THE NEW YORK FOREIGN PRESS CENTER, NEW YORK (Virtual)
MODERATOR: Good afternoon and welcome to today’s New York Foreign Press Center briefing. My name is Daphne Stavropoulos and I’m today’s moderator.
It’s a pleasure to introduce our speakers from Interactive Brokers. Steve Sanders is the executive vice president of marketing and product development, and Steve Sosnick is the chief strategist at international broker – excuse me, Interactive Brokers. We are also joined by Kat Ewert, who is the director of publication relations, and you can direct any questions following today’s briefing to her. I will share her email address after with all of you.
This briefing is on the record and as part of our annual Wall Street series, providing our members with access to the latest from financial experts and analysts. Over the next few weeks, briefers will continue to explore various aspects of the U.S. and global economies.
Today our speakers from Interactive Brokers will discuss the growing interest in trading around the world and market volatility and what it means for investors. Mr. Sosnick will also share his outlook for cryptocurrencies. This briefing is on the record and the views expressed – excuse me – expressed by briefers not affiliated with the Department of State or the U.S. Government are their own and don’t necessarily reflect the views of the U.S. Department of State or Government.
If you’ve not had the opportunity to do so, please ensure your full name and your media outlet appear on your screen. You can do this by clicking the blue button associated with your profile. Following our speakers’ remarks, I’ll open the floor for questions. And if you have a question, go to the participant field and raise your virtual hand and wait for me to call on you. When called on, please enable both your audio and your video and identify yourself by full name and outlet. And with that, let me turn the floor over to Mr. Sanders. Thank you and welcome.
MR SANDERS: Thank you, Daphne. Thank you very much. Kat, if we can throw up some of the slides. Oh, I think it disappeared. All right. Well, I’ll start talking and hopefully we can get the slides back up.
So we are really one of the truly global financial organizations. We have clients in over 200 countries and territories around the world, and in fact, 80 percent of our new clients come from outside the U.S. The reason being for this is that we got our start as an options market maker back in 1979. We had floor operations first in the U.S. trading options, and then we expanded that all around the world, so we had options market-making operations in the U.S. and Canada and Europe and Asia. And trading these options all around the world, we established local offices everywhere.
And in about 1993, we made the decision that we would take our technology that we developed for our options market making and we would offer it out to likeminded clients and the public. At the time, this was former floor traders or people who were upstairs that might have an interest in trading stocks and options, but maybe geographically they were not located in a big city with a trading floor.
So our first slide here shows our 2021 numbers. We have over 10 billion in equity capital, close to – and this is grown, but we have well over 1.7 million accounts and client equity well above 350 billion, and daily average revenue trades of over 2 million. And you can see the distribution here. Although at first we were very U.S.-focused – as I said, 80 percent of our accounts are now coming from outside the U.S., but you can see our current breakdown here, which is pretty well represented around the world. So basically over the years, we’ve really been targeting professionals and active traders, sophisticated investors, and institutions all around the world.
So Daphne, is it best to take questions as I go or we’ll do this at the end?
MODERATOR: I think if we could do opening remarks at the top, and then we can sort of transition to a Q&A period.
MR SANDERS: Okay. Good, good, good. Okay. So what is the major reason why we’re able to sign up clients all around the world? It’s because of the technology that we’ve developed, and specifically the universal account. So what does the universal account do? What it does is it allows you to deposit in a myriad of different currencies, whatever your local currency is – pounds, Hong Kong dollars, Canadian dollars – you can deposit in that currency, and then you’re able to trade stock options, futures, forex bonds, and funds, and now crypto around the world.
