WEBVTT - How Amateurs Lost Billions on Options 0:00:14.400 --> 0:00:18.000 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:18.239 --> 0:00:20.520 My name is Mike Reagan. I'm a senior editor at 0:00:20.520 --> 0:00:24.200 Bloomberg and humbled Onna Higher Across Acid reporter with Bloomberg. 0:00:24.560 --> 0:00:27.240 And this week on the show, Well, do you remember 0:00:27.320 --> 0:00:31.040 during the COVID lockdowns, when the meme stocks like game 0:00:31.120 --> 0:00:35.000 Stop and a m C started going crazy and social 0:00:35.040 --> 0:00:38.120 media was filled with posts about amateur tradings who are 0:00:38.120 --> 0:00:41.640 making a killing trading their options. Well, like many things 0:00:41.680 --> 0:00:45.199 on social media, that wasn't exactly the whole story. It 0:00:45.200 --> 0:00:48.960 turns out that collectively, day traders took a massive beating 0:00:49.080 --> 0:00:53.279 on options trades between November two thousand and nineteen and 0:00:53.440 --> 0:00:58.080 June of that's according to some researchers from the London 0:00:58.200 --> 0:01:00.920 Business School who did an in depth study of that 0:01:01.000 --> 0:01:04.480 wild era of trading, and we're lucky enough to have 0:01:04.600 --> 0:01:07.160 them on the show this week to discuss it. But 0:01:07.200 --> 0:01:09.720 what do you tell us about our guests here? Who 0:01:09.720 --> 0:01:12.400 do we have? Yeah, let me introduce them. We have 0:01:12.440 --> 0:01:17.960 so Atlanta, Briska Loova, Anna Pavlova and Ticea Sikorskaya. They're 0:01:18.000 --> 0:01:21.000 all researchers from the London Business School and they're they're 0:01:21.040 --> 0:01:23.280 the authors of the report you mentioned, and I want 0:01:23.280 --> 0:01:24.760 to welcome all of you to the show. Thanks so 0:01:24.840 --> 0:01:27.600 much for joining us, thank you, thank you for having us. 0:01:29.520 --> 0:01:32.000 And I want to start with you. I wanted to 0:01:32.040 --> 0:01:35.800 ask you what you saw happening with retail investor trading, 0:01:35.840 --> 0:01:38.120 what you saw happening in the space, all the mania 0:01:38.200 --> 0:01:40.759 and hype that we had been seeing back in at 0:01:40.800 --> 0:01:44.360 the start of one and what made you guys come 0:01:44.400 --> 0:01:48.000 together and start looking into this topic. We have a 0:01:48.040 --> 0:01:51.920 sample starting from November twenty nineteen going until mid the 0:01:54.080 --> 0:01:57.559 and what we so seeing that sample is a huge 0:01:57.680 --> 0:02:02.000 growth in the trading volume in options. In fact, our 0:02:02.200 --> 0:02:06.360 data is in daily files and you can even measure 0:02:06.400 --> 0:02:11.960 this in megabytes, gigabytes, terabytes. How these files, the size 0:02:12.000 --> 0:02:14.520 of these files grow. Towards the end of the sample, 0:02:15.120 --> 0:02:19.280 we had a huge increase in retail interest during the pandemic. 0:02:20.040 --> 0:02:26.200 Then of course June July twenty we had a major 0:02:26.880 --> 0:02:32.840 peak in our data set, and yeah, it just went 0:02:32.919 --> 0:02:36.680 on from there. It's um, it's growing this volume and 0:02:36.760 --> 0:02:41.920 it's there's no stopping for now. And Sedlanta, can you 0:02:41.919 --> 0:02:44.680 maybe talk about what exactly you guys found, because the 0:02:44.720 --> 0:02:48.600 big takeaway from me. Obviously you looked a lot into wholesalers. 0:02:48.760 --> 0:02:50.720 But the big takeaway and something I ended up writing 0:02:50.760 --> 0:02:54.640 about is the losses accrued by retail investors trading options. 