Ep70 - Interview With Steve Quirk of Robinhood

So, I've been in my career just for so long trying to just dispel this notion that retail buys the top and sells the bottom. And I find that, you know, I mean, it's largely driven by people who want to manage their money, but I find the easiest way to dispel that is just show them data. And so, what we do is we created an index that looks at the top 100 stocks at Robinhood, and it's very democratic. So, if I have $20 million or $200, if 10% of my portfolio is Apple, that's an equal weighting. And we take those 100 stocks on a monthly basis, and then we overlay them on the Nasdaq and on the S&P. And we just show it and say we give a little color, and we just say, "Here, here's what they're rolling into. This is what they're doing. And here's how they're performing against the broad-based indices." So, it's aggregate, it's aggregated, so they can just look at in aggregate, how is Robinhood doing? And for two of the last 3 years, they outperformed the market.

Yeah, thank you. Oh, thanks for having me. That's a lot of billing. I got to... We have to make this an amazing segment, otherwise I won't live up to it.

Yeah, yeah, yeah. We've had some fun together through the years, I think, huh?

Mhm. I got started in, well, 1987 and I actually didn't start at the CBOE. I spent most of my career at the CBOE, but I started at the CME and I started in the S&P option pit. Not the S&P futures pit, which was much bigger, but it's a little satellite pit that was right next to the S&P futures pit. And I was there for probably, I don't know, a year and a half or two years and then moved to the CBOE. And spent, you know, many years there, almost 20 years on the trading floor in various capacities. But yeah, I mean, I started the week of the crash and really the week after because I don't know, people don't remember that one of the consequences of the crash was they shortened the hours to 9:30 to 1:30. And they, because there was just so much uncertainty. People didn't understand clearing firms, brokerage firms, individual market makers, market making firms, they were all very, very unsettled about what was happening and nobody knew who was going to survive, who wasn't going to survive. It was quite, quite an interesting time. The bad news is, you know, of course, there was people got harmed, but the good news was, you know, some of the things that came out of it, you know, the whole concept of skew and just the way, you know, limits were implemented and some of the other things. It feels like every episode drives some positive developments to ensure that that episode doesn't repeat itself. However, some variation of that episode always seems to come afterwards.

It does, exactly. Well said.

It's an interesting question because it depends on, you know, the answer to it is different depending upon, you know, my career at TD Ameritrade and Schwab, the average age of the customer was like 60. So, what they, their behavior's like, what I always say is there's a lot more similarities than differences. However, the differences are kind of important and one of the differences that exists with the Robinhood customer base, which average age 36, is they're in the early stages of their investing career and they're still accumulating wealth. So, they have a more aggressive stance. They should because they know they've got 30 to 40 years of investing left. And so, when there are opportunities and dips, they're aggressive. And I think what often gets reported is, well, they don't know, they haven't lived through some of these prolonged downturns in the market. That's true, but I don't know that they'd change their behavior even if they had lived through them because, again, I think they're... I just read an article a couple days ago where they said if you had been investing since, I can't remember the time blind, it's like 1970. If you had been continually investing on the best days, you know, when the best drops happen, you would have had X return. If you were continually investing at the worst days, you would have had an amazing return. Not as good as the best, of course. But if you had sat and tried to market time and etc. etc., you would have woefully underperformed. And that doesn't mean that people don't still like to take some portion of their portfolio and trade the active names and generate income and do all the things that we'll talk about. It just means for a lot of people, they have a core portfolio that they kind of, for lack of better terms, set it and forget it. For the most part. So, I think that what we see is exactly that. I think the other thing that's really fascinating is like retail customers now, across the board, have become savvy portfolio managers. So, they'll take an occasion like when the tariffs were first introduced, see really popular names drop 40-50%, dive in and then as they get some appreciation they'll roll out of them and roll into something that's underappreciated. And this is the behavior of portfolio managers which individuals are doing and I think that's largely due to the amount of information, education, and content available so that people have a good understanding of how to be effective in the market.

