Vanguard Chief Investment Officer Gus Sauter is one of the key figures in the history of low-cost index funds and ETFs. He played a big role in developing the trading systems Vanguard uses in its massive index funds and also led the firm’s entry to the ETF market.
Sauter plans to retire at the end of 2012 after a storied 25-year career at Vanguard and says he’s considering teaching as one option after he steps down.
We caught up with Sauter on Thursday in a telephone interview. The Vanguard CIO discussed similarities between Black Monday in 1987 and the 2010 flash crash, how Vanguard index funds trade, high-frequency trading and how ETFs are impacting the market.
Sauter joined Vanguard in October 1987, just two weeks before one of the biggest market crashes in history.
Sauter, 57, directs Vanguard’s global investment management groups, which oversee aggregate assets of $1.6 trillion of Vanguard’s $2.1 trillion in global assets.
Below is an edited transcript of Thursday’s interview:
ETFtrends: Are there any links between Black Monday in 1987 and the more recent flash crash?
Sauter: Both crashes involved macroeconomic concerns. In 1987, interest rates worked higher but the stock market ignored it and skyrocketed. The 2010 flash crash involved concerns over the macro picture, Greece and the debt crisis. In other words, people were really eager to sell. The big difference between the two relates to market structure. In 1987 it was mostly a manual market. Specialists controlled stocks, and if things got crazy they would halt trading. The 2010 flash crash was a liquidity event. Reg NMS [Regulation National Market System] resulted in more links between exchanges and trading. Stocks trading on multiple venues. There was no mechanism to halt trading. In the old says, the specialist would say sorry, but we’re taking a timeout. Now we have circuit breakers that would have prevented the flash crash. We also have “limit up-limit down” coming. During the flash crash there was no one to control liquidity.
Q: Please talk about the development of the programs to trade indexes and benchmark changes at Vanguard funds.
Sauter: We were early adopters of the various electronic communication networks [ECNs] and automatic exchanges. We’ve always taken control of our own trades. We executed our own trades as opposed to giving trades to a broker with discretion. This helps us lower trading costs and avoid being front-run in the index funds. Our adoption of electronic exchanges was very important in the development of our trading programs. The biggest thing was taking control of our own trading and finding pockets of liquidity without the marketplace realizing we were participating.