0:02:54.760 --> 0:02:58.799 Can you tell us more about that? Well, we were 0:02:58.880 --> 0:03:01.680 interested in reading, understand and what three investors do in 0:03:01.720 --> 0:03:04.240 the options market, because, to be honest, one of the 0:03:04.240 --> 0:03:07.400 big problems there is that we actually don't really have 0:03:07.520 --> 0:03:10.720 a good measure or good data will allow us to distinguish, 0:03:10.960 --> 0:03:13.040 you know, which of those trade day trades are going 0:03:13.080 --> 0:03:15.280 to be retail and which are going to be coming 0:03:15.320 --> 0:03:19.320 from institutional investors. The only proxy is that people have 0:03:19.400 --> 0:03:22.560 been looking at before were for example, small trades when 0:03:22.600 --> 0:03:25.080 I will receive like somebody buying you know, one lord 0:03:25.240 --> 0:03:27.079 or like five lads, just you know, a little bit 0:03:27.880 --> 0:03:30.760 of the underlying contracts. But we also know that this 0:03:30.840 --> 0:03:33.800 is not a good measure of retail trading because there 0:03:33.880 --> 0:03:37.280 is a lot of institutional investors who actually split the 0:03:37.360 --> 0:03:39.960 big orders in those tiny little bits, and so we 0:03:40.000 --> 0:03:42.200 really wanted to see what the little guils are doing 0:03:42.600 --> 0:03:45.080 because obviously we're concerned about them, and a lot of 0:03:45.080 --> 0:03:48.000 my own students, you know, the trade and financial markets, 0:03:48.000 --> 0:03:51.480 so everyone was watching game stuff and I was teaching 0:03:51.640 --> 0:03:54.640 an asset management class for them, so you know, every 0:03:54.680 --> 0:03:56.680 session we would go back to the news and just 0:03:56.760 --> 0:03:59.240 talk what has been happening in the last three days, 0:03:59.320 --> 0:04:02.800 and every time they would be something new. UM, So 0:04:02.960 --> 0:04:06.600 naturally kind of looking at their strategies, what they do, 0:04:06.640 --> 0:04:08.600 what kind of contracts they like, and if there is 0:04:08.640 --> 0:04:11.760 a better way to identify those trades. Just exactly what 0:04:12.200 --> 0:04:14.560 you know is the core of the paper, and it 0:04:14.720 --> 0:04:16.960 was just a natural thing, you know, following all the 0:04:17.000 --> 0:04:20.400 discussions with the students. But their performance, as you mentioned, 0:04:20.600 --> 0:04:24.800 was exactly what really UM not surprised us. UM. We 0:04:24.880 --> 0:04:27.800 do know that retail investors tend to trade a lot 0:04:27.800 --> 0:04:30.720 more and quite often they as a result, encour much 0:04:30.800 --> 0:04:34.440 larger losses, but we did not expect to see anything 0:04:34.520 --> 0:04:37.400 like this in the options market. So that focus on 0:04:37.600 --> 0:04:40.640 super short term contracts a lot really like pictures of 0:04:40.680 --> 0:04:43.840 all the payoffs and of course those massive aggregate losses 0:04:43.920 --> 0:04:47.120 during such a short period of time. That was mind 0:04:47.160 --> 0:04:50.680 bolting for us. And the lasses are something around one 0:04:50.720 --> 0:04:54.800 billion dollars plus if you account for trading carts, it's 0:04:54.880 --> 0:04:59.120 even higher than that, right, absolutely, absolutely so, not only 0:04:59.160 --> 0:05:02.440 they basically make mistake on you know, which type of contracts, 0:05:02.440 --> 0:05:04.640 which direction you know the price is going to go, 0:05:05.040 --> 0:05:08.159 but they also underestimate clearly is a total cost got 0:05:08.160 --> 0:05:11.000 to pay for making this type of test. Yeah, and 0:05:11.040 --> 0:05:14.560 we asked the question whether their investors perhaps learned from 0:05:14.600 --> 0:05:18.400 their mistakes. So we cut our data month by month 0:05:18.760 --> 0:05:22.640 and looked at their performance each month, and we were 0:05:22.640 --> 0:05:25.480 hoping to see that it was bad in the beginning, 0:05:25.640 --> 0:05:30.320 but it became much better towards the end of the sample. Well, 0:05:30.680 --> 0:05:34.600 we found the reverse. It was actually okay in the 0:05:34.640 --> 0:05:39.080 beginning of the sample, but then it got really bad. Well, 0:05:39.120 --> 0:05:41.039 I see. Can I ask you to come in and 0:05:41.040 --> 0:05:43.479 talk about what actually was happening with the broader market 0:05:43.520 --> 0:05:46.599 at the time, Like how striking was it to come 0:05:46.680 --> 0:05:50.279 to this conclusion considering that we actually had the stock 0:05:50.320 --> 0:05:54.320 market overall, the SMP having a really really great year 0:05:54.480 --> 0:06:01.320 in Yeah. Sure, if you look at the return overall 0:06:01.320 --> 0:06:04.520 of let sels and if a