Vanguard’s Sauter, Pt. IV: The Need for Market Structure Debate

In the last of Traders Magazine’s four-part Q&A with Sauter, he explains why he became involved in industry debates.


Traders Magazine: When the bid-rigging scandal broke in the 1990s, were you trying to work with the SEC and clean up that mess?
Gus Sauter: That was what got me involved. It was the catalyst for getting me to work with various committee and get involved.

Traders Magazine: You were interested because you feared people would lose confidence in markets
Gus Sauter: Yes, and we realized how difficult it was to trade, especially in the over the counter market. So I became very involved.

Traders Magazine: And you also became involved in the Reg NMS debate.
Gus Sauter:  Yes.

Traders Magazine: And in the midst of the debate some wanted to drop the trade-through rule. You believed that would have left the limit orders unprotected. And you were arguing for the rule and auto-execution on all exchanges. I assume you’re proud of what happened?
Gus Sauter: Yes, very much so. Again, if your limit orders aren’t protected, then you are going to be disincentives to create limit orders. That means less liquidity on the book.

Traders Magazine: And so…
Gus Sauter: You have a much less liquid trading environment. I’m very glad that Reg NMS did happen

Traders Magazine: One last thing, are you fearful about all these recent market events? And even with all these reforms that have come along, people are putting a lot less money into equity funds. Doesn’t that worry you that we could be going back to the 1990s?
Gus Sauter: Well, I’m certainly disappointed every time you hear about a new event. But frankly I don’t think that is a result of a lack of confidence in equities. I think a good bull market would bring back all the confidence in the world in equities. We still have significant cash flow into our equity funds.

Traders Magazine: So it’s a disappointment in the returns and not an uncomfortable feeling that markets are rigged against the little guy the way they were in 1990s.
Gus Sauter: Yes, because if you look at cash flows into index funds, they’re still extremely strong.

Traders Magazine: So the future of low expense funds, in your opinion, is bright.
Gus Sauter: Yes, exactly, there are lots of studies that show low expense funds outperform high expense funds. And it is striking how conspicuous that is.

Traders Magazine: How about the future of Gus Sauter? What do you plan to do after you leave Vanguard?
Gus Sauter: I haven’t really figured that out. I’m sprinting toward the end of the year. I’m going to take the first quarter of 2013 off and just decompress. I’m kind of intrigued by the idea of teaching. I definitely want to get back to my golf game. I work about 60 hours or more now and only get to golf once or twice a year.

Traders Magazine: Will you break a hundred?
Gus Sauter: Hopefully I can do that.