Well, if you think about the number of times, I like to say this because I think it's kind of funny to say. I mean, retail customers have bailed out the market a couple times now. They bailed it out during COVID, they bailed it out during the tariff, you know, they're bailing it out. And in times past they probably couldn't have done it because they weren't as big of a component in the market. Now, like Henry Schwartz has some presentations on volume. I don't know if you've ever seen them. They're amazing. Like the percentage of retail has gone up and I think there was a lot of conjecture that what happened around COVID would be a blip. It was just an acceleration and that growth continues. So, as they become a bigger force, they can move the market and that's kind of cool.

I think it's actually a little bit of all of the above. That is the one thing that I often, I have this conversation with a friend of yours as well, JJ. You know, the point that we always make to each other, especially at a young age, you got to put your money to work. Like you're not going to put it in a bank where you're earning a tenth of a percent. Like that is a recipe for disaster. Everybody knows that. So yeah, I can find funds and things that yield a little better, which is good, you know, in times where you're really uncomfortable, you should do that. If you're not comfortable, then you should do that. But in the long run, you know, people have money and they got to put it to work if they want to achieve the goals of buying a home or doing all the, sending kids to college and all the other things that come up. So I think that's a component of it. But I also think the education. I think people understand it. Now it's very easy to look back in history. It's very easy to see the power of compounding. It's very easy for people to understand these things and, you know, they can be on a more level playing field with the professionals, which is I think what every one of them strives to do.

I don't know that we know what percentage trade the wheel because sometimes you back into the wheel, you know what I mean? I mean, we have people that are aggressive put sellers. And I think they don't ever want to have to take that stock and create the wheel, but sometimes they do. But I love, I love talking to people about that strategy because I think it's just such a cool and effective strategy. And I remember when we used to do some, you and I have both taught, when we used to do some teachings on it. I remember the example that we used quite frequently was GE from the 2008-9 period where it got as low as, I'm going to be off of my numbers, like 570 or something like that. And it came from, you know, levels that were crazy. But the premiums and the volatility was so high in that individual name because it was moving. Like just using the wheel, in 9 months you had that stock for free. You'd sell puts for 50 cents, I mean, you'd sell the call for 50 cents and like you had that thing for free. And that's like a just an amazing example of when done effectively how powerful it is for that strategy. I'm sure you guys talk about it all the time so I don't, I don't think we need to talk about it. But the one thing I would say though because I know a lot of people who do use the strategy and the one thing that's kind of cool is they all have different variables that they plug in. I want X amount of premium, I want this distance, you know, from strike price, I want, you know, all the variables that are going to dictate what you're going to find attractive. But I also think there's another funny element to it which I found myself in my own career. There are instruments which people are comfortable with, stocks, ETFs, whatever that they do it with, and there are ones that aren't. And I've had that in my career. Like there are some names that I don't know what it is. I just can't get it right. So I mean like the stubborn kid from Wisconsin and me says I'm going to keep going here until I figure this out. But then one day I have this day of reckoning that says, "You know what? Why in the hell am I fighting this? Why don't I just stick with the ones that I keep making money in and keep doing that because I like it's probably a bad analogy but I have three kids. It's kind of like I understand this one does this a little better, this one does this a little better, and this one does this a little better. Let them all be their own." And let's capitalize on what they do well.

Well, I think it's both actually. I think there's both. And, you know, I mean the huge growth in short-dated options kind of illustrates both. Like I love the topic of short-dated options because, you know, the critics will be like, "Oh, the exchanges created these products so that they can just have more and more of these expirations daily and get more people to trade and all these things." And I'm like, "Exchanges created products that the customers want." Like if I'm a person who has 60% gains in Apple and I know exactly what day their earnings is, which is going, could or could not jeopardize that, but I don't want to take a taxable gain, I can protect it on a one-day basis. Like it's a good instrument for that. And it was designed with customers in mind. I think what gets lost in that conversation is, you know, they're like, "Oh, these are short-dated products. Like you should be holding things for X amount of period of time." I'm like, "Every single product, every single asset class has a shorter duration than it did 20 years ago." And part of the reason for that is these sectors come so fast and leave so fast. Like 2 years ago, we didn't even know what AI was, right? Now it's the hottest thing in the market and I'm not going to prognosticate that it won't be around in 5 years. It's going to be transformational, but I'm using it as an example of things like the average stock doesn't come into the Dow or S&P or Nasdaq and sit for 100 years the way they used to. So you have to be a lot more nimble with your investing. Otherwise, you're going to be stuck. And so I think, you know, the exchanges and market participants understand that and they try and create products and technology so that people can be successful.