hundred, you do see, uh, 0:06:04.880 --> 0:06:08.520 overall good return for the thousand twenties. But then what 0:06:08.640 --> 0:06:11.320 you should also remember is that there was a huge 0:06:11.320 --> 0:06:14.320 amount of volatility at that time, and this is exactly 0:06:14.360 --> 0:06:17.440 what attracts option traders, you need to have a lot 0:06:17.440 --> 0:06:20.839 of volatility to be able to, you know, hit those 0:06:21.400 --> 0:06:24.960 very rare playoffs that clan I was talking about. And 0:06:25.160 --> 0:06:28.359 so I just wanted to say that probably an options market, 0:06:28.400 --> 0:06:30.640 you don't really need the market to go up to 0:06:31.440 --> 0:06:34.320 have your beds working out. And that's why even now, 0:06:34.360 --> 0:06:38.560 you would not expect people to reduce this bigheraor or 0:06:38.680 --> 0:06:41.760 to stop gambling because the market is going down, because 0:06:41.800 --> 0:06:45.920 you can still trade contracts with the same way of profile. 0:06:47.160 --> 0:06:49.000 And can I also ask you, tay see what sort 0:06:49.000 --> 0:06:53.039 of feedback you guys received after the research paper came out. 0:06:53.640 --> 0:06:57.560 What were people telling you, Well, it's so far in progress, 0:06:57.600 --> 0:07:00.839 we're still presenting it in conferences, but it has definitely 0:07:00.880 --> 0:07:03.440 received a lot of attention. When we are happy that 0:07:03.520 --> 0:07:05.919 we can attract this attention to this topic because it 0:07:05.920 --> 0:07:09.920 seems like it is important, particularly important for this new 0:07:09.920 --> 0:07:15.840 generation of retail traders. And what I find uh sort 0:07:15.840 --> 0:07:18.800 of fascinating about this topic, um is there's been a 0:07:18.800 --> 0:07:22.200 lot of scrutiny in the US towards the wholesalers or 0:07:22.240 --> 0:07:25.680 the internalizers however you want to call him, the the 0:07:25.880 --> 0:07:29.800 market makers who UH engage in payment for order flow. 0:07:30.640 --> 0:07:34.400 I'm wondering if in this research a if if you 0:07:34.960 --> 0:07:39.840 sort of detected anything that would suggest that these players 0:07:40.400 --> 0:07:42.680 did anything that was against the rules. I mean, obviously 0:07:42.720 --> 0:07:46.200 there's a debate about whether this type of practice should 0:07:46.240 --> 0:07:49.720 be allowed or should be reformed to some degree, but 0:07:50.000 --> 0:07:54.640 were they playing within the rules. Well, we haven't found anything, 0:07:54.920 --> 0:07:58.440 I'm afraid to tell you, but they are some facts 0:07:58.520 --> 0:08:02.880 about these wholesalers to be document For example, did you 0:08:02.960 --> 0:08:09.080 know that eighty five of payment for other flow people 0:08:09.400 --> 0:08:15.920 in options comes from just three wholesalers? Sit adele, says Quehanna, 0:08:16.120 --> 0:08:21.280 and we'll we're in. That is amazing. Yeah, And you know, 0:08:21.280 --> 0:08:25.760 there's spent a lot of talk in years past about, um, 0:08:25.800 --> 0:08:31.720 you know, options are incredibly complicated products that perhaps retail 0:08:32.040 --> 0:08:35.280 traders should not be going near there. I remember in 0:08:35.360 --> 0:08:37.840 years past there was talk about, well, in order to 0:08:37.920 --> 0:08:40.760 actually trade options, you should have to undergo some sort 0:08:40.760 --> 0:08:43.679 of education program and pass a test that sort of thing. 0:08:44.520 --> 0:08:46.440 Do you guys think there's some merit to that is? 0:08:46.679 --> 0:08:50.199 Should maybe that be you know, the way the direction 0:08:50.240 --> 0:08:53.800 this should go, that retail traders should perhaps not be 0:08:54.480 --> 0:08:57.840 allowed to engage in this type of really risky trading 0:08:57.880 --> 0:09:03.040 without some sort of education. First, well, during our day job, 0:09:03.400 --> 0:09:06.960 we teach students how to invest their money, and what 0:09:07.080 --> 0:09:10.800 we tell them that even if they make mistakes paying 0:09:10.800 --> 0:09:13.240 too high a fee, they should still invest in the 0:09:13.240 --> 0:09:16.800 stock market because the worst they can do to themselves 0:09:16.960 --> 0:09:21.640 is to not participate in options. There is no such thing. 