So let’s say you are a client in Hong Kong. You can deposit Hong Kong dollars. And let’s say you were interested in trading Google on a U.S. exchange. You can do this in one of two ways. You could either convert those Hong Kong dollars to U.S. dollars at the best possible interbank rate – and we have 17 different banks quoting in there, and we give best top of book, so the conversion is always the best – and you can convert that to U.S. dollars, buy the Google stock, hopefully watch it appreciate, sell the Google stock, and then convert your currency back into Hong Kong dollars. Or alternatively, you could not buy the U.S. currency, and you can use your Hong Kong dollars as collateral, buy the Google stock by buying on margin and taking out a loan in U.S. dollars, and doing it that way. And you have the choice. It all depends on whether you want to take the currency risk or not. You can go either way, okay.
But the key here is that you deposit in one currency, which we call the base currency, and then you can convert it to any of our other currencies. So you can see here that we’re represented in 135 market centers around the world, in 33 countries, and we support 23 currencies. And as I said, anyone who wants to trade stock options, futures, forex, bonds, funds, or crypto can do so from a single screen, and they don’t need to open up separate accounts. So that is really the key to our success of why we’ve been such a big player in the worldwide brokerage space. I don’t know of another broker that really makes it as easy. And as I said, the sweet spot of our growth has been outside of the U.S. over the last few years. So it’s been very good for us.
So that’s really what I have to share in terms of the broker. And I’ll – we can open it up to questions later, and I’ll turn it over to Steve Sosnick who can talk a little bit about the markets. Steve —
MR SOSNICK: Thank you, Steve. And thank you to our hosts at the State Department. Thank you to the – and I’ve never thought I’d say this without winning a Golden Globe – thank you to the foreign press. It’s a pleasure to be addressing all of you.
We’re going to talk a little bit today about volatility and how to affects markets and some other stuff. So I’m going – we brought up this slide, and volatility – I come at it, because I – Steve mentioned how the firm began as an options trading firm. That’s what I did. I ran a large part of our options market making business from 1995 till we exited the bulk of the proprietary trading business a few years ago.
I morphed over to being the firm’s strategist kind of by accident. Somewhere along the line I was invited to write guest columns for some magazines, and I was allowed to do it, and that became approval to talk to the press, and along the way added a title, and then that became my fulltime job, was acting in a strategic capacity. And now I publish on our website daily, Traders Insight, that you can see, or basically I’m happy to talk to people when inquiries come in, which I hope we’ll do as a follow-up.
So I always – I approach volatility as an option trader. And volatility is – it’s a mathematical construct. It’s really just how much does a given item move over a period of time. But people don’t really think of it is this way, and this is kind of the little joke that I’m telling in the slide that we have up, is people don’t mind when markets go up. That’s kind of what they’re supposed to do, right? So when markets – so if you look at this chart here, we had two days where the markets had substantial rises. It’s just from a couple weeks ago; there’s nothing meaningful about the days particularly. But we had a couple days in a row where markets rose dramatically and nobody really said anything. That’s fine. That’s what they’re supposed to do. That’s – nobody’s really complaining about – today’s move higher. On the other hand, as soon as markets go down people worry about volatility.
And so as an option trader, I’ve always approached it a bit more I’m going to say agnostically. And while I mention it’s a mathematical construct, there’s a reason for it, and volatility reflects uncertainty. Markets are always seeking an equilibrium – all markets – are seeking an equilibrium about how to value instruments, and in this case financial instruments, as new information arrives. And new information is arriving constantly. If everyone agreed on the prices that everything was worth, then prices wouldn’t move. We would have this perfect consensus and markets would just sit there. But obviously that’s not the way things work. And of course, the less agreement there is about how we value things, the more volatile they get.
And so that is why we see volatility. It’s really reflecting uncertainty. And that’s why a lot of times you’ll hear the VIX index, the CBOE Volatility Index, referred to as the fear gauge in the market. And it’s not a fear gauge. It’s not constructed that way. I don’t – I won’t bore you with the mathematics behind it, but basically when volatility increases, it’s reflected in the VIX. I see that being – volatility being reflected in an inability for the market to reach a stable consensus on prices. It becomes more difficult. That tends to happen when markets are more fearful; that’s why we see volatility moving that way.
