were instances where I
actually did take a paper ticket and slide it into the time stamp
machine when I took a trade over the telephone.
And there were pink tickets for cell orders and and green
tickets for buy orders passed all both of them.
I I don't know that that really functionally exists for the most
part anymore. So it is I think essentially all
electronic at this point but but I am old enough to remember
paper tickets. So yeah, look the the if you
start with with the compliments to the to the US equities
markets, they are the most liquid in the world, most
sophisticated in many ways the most efficient.
And so the the proponents who who think that everything works
just fine would say, look investors have never had it
better. They can get a trade execution
done in less than a second. So instantaneously essentially
get the prices that they see on the screen there.
There's greater liquidity than there ever has been.
There's more participants than there ever has been and and by
and large that's true. So when you look around the
world, I I would say that the US equities markets are the leading
equities markets in in many regards.
On the other side and this is some of what's covered in
Michael Lewis's book in the really arcane elements of the
market at highly technical levels where milliseconds,
microseconds, nanoseconds start to matter, there are some
inefficiencies and some of those are structural inefficiencies
that are persistent and some of that is actually a byproduct of
the regulations. So you know, one thing that I've
learned and operating in a variety of different regulatory
environments with different rule sets and different market
structures is that it's really, really hard to solve for
everything. So you have to look at who is
your who are your primary constituents, what are you
optimizing for and what are you willing to trade off.
And so while the US equities market is, is the most liquid,
probably the most efficient in the world, there definitely are
some tradeoffs and there's always room for improvement.
And so a lot of, I would say the work that I've done at least in
the equities markets has been about creating more competition,
price competition for the income and exchanges, technology
competition, making things more transparent, more efficient.
And and I think that that a lot of the businesses that I've been
a part of have been successful in, in those types of endeavors.
And the markets overall, I think, are arguably much more
efficient today than they were 20 years ago, even with all of
the emergence of technology. And in a market that's become so
complicated that someone who you know is a trader in the 1970s,
for example, might not even recognize the market today.
How do you solve for fairness in a case where the the book
details You should read Flash Boys by Michael Lewis.
If you haven't. It's a it's a really fascinating
tale here. But there's an arms race for
nanoseconds and high frequency traders, you know, are being
able to extract rents essentially out of the financial
system. Well, depends on how you view
it, right? If you if you think that they're
adding value, they're adding liquidity, they're being
counterparty to many transactions that would
otherwise have a much harder time being filled.
And that's a valuable service. If you take a more grim view of
it, they're basically creating phony transactions.
That they're able to manipulate, basically just to extract money
from the financial system to the tune of billions, maybe more, I
don't even know, a lot of money. But you're trying to design a
system that doesn't create an arms race dynamic like that.
What are you trading off? Are you giving something up for
fairness? So the the arms race part is an
interesting question because I I do think that there there is
undeniably an arms race and and even some of the high frequency
trading firms and and I think this this is if I recall
correctly was maybe a point that was made in the book.
The exchanges would often offer what was called the New Port.
So it's just a network connection port and it was a
slightly faster port that shaved, you know in some
instances maybe some milliseconds then later
microseconds now probably nanoseconds off of the order and
trade messaging time which to average people is a completely
meaningless amount of time. To high frequency traders it can
become an extremely important important amount of time.
But you reach if everybody has the same type of network
connection then there's no advantage and and everybody's on
a on a level at least for that certain category of of trading
firm that is directly connected via one of these network
connections. But if the exchange offers a new
network connection that's slightly faster, even if it's
100 microseconds or 100 nanoseconds faster, if only one
of those firms steps up and uses that slightly faster connection,
they have an edge over everybody else, and then everybody's
forced to step up. And this is an interesting
dynamic, because the slightly faster connection that nobody
actually really wants might be four times as expensive as the
previous one. So, so long as one firm takes
advantage of it and everybody then steps up, everyone's costs
just went up and all they did is level is reach a new level of
equilibrium. So they really in the long run
get no advantage but but do increase their cost so.
