Bear Market Tips For Active Traders (Episode 38)

What we are seeing is a very, very interesting dichotomy. That's basically getting created in the market, right? So what happens when you have bearish markets like this, that bearish market being further fueled by this continuous unending trickle of interest rate hikes in all the hype and the volatility that creates. And sometimes I'm just not a big fan of these trickle down, slow trickle, uh, interest rate hikes. But when you have a situation like that, like what happens to, to the two, the market, it tends to basically go ahead and split itself into two categories. On one side, you have the younger millennial trader who's more driven by opportunity and speculation. Those traders, um, tend to hold up. They hold up the, the direction they've traditionally not been fundamental driven to most recently. So I think what happens in a market like this is while they hold up, the active traders become very, very effective.

So, and so you, the second dichotomy that gets evolved is basically a lot of active traders jump into the market and they know how they do largely options trading and you see them actually playing in both directions. So you have this interesting dichotomy that we see in the market is while the active traders are basically becoming more and more active, and that is driven by the fact that we are all seeing record number of options, trading debt suffering, and to a point where single stock options, the number of single stock option trades is actually more than the number of shares that are traded in the market. And so, and you have actually the situation where, you know, these, the younger, you know, first time investors are, are all hold up. So you have the situation in the market, but the sentiment is negative right on the whole, the sentiment is largely negative. Retail traders are as much as they have baked in interest rates into their strategies. It's still not basically it still doesn't add up in their heads in, in a total way, but you have this dichotomy where the less accurate traders are hold up and the more accurate traders are like very, very active in the market today.

Um, there is a little bit of hedging. I mean, there's no question about it, right? But I think the folks who stay active are folks who are actually working on a strategy. I mean, most of the guys that you see are, have generally, they're generally the demographic of them. They're more than 45 to 50 years old. They're largely based around San Francisco, New York and, and Chicago, little bit in the south, right. Little bit in south. But what they do is they're all driven by strategies. There's one thing common when we analyze these retail investors, number one is they all tend to have account sizes that are more than $40,000 in size. Number one, they tend to historically have traded more than a couple of hundred trades in a given month. They all trade options with more than six contracts per trade and most important, they all have an educator or an influencer or some kind of a signal that they words or work along with.

And so what they do is that combination of the customer stays very, very active and just purely the speculation I've always said, you know, I think I've said, is that in these kind of markets, you're not going to have that. What I call as the, the PR speculator trader stay there for longer. So you'll see much reduction in the meme, stock rallies and all this stuff, because lack of speculation, completely dampens mem stock behavior. So you get, you basically get that trader that is there, but option traders are like, that is the, what I was describing is basically some hedge, but mostly strategy driven. And that's a demographic of that customer. Who's very active right now.

No, actually I think people are coming back to fundamentals in a gradual way and more and more right. What happens when you have a bear market for such a long time and an extremely delayed interest rate hikes have been talking about for two years is they finally are acting as though they're in a rush, right? And they want to control inflation at whatever cost it is. Right. We, we should not be surprised if you see a hundred basis point increase coming at our doorsteps really soon. Right. And so what basically happens in these kind of what happens fundamentally in these kind of environments for these guys is that, you know, they basically go ahead and just hold up. They just, just don't do a lot of work. And coming back to your question of the, what these options traders are largely doing, I mean, they're active, they're trying to implement on a strategy and they are basically going ahead and waiting for the opportunities and this and the volatility fundamentally gives them those opportunities. So I hope I answered the question, but that's what that those guys do.