One of the things we’ve kind of gotten a bit used to here is the Fed, through all their activities, has really suppressed volatility. And that’s because they’ve been putting money into the markets through quantitative easing and zero interest rates. Money has just been flowing in. It also has been flowing in as a result of fiscal stimulus, the stimulus checks and other stimulative measures. All that money needs to find a home. It’s not finding a home in savings accounts, it’s not finding a home in mattresses. Those don’t earn anything. So they’re going into riskier assets, such as stocks, bonds, cryptos, et cetera.
The problem is this onrush of money has really impeded the price discovery function of the market. Remember going back there, the market’s always trying to find the right price for things. Well, if there’s just this wave of money, this high tide coming in, it really makes it hard to discover what the right prices are. And many of you probably heard this term, the “Fed put.” And that is the notion that if things get a little hairy in the markets, the Fed will come in and add liquidity and do their best to stabilize it.
If you ask many people where they think it is, they would tell you, well, it’s down 5 percent, down 10 percent. It was actually almost down – many people were thinking it was down 2 percent, because every dip was met so quickly by so much money. But the Fed put – my argument is it struck somewhere like 20 or 25 percent below the market, Think about March 2020, what it took for the Fed to really step in and stabilize markets. And so the Fed has been constantly putting in money, but it’s really changed the level of price discovery, and it’s changed people’s notion of how far markets can decline in the meantime.
That’s why my number one call is for – for 2022 is that expect more volatility. What we’re seeing now is really what to expect, because we’re – because the Fed is changing its tone.
Because think about it now. The Fed is telling us they’re going to be raising rates. The debate is how many times this year. The debate is how much is – how much are they going to do in March at the next meeting? Might they do something sooner? I doubt it. Might they do 50 basis points? Maybe. I think right now the Fed governors are doing their own price discovery by putting out different scenarios and seeing how the market reacts.
But what we can expect when the Fed stops adding liquidity, then we – then this price discovery becomes more difficult, because you don’t have this wave of money coming in. And also market liquidity shrinks, and that’s an important feature. As someone who provided liquidity as a market-maker for many years, we knew how much capital we were providing, how tight our spreads were, and how much we were willing to bid for at any given price or offer at any given price. When things are volatile, that liquidity shrinks. It’s sort of a self-fulfilling feedback loop in some way: As price discovery becomes more difficult, liquidity shrinks; as liquidity shrinks, it becomes more volatile: volatility is the difficulty of price discovery, and here we go.
And to me, there’s a very scary little feature out there. And that is the Fed hasn’t actually done anything yet. They really haven’t tapered. We ask everybody, oh, the Fed has been tapering. But they really haven’t. They haven’t raised rates yet. They’ve talked about it. We’ve had a lot of talk in the media about how much they might raise rates and when, but they haven’t actually done so.
And Kat, if you could pull up the next chart, you’ll notice here this is a chart of securities held in the Fed’s balance sheet. And you’ll see it rises pretty much inexorably throughout the past couple of years. We all know that; the Fed has been buying assets over that period of time. That’s the blue line on top.
So we smoothed it out using moving averages. Common financial tactic. And the – sort of the middle line there is the four-week moving average – more or less a month. The Fed keeps talking about how much – how many bonds they buy in a month. And if they were slowing down their bond buying, you would see the moving average decline. Because in theory, they were buying 120 billion, then they were buying 105 billion, then they were buying 90 billion, et cetera, et cetera.
Well, you’ll see the pace hasn’t slowed. The line at the bottom is the 10-week moving average, which is slower to react – two and a half months, basically. And so if the Fed were tapering, you’d expect to see – you’d expect to see the top line start to flatten out more dramatically than it has. It’s been flattening out lately, but it still hasn’t broken through its moving average, and you would expect to see that monthly moving average start to decline relative to the longer-term moving average, and we haven’t in a meaningful way.