So that's that's one of the, I don't know that there's an easy
answer to that question because exchanges are commercial
entities and so of course they want to release new products and
services that they can charge their customers for.
And you know trading firms are are incentivized to try to get
whatever advantage that they can in the market.
But one thing that I do want to know which I think is really
interesting and and it's one of the things that informs some of
my thinking or at least my perspective as I am looking at
and learning about the voluntary carbon market is some of what
you touched on and and whether high frequency trading is good
or bad. And I think some of that got
lost in the whole conversation around the Michael Lewis book.
But you really it's a nuanced discussion and in all of the
market structure arguments in the US and around the world it
there are camps and you know even tribes you might say and
some people are very anti high frequency trading.
Other people think it's the best thing that's ever happened to
the markets and and then there's maybe a range of people in
between. And I think it's really
important and this was a lot of what I've tried to do and
anything I've written or anytime that I've spoken about these
subjects is to try to actually tease out what the different
activities are that high frequency traders may engage in
and what function and purpose they serve in the market.
So true market making is is I think without doubt value add to
the market. You have a firm, for example,
that's providing a bid and an offer essentially all the time,
providing liquidity, helping with price discovery.
That's valuable. There are other practices like
something called latency arbitrage where you just have
firms that are just slightly faster than other firms and are
able to, as the saying goes, quote UN quote, pick off slower,
less informed traders and that's extractive.
So there really isn't, you can't really necessarily argue that
there is a lot of benefit being introduced to the market for
those two practices. So you're essentially using the
same computers. Could be this could be a single
firm engaging in both of those different trading strategies,
market making and latency arbitrage.
And so if that level of discussion, the nuance becomes
important because you got one firm doing two things, one value
add to the market, one maybe extracted from the market.
And when I look at a lot of the arguments now three months into
the voluntary carbon market there there's a lot of
similarities in terms of you know, different ideologies,
different camps, different tribes.
And a lot gets lost in these very sort of monolithic
arguments where there isn't any opportunity for nuance or there
isn't enough opportunity given to nuance.
So I would say that now having traversed a number of different
markets from equities to derivatives to commodities to
now carbon, those themes seem to continuously reemerge in each of
those markets around the lack of nuance and the tribal infighting
which is is pretty unfortunate. How does it translate though
that come from pretty mature markets, even if you're doing
things that are immature within pretty established segments?
And then you come to a space like carbon and Nori for a long
time. And I would say even still, our
vision has been that the way to scale carbon removal is at some
point, when appropriate, to have commodity scale infrastructure
so that huge amounts of carbon can be sequestered permanently
and just put away and dealt with.
And climate change can be reversed.
Hence the name of the podcast, Reversing Climate Change.
But. We're, I don't think we're
anywhere close to that. Most of these deals behave more
like over the counter financial transactions where they're like
private bespoke deals. They're not taking place in
large order books like you might have experience if you've traded
crypto or if you've traded stocks on an electronic trading
system. So what's the attraction here?
Are you trying to get to that stage?
Is it attractive because it's different and it's still much
earlier than your previous experience?
What's the, what's the link there.
So I think it's probably all of that and I'll explain the market
right now and and maybe just as a as a proviso.
There is no one market structure that fits all assets in all
environments and notwithstanding the availability of the
technology today what what's called a matching engine which
is the, the technology that exchanges run the, the matching
model is called the central limit order book.
That technology and that type of trade matching has now existed
for call it 30 years and it's widely adopted in equities
trading, derivatives trading, So Futures Trading, options
trading, currencies trading. Where you see it less is for
example in bonds and each asset and and also by the way for for
shares and private companies there are a variety of assets
where a central limit order book is just not the appropriate way
to match orders. Sometimes it is more appropriate
for it to be an over the counter bespoke product and trade where
things do need to be configured or tailored based on the
counterparties. So when I look at the the
voluntary carbon market. The products and the type of
trading today, it feels more like an online marketplace like
an Amazon or eBay versus let's say like Chicago Board Options
Exchange or New York Stock Exchange.
