Brett Harrison — FTX US former president speaks out

**Brett Harrison** (0:00)
You are probably going to be fired for this letter that you wrote. Sam is going to destroy your professional reputation. Like, where do you think you're going to be able to work after Ftx? It was threatening me.
When I knew Sam when he was 21, 22 years old, he was like a happy, healthy looking kid. When I got to Ftx, I saw someone who was very different than that person I remember. And it felt like he was spending virtually no time helping the company move forward. It was so much about image and brand and PR.
Media was primed for the archetype that was Sam. Doesn't matter how little time he spent with the company, doesn't matter how he treated employees internally. Architect, it makes it really easy to access kind of all corners of the digital asset ecosystem.

**Dwarkesh Patel** (0:46)
Okay, today I have the pleasure of speaking with Brett Harrison, who is now the founder of Architect, which provides traders with infrastructure for accessing digital markets.
Before that, he was the president of Ftx Us. And before that, he was the head of ETF technology at Citadel. And he has a large amount of experience in leadership positions in finance and tech. So this is going to be a very interesting conversation. Thanks for coming on the Lunar Society, Brett.

**Brett Harrison** (1:15)
Yeah, thanks for coming out to Chicago.

**Dwarkesh Patel** (1:17)
Yeah, my pleasure, my pleasure.
Is the growth of ETFs a good thing for the health of markets? There's one view that as there's more passive investing, you're kind of diluting the power of smart money. And in fact, what these active investors are doing with their fees is subsidizing the price discovery that makes markets efficient. And with passive investing, you're sort of rewriting off of that. You were head of ETF technology at Citadel. So you're the perfect person to ask this.
Is it bad that there's so much passive investing?

**Brett Harrison** (1:49)
I think on net it's good. I think that most investors in the market shouldn't be trying to pick individual stock names.
And the best thing people can do is invest in sort of diversified instruments. And it is far, far, far less expensive to invest in like indices now than it ever was in history because of the advent of ETFs.

**Dwarkesh Patel** (2:15)
Yeah, so maybe it's good for individual investors to put their money in passive investments. But what about like the health of the market as a whole? Is it hampered by how much money goes into passive investments?

**Brett Harrison** (2:28)
It's hard to be able to tell what it would look like if there was less money in passive investment now.
I do think one of the potential downsides is ending up creating extra correlated activity between instruments purely by virtue of them being included in index products. So when Tesla gets added to the S&P 500, Tesla doesn't suddenly become a different company whose market value is fundamentally changing. But yet it's going to start moving very differently in terms of its beta correlation between other instruments in S&P 500 purely as a function of all the passive investing that moves these instruments in the same direction. So that's the sense in which I think it could be detrimental.

**Dwarkesh Patel** (3:13)
Naively, you would assume that like efficient market hypothesis would say that if people know that Tesla stock price would irrationally climb when it's included in the S&P 500, then people would short it and then there should be no impact from this irrelevant information. Why isn't that the case?

**Brett Harrison** (3:29)
It probably mostly is.
I think that sometimes there can be liquidity differences that cause at least temporary dislocations in stocks. I mean, the simplest example is like you have an ADR, an American depository receipt, that's sort of expungible for some underlying foreign stock.
And these two things should be like almost the same value at all times, like net of currency conversion and conversion ratios. But if one of the markets is highly illiquid or difficult to access, then there's going to be dislocations in price. And that's like the job of like the Jane Street of the world to kind of arbitrage away the price over time. And so long run, you wouldn't expect these things to be dislocated for that long. So I'm sure there are people who are understanding like the fundamentals of individual names in S&P 500 And when there's like American news and the entire S&P falls, they are, you know, maybe buying S&P and selling individual names and expecting that relative value spread to come in over time.

**Dwarkesh Patel** (4:29)