Yes. It generally what happens is right when interest rates go go up, right? When interest rates go up, Kate, what happens is it impacts tech stocks. The most, it generally tends to impact the tech stocks the most because tech stocks pay dividends. Regionally tech companies generally tend to pay higher dividends, right? And so when tech stocks go, when interest rates go up, tech companies taper down on their dividend offerings or offer less dividends. So a lot of these tech stock companies in the high interest rate markets basically are not the prime interest. So you see a lot of dumping of tech stocks that fundamentally ups, and then you have a play that operate between retail and institutional, institutional dumps and retail dumps. And you did kind of creates a domino effect, right? So what we are seeing right now is retail investors are investing lot more driven by fundamentals. And I believe that there's return to fundamentals to too earlier question. They're a lot more the accurate since now you have the more sophisticated investor he's trading more on fundamentals. There's a more, much more fundamental impact. The early stage investors have hold up. They've never invested based on fundamentals the last couple of years, you know, I mean, many of these prices didn't make any sense, right? So you have this interesting dichotomy right now. And so the return is back to these fundamentals and these accurate traders are behaving the way they are.

Yeah. So tech stocks go through a point where they all tend to dump a little bit and then they taper off you don't, you're not seeing. And then you see fundamental based investing, really kicking in. And that's the reason, for example, we were seeing a puffing Netflix, right? I mean, Netflix took a beating over the last couple of months, right? And now the FRS has gone away. I mean, people now have test begin to believe that there is some fundamentals that make the company still a stronger company. So I think what happens is they get back to the fundamental. So what I see in the market to answer a question is the fact that I think there's still quite a bit of interest in metaverse based stocks. We see quite a bit of activity on metaverse. We still see some interest ly around, you know, what I call is the traditional, what I call as oil and energy sectors, energy transition is basically a huge sector that we see some volumes on.

And we see are, we certainly have seen some caping off of basically tech and stocks, mostly because of the initial decline prices. And then companies with strong fundamentals. We still see a strong growth in more volumes in that. And the speculate stock, the general mean stock kind of, uh, firms, right? They're all seeing much lesser volumes than, than they ever saw. I think fundamentally mean stock rallies are much, much and are more and more, less and less likely to happen. Number one is first of all, because I think that traders don't need to engage, engage in them. The guys who engage in them are out the market a little bit. And most importantly is the fact that I think the mean stock, generally interest rates just dampen speculation. That drives mean stocks. So the mean stock traders out. So that's what I believe.

I still don't see that trend yet. In the retail side. I see, see, taking away all the speculation that on the new cycles that basically occur long term. I still don't think the retail investor has a very negative Senti. There's a short term negative sentiment, but there's still positive. What I call is the retail customer still thinks of market as a viable place to put in his money. So, I mean, I certainly see traditionally reads and all these have you mean there's certainly not a big section of the total market volume, right? I certainly don't see any fundamental decrease in any of those sections. I mean, I just don't. And I say that only because I think, I just don't think people are looking for, you know, income driven ways of investing yet. I, and I think that's because people are still positive about the long term, what I call as viability of the capital markets in the us ply American us stock markets. Now I'm right now, I'm traveling in Asia and some of these countries where the sentiment is much different, but the us listed securities are still not what I call it. There's still not what I call as panic, negative sentiment driven trading or dumping that's occurring in the us markets. I mean, as you know, yesterday and today, the markets have been much better,

Yeah. You know, to be very honest, I see. I'm just feeling of the data that I see. Right. I see the data that I see and, you know, in the traditional, see the, if you think about develop management, retail section in general, there's a lot of millennial and young, you know, if you think of the 18 to 25, 25 to 35, right? Those folks tend to invest these days more and more. So digital advisors, you see a lot, lot of attract. And then you see basically the later stage of people generally employing advisors. If you think about that for retail market in general, I think when you have a market like this, I think it creates a viral sentiment sometimes even driven by these advisors. I think there's sometimes the advisors tend to basically, um, try to actually go ahead and, you know, portray more of a negative sentiment in the market.

It, it kind of helps their AUM acquisition. It, it, mostly retail investors want to give advisors their assets when they think that the markets are need to be managed. So if generally every poll that you see and it occurs all the time, any institutional level poll that you see that's connected by a large bank and the poll advisors, right? The negative sentiment is 10 times multiplied because what is advisor gonna say? It is so bearish, anything you touch is growing, so you don't need me. And so I think that so generally I'm generally very, very cautious about, you know, advisor based be feedback on market sentiment. The best way is to talk to a retail customer, right? To take a look at the volumes a self-directed market. In my, in my opinion, is a purest, direct representation of what the market sentiment is because somebody is picking from a wide spectrum and choosing a section.