That's the state of the market today.
And I think that that's the the type of transactions that are
being done are a function of A the maturity of the the markets
and the technology deployed in the voluntary garden market.
B the level of education and understanding of the buyers in
the market and then see the products that suppliers are
making available to them. So as I've looked at some of the
the carbon credit projects that are available and and who's
buying them and what what they're buying.
It feels the comparison that I've made is it or the analogy
I've made is it feels a little bit more like buying a piece of
real estate than it does buying a more standardized tradable
product. So there's it's almost like
buying a house the the buyer kind of has to in some cases
look at. At the Co benefits and it
there's a a feel factor about it.
Do I, you know, do I see myself living in this house?
Do I want to make meals in this kitchen?
Do I feel like sitting in this living room and and watching a
movie? It's a little bit more like
that. There's maybe a more of an
emotional softer touch to it. Then I just want to trade this
digital fungible standardized representation of carbon on a
screen. So what's interesting to me in
the part that's exciting is 1. It's a bit of a departure from
stuff I've worked on in the past.
So the majority of my experience is exchange traded standardized
products, fungible products. So doing something that's a
little more bespoke, a little more tailored is new and
interesting to me. But two, I think that the market
can evolve towards some more standardization and things that
are more tradable. I think it'll be a process and I
don't know that it necessarily means that those standardized
tradable instruments will completely supplant what exists
today in terms of maybe the more bespoke contracts and and
projects and things. But the opportunity to create a
new market, create products that are tailored to and suit the
market as it exists today is fun and interesting, interesting
challenge. And then thinking about how all
of the knowledge, experience and expertise that I bring from more
traditional capital markets to the team at Nori and and how we
can combine, you know, graft that onto all the carbon markets
knowledge that the team here has and envision what the future
could look like in terms of the development of Nori's
marketplace specifically. But then the voluntary carbon
more carbon market more broadly. It's pretty exciting.
It's a massive opportunity. There's a lot of really, I
think, interesting white space that we have to operate in to
define and design products and services to both meet the
market's needs and then and help them transition to a new, more
efficient, more transparent, higher integrity marketplace
than maybe we have today. Well, as recently as today.
You were joking. Even shared an XKCD comic about
the proliferation of standards, and I'm curious if you've seen
how standards have consolidated in other industries that you've
worked in. Granted, I imagine some of these
standards are actual proprietary financial products that are
being designed by a forprofit companies.
That dynamic is a little bit different than Carbon, but how
do we deal with this within Carbon where there's 10s?
Of different standards bodies that are all competing for
influence for what kind of additionality or permanent
standards should be codified for the entire carbon removal or
even voluntary carbon market sector as a whole.
There's sort of a a really huge amount of these things and even
as someone who works in this space, I find it difficult to
keep up with all of them and all of the details of all that.
I mean, frankly, it's a fulltime job or the fulltime job of an
entire department to participate in and set these standards.
So what might you predict for such a proliferation, given your
experience in other parallel industries?
Sure. So I'll give maybe a couple of
examples. One where I think the industry
managed to get it together globally and and develop a
common standard that really has functioned extremely well
globally. And then and then maybe some
examples of some, some either standards that are in the
process of being developed or situations where I don't know
that you'll ever see a common international standard.
So one standard that that is pretty common internationally
across virtually, I think all financial markets at this point
is something called the Financial Information Exchange
protocol or FIX in the industry parlance.
And so FIX protocol.org is a nonprofit, and they publish A
specification. It describes how computers
essentially via API can talk to each other in the financial
markets. So trading firms talking to
their brokerages, brokerages talking to the exchange, so how
the computers communicate back and forth with each other.
And going back to that early stage of the development of the
electronic markets that I was talking about earlier, when you
have this proliferation of markets when they first started
up and there was no standard, each of those different Ecn's or
alternative trading systems and and the exchanges themselves all
had different API specifications.