Exactly. Yeah. Yeah. We had, I don't know, I'm sure you read the Journal, Gunjan. Yeah. She did a segment on short-dated options and she's like, it was really good and fun because she's not really an option trader. So, we got her set up with her account. The Journal funded her, you know, and the deal was I think they gave her 500 bucks. If she made money, it was going to a charity. If she lost money, well, well, it's a lesson learned. So, she played around with them and we kind of, she wanted to do it herself so we left her alone. We just helped her set it up the way she wanted to be set up. She ended up making money. She like, I think she like made like 1,800 bucks or something like that. I can't remember the article to say. And so, she donated it, of course. And her, she was on X and she, you know, was putting blurbs about it. And then, her mom like responds and says, "Keep doing it." And I said, "Always listen to your mother. Always listen to your mother." Yeah, it was a good example, but the conversation I had with her, which was really kind of fascinating, was it's kind of like speculating or gambling. And I'm like, I have a struggle with this. Like tell me when it's short enough that it's considered speculating or gambling. Like is it a week? Is it a month? Is it a year? Like I mean, we say long, everybody buy and hold. Oh my god, those people are amazing if they buy and hold. They have to buy and hold for 20 years, then they're cool. But if you buy and hold for a year, it's uncool. Like I just don't, I think people get to decide their own investment duration timeline. And for the people that are judging them, oh well. Like that's the one thing I love about like real passionate retail customers. They hear all the things people chirp about them and they're like, at the end of the day, they don't give a crap what people think. Especially if they're successful. I mean, you talk to them all the time. The successful ones, they have conviction. They're not going to be derailed because somebody is telling them they shouldn't be doing something some way.

Yeah. Yeah. I always laugh at the people who are like, "Well, you understand 80% of options expire worthless." I'm like, you're assuming people buy options. Like, I want an option to expire worthless if I'm selling it. Like, I don't know why we're using that as a data point as if everybody is losing money. It's the opposite.

No, I think they, I think with the tools that have been rolled out across brokerage, they get return on capital, return on investment, and they use it as a catalyst. That's one of the things that all the variables that we were talking about earlier, one of the things that people are very cognizant of. The problem, I think, becomes, you know, market conditions change. So even when we talk to people about how to invest, we're pretty adamant that if you have a successful plan, when you get punched in the mouth, stick with it. And be careful not to do too much moderating of that or changing of that. But there are times when, you know, market conditions become so different that, I mean, when the volatility spikes and seems like it lasts for about 30 seconds nowadays to 60, you don't need to put as much capital at risk to get the same return. So, like you should definitely adjust that plan. You know what I mean?

Yeah. Yeah. I think one of the things that's most interesting, and it's funny because it's not just at Robinhood, it happens broadly across the industry. In times like during the tariff tantrum and in times where things get quite volatile, we notice that customers have less conviction about individual names and more conviction about the market. And when I say the market, I'm using air quotes. Sorry, I know we're on audio. The market would mean broad-based ETFs. So, actually there's an increase in broad-based ETFs. And again, in talking to customers, essentially what they'll tell you is, I have more confidence that the market is going to bounce than an individual name is going to bounce because, you know, there's a lot of variables that are probably driving that volatility. And so, it's funny, as soon as you see that volatility sort of subside, and it, man, it happens quick now, quicker than in our day, your and my day, you see people gravitate back out of the ETFs and back into the single names. And that happens across the industry because you'll see it. You'll see ETF percentages go up. There's also some level of, I'm guessing, some level of protection there, too. You know what I mean? By institutions and individuals as I'm sure you're well aware, you know, the easiest way for them to get protection is just get broad protection.

