So you really didn't have a big background as a trader when you first came to Vanguard?
No, not as a trader. I was really more of a portfolio manager.
When you came to Vanguard in 1987 what was your background?
I came from a trust investment department (First Bankcorp. Of Ohio), where I was a trust investment officer managing accounts.
You were managing money?
I had developed a quantitative model to actually manage equities at the bank. And at the time, Vanguard was looking for someone to build out it quantitative capabilities both in indexing and active quantitative equity.
When you became a member of the Vanguard crew back in the late 1980s, creating equity index funds, it was very different.
We had one person in the equity department. And I was the second and I was brought in to run the department. We had a trader and I was basically in charge of building that business. We started about a billion and we went through a trillion two days ago.
What are your total assets now?
Yes, on the equity side it's one trillion to the penny. And on the fixed income, it is roughly $600 billion.
How did you become Vanguard's first chief investment officer in 2003?
It's kind of interesting. Ian McKinnon started our fixed income group back in the early 1980s. He reported directly to the chairman. And I came in 1987 and ran the equity group. So we basically had different money management units that worked autonomously. And in 2003, Ian retired. Then Jack Brennan (John Bogle's successor as CEO of Vanguard Funds) asked me if I would like to take on the responsibility for overseeing both. And it sounded like a pretty good challenge to me so I took it on.
The trading business has changed much over the past decade. For instance, off board trades changes represents about a third of all trading and dark pools constitute about 13% and wholesalers are doing more internalizing. How do you view these changes?
I would certainly say that if we were starting from scratch with the market, we would certainly not design the structure that we have.
You'd still want a CLOB.
I may be the last person who likes the idea of a central limit order book, but that is what Reg NMS is trying to do.
Reg NMS is trying to put things back together again so we don't have things trading in different venues at different prices. While we wouldn't create the structure we have today, it is the structure we have today.
OK, so you go to market with the market you have, with all its good and bad points. So is it fair to say that you are an advocate of publicly displayed limit orders as opposed to dark pools?
Yes, that is how I would design a system if I was starting from scratch. I would prefer the lit markets.
To the extent that dark pools are out there, I would be fighting myself if I didn't use them.
How do you view trading in pennies and sub-pennies and the pilots in trading them?
I do worry about some of these incentives to basically pay for order flow. That usually ends up with some sort of conflict of interest. Obviously, they're trying to incent liquidity. That's a good thing. But paying for order flow is a conflict of interest.
What is best execution? Why is there such a debate about it?
The way I see it is, if you're a portfolio manager and you want to own a security, you basically want to own it at the price at when you made the decision. So anything different from that will become your transaction cost.