And so and some of them were proprietary and they had IP
around them and if you wanted to use them, you might have to
license them and pay a royalty. So if you rewind back to that
state of the market, if you were some sort of actor in that
market that needed to trade on multiple different venues, that
meant that your technology team had to read, understand and
implement each specification for each of those training
counterparties that was heterogeneous and that just
created inefficiency and operational overhead and cost
for for everybody. And the only firms that really
benefited from that were the incumbents that you sort of had
to, you had no choice, you had to go and use their protocol
because you had to access that market for either the products
that traded there or to access the liquidity.
And so the industry finally just decided to get together and try
to deal with that and they created this thing called FIX
and now pretty much every financial exchange in the world
and and banks and brokerage firms that everyone uses FIX to
talk to each other. And I just created a common set
of standards that removed all that inefficiency.
That's great. That's global and it's an
arguably amazing success. If we look at maybe some
examples where we haven't seen such such success, one that is,
is you know maybe more mature, but it's pretty clear that
you're not going to get to a common standard is it's just the
the rules around equities trading.
So equities are a pretty well known and understood type of
product today. There are you know there have
been, there's been equity ownership and and stocks now for
what a good 600 years or something like that.
And so you know equity shares have come a long way.
But if you look at if you were to try to point to a global
standard for equities rules and regulations, there is no such
thing. Just in Canada you have the
different, each of different provinces has their own rules.
In the US, you've at least got one regulator, the SEC.
In other markets you have, but but in the US you also have the
CFTC. So you have two different, you
have two different federal regulators that that regulate
different parts of the market. You have other markets where you
have one regulator that regulates equities, derivatives,
so multiple different products. And then the rules across even
within let's say, Canada, across the different provinces may not
be 100% aligned. Across countries they're
definitely not 100% aligned And so there really is no notion of
a global set of standards around equities regulation.
There are international organizations, ones called IOSCO
and that's a a group of you can think about that as like a a
meta regulator group where all of the national regulators get
together and and talk and try to develop standards and create
efficiency. So there is some effort to
coordinate, but there definitely is not a a universal standard.
I don't think that's going to change anytime soon.
There are just too many competing interests, different
histories and peculiarities in each of the markets.
So for anyone operating on an international basis, they, as
you noted, they have to have a team that's familiar with all
the rules and regulations in each of the markets that they
want to operate in. And that's just the cost of
doing business. Then if we take maybe one more,
let's say more recent example, just just Prior to joining nor,
I spent four years building ACFTC regulated futures exchange
and clearinghouse for derivatives of futures contracts
on crypto commodities. So Bitcoin is an example and and
either is another example. And in the US, the crypto spot
market for Bitcoin, let's say, is not regulated by the CFTC or
the SCC. If you want to operate a Bitcoin
exchange, you have to go from state to state and get what's
called the money transmission license and register with
Fincent as a money services business.
And so you have a heterogeneous set of rules and regulations in
the different States and territories that you have to
comply with. The SCC has taken a view that a
lot of crypto assets are securities, but there aren't and
and there's been a lot of enforcement actions and there's
been some settlements. But, but the one of the main
arguments in the crypto world right now is that that the rules
are not clear enough and different people take different
views on that. Some people think they're pretty
clear. Other people think they're not
clear at all. And there's been no shortage of
draft legislation. I think there's four or five
different proposals at this point working their way through
Congress to try to create clarity or or and even within
the regulators has to 1st. For example, if the SEC is
proposed as an environment where it would be essentially like a
sandbox pilot type program. So it's just another example of
an industry that there's new technology, new business
practices, new products, regulations trying to catch up.
And there is no current standard either within the regulatory
environment or at a policy level.
And you just have a lot of different people with different
views trying to help solve that problem.
