E211: Disrupting The $100 Trillion Bond Market

It's a huge financial market, over a hundred trillion-dollar financial market, but despite its size, it's traditionally lagged about 20 to 30 years behind the global stock market.

And it's really just been over the past 10 years when the fixed income market has come online.

And so, what we do here at the moment is we build really the full set of tools on top of that core electronic trading infrastructure to enable people in the fixed income market to trade bonds.

I knew literally nothing about the fixed income market.

I started at Citadel.

My background was in statistics and math.

It was right at the time when the fixed income market was undergoing this electronic trading revolution, and Citadel had decided to enter the space with its typical approach to highly automated, highly algorithmic trading.

And by doing so, by building automated trading systems, automated portfolio optimization technology, you could genuinely make traders not like 25% more efficient or 50% more efficient, but genuinely 25 to 50 times more efficient.

And you could enable them to do things that just were never possible in the fixed income market before.

And last time we chatted, you mentioned that you could tax loss harvest bonds.

So tell me about that.

How does that work?

So you just raised a $36 million Series B from Index.

Congratulations.

Tell me about how that round came together and tell me about the latest on Moment.

For context, Moment builds fixed income trading, portfolio management, and risk and compliance software.

And we started off serving primarily FinTechs.

And that was really how the business, how the business began, and really where we focused for almost the first year and a half of the company.

And then it was really a little over a year ago when we started winning RFPs for some of the largest financial institutions in the U.S.

After, call it five or six of those, when we took a step back and we said, okay, it's time to dramatically expand the team, dramatically expand our engineering capacity.

And we decided to raise a Series B.

And fortunately, the round came together pretty quickly and we ended up with amazing partners in Jan Hammer and the entire index team.

Explain it maybe as an eighth grader or a high schooler.

What is it exactly that moment does?

Yeah, so fundamentally, we operate in the fixed income market.

And so fixed income is a massive financial market.

It's also called the bond market.

And it's about one and a half times larger than the entire global stock market.

And it's totally critical to the functioning of pretty much everything in the world, from how we build schools to how we build roads to how companies invest in massive data centers and so on.

Bonds are absolutely critical.

And the fixed income market is the secondary market where people buy and sell bonds that are issued by governments, by companies, and so on.

And so traditionally, despite the size of this market, and again, it's huge, it's a huge financial market, over a hundred trillion dollar financial market, but despite its size, it's traditionally lagged about 20 to 30 years behind the global stock market, the global options and futures markets in terms of automation and electronic trading.

And it's really just been over the past 10 years when the fixed income market has come online.

And so what we do here at moment is we build really the full set of tools on top of that core electronic trading infrastructure to enable people in the fixed income market to trade bonds, build portfolio of...

build portfolios of bonds and view really detailed analytics on their portfolios in ways that

have always been kind of standard in the equities market and many other financial markets, but have just never been possible in the bond market before.

You first started working with the fixed income market when you were at Citadel.

Tell me about what you did at Citadel and what your experience was like there.

I knew literally nothing about the fixed income market, or really financial markets as a whole when I started at Citadel.

My background was in statistics and math.

And I had ended up joining Citadel.

And that's actually where

I got to know one of my now co-founders, Dean, very well, because pretty much completely by chance, we ended up as the two junior members of the pretty much newly created fixed income algo market making desk, specifically for corporate bonds and fixed income ETFs.

And that was just a tremendous experience for us because it was right at the time when the fixed income market was undergoing this electronic trading revolution.

And Citadel had decided to enter the space with its typical approach to highly automated, highly algorithmic trading.

And that was something that really did not exist in full force in the fixed income market prior to that.

So we got to work on a number of tremendously interesting problems.

But but most of all, what that experience showed us was that it actually was possible to automate the fixed income market.

And by doing so, by building automated trading systems, automated portfolio optimization technology, you could genuinely make traders not like 25% more efficient or 50% more efficient, but genuinely 25 to 50 times more efficient.

And you could enable them to do things that just were never possible in the fixed income market before and that was completely critical for now the genesis of moment

bring it down to earth to pension funds endowments high net worth individuals

how did they benefit from a more efficient fixed income market and what problem are you really trying to solve many investors in the financial markets rely on fixed income as a core part of their portfolio.

And that can range on one hand from basically every bank, every pension fund, every insurance company is doing liability-driven investing to make sure that they can meet the demands on the capital that they have, all the way to, you know, a retiree who's entering the decumulation phase of their investment lifecycle and they need predictable income.

And for so long,

these types of things have been a tremendous challenge for participants in the fixed income market because it was really, really difficult to trade bonds.