As of last Wednesday when the numbers were last available, which I believe was February 9th, I ran how much that number had increased since the – call it the month prior, January 5th, and that was 116 billion. So that’s not much of a taper, which raises the very important question: What happens when they do taper? This is – this could be very problematic. Ten-year yields are around 2 percent with inflation running about 7 percent. Today’s CPI number was almost – PPI number, rather, was almost 10 percent.
So a couple of things are in play here. Number one, the market is telling you that they think inflation is indeed transitory, that we can’t persist at these levels. There’s something to be said for that. I think that a lot of what we’re seeing is indeed somewhat temporary and it is indeed – if the Fed acts, it’s likely to back off. But is it going to back off all the way back to 2 percent? I think that we still are seeing the distortive effects of Fed bond buying.
And so moving that over to cryptos, because I did mention that we would talk about it, I think cryptocurrency has been the beneficiary of both a generational shift and the easy money policies. The early adopters in crypto are the younger generation. They should be. It’s a technological change; it’s a different way of thinking. Younger people are more adept at getting their mind around that sort of stuff. They’re bigger risk takers, among other things.
But I think a lot of why we see the cryptocurrency adoption was because money was so easy. People were literally getting money into their bank accounts. Well, that’s the kind of money you take risk with, and what better sort of asset to put it in if you’re a young person who’s getting a stimulus check, who’s getting a moratorium on their student loans – both of which I’m not complaining about, mind you – this is not a – that’s not a negative. But I’m just – how they affect economic – this is strictly how they affected economic behavior.
In an era of low interest rates and rising asset prices, it behooves you to take risk, and they did. And that’s where cryptos went. And I do see that that the – as we start to transition into an interest rate regime that is less about negative interest rates where volatility increases, I think that puts some headwinds on crypto. And I’ve got to say, having watched the Super Bowl on Sunday, the number of crypto ads – and I published something about this yesterday. The number and the type of crypto ads were very reminiscent of the ads that we saw in January 2020, right in the height of the internet bubble. And I actually looked back on that, and 10 out of the 14 companies that advertised in the January 2020 Super Bowl were defunct within a couple of years. The other – there are four survivors.
But I’m not going to say that crypto is going to suffer that demise. I think that crypto, bitcoin very specifically, was – gave us the blockchain. And I think the blockchain is the part that’s analogous to the internet. And I think, but bear in mind that a lot of the companies that we think of internet leaders were either – came about after the internet bubble – think Facebook, Meta, whatever you want to call it, Alphabet/Google, Netflix, these are all post-bubble companies; or they were pre-bubble companies, such as Apple and Microsoft, that learned to adapt.
So I think that there’s going to be some shaking out for crypto. I can’t – and I think as a result, I would certainly expect, if I’m expecting a volatile equity market and bond market, I think it’s quite fair to expect something similar in crypto.
And that’s the end of my prepared remarks. And I guess at this point, Daphne, if you could moderate, we’ll be happy to take the questions.
MODERATOR: Sure, absolutely. Thank you so much for those opening remarks. We’re going to move on to our Q&A session. Let me open the floor for questions. If you have a question, please raise your virtual hand and wait for me to call on you, and you’re also welcome to send me a message in the chat and I can read it out loud.
The first question is going to go to Kaori. Go ahead, Kaori, and introduce yourself by your full name and your outlet. Thanks.
QUESTION: Hi, I’m Kaori Yoshida from Nikkei. Thank you so much for doing this briefing. You can hear me, right?
MR SANDERS: Yes.
MR SOSNICK: Yes.
QUESTION: Okay. So I was wondering if I could ask about the movements we’ve seen from the retail investors. Just over a year ago we saw the whole GameStop situation. I was wondering if I could ask: How has the situation changed? Are you seeing retail investors kind of buying the dip, or all of those other trends that retail investors were really interested in?
And as you mentioned in your remarks, you’re expecting a lot of volatility in the markets this year. How do you think retail investors are going to react?
MR SANDERS: So Steve, do you want to take —
MR SOSNICK: I’ll let you answer the first part about how – about what we’re seeing in terms of our trends, and then I’ll take – pick it up from there.