And and so there are a variety of industry groups that have
formed in the cryptocurrency world where commercial actors
have gotten together and said Okay since since no one is
defining this formally in terms of the the federal regulators or
or even Congress, we're just going to set out a set of
principles or a set of rules that we all agree to voluntarily
contribute to and and adhere to. And that's all well and good,
but it doesn't create any sort of regulatory clarity.
And I definitely have seen some of that in the voluntary carbon
market in terms of just efforts to to try to create some sort of
standard but without any, I would say formal blessing that
ensures that companies can confidently operate in
accordance with the standard and and not face regulatory or or
commercial risk. It's there, it's hard to support
any one of those. And then finally, I would just
say I've I've seen some calls for we need a global regulatory
framework for carbon. And given the experience with
other asset classes and the the, you know, either internal
disagreement within countries across regulators or then
disagreement across countries. I find that to be a pretty, in
some ways naive point of view that we're going to get a global
regulatory standard for carbon, so.
Many different angles to go with, but I guess I'll go with
the most recent here. I also have the thought that
maybe too much standard setting can ruin some potential for
innovation. I think when you're in a room
and too many people agree too much, I feel called as my duty
to maybe throw a little bit of a monkey wrench and try and say
like actually here's a. Counter example or here's a spot
where these ideas, while they sound good in this case, don't
work as well here. I think if you get everyone in a
room to agree about everything, that's part of I'm going to make
a most Ross of Ross connections here.
Is that not like the UN Security Council where, you know, Russia,
China and the US are never always going to agree,
especially not right now. So they just veto the proposals
of the other countries and there's really not a process of
like agreeing to something in some cases maybe be worthwhile.
To have different spheres of influence.
God, am I just reinventing the Cold War right now?
But surely that might work better, at least for decision
making, than just having a Security Council where everyone
has that same type of authority? How did I just get myself into?
Good luck, Matt. Yeah, you.
So you happily find yourself comfortably at home in a lot of
the debate in other regulatory circles.
So there are really I I I think if you distill it down there
probably two different approaches to regulation.
One is called a rules based approach and the other is the
other is called the principles based approach.
Rules based approach is fairly prescriptive.
So you know the the rules are written pretty specifically
highly descriptive in some cases about what you can and can't do.
And then principles based is less prescriptive and really
lays out a set of things that the market is trying, the rules
are trying to achieve or trying to prevent.
And there's a lot more latitude in in that case for actors to
decide what adheres to those those principles.
The problem with the rules based approach is that one it it
creates a lot of constraints and and so there's less room for
creativity. But almost counterintuitively it
does create some room for creativity because if you do
something that isn't explicitly prohibited by the rules, you can
say, well there was no rule that you can point to that says I
can't do that, so therefore I can.
And unfortunately that happens often enough when you have
really smart people that spend a lot of time thinking about the
rules and how to game them or or circumvent them, especially if
there is an edge in there and they can make money doing it.
So you have to create ever more rules to make it ever tighter
and ever more explicit and and then that just, you know,
creates less and less room for innovation and creativity.
On the other hand, if it's more principles based, you may have a
lot more of a Gray area, but a lot more room for creativity And
and maybe to come back to just a concrete example where you can
see the consequences of let's say a rules based environment.
I would characterize the US equities market is a rules based
environment and it's very constraining around what
exchanges can and can't do from a pricing standpoint, from an
access standpoint, from the type, the ways in which they're
the exchange can operate, what order types they're permitted to
allow or not allow. And so if you look at the way
exchanges compete in the US equities market, it really isn't
anymore about a lot of creativity.
It's about pricing in ever finer sub penny increments and
creating really complicated fee structures with all kinds of
different complicated tiers that create economic incentives.
I mean the exchanges have economists on staff who spend a
lot of time designing these really complicated pricing
schemes and and that's where innovation happens in these
really complicated pricing schemes or at the level that I
was describing earlier where you're talking about shaving now
nanoseconds off of order and trade message time response
times. So.
So that's what really amounts to innovation and creativity in the
US equities markets and and that's that's not great.
It's harder to to come up with something new.