I see a lot of people pile into something that they previously aren't in, which is, so, I don't know if I would call it crowding because I think these trades, like markets can support it. But a couple months ago, silver ETFs, silver, like that's never been at the top of our top 10, you know, with 27 and a half million people, we're doing 10 billion in notional and silver's at the top of the list. And then all of a sudden energy's at the top of the list and that's, listen, we traded across the board. You could trade silver on futures, you could trade it in ETFs, you could trade it in individual names. So, everything bubbles up pretty quickly. And to me, that's kind of fascinating to see.

I think the thing that we kind of lay out and we have an index we created. So, I've been in my career just for so long trying to just dispel this notion that retail buys the top and sells the bottom. And I find that, you know, I mean, it's largely driven by people who want to manage their money. But I find the easiest way to dispel that is just show them data. And so what we do is we created an index that looks at the top 100 stocks at Robinhood, and it's very democratic. So, if I have $20 million or $200, if 10% of my portfolio is Apple, that's an equal weighting. And we take those 100 stocks on a monthly basis, and then we overlay them on the Nasdaq and on the S&P. And we just show it and say we give a little color, and we just say here, here's what they're rolling into, this is what they're doing. And here's how they're performing against the broad-based indices. So, it's aggregate, it's aggregated, so they can just look at in aggregate, how is Robinhood doing? And for two of the last three years, they outperformed the market. Now, we're very open to sharing that, and we share it, and, you know, you'll have people on a certain network that everybody follows, look at it, say, "Oh, look at this month, they're down. They're down. Look at they're underperforming." I always point out, "Hey guys, these people aren't investing for a month. They're investing for a very long period of time. Are they going to have a month where they underperform? Sure. But let's look back, take a longer look, a longer view, which is what they're doing, and I think they're doing quite well. So, I think that's really cool and powerful, and a powerful way to kind of point out that they are having success."

I think it's different. I think it actually, I think there's a separation between people who have more experience and people have less experience. What I mean by that is I think people have more experience fare better in the very volatile times, and people who have less experience don't fare as well as the people who have as much more experience. I actually attribute that to their experiences. Like what we just talked about and particularly lately, how quickly the VIX or any volatile instrument just goes like this. It's really quick. So, you know, you have to capitalize on it in a pretty quick manner in order to take advantage of the elevated premiums. You know, I think the people who haven't had as much experience, to them it's more of a frightening environment and that's okay. So they kind of step out, which is perfectly fine until they learn it. What we strive to do is through, we're rolling out social tools, is help the people who have more experience share wisdom with the ones who have less experience because people are very aspirational and when they're trading, they want to get to the next level. They want to get to the next level. They want to have a better understanding, particularly on options because there's so much to learn. Giving them avenues to do that to learn from people who have more experience, I think is really beneficial. You and I have been doing this a hell of a long time. I will tell you in periods, some periods like even like 2008 and 9, I was like, I'm spooked a little bit here, man. I remember when companies started going out of business, I'm like, "Whoa, whoa, whoa. I've seen movies. I don't know if I've seen this one before."

Mhm. I think the people that sort of, we talked about a little bit earlier, kind of stick with the plan, are diligent in continuing to work and learn. You know, the curious ones. There was, there's a thing we did and this is all the way back to our TD Ameritrade days, we actually did this study on people who were having success in the market. They have a level of optimism that's far above people who weren't being as successful or people who would leave the market. And I think that natural curiosity and natural optimism leads them to either instruments or strategies or areas of the market where there's an opportunity. And often times that's, you know, those opportunities are where they can make some money. So, if I just think about that anecdotally, you know, in all my interactions with retail customers, it totally drives. Totally drives. When you talk to people who are so passionate about what they're doing, like even if they hit a fork in the road and have an unsuccessful period of investing, they navigate it and get past it. And so I think that's actually a really interesting finding for us.