MR SANDERS: Okay. So our broker is traditionally catered to the more self-directed, educated type of client, not somebody jumping in just to – because they heard from a friend this works or that works. So we tend to have more sophisticated traders and active investors that really know what they are doing. So we haven’t really seen in the same way that maybe some of the other retail brokers have seen people just jumping in and seeing if they can make money, and then all of a sudden when the markets collapse they retire from trading. Our philosophy has never been to try to attract the crash-and-burn, but rather people that are willing to educate themselves. And one of the things we do, we have what we call the Interactive Brokers Campus, which includes our Traders’ Academy. We try to provide a lot of education so people can learn about the markets before they dive in and do things. So for us, it hasn’t been, I would say, as – we didn’t see the radical moves like the others in the same way. It’s just been pretty steady.
So Steve, do you want to comment further?
MR SOSNICK: Yeah. Well, first, thank you for your question. By the way, I read Nikkei because especially – I’m the parent of an export – of an expat in Japan, so I’m – I read it every day hoping to see when I can go back and visit.
But anyway, I think what you referred to, what we’ve seen are very – really extraordinary times pretty much without precedent. I think the closest precedent – and I didn’t – I brought it up in my remarks and I don’t mean to harp on it – was sort of the dot-com era of 20 – of the 2000s. At that point, there were a lot of parallels. We had this great new technology, the internet, which it did live up to the hype, as we’re now utilizing it for a business meeting. But at the time, there were all sorts of excitement placed upon anything internet-related. I remember it was a big thing – a company would have an internet site and the stock would go up, and I think you started to see some of that craziness with crypto.
We also, at that point, had this huge democratization of investing. At that point, it was commissions coming way, way down thanks to brokers like ourselves and other internet-based brokers. And so you had this huge democratization of investing, and you had very easy money from the fed and other central banks because they were very afraid of the Y2K crisis.
Fast forward ahead, we had a huge democratization in access to markets because trading became – trading became free. As a parenthesis, by the way, although we offer commission-free trading, the vast majority of our customers don’t take – don’t use that. They prefer to get price improvement using our algorithms and find that that saves them more money than the free commissions, which we could have a whole other discussion about. But I just wanted to throw that in there because that tells you a bit of a difference in the way that our customers are thinking.
But going back to the democratization, fractional shares made it very easy for people to trade. The options markets became much more accessible. And at the same time, you had this wave of money, this tsunami of money, and so it was a very unique situation. So I think a lot of practices that normally required a bit more caution went out the window. Traders have been around for a while, and I’ve written about this. The phrase was always “Buy the dips and sell the rips.” Well, there weren’t – you didn’t sell in the last two years, over the last two years until a few months ago. Because why? It was just going to go up anyway. There was more money. So it was just – so the – and the – what I like to call the half-life of the dips got shorter and shorter. The amount that they would go down kept decreasing. The length of time that the dips persisted decreased.
These are not normal behaviors. These are behaviors – they’re logical behaviors. I’m not calling anybody illogical, but they’re the type of behaviors that work really well when you have very easy money and constantly flowing money. People had money, and particularly in 2020 people had a lot of – people had all this found money and nothing to spend it on. Most – yes, many people were injured financially, but most people kept their jobs and most people didn’t have anything to spend their money on. And so – and they gathered in – they used social media as a gathering place – Reddit, for example.
And so I think we’re going to see some unwinding of this behavior. I’m not – again, I’m not saying it’s negative. It’s unusual, and I think as we get more back to normal, both financially and socially, I think the investment climate also becomes more normal.
I hope that answered your question.
QUESTION: Yes, thank you. So could – I get the sense that you’re kind of predicting that this year is going to be a year of normalization, just kind of back to how things were pre-pandemic times? Did I get that right?
MR SOSNICK: Yes, socially. But in terms of a market, the problem is it’s a little bit of a – it’s a bit of a hangover. We’ve had one heck of a party for the last two years, and I think that that return to normalization is going to be a little difficult.
