[This article appears in our May 2020 issue of ETF Report.]
For many ETF market participants, Reggie Browne needs no introduction. The longtime market maker and principal of GTS has been an industry stalwart since ETFs’ earliest days, providing liquidity to ETFs young and old ever since the SPDR S&P 500 ETF Trust (SPY) launched back in 1996. Prior to GTS, Browne held senior leadership positions at a number of market-making and equity trading firms, including Cantor Fitzgerald, Newedge USA, Susquehanna International Group and O’Connor Associates.
Known as the “Godfather of ETFs,” Browne has had a career more like that of a midwife, bringing to life the ETF industry around the world. Not only has he seeded and acted as lead market maker for countless first-of-their-kind ETFs—including the first senior loan ETF, first active bond ETF and the first frontier markets ETF—he has also helped develop several foreign ETF markets from the ground up, sometimes as their only liquidity provider.
Browne sees himself as an ambassador, educating investors and institutions alike on the power and promise of ETFs. He has worked closely with regulators and exchanges to develop new and more efficient trading rules, and he regularly visits college campuses to educate students about capital markets and the power of financial inclusion.
We are proud to announce that Browne is our 2019 Lifetime Achievement Award winner. We recently chatted with him to reflect on his career, including how the industry has evolved since he first started, and to see where he thinks ETFs go from here.
This interview comes at an interesting time, with massive market declines driven by falling oil prices and the spread of COVID-19. How do trading days like March 9, 2020 compare to some of your more memorable trading moments?
Well, where we are today versus where we were back in 1995 or 1996, I think is actually akin to “mission accomplished.” In particular, we’ve seen ETFs alleviate some of the market stresses and pressures of investors expressing their views, and allow for hedging and risk transfer to occur in an orderly fashion. This market correction has been orderly. That’s amazing!
It’s also amazing just how quick some of the moves have been, and it’s been impressive to see ETFs react in ways that help investors do what they need to do. I think it’s just impressive to see the volume at which SPY is trading, how heavily it trades in times of stress, and how it’s become the largest equity in the world. I can think back to when, on a good day, it was trading 3 million or 4 million shares. Now we do that in just the first 30 seconds of the day.
As one of the first market makers in SPY, you’ve been trading ETFs from their very inception. How did you find yourself trading ETFs?
At the time, I was employed at Susquehanna International Group. My intermediate goals were to trade futures in Chicago. But my family said, “We’re not moving from New York to Chicago.” So I was appointed to go trade SPY, because it was a brand new product. And, lo and behold, off it went.
Just by circumstance I fell into [trading SPY]; I think I was one of two market makers. We were competing to demonstrate that liquidity was available on the floor in this new instrument. Folks like Gary Eisenreich and others were out beating the drums about the benefits of this new thing and proving liquidity was there.
What’s something you think most people in the ETF industry misunderstand about the market-making business?
Most people underappreciate liquidity services around ETFs—not everything is a penny wide. There’s still plenty of room to travel in that area, in particular.
There’s also work left to do around the regulatory framework for investor protections. ETFs are more complex than ever, as people put derivatives or digital assets or some other unique underlying investment inside them.
But one of the biggest challenges I’m most interested in is the fact that so many ETFs cover the same equity set. There are only around 3,500 listed companies in the United States. Take Procter & Gamble; that’s the most heavily indexed equity in ETFs, because it’s a value stock, it’s a consumer stock, it’s many different things.
So I think the number of stocks listed is a risk factor. For the ETF industry to keep growing, and passive investing in general, you can’t just keep indexing the same series of stocks.
Right. There are only so many ways to slice and dice the market.
Exactly. There needs to be an attempt to bring more private companies into the public markets, and we need to reduce some of the hurdles for that to occur. Some of it is regulatory; some is legislative. Some is that we need better incentives [for companies] to come to the public markets.
If you think about all the market cap expansion that’s occurred in private companies—just look at Uber. From the time it was conceived to the time it went public, there wasn’t an opportunity for ETFs to include it in an index. So that’s one area I think limits the ETF industry from growing.
I also think ETFs can bring more households into the marketplace. Forty-eight percent of Americans don’t have exposure to the financial markets directly. ETFs can be a solution to that.
How can ETFs create more financial inclusion?
Ordinary Americans understand the power of being self-directed, and they can use financial instruments in their everyday lives to increase household wealth. I think the next area of growth, which will provide the most interesting opportunities for the ETF ecosystem to grow, is in solving problems.
[For example,] there’s a narrative that many young people don’t believe capital markets work for them, that younger people think capitalism isn’t working for them. And they don’t have access to the marketplace. But some opportunities have presented themselves, like the free trading now offered by various retail platforms, and fractional share trading—these are all driving younger people into the financial markets.
In fact, ETFs can be one of the best exports of American capitalism around the world. In some emerging economies
—particularly some South American or developed Asian economies—where households don’t participate at a great level in the financial markets, ETFs can be a vehicle for them. Those are outcomes I witnessed firsthand in my travels.
Looking back on your long career, were there any turning points you see where it could’ve all gone very differently, if you’d made a different choice?
Coming to New York was one. I started my career on the Philadelphia Stock Exchange, under O’Connor Associates. But had I not come to New York, the opportunity to participate in the ETF community early on would not have been there.
Jumping into ETFs early, not knowing what the future held, had a great impact in my life, in general. In terms of the development of my business career, It was largely being in the right place at the right time, then applying entrepreneurial experiences to it.
Where do you see opportunities for growth in your business moving forward?
There’s opportunity for growth in ETFs and in the liquidity division in various still-developing market centers. Engagement of the unbanked and emerging consumers, who have yet to understand the power of commerce and financial markets, is a big area of growth. I’m hoping to be part of that.
My time dealing with exchanges and regulatory bodies and being a part of shaping the industry has been interesting. If I can convey to the average person how it all works, all the commitment and hard work that everyone puts in to get it right, so that the average investor doesn’t fear the financial markets—If I can tell that story to somebody, I feel as though I’m paying it forward.
If I can convince one person that the financial markets can be a benefit to their lives, I’d feel as if I’d paid back everything I’ve gotten.