It was basically done completely by hand, over the phone, over Bloomberg chat, etc.

The market was, generally speaking, not very transparent.

As a result, not very efficient.

And oftentimes, what happens in not very transparent and not very efficient markets is that the least sophisticated users end up getting the worst prices and the bad end of the deal.

And then finally, it was just difficult to operate in from a portfolio management perspective.

And so with Moment, our core mission is to make it unbelievably easy, efficient, and transparent to trade and build portfolios of bonds.

So what we do is we enable our customers, whether that's a financial advisor or whether that's an asset manager or whether that's a treasury management platform, or so on, to access the fixed income market with best execution across every potential source of liquidity, as well as institutional grade trading and portfolio management tools that allow them to construct and manage portfolios that very precisely target their needs.

Maybe taking a step back, how is fixed income purchased today, whether it's by intermediaries like like RIAs or by high net worth investors?

What's the practice today?

Still today, about half of trading volume is done over the phone or over chat.

And

even the vast majority of trading volume that happens quote unquote electronically is often done by traders manually going through a number of different exchanges' websites to view what is the available inventory here.

What are the available bonds over here?

How about over here?

What are those bonds trading at on this other exchange?

And so on.

And so, what we do at the moment, and where we started, was by building what's called an execution management system.

And basically, what that means is we connect to a number of different exchanges, essentially, in the fixed income market.

They're called alternative trading systems.

And we allow traders to automatically execute orders at the best available price price across those exchanges, and oftentimes without ever having to click a single button.

The order gets submitted and then automatically executed using our smart order routing algorithms.

And that's really where the company got started.

But then we took that a step further by building a portfolio management system on top of this core trading system.

And what that does is allow our customers to really solve the fundamental problem they're getting at when they're trading bonds, which is not just how do I trade this bond, but how do I build a portfolio of bonds?

And so, using our software, a customer, for instance, can just write, hey, I have this client, you know, they live in New York City, they make X dollars per year, they're looking to invest $200,000 in a New York municipal bond ladder with these custom tax characteristics, go do it for me, and generate a portfolio in a matter of five to 10 seconds that's customized to that customer with those needs.

So maybe you could break it down even further.

So you have this New York retiree and they're investing $200,000.

They're essentially trying to build out a certain annuity cash flow over the next 10 to 15 years.

Why does there have to be a technology that comes in and solves that problem?

What's the inefficiency exactly?

It's just a hard problem to solve.

So

I'll put it this way.

At any given time, there are probably about 500,000 different bonds that are available in the market that you could go buy right now.

And so the problem of, hey, you know, I want these cash flows over the next 15 years.

I have this tax situation which lends itself to this type of security.

Going and building a portfolio to do that manually, which is what many people do, typically takes about one to two hours.

And so now with our platform, you can literally just type in, hey, here's the request from the client.

Here's some information about them.

Go build the portfolio and go build it at the best available price across all the different exchanges.

And we allow you to do that in, instead of two hours, about five to ten seconds.

And last time we chatted, you mentioned that you could tax loss harvest bonds.

So tell me about that.

How does that work?

And, you know, how pronounced are these benefits?

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A number of people have done some pretty interesting research on this.

In particular, Alliance Bernstein published a paper about two years ago doing a historical look back on the benefits of tax loss harvesting in municipal bonds, in particular.

But the long and short of it is, you know, bonds are obviously less volatile than equities.

However, the great advantage that bonds have when it comes to tax loss harvesting, that equities do not have, is that equities are perpetual securities and bonds are not perpetual securities.

And the result of that is that when you tax loss harvest in equity, you are...

You basically took a security that you bought at a high price.

You're now selling it at a low price and you're harvesting a tax loss there.

But you're also now investing in a comparable security at a low price, and that security will presumably appreciate over time, and now you will have a capital gain that you will have to pay taxes on.

And so really, when you're doing tax loss harvesting in equities, it's not like you're creating tax losses out of nowhere.

You're just kind of moving them around temporally.

Whereas in fixed income, You can buy a bond, it might sell off, you sell that bond, and you generate a tax loss.

And now you invest in a new fixed income security, and say it's a municipal bond, and the income is tax-free.

Eventually, what's going to happen is not that that bond matures and you sell it like you would in equity, but the bond matures and you've not created any new capital gain.

And so, the end result here is that, whereas in equities, it's really a matter of deferring capital gains.

In fixed income, you can take advantage of capital losses today without creating and offsetting capital gain for the future.

So you have that true loss.

You also have these municipal tax benefits where you could oftentimes

not pay

federal and oftentimes state tax as well on your gains.