0:09:22.840 --> 0:09:25.680 There is no such thing as losing on the equity 0:09:25.720 --> 0:09:28.920 premium because there is no such thing as an option premium. 0:09:28.920 --> 0:09:32.000 It's a zero some game. It's a win to some 0:09:32.200 --> 0:09:35.640 one side and the loss to another side. So what 0:09:35.679 --> 0:09:40.200 we tell students is that they should not invest in options. 0:09:40.760 --> 0:09:44.600 Retail investors should not invest in options unless they have 0:09:44.679 --> 0:09:48.960 some risk to hedge. We have looked very carefully in 0:09:49.000 --> 0:09:53.200 our data whether the patterns we find are consistent with hedging, 0:09:53.960 --> 0:09:59.199 and tell you what not at all your speculation as 0:09:59.240 --> 0:10:02.560 far as we can tell. While we talk a lot 0:10:02.600 --> 0:10:06.160 about the recent growth of options popularity inm on retail 0:10:06.200 --> 0:10:09.720 investors and all the technology you know, all these apps 0:10:09.800 --> 0:10:12.480 that go along with it, but it is actually also 0:10:12.559 --> 0:10:16.560 worth remembering that actually people have been trading options for 0:10:16.640 --> 0:10:20.640 not just years, but centuries, and in fact, the first 0:10:20.920 --> 0:10:24.840 ever book that was written about financial markets in six 0:10:25.720 --> 0:10:29.880 in Amsterdam is almost all about options training and it 0:10:29.920 --> 0:10:32.880 talks about exactly the same issues that we see in 0:10:32.920 --> 0:10:37.880 the markets today, herding behavior, over confidence, you know, short 0:10:38.000 --> 0:10:41.920 term mism of the investors, and of course real underestimation 0:10:42.000 --> 0:10:45.600 of the risks of the financial art. I love that 0:10:45.679 --> 0:10:48.200 you have these facts sort of just sitting on the 0:10:48.240 --> 0:10:50.320 top of your head. But Atlanta, I actually have a 0:10:50.320 --> 0:10:52.240 follow up for you, which is when you and I 0:10:52.280 --> 0:10:54.240 spoke a couple of weeks ago, you had told me 0:10:54.280 --> 0:10:57.440 that the type of contracts that retail investors tend to 0:10:57.800 --> 0:11:01.200 favor have sort of lottery features, and I wanted you 0:11:01.320 --> 0:11:04.360 to sort of explain that and what you mean when 0:11:04.360 --> 0:11:09.000 you say lottery like features. Well, what are the usual 0:11:09.040 --> 0:11:12.199 features of the lottery. Um, Usually you pay a small 0:11:12.240 --> 0:11:15.440 fee to participate in this lottery in and raw to 0:11:15.480 --> 0:11:18.520 win something big, but the chances of your winning are 0:11:18.559 --> 0:11:21.920 actually incredibly small, right, So this is the type of 0:11:21.960 --> 0:11:25.320 or bet, but in this case some financial market where 0:11:25.360 --> 0:11:28.319 you pay some fee up front and then there is 0:11:28.320 --> 0:11:31.559 a small probability that you can win, but actually very 0:11:31.640 --> 0:11:34.560 high probabilities that you're not going to get anything. And 0:11:34.640 --> 0:11:38.320 these are exactly the features of the option contracts that 0:11:38.360 --> 0:11:41.599 we find out to be really popular among retail investors. 0:11:42.280 --> 0:11:45.040 So for example, these are the contracts which are very 0:11:45.080 --> 0:11:48.920 short in terms of the maturity, like weekly options that 0:11:48.960 --> 0:11:51.559 are going to expire maybe two or three days from now. 0:11:52.320 --> 0:11:54.920 These are the contracts they like that are going to 0:11:55.000 --> 0:11:56.880 be on the stocks that do not cost a lot 0:11:56.920 --> 0:11:59.960 of money, so the fee of participating is also quite 0:12:00.040 --> 0:12:04.040 not And these are unfortunately also the contracts on securities 0:12:04.080 --> 0:12:06.720 that have been all over the news. So it doesn't 0:12:06.800 --> 0:12:10.040 look like, you know, they're really doing it for you know, 0:12:10.080 --> 0:12:13.240 hedging purpose of doing some sort of deep analysis. It 0:12:13.280 --> 0:12:16.120 seems like