It's not to say that that no one can and obviously if you've read
Flash Boys you know that I EX did come up with the new
invention that was within the constraints of the rules.
But it was really precisely targeted.
And even at that there, there was some resistance to and and
in an argument that some of what I X was doing was not compliant
with the rules and and that was a big part of the battle of the
i.e. X exchange application.
So I don't know that there is really it's it's all a matter of
trade-offs and what are you trying to optimize for.
So you know the the state of the UN and and post Cold War you
don't have uniformity of opinion then that may or may not be
desirable depending on where you sit and I would say the same
applies for regulation. Yeah, those trade-offs are
really profound. A rulesbased regime seems to
assume an end of history almost where there's probably not a lot
of room left for innovation and the job of the regulator is to
manage the existing system. I mean, how much room is there
for innovation still in the equities market?
I know those are famous last words, but also, are we not at
that point? Like how much could really be
done? That would really blow
everyone's minds. But I know everyone who has ever
predicted that usually has to eat their words within a couple
years at least. So is that not?
Is it just not appropriate to to be rules based?
Are there places that were pretty much done innovating and
can just settle into a technicianbased view of the law
and people are just administering it?
Well, I I don't know, I guess it, you know, in the world of
science. Wasn't it maybe the late 1800s,
early 1900s, when they thought that pretty much all major
discoveries had happened and there wasn't much more to learn?
As it's coming out of my mouth, I'm like, this is such an
obvious thing to just dunk on, but dunk away.
Go ahead. Plate tectonics is pretty recent
too. It's like only a couple decades
exactly. So the I would say it presumes
that one regulators can know everything and that the market
static and that technology doesn't evolve or business
practices don't evolve and that's just not ever going to be
true. I think it also fails to
recognize that there are different actors in the markets
who have different objectives. A an asset manager or pension
fund has a different set of priorities and a different set
of objectives than a market maker.
But both of those are important actors in the market.
And so if you're an exchange or regulator and you're trying to
design A market, who are you designing it for?
You designing it for the end investor, you deciding it who
who has a certain set of objectives and.
And certain preferences or you designing it for the market
maker that has a completely different set of objectives and
preferences. And the art and I think
challenge for regulators is that you have to try to strike that
balance thoughtfully and some everybody's going to be nobody's
ever 100% happy in that negotiation, which I guess you
know is the definition of a good outcome.
But it but it's just it's an ongoing battle.
In fact right now there's a new set of proposals really
fundamentally proposing a pretty fundamentally change US equities
market structure and there's a lot of people very upset about
that. There's some people are very
happy about it and think it's you know 20 years overdue.
So it's you take all of that and then recognize that regulation
by definition has to be a slow and and conservative process and
and almost you know Hippocratic Oath do no harm type of
environment and it's just really hard when technology and
business practices evolve pretty quickly but then you can look
for opportunities to to innovate in different ways And I would
say if we want to point to a concrete example of that the
exchange traded fund or ETF is a relatively new invention.
So that's you know that doesn't have anything to do with the way
exchanges match orders and create trades.
It's a new product that can list on an exchange and it you know
in the case of let's say the SPIDERS ETF that allows an
investor to get access to the entirety of the S&P 500 index
through one share or one type of share rather than having to buy
individual shares and all the individual constituent companies
that that's an interesting innovation.
Another would be the GLDETF for the the the goal it's the the
gold ETF. So prior to the invention of
GLD, if you wanted to own gold, you could buy bars and store
them at a vault. You could order coins, have them
shipped to your house and put them in your safe or bury them
in your backyard. When GLD was invented, suddenly
you could buy shares that were ownership, partial ownership of
a trust that held gold and you could buy those in the context
of your your, your typical brokerage account be that you
know, E*Trade or fidelity. And so it does feel like there's
still opportunities for innovation, you know just it may
come from places that you don't necessarily expect and that's
it's. So taking this all back to some
of the things I find really exciting about voluntary carbon
market is we don't have really clearly defined regulations.