So these things, these things really add up, especially if you assume that taxes will go up in the future.

Exactly.

I mean, the amount of tax optimization you can do in the fixed income market, I'm obviously biased, but I would say it's vastly more than what you can do in the equities market because you also have this structure of corporate bonds are taxed differently from municipal bonds, which are taxed differently from treasury bonds.

It's as if, you know, buying Apple was taxed differently than buying Google versus buying NVIDIA and so on.

One of the hottest trends, if not the hottest trends, is tax loss harvesting, this levered strategy in the equities model in the equities market with AQR, Quantino, Parametric, firms like that.

Is there a way to short a bond?

Yeah, so you can absolutely short bonds.

Generally speaking, you cannot short municipal bonds, but you can short corporate bonds, treasury bonds, and so on.

Do you see that

in the next five, 10 years becoming a trend alongside kind of the equity tax loss harvesting?

It is certainly possible.

I think along a lot of dimensions, and this is a recurring theme, if you dig into more and more topics in the fixed income market, the fixed income market in many ways is 10 to 20 years behind the equities market, potentially more.

And so, you know, the fixed income market first has to really implement tax loss harvesting well.

And then I think there are a lot of opportunities from there.

But, you know, there's still a lot of work to be done to nail the basics.

When you double click on the second order effects of this quote-unquote retail tailwinds in the equity markets, the reason I put in quotes is it's really $10 million plus

high net worth.

And you have this estimated $150 trillion that's going into privates and alternatives.

The second order effect of that is what I think we're going to see a lot is much more catering towards the taxable investor.

And if you think today, the institutional market is $150 trillion and the high-net worth market is significantly lower than that, probably in the single-digit trillions.

When you have this increase in the high-net worth market, you're going to see a lot more companies like Moment becoming instrumental in the market and start to get much more market share versus just kind of being this fun thing for retail investors.

It's almost like a consumer, you're going to see much more serious businesses come about.

Couldn't agree more.

And funny enough, we come from the institutional market.

And so there was a natural question when we were starting moment of, okay, should we just go build software for huge institutions?

But why we ended up focusing on wealth management was, you know, the way that we see the future of the fixed income market is with a lens of automation.

That trading is going to be automated, portfolio management is going to be automated, risk and compliance is going to be automated.

And where that can deliver the greatest benefit is where the cardinality and size of the end user population is very large.

Because if you're an institutional investor managing 50 fixed income portfolios, Okay, that's hard to do manually, but that's doable.

If you're an asset manager managing 200,000 fixed income portfolios for end investors, or you're a financial advisory firm managing 10 million fixed income portfolios for end investors, that is simply impossible without automation.

And so

As weird as it may seem, I think we might actually see the high net worth and wealth management segment actually leapfrog some of the institutional segment in terms of automation and technology.

I had the CIO of Parametric, Tom Lee, he manages $600 billion, which is kind of crazy, but that's where they're putting all their money.

And just to further strengthen your point, is the complexity, it almost becomes...

infinitely more complex with more use cases and more money and more customers.

So there becomes more and more need for processes versus to your point, you could easily manually manage 20 customers.

Another trend that I think is very opportune here is these RA roll-ups.

It's the same concept.

You have these mom-and-pop shops that are being rolled up into these larger platforms, and now you have thousands of accounts as well.

And you need some technological solution.

It becomes unworkable to really do everything manually.

Institutions are just being forced, for better or worse, to operate at greater and greater degrees of scale in terms of number of accounts, number of assets, number of advisors, number of portfolio managers, et cetera.

And as that increasingly becomes the case, the need for automation just continues to grow.

Want to back up a little bit at Citadel?

You and your co-founders worked at Citadel.

I think it's one of the most interesting cultures in finance.

Tell me about culturally

what makes Citadel so great?

So

I've never met Ken Griffin, but I've learned a lot about him over my time at Citadel and since then as well.

And I think that he is just an unbelievably ambitious person with an incredible degree of relentlessness in pursuing that ambition.

And I think he built Citadel to be a place where culturally, operationally, organizationally, and so on, if you are an incredibly ambitious person and you are really relentless in pursuing that ambition, that you're never going to feel like you're hitting your head up against the ceiling, that you are always going to have more and more challenges and more and more opportunities just thrust upon you.

And I think that makes for a really strong culture of people who are just excited to go do things and feel incredibly empowered to go do them as well.

Ken Griffin at least publicly claims that his main competitive advantage is recruiting and people.

How much did you experience that at Citadel?

And also, how much of having a strong culture is also about weeding out bad players?

So, or those that can't keep up?

Is that a necessary component?