they're just following whatever is trendy and try 0:12:16.200 --> 0:12:20.000 to bet on the price going off. An I know 0:12:20.120 --> 0:12:23.920 this is this is gonna be a tough question to answer, um, 0:12:24.040 --> 0:12:27.760 but do you think, what if you have any opinions 0:12:27.760 --> 0:12:31.280 on whether this was sort of a one time phenomenon 0:12:31.640 --> 0:12:35.240 that it was a confluence of you know, people stuck 0:12:35.240 --> 0:12:37.959 at home, too much time on their hands, maybe a 0:12:38.000 --> 0:12:41.400 little too much cash, and sort of a perfect storm 0:12:41.440 --> 0:12:44.199 that created the type of environment for this type of 0:12:44.800 --> 0:12:48.320 as you say, crowd behavior and hurting or you know, 0:12:48.800 --> 0:12:50.480 is there a risk that we could see something like 0:12:50.520 --> 0:12:53.720 this happened again sort of after you know, the traders 0:12:53.720 --> 0:12:58.080 who who lost their shirts in this round of trading, uh, 0:12:58.160 --> 0:13:00.520 you know, get some more money to trade or more 0:13:00.559 --> 0:13:02.640 traders come in. How do you think, you know, how 0:13:02.640 --> 0:13:05.400 do you think of it as as terms of risk 0:13:05.480 --> 0:13:09.120 going forward or was it just sort of one of 0:13:09.120 --> 0:13:11.680 the crazy things that happened during the pandemic And we 0:13:11.760 --> 0:13:15.800 probably won't see something like this again. Haven't we seen 0:13:16.000 --> 0:13:19.600 something like this? Just last week? Bloomberg wrote about Revlon 0:13:20.280 --> 0:13:27.440 that's new game stop true, it's probably speaks more to just, uh, 0:13:27.480 --> 0:13:31.560 you know, that get rich quick mentality that's been been 0:13:31.600 --> 0:13:33.560 with us forever, I guess. And and this is just 0:13:33.640 --> 0:13:37.040 really a drastic example of it, of of it really 0:13:37.120 --> 0:13:43.120 getting out of control, absolutely, and it's gambling and seems 0:13:43.400 --> 0:13:53.320 and hey, it's cheap than Las Vegas. So you mentioned 0:13:53.320 --> 0:13:56.440 that a lot of retail investors tend to favor the 0:13:56.520 --> 0:13:59.120 stocks that they see online or you know, read it 0:13:59.160 --> 0:14:01.520 as often mentioned and Twitter as well, and you had 0:14:01.520 --> 0:14:05.400 found that stacks mentioned on Wall Street, um, those that 0:14:05.640 --> 0:14:09.760 actually didn't totally pay off for retail investors. Right, So 0:14:09.800 --> 0:14:13.320 you have a list of tap losers for retail trades, 0:14:13.400 --> 0:14:17.080 and that includes game Stop and am C in your research. 0:14:17.480 --> 0:14:19.880 But both of those stocks were stuck that were in 0:14:19.880 --> 0:14:23.480 the top five winner's basket for the market as a whole, 0:14:23.600 --> 0:14:27.000 So can you tell us about that? And you're absolutely right, 0:14:27.480 --> 0:14:30.440 you know, the common narrative was that during the time 0:14:30.480 --> 0:14:33.200 of the Game Stop, it was the retail investors that 0:14:33.320 --> 0:14:36.800 finally took control of the markets and managed to get 0:14:37.080 --> 0:14:40.000 a good profit out of those transactions. But that's actually 0:14:40.040 --> 0:14:42.760 not what we see in the data. In fact, game 0:14:42.800 --> 0:14:47.040 Stop and AMC Entertainment, which was another really popular meme 0:14:47.120 --> 0:14:51.400 stop back at the time, they were among the worst 0:14:51.480 --> 0:14:55.240 performing contracts that the retail investors have been dealing with 0:14:55.600 --> 0:14:58.800 during the whole sample that we consider. So not only 0:14:58.920 --> 0:15:01.680 that they definitely so we've lost a lot of money 0:15:01.680 --> 0:15:05.920 on these type of securities. But surprisingly, as they also mentioned, 0:15:06.320 --> 0:15:09.880 it's actually the transactions that were utenated by other market 0:15:09.920 --> 0:15:14.520 participants that is usually petge funds, you know, professional investors 0:15:14.840 --> 0:15:18.120 who managed to win a lot on building on options 0:15:18.160 --> 0:15:21.560 at the same time exactly the same theme stocks Jimmy 0:15:21.880 --> 