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.