There is a lot of room for commercial innovation, creation
of standards, development of new products, market structure can
evolve and we don't have that really prescriptive rules based
set of constraints right now. So that creates a lot of
opportunity for flexibility and creativity and that's fantastic.
The risk is that it also creates the opportunity for bad actors
and we've definitely seen some of that in terms of some of the
double counting issues or some of the issues about even
outright fraud and carbon credits and so.
So again it's it's a set of trade-offs, so you know you want
to be careful what you wish for. If you wish for regulation, and
it comes very quickly and thoughtfully, you may end up
with a cure that's worse than the disease.
But at the same time, if the industry doesn't to some degree
police itself, then you create an opportunity for bad actors
that can sully the reputation of the entire industry.
So neither of those two ends of that spectrum are are places
that you want to be. You could just give me something
easy to walk away with. You got to give me some, some
Gray middle ground Hell, I have to carry around with me, Matt.
But well, if if you want to work in market structure, I think you
have to be, you have to have a high tolerance for pain and an
ambiguity, yeah. There's so many layers of of
ambiguity and trying to design a product here that makes sense.
And I think trying to design something that is perfect on
every metric. I think we said in carbon
markets too, if you want everything to be perfectly
additional, perfectly permanent and all these things, that means
your scale is. Pretty, pretty small and is
likely to remain pretty small for for a while and inexpensive.
So you can have everything you want, you just have to pay a
price on it on a different dimension than maybe you
expected. You can be a little bit more
openended on on how much those other things matter and to what
extent, and you will have a corresponding updating of those
other sliders, but it doesn't just seem like you can get
everything you want. For a cheap price and great
availability at all times, it seems like one has to choose
what is actually important here to reverse climate change.
And it really isn't that simple. I think people have good faith
can disagree about where those sliders should be.
I think that is an absolutely critical point.
You can reach what you might define as perfection that
becomes utterly irrelevant, and so you can have your perfect
precious little thing that nobody cares about.
That's not a good outcome and it's someone who's a relative
newcomer to this market. I can say that, you know, not
that it's unique to the market, the arguments and and the
different tribal battles and things that are going on.
But the industry should ask itself what is that doing for
people like me who are relative newcomers.
Now I've decided to join a company and and jump in with
both feet. But if I'm someone sitting at a
real economy corporation and I'm starting down the path of the
carbon journey and trying to understand what the challenges
are, what the the opportunities are, what the products are, what
the solutions are, and you know, I, I open up the the cover to
the market and to see a bunch of people screaming at each other
about highly technical, arcane topics, is that something that
is going to invite me to to come in and want to participate?
Probably not. So for the market.
I think one of the things that we if the goal of the market is
to remove carbon from the atmosphere, stabilize the
climate, reverse climate change, then we would need to bring as
many people into the tent as possible.
We want to have a big tent approach here and you can't do
that. If everybody's infighting and
arguing and one upping it, it just doesn't work.
So if we just start from the standpoint of we want to assume
good intent, we want to identify the good actors, we want to
support each other. Let's grow the market.
Let's make it easier for people to interact with the market, to
navigate it, to understand the products.
Let's be creative about removing points of friction and make the
market big and important and then we achieve the impact that
everybody I think that's that's spending a good portion of their
time and careers in this this new market is trying to
accomplish. And and that would be you know
that's just that's my frame of mind when I come into this.
I want to meet people. I want to learn more about the
market and want to be collaborative and and not
ideological or tribal. It's.
A good goal, definitely a good starting point.
Well, we're really glad you're here with us.
You bring so much interesting experience for us and the
industry as it scales. Thanks for being here, Matt.
And if you like the show, by the way, we're going to be doing
another episode with Matt here that's more applied and with a
special guest coming soon. So thank you again, Matt.
Thanks for having me, Ross. It's been a pleasure to be here
and it's been a pleasure the last three months with the team
here. Thank you so much for listening.
If you could please subscribe and give us a great rating and
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We will catch you next time.