0:15:26.800 and AMC, and I wonder you know, clearly the narrative 0:15:26.840 --> 0:15:28.800 in the press and the media was that this was 0:15:29.080 --> 0:15:33.280 so driven by Reddit and social media and these influential 0:15:33.440 --> 0:15:36.840 characters on Reddit. Um. I know it's hard to sort 0:15:36.880 --> 0:15:39.920 of suss that out from just crunching through the data 0:15:40.400 --> 0:15:42.920 like you guys did, but I'm curious if if any 0:15:42.960 --> 0:15:45.560 of you have any opinions on if there's something that 0:15:45.600 --> 0:15:50.040 should be done about that phenomenon. Clearly there were some 0:15:50.240 --> 0:15:54.800 dishonest people on social media, I believe, who tried to 0:15:55.480 --> 0:16:01.680 convince amateur new traders that you know, I remember, you know, 0:16:01.920 --> 0:16:04.640 posts about AMC is going to go to a hundred 0:16:04.680 --> 0:16:08.240 thousand dollars of share once the Hedge funds cover, you know, 0:16:08.440 --> 0:16:12.520 some ridiculous sort of notions being thrown around on social 0:16:12.600 --> 0:16:15.920 media that, um, you know, if you're a brand new 0:16:16.000 --> 0:16:19.000 trader and you get sucked into this rabbit hole. Uh, 0:16:19.320 --> 0:16:21.480 it seems like some of them felt worth. I mean, 0:16:21.720 --> 0:16:24.080 you know, we live in a society where freedom of 0:16:24.160 --> 0:16:26.600 speech is highly valued. But is there you know, is 0:16:26.600 --> 0:16:28.680 there something you think that could be done to prevent 0:16:28.760 --> 0:16:32.320 that sort of manipulative behavior that that sort of draws 0:16:32.360 --> 0:16:37.440 people into these losing trades. That's a great question, Mike, 0:16:37.640 --> 0:16:42.320 and to bell STI also really difficult one. Um, defining 0:16:42.440 --> 0:16:44.480 kind of the rules of the freedom of speech is 0:16:44.640 --> 0:16:49.720 incredibly complicated topic, and finance in particular. But one thing 0:16:49.800 --> 0:16:52.560 that I think it's worth always remembering for investors is 0:16:52.640 --> 0:16:55.480 that whatever you do on various forums, that does not 0:16:55.600 --> 0:16:58.880 necessarily mean that this is actually what those people implement 0:16:58.960 --> 0:17:01.160 in real life. So they could be just chip talk 0:17:01.280 --> 0:17:02.960 and a lot of the people would be, you know, 0:17:03.120 --> 0:17:06.359 talking about different strategies or the performance that, but that 0:17:06.600 --> 0:17:08.919 often has nothing to do with reality. Let me give 0:17:08.960 --> 0:17:12.280 you one example. Back at the height of the you know, 0:17:12.440 --> 0:17:17.280 game stop Frenzy um Citadel actually released a report based 0:17:17.359 --> 0:17:21.520 on their transactions of the same retail investors that they 0:17:21.640 --> 0:17:24.480 actually implement, and what they find out is that during 0:17:24.520 --> 0:17:27.520 the week or that incredible increase in the price where 0:17:27.520 --> 0:17:30.520 the Wolstree Bad forum was all about, you know, holding 0:17:30.640 --> 0:17:33.320 too the moon and hoping that the price of Jimmy 0:17:33.359 --> 0:17:36.320 and It's going to reach all the way to one dollars, 0:17:36.960 --> 0:17:42.560 that was the time where the amount of buying investors 0:17:42.640 --> 0:17:47.240 and selling investors was almost exactly identically. So the retail 0:17:47.400 --> 0:17:50.080 or the flow was incredibly balanced, and there was actually 0:17:50.200 --> 0:17:52.760 not much evidence that they were really not holding too 0:17:52.800 --> 0:17:56.320 the moon. So yes, forums are quite trickier, and I 0:17:56.400 --> 0:17:58.480 honestly we don't think that there is any reason to 0:17:58.560 --> 0:18:00.760 believe whatever you read them. After all, these are not 0:18:00.880 --> 0:18:04.480 financial advisors. They're not bound to you by any code 0:18:04.520 --> 0:18:07.359 of ethic. You cannot see, Um, you know a person 0:18:07.480 --> 0:18:10.880 who's been writing, you know, some dishonest information or convincing 0:18:10.920 --> 0:18:13.680 other people to be in a certain way. The best 0:18:13.720 --> 0:18:16.440 thing is