Or are you able to build a strong culture while also accommodating for lower performers?

The biggest thing is you just want to hire incredible performers.

And different companies are willing to make different trade-offs on this.

But I think the end result that Citadel recognizes that I think is absolutely true is that small teams of genuinely incredible people can massively outperform huge teams of good people.

And so applying that to

startups and moment now,

especially for us where

the opportunities for us to go after vastly outstrip our ability to go after them right now and the resources on the engineering side, on the implementation side, on the sales side, and so on that we have to go after them.

It is so tempting to lower your bar and say, we just need to get people in the door because if I go build this feature, we can go go serve this customer.

And I know that if I just hire solid people, we will be able to go build this feature and we will be able to go serve this customer.

And that becomes incredibly tempting.

But I think what is so critical and what we really try to stick by at the moment is just you cannot sell out for the short term and let your talent bar drop because that is a dangerous, dangerous cycle.

And you end up in really difficult situations as well where you could impact the team quite a bit culturally if you end up in a situation where you know you've hired a number of people who are not truly incredible and so i think the most important place to focus on when you're trying to build an incredible team is that first hiring step and no matter how tempting it is like just not lowering your lowering your bar there even if you have to go build five features you have five customers who are willing to pay pay you $5 million each to go do it.

You have to anticipate your hiring needs ahead of time so that you're never in a place of extreme desperation.

And from a feature set, I love the quote: build half a product, not a half-ass product.

That's Jason Freed from 37 Signal.

So resist the urge to do anything that's not world-class.

Just give one part of the feature, and people will grovel and complain about this feature that they want.

But have the

discipline to not release things that are just not world-class.

At the end of the day, especially if you are building mission-critical financial infrastructure, your most important currency is the trust that you build with your customers.

And there is, for better or worse, depending on who you are, a long history of software vendors in the financial markets not delivering on what they say that they're going to deliver.

And so what's really, really critical for us is when we say we are going to do something on this timeline, and when we say that to a customer, that is exactly what happens.

And sometimes that means under-promising versus what our most aggressive estimate is.

But at the end of the day, that is the most important thing for us, maintaining that trust with our customers, because that's what causes them to come back to us again and again and ask us to do more and more and more for them.

Given that you are operating in the financial space and trust is such a big factor,

are you less

go fast and break things and more kind of get it right from the first time versus, say, like an AI note-taking app or a consumer product?

Is that something that you consciously think about, like

making sure that you get it right on the first time?

100%.

There is no room for error.

And so when something goes into production, we have to be incredibly confident that nothing is going to break and everything is going to function as it is supposed to function.

And, you know, I think to some extent, the idea that you cannot also move fast is a bit of a false dichotomy because

you can still learn a lot and spend a ton of time talking talking to customers and building designs with them and building prototypes with them and so on that allow you to iterate and learn really fast.

But when it comes time to ship a feature to production, that has to be absolutely ironclad.

Maybe you could tell me a little bit about who your customers are and who are the end customers.

So tell me exactly who you serve directly and who do they serve.

Yeah, so we typically serve large wealth management institutions.

And so examples of that are LPL Financial, which is a $2 trillion broker dealer, and Hightower Advisors, which is a $300 billion RIA aggregator.

And so we serve a number of different functions within them, ranging from their trading team and their traders to their asset management teams that manage portfolios internally for their for their end customers.

But at the end of the day, their end customers are individuals who are looking to have

stable income, predictable returns,

oftentimes retirees who are in the deaccumulation phase of their investment lifecycle and are just in a position where they want to be able to rely on predictable returns and predictable income from their portfolio, which obviously naturally lends itself to fixed income.

What would you like our listeners to know about you, about Moment, or anything else you'd like to share?

So, the number one thing I would love for people to know is that we are hiring, and we are looking for incredible people to join us across pretty much every function, ranging from obviously engineering to product to design to our forward-deployed implementation teams to finance and marketing and sales.

And so,

we are just, as I said before, we are just so bought into the notion that small teams of incredible people can just massively outperform huge teams of mediocre people.

And we are looking for more incredible people to join our team today.

I think the caliber of our team is the number one thing that myself and my co-founders are most proud of here.

And we are really, really looking to find more people like the people we've brought on today to join us on the next 10 years of our journey.

Well, I'm going to keep my job, but I'm very sold on Moment.

And I would love any opportunity to invest in the company.

I think what you guys are doing, I think investors are probably underpricing the size of your market, frankly.

And I'm really excited about what you guys are doing and

look forward to continuing the conversation live.

I really appreciate it.

Thanks for having me.

Thanks for listening to my conversation.

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