And I don't see that. I just still don't see. I mean, for example, here is a great example of it, right? When the bear market suck this morning. I mean, there were so many pre-market orders that, that we had seen today. Then we have ever seen in the past. And for example, we have trade itself. Our highest trading volume month highest in the history of the company was basically June. And we connect over, you know, 300 platforms in all kinds of traders across all these platforms. We don't see it. I mean, unless somebody's telling me putting the polls aside just volume numbers, right. We don't see it.

No, not really. I mean, this is quite a bit of word buying and selling and strategy implementation. We see all combinations and I'll tell you one interesting thing. I'll tell you one absolutely interesting thing. We started tracking the number of trades across various age groups that people place per month, right? That number for 35 and more was consistent in the month of June and in the month of may, the month of March and the month of February, this year to what we saw last year. And so I think all, you are seeing some amount of frauds and speculative investors basically holding up a little bit, but I think the more accurate traders can need to trade. So I don't see, I see a lot of news cycles and a lot of negative sentiment, but that does not mean they're not active in the market. I mean, you could still engage in the market with, uh, when you have a negative sentiment, but the accurate traders,

It's a new era seeing, talking about cash. Generally brokerage funds like ours, right? If 50% of the total position of value is cash. You know, for us at an average, if somebody has a hundred thousand dollars, if somebody has a thousand dollars, generally half of it tends to stay in cash, right? Historically when, when you have bearish markets like or where you have a lot of negative sentiments, the cash kind of goes up, right? The amount of cash they have in their accounts goes up. That is true in that dichotomy of the younger investor. But right now where mostly volume is driven. I mean they, in fact it actually is either at the same levels or sometimes even much less cash is actually going ahead and getting deployed into positions.

I'll tell you a few things that I see overall, the macro level in the market, right? So what has happened had is starting 20 16, 20 5 million new retail traders jumped into the market. Okay? So roughly this country, till that time had roughly between 90, 80 to 90 funded accounts. Now I'll tell you all brokerage firms talk about, you know, we've got 5 million accounts, 4 million accounts. So that question is how many of them are funded, right? I mean, you can agree what has this small subset of it, right? What do I, if, if it's not funded, it's an email, it's an email account, right? It's just an email-based account. But putting that aside, there's roughly around, see, there are roughly a hundred and twenty seven hundred twenty 6 million funded accounts in this country, equity and auction based. A majority of them basically came in after 2016, right? Almost 25 million came in out from 16.

Now what has happened is there has, there has been a rapid graduation effect in the market. So when the pandemic hit in 2020, right first quarter 2020, the hypersensitive news cycles, people staying at home connected, literally having no other place to invest. I mean the casinos were gone, the games were gone. I mean, so the stock market became a location where they could, it was very rip for them to get engaged. But what that did, Kate is actually graduated people into more advanced training, much before, than they all normally would when we were jumping into the business in the, in the two thousands. And in the early, you know, in the teens or 2010 to 2015, I mean, it'll take three or four years before somebody becomes an option trader. Now what happened because it's a graduation effect is, you know, people tried trading options like two months after they jumped into the stock market.

So that's a trend that we saw. So we saw mass first, we saw a lot of influx in the booming and this increase in size. And then we saw a rapid graduation effect. And one of the stuff that nobody talks about is that it's an internationalization of the us retail market. Nobody's covering that. It's untold story roughly around two interesting data points, roughly around 12 million traders traded options within the first year of them opening a brokerage account. That's number one. And number two is another 16 million new brokerage accounts were opened in this country after 2019 that were actually not resident in the us, or for example, an Indian citizen opening up an account in the us market. So European citizen or English citizen, or from British citizen. So you have a retail market right now that is much larger insights to a point where 30% of the total trading volume is coming from retail today, it's a single larger segment.