One of the things I always think about, my kids would go to sleepaway camp and they had a great time. And – but they spent several weeks just around other boys their age, and you can imagine when they came back, it required a couple of weeks to get them to just act like regular people again, not like boys who only were among boys without – and that’s kind of my mentality here is that it will take a certain amount of readjustment. And anytime we readjust, there is uncertainty and volatility that results.
QUESTION: Thank you.
MR SOSNICK: You’re welcome.
MODERATOR: Thank you so much. If I don’t see any hands raised, I have a question that just came in from Yan Jin of China. And I think that Steve Sosnick, you touched on this, but I’m going to read it and see if there is anything else you wanted to add. Her question is: “Many platforms promote cryptocurrencies while many governments are against cryptocurrencies. How do you deal with the conflicts of the outlook for cryptocurrencies?”
MR SANDERS: Probably better for – that one’s probably better for me. So we have a registration system that permission is based on country. So wherever we’re not allowed to trade something, obviously we’re not going to allow it. So crypto is probably one of the only products I mentioned that isn’t universally available around the world. So far it’s only in the U.S. and maybe one or two other locations. So the answer is until we get comfortable with the local regulatory regime and we make sure that we can offer it in a particular country, it’s not available to the client.
MR SOSNICK: And if we want to think more broadly, your question touches upon the differing – almost the lack of regulatory regime in crypto. And obviously, it varies wildly from country to country. And so I suspect as more participants can be added, well obviously that increases the demand in theory, and that helps. But I also think that a lot of practices that are going on now exist because of the lack of regulation, and so there’s really a lot of cross currents.
My expertise is not in this type of arena, and your question raises a multitude of thoughts that I can’t – in general, I think – I think in general the industry would be better off with a bit more sensible regulation, if you harmonize the regulations something closer to banking, figure out how this looks like banking, figure out how this looks like investments, and harmonize those – the regulations more in accordance with whatever countryies’ banking and investment regulations there are. Until then, that’s another one of these things that is a volatility-inducing event, because there’s no consensus on this.
MR SANDERS: I just want to add one thing to Steve’s comments. What makes it so difficult for us as a company, because we’re in so many countries, there is just so much – there’s a tremendous amount of regulatory research we need to do, because there’s just no global regulatory body that’s ever going to come together and issue the same rules. We really have to go country by country.
MODERATOR: Absolutely. It makes a lot of sense. We have time for one or two more questions if you want to send me questions in the chat or raise your virtual hands.
MR SOSNICK: I can’t believe I was that clear.
MODERATOR: You were. But we also can have our journalists colleagues who joined us today and on the livestream follow up with Kat Ewert. And I will be sending her information via email shortly after this briefing for any direct follow-up.
MR SOSNICK: If I may Daphne, we welcome anyone on the call – we actually do send out – we have a daily newsletter that we send out overall that anyone can sign up for. We also have a weekly – more or less weekly newsletter that we send out specifically to journalists. And we don’t just randomly send it out, but we would certainly welcome anybody on the call to reach out to my colleague Kat and get on the mailing list, because – if you’re at all interested, because we love communicating with journalists as much as we can, and that’s one of the ways we do so.
MR SANDERS: And our new podcast series, Steve, which deals with industry leaders within the trading industry that Steve is very much a part of.
MR SOSNICK: Indeed, yes, we have – and we do all that —
MR SANDERS: You can find all that on our website under education. As I said, education is a very important part of what we do here, and the newsletter and the courses and the podcast can all be found from our website under education.
MODERATOR: Perfect. Well, thank you so much. I want to be respectful of your time today. You’ve been very generous with it.
Seeing that there are no more questions, I think that concludes today’s briefing. Thank you Steve Sosnick, Steve Sanders, for joining us today. Today’s briefing was on the record, and please stay tuned for invitations for upcoming briefings in this series as well. Thank you and have a good day.