Well, I think one of the things that we've just started rolling out is a social tool in it. Like the problem with social, having dabbled around in social both personally for, you know, investments and looking for news and what's moving the market and on built it for brokerage firms is there's a lot of content in there that isn't about the market and there's a lot of content in there that really isn't pertinent to what people are looking for. So, the way we built it was if you have a Robinhood account and you actually are making this trade and you are willing to share it or share your portfolio or whatever you're doing, then you knock yourself out. You're welcome to do it. If you're just in there bantering, that's okay as well, but you're not bantering about you made 1,296% on an investment because that's not happening. Like we're not, this is meant to not be a political thing. It's not meant to be, it's meant to be market based, which I think people want. And we also don't want to be a pump and dump message board. So, we're preventing those things, but it's a great avenue. Think about it. We have 27 and a half million customers and half of them are brand new to the market. So, for them, all they want to do is soak up knowledge from people who have been doing it longer. And, you know, a lot of people really find it fulfilling to share that. You know, I mean the whole idea that it's a zero-sum, like I can't make money if you're making money, it doesn't exist in the market. So, you can easily share your wisdom with others and they can generate revenue and returns off it as well.

I think people learn really quickly. I think it used to be one of the things that used to dog people when they first got into the market. Oh my god, I love Nvidia more than anything. I'm putting 98.2% of my portfolio in that. And look, it can work, but we all know it can not work too. And so, you know, appropriately sizing the investments and what you're doing in their portfolio is like the core of the things that we try to share with customers as ways, like what we always try to tell people is, you know, we're a self-directed brokerage firm. We don't tell, we don't give people advice. We don't tell them what the market's going to do. We don't prognosticate. We just give them the vehicle, we give them the manual, and we give them as much information and as many maps as we can so that they can find whatever they need. But what we also tell them is, "Listen, we're kind of like pilots that are flying ahead of you. We know where all the turbulence are. I'm not going to guarantee you you're not going to hit some turbulence, but we're pretty sure that we've mapped most of them out. And here, here's a map to tell you where they all are. I would encourage you to use it and you'll avoid a lot of those turbulence hopefully and that'll be a much smoother destination."

Mhm. Yeah. Oh, yeah. Well, I mean, yeah, that's product selection is really cool. We go all the way back to the exchange with that too. Like I mean, when the exchanges come out with new products, we generally are collaborating with them on those products and just giving them feedback on how are your customers going to react to this and often times our feedback is it's just too big. It's just too big of a product for our customers. Now, it might not be too big for a Schwab customer. Their account's a lot bigger than an average Robinhood customer, but we give them that feedback and I think that's kind of super helpful for them because the whole concept of minis and micros at the CME, that came from us. They're about to roll out single stock futures. We've given them the same feedback. They're too big. Too big. Too big of a product. They're rolling out 50 of them. They'll get traction, but I think the smaller version will get more traction.

Long-term wealth? Look, I love the wheel. I use the wheel. I love it. And it's a strategy. The only thing with the wheel that I find personally is it does take some time. Like, you know what I mean? To learn it. And once you learn it, it becomes really easy to implement. But, I just think you have to sort of commit to taking the time to learn how to do it correctly and then to be on it. You know, when appropriate. I think a combination of that with, again, a core portfolio and then other, look, I have a risk profile that's probably different than some people. I'm not afraid of naked options. And I wouldn't, I don't tell people to do what I do. But, I will, when the market has a big sell-off, I will sell some puts and when it has a big rally back, I'll sell some calls and I love that position.

I don't know if they should stay away because it's a starting point for most option traders, but I wouldn't have my entire strategy be based on buying well out of the money calls. And it's appealing to people when they first get started because they see the risk reward. So, they can see that they can make a very lot of money with a very small investment, but what they aren't looking at is the probability of that happening, which is very low. And so, I think it's fine as a strategy if it's a component of your strategy. If it is your strategy, I just don't think in the long run it's a very difficult strategy to be successful at if that's all you're doing. So, I think that's one of the things. And look, it's fine. It's the way people start. So, that's completely understandable. That's how you start learning about options. So, that's understandable, but I think, and we see it, people start there, but then they gravitate into all the other strategies, which I think you have much better returns over a longer period of time.

Well, this is fun. Thank you. Thanks for having me.