just, you know, to remember that you have 0:18:16.520 --> 0:18:19.320 to think very very careful about what to trust in 0:18:19.480 --> 0:18:23.040 terms of the information. I think only read Wildonna's stories 0:18:23.200 --> 0:18:27.840 is what you're saying, right, Definitely, That's not how the 0:18:28.480 --> 0:18:31.240 Twitter responses I get sometimes. But T see, I want 0:18:31.240 --> 0:18:33.320 to bring you in here because a big part of 0:18:33.400 --> 0:18:35.440 what you guys were looking into where the trading costs 0:18:35.480 --> 0:18:39.320 that were associated with retail investors trading these options, and 0:18:39.480 --> 0:18:42.080 so you guys wrote the retail investors might have been 0:18:42.240 --> 0:18:46.400 underestimating the trading costs associated a bit ask spreads were 0:18:46.440 --> 0:18:49.600 super vide for retail versus the overall market. Why is that? 0:18:49.680 --> 0:18:52.840 And can you explain that to us? Yeah? Probably it's 0:18:52.880 --> 0:18:57.040 just for us mentioning that the zero commissioned profit promise 0:18:57.200 --> 0:19:01.399 that typically comes from the broker is only part of 0:19:01.480 --> 0:19:04.959 the cost that you wear when you trade in this market. 0:19:05.520 --> 0:19:07.560 So the price that you will actually pay will not 0:19:07.800 --> 0:19:11.800 be the midpoint, you know, the uh, somewhere in between 0:19:11.840 --> 0:19:15.240 the asking and the big price in the market. UH. So, 0:19:15.440 --> 0:19:18.480 in fact, you will always kind of imagine, if you're 0:19:18.480 --> 0:19:21.080 buying a contract and then you're selling it, you will 0:19:21.119 --> 0:19:24.040 be paying this round trip costs each time. And this 0:19:24.200 --> 0:19:26.640 is what happens in markets with such high ron over 0:19:26.960 --> 0:19:31.600 like options, and that is why investors paidous costs. And 0:19:31.680 --> 0:19:34.639 what we see is also as we mentioned before, this 0:19:34.800 --> 0:19:38.480 investors seemed to prefer really short term contracts. And imagine 0:19:38.520 --> 0:19:42.480 if you were, like, let's say, interested in weeklies on Amazon, 0:19:42.720 --> 0:19:45.400 for example, so you buy it this week and then 0:19:45.440 --> 0:19:48.520 within the wicket will expire. But if you again want 0:19:48.560 --> 0:19:50.639 to gamble, you will buy one more contract and then 0:19:50.720 --> 0:19:52.720 one more one more, so you turn over will be 0:19:52.800 --> 0:19:55.760 pretty high, and each time you will pay around twelve 0:19:55.880 --> 0:19:59.640 percent UH with ask spread. That is what we document 0:19:59.760 --> 0:20:03.040 and the payment sure, zero commission, but twelve percent is 0:20:03.080 --> 0:20:07.080 still a lot. And I'm sure every market maker in 0:20:07.160 --> 0:20:11.879 the world is their eyes pop out their heads when 0:20:11.920 --> 0:20:16.000 they hear the a twelve percent that has spread there's 0:20:16.000 --> 0:20:19.000 a lot of potential than the profit from that. I 0:20:19.080 --> 0:20:24.440 suppose you're absolutely right. And by the way, this spread 0:20:24.600 --> 0:20:26.760 is even higher than what you get for used cars. 0:20:27.400 --> 0:20:30.840 That tells me something about you know, how this market opulates. 0:20:33.000 --> 0:20:35.680 That's great, you can higher than used cars. I like that. 0:20:36.119 --> 0:20:38.280 That might be the craziest thing of the week. So 0:20:38.400 --> 0:20:41.000 when we looked at payment for other flow for the 0:20:41.240 --> 0:20:45.680 very first time, we got data from all retail brokerages 0:20:45.720 --> 0:20:49.879 in the US, and what shocked us is that payment 0:20:49.960 --> 0:20:53.719 for other flow for options is so much higher than 0:20:53.800 --> 0:20:57.800 for stocks. Two thirds of payment for other flow comes 0:20:57.840 --> 0:21:00.920 from options, and you would think only a very small 0:21:01.000 --> 0:21:05.560 fraction of those retails and that there's trade options. That's 0:21:05.600 --> 0:21:08.560 how we started digging, and that's when we discovered that 0:21:08.680 --> 0:21:14.080 twelve percent. That is surely the answer why it is 0:21:14.240 --> 0:21:19.679 so attractive to be a wholesaler in intermediating options transactions 0:21:20.359 --> 0:21:22.639 at Lana. Can I ask you about the new some 0:21:22.760 --> 0:21:24.560 of the headlines that we had seen recently about the 0:21:24.800 --> 0:21:28.280 SEC waying changes to its trading rules. I'm wanting, just 0:21:29.320 --> 0:21:34.360 like from your personal view, what you make of those Well, um, 0:21:34.760 --> 0:21:37.240 to be honest, we still are going to be waiting 0:21:37.240 --> 0:21:39.440 to see kind of the final decision on how those 0:21:39.520 --> 0:21:42.560 changes are going to be implemented in the markets. But 0:21:42.680 --> 0:21:44.879 I think there is definitely a lot of the interest 0:21:44.960 --> 0:21:47.800 in this topic and both equities and options, and that's 0:21:48.680 --> 0:21:51.080 actually one of the reason why we think that looking 0:21:51.160 --> 0:21:54.400 at the options market is becoming more and more important 0:21:54.480 --> 0:21:57.840 because one of the points that the SEC chairman was 0:21:58.080 --> 0:22:00.960 mentioning and there isn't announcement, is that they are thinking 0:22:01.000 --> 0:22:04.680 about potentially adopting some of the elements of this trade, 0:22:04.720 --> 0:22:08.280 how it's organized in the auctions market and then transferred 0:22:08.440 --> 0:22:11.600 into the trading in stocks, in particular the so called 0:22:12.000 --> 0:22:15.720 auctions um during which are the pricing of those contractors 0:22:15.760 --> 0:22:19.040 being determined. So we definitely need to, you know, learn 0:22:19.080 --> 0:22:21.720 more about this market, is how they operate, what's the 0:22:21.760 --> 0:22:25.080 market power of different participants, and how it all fixed together, 0:22:25.160 --> 0:22:28.399 because ultimately we need to design the system that's going 0:22:28.440 --> 0:22:32.080 to benefit retail investors first and foremost. And there are 0:22:32.160 --> 0:22:34.359 lots of questions on which we still don't belt up 0:22:34.400 --> 0:22:40.639 really good data, really good answers. Well, so far, this 0:22:40.760 --> 0:22:46.480 attention of politymaker has been focused primarily on equities. Why equities, 0:22:47.280 --> 0:22:53.240 because these trades and equities retail trades are crossed by 0:22:53.359 --> 0:23:01.439 these wholesalers on their own private platforms. That's what internalization is. Technically, 0:23:01.840 --> 0:23:07.359 options trades cannot be internalized because all options in the 0:23:07.440 --> 0:23:13.240 United States trade on exchanges. But what we've found is 0:23:13.359 --> 0:23:18.080 that some of these orders are effectively internalized, and they 0:23:18.160 --> 0:23:22.560 do it through the so called price improvement auctions. The 0:23:22.640 --> 0:23:29.920 wholesaler engages an affiliated market maker, and the market maker 0:23:30.480 --> 0:23:35.840 brings retail order with its own contra order and pushes 0:23:35.920 --> 0:23:41.920 it through these price improvement auctions. Theoretically, these price improvement auctions, 0:23:42.440 --> 0:23:45.800 they have an exposure period a hundred milliseconds, which is 0:23:46.240 --> 0:23:49.560 a lot in the trading world, and other market makers 0:23:49.680 --> 0:23:55.600 can compete for these orders, but practically the fees to 0:23:55.680 --> 0:24:00.440 break these auctions are quite high, so many orders just 0:24:00.600 --> 0:24:07.359 go through without competition. Therefore, they're effectively internalized. And Garrett 0:24:07.400 --> 0:24:11.040 Gasler mentioned that one of the things they want to 0:24:11.160 --> 0:24:16.000 do is to institute auctions like price improvement auctions we 0:24:16.080 --> 0:24:21.399 have in the options market. This is a little concerning, 0:24:21.520 --> 0:24:26.360 isn't it, because that's exactly how options orders are effectively 0:24:26.480 --> 0:24:33.360 internalized in bright daylight on national exchange. Well, I want 0:24:33.400 --> 0:24:35.359 to actually have a follow up for you on that, 0:24:35.600 --> 0:24:37.560 which is that a lot of the talk about the 0:24:37.600 --> 0:24:41.800