You have more people trading options. For example, I was talking single stock options becoming more than number of shares, number two. And then there's a massive graduation effect of people trading more advanced functions. And there's an internationalization of the brokerage market because a lot more us has become the central point where, you know, for example are traveling in India a couple of days ago. I mean, they get up in the morning and they use a us brand. They use a use us branded card. They us Facebook, they work for us companies and they all like to invest in the us markets. The us markets have become a darling for the next generation investors. So the main trend and in se, is graduation increase in retail volume, set size and lastly, and most important internationalization of the brokerage market. Now why do I find that fascinating is just imagine a situation a year from now. If you have that many, 10, 20% of your accounts coming from different countries, the geopolitical environments in that country in outside the us can impact trading volumes in the us while so far, we've been just dealing with what us policy defines trading volumes in the us. Now you could come to a situation where a policy change by the Indian government could actually impact retail volumes in the us that,

No, I think there's a bunch of reasons, right? There's a bunch of reasons and I'm sure we can jump into those couple of things have happened, right? I think you fundamentally saw a reduction in cost of doing brokers. So retail brokerage commissions started actually crazy. I think a big news event was created. Mostly it hit the new cycles, more like 20, 20, 20 18 timeframe. But a lot of these millennial apps, particularly forms like Robinhood and forms like, you know, a lot of these younger rest coasts, what I call a single play vertical apps did an amazing job at attracting a next generation of the customers to come into the retail market. Now I'm not sure any of, many of these did a good job as to helping them graduate into more advanced functions, but they were amazingly good at letting new people come in. So the friction in the market kind of operated, mostly driven by tech commissions, kind of went down.

Number one, commissions kind of went down and basically brokerage firms spent a lot of time and money actually trying to get into the transactional side of the brokerage business. Now what happens? So all these factors, right? All these factors had driven a lot of people to jump into the market, mostly and venture. A lot of fin FinTech became boom point for investors. So you have this perfect concoction of venture funding where you, people where firms never had to worry about profitability. They only had to worry about rope. Um, and you know, there's a reason why I say that. And at the same time, you know, commissions were going down. Technology was making friction very, very less. And I think all these factors together bought a lot of people to the market, um, starting 2016. And you can see the volumes you can, you can.

So today I'll give you another interesting sta right? Um, roughly in a given day today, if you think about us driven by us residents, if you take a look at volume, Kate, roughly around 18 to 23 million retail trade zer in the market today from, from you as funded accounts. So let's say over 23 million, about five and half to six millions from people who trade less than three times a month, roughly around another seven to 8 million from people who trade between three and 10 times, you know, on a given day and close to 10 plus million trade occur from people who basically trade more than 10 times. So that's the construction of how and what, what is interesting is that those folks who basically go ahead and trade 10 plus times and three to 10 times basically drive majority of the value in the market. You so that's what the current state of the market is in the section that, you know, it's a much larger market at the same time. It has evolved into various sections and the active trading and the zero to three to 10 and 10 plus have really boomed to engaging very, very actively versus, and the zero to three guys have kind of tapered off in the last six months.

So I'm one of the co-founders and the CEO of trade year. We are one of the larger, uh, what I call as firms that are focused on empowering others to build innovative investing products. We power close to like 300 plus platforms in both domestically, internationally. And you know, we enable, so we want to support all kinds of retail investors. You can come to trad.com and you can actually use one of our own proprietary platforms like trade Hawk or dash or mobile. I mean also you're soon launching crypto platforms to use it. Or you can select from close to hundreds of other platforms that people have built on our API. So you have a wide variety of choice that you could, you could select from number one and number two, and all our platforms are all largely, I mean, free equity subscriptions is about 10 bucks per month and you could trade as much as you want. So we have this unique perspective of just not just watching our volumes, but watching volumes as a, in a hub and spoke way of hundreds of platforms. We tend to have a lot of, uh, perspective on the market, but you know, love for you guys to go to trader.com and see if there's something that you're looking for and hopefully we can help you with that.

Hmm. Thanks. Thanks so much, Kate. Really appreciate.