Navigating the New Era of Retail Investing with Stephen Sikes: Myths, Strategies, and the Rise of the Informed Investor

Unlock the secrets behind the ever-evolving world of retail investing with our special guest, Stephen Sikes, COO at Public. This episode promises a journey into the heart of modern market dynamics, where we shatter the myth of the "dumb money" investor and introduce you to the savvy, diverse profiles making their mark on the financial landscape. Stephen brings his seasoned expertise to the table, revealing how Public has opened doors for an influx of younger investors since 2018, and demonstrating the platform's commitment to education and long-term investment strategies, despite the allure of options trading and speculative assets.

The allure of volatility is undeniable, and our conversation with Stephen dives into how retail investors are riding the waves shaped by Bitcoin ETFs, the Reddit IPO, and the narratives that fuel their investment choices. We examine the robust performance of certain tech giants, the surprising agility of small-cap sectors, and how retail investors are increasingly preferring individual stories to broad ETFs. Stephen and I also tackle the complexities of options trading in a fluctuating market, discussing how retail investors balance their portfolios between ambitious trades and dependable, long-term investments.

As we wrap up this episode, we focus on the recent shift toward more conservative investment vehicles such as bonds, showcasing Public's innovative bond trading platform. We dissect the divergent outcomes for AMC's equity and bondholders, illustrating the critical importance of a diversified portfolio. And by challenging the stereotype of retail investors as careless risk-takers, we underscore the calculated strategies they employ, highlighting Public's role in fostering an informed and strategic investing community. Join us and equip yourself with invaluable insights that redefine what it means to be a retail investor today.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:07

My name is Michael Guyatt, publisher of the Lead Lag Report. Joining me for the rough hour is Mr Stephen Sykes. Stephen, introduce yourself to the audience and to me a little bit more formally. Who are you, what's your background, how'd you get involved in public and what are some of the things that you're doing?

Speaker 2: 0:21

right now? Yeah, hey, thanks for having me Really excited to be here and to talk to the audience and talk about sort of retail investing and what are some of the things that you're doing right now? Yeah, hey, thanks for having me Really excited to be here and to talk to the audience and talk about sort of retail investing and what we're seeing. First, my background so I'm the COO at Public. Part of my responsibility is I also sort of lead our broker dealer and I lead all of our regulated functions, which means, as we're talking about sort of the platform from a capital market perspective and what do we do, and sort of helping retail investors access the various asset classes. We do Like I'm at the tip of the spear and I spend all of my time thinking about how to build a great sort of multi-asset investment platform for, you know, the modern generation of retail investors. And I think before I was at Public, where I've been here about three and a half years, coming up on four years, public itself is, you know, a relatively young, certainly mighty firm. I was at SoFi where I helped start sort of all the SoFi invest businesses and ran those as the business lead for a few years. So anyway, that's my quick CV.

Speaker 2: 1:09

I think the two seconds on public just hopefully most of the listeners are familiar, or hopefully more than a few of our public members and you know, have chosen us to be their primary investment account. But I think that's what we're aiming for. That's where we see our place in the industry, right Is? We want to be, you know, sort of the modern multi-asset brokerage for retail investment, retail investors, and I think that means not just offering sort of the standard equities, crypto options, but we do want to bring a broader set of asset classes to bear so the retail investors can build a great sort of self-directed portfolio.

Speaker 2: 1:43

And you know, we certainly see ourselves in a position where we started our journey serving long-term investors, focused on building a business there, and over time we've sort of broadened out to include things like options trading and I think we've started to see a significant growth in sort of what I would call like the trader end of the spectrum among our member base and seeing some interesting insights there. But anyway, that's me, that's public. I do pride myself on putting myself on the community among retail investors, so I'm an easy guy to reach. So if anything's interesting that you hear on the conversation or if you ever have any questions about public, feel free to DM me on Twitter or find me on Reddit, where I'm increasingly spending more time.

Speaker 1: 2:17

So anyway, back over to you, Michael. I feel like we should define properly what a retail investor is. I say that because I think the impression for a number of years I think it was largely true was that retail was just code for saying relatively little money that's trading, it's not the big money that's moving things around At public. How do you think through that archetype of what a retail trader, investor, is?

Speaker 2: 2:38

Yeah, I mean like again, I think the answer is for people that don't do it professionally. I think is the answer right. And certainly there are people on sort of they might be categorized more broadly as professional-esque or you know, or view sort of day trading as their professional or trading as their sort of profession, right, whether they're retired or just, you know, managing their own assets. But generally we think about people that aren't sort of on the institutional spectrum. So quite a broad spectrum, no-transcript. The presence of both ends of that spectrum have become have grown over the last few years relative to maybe what you would have thought of 15 or 20 years ago in the industry.

Speaker 1: 3:40

As I think the other impression is that and I say this with a broad brush that retail can be equated to, in quote, dumb money, which I never liked that term because it has nothing to do with intelligence. But going back to your point about professional versus non-professional, presumably has to know the industry and know what they're doing and talking about. Retail, if they're not doing it as a career, is maybe doing it based on other dynamics, maybe less informed than the professional players. Let's talk about the education level on average, if, from what you observed, retail is perhaps smarter to market dynamics or more understanding of the way that investments work.

Speaker 2: 4:16

Yeah, I mean, I think you know one incredibly hard to generalize about the retail market. For the same reason I just said earlier, there's a huge diversity of profile segments, of goals and aims and strategies among sort of the retail investor base. But I think there are a couple of things that we've witnessed, and I've witnessed over the last few years in the industry, which are increasing what I would say the sort of quality of investment decision and the improvement in outcomes for retail investors. So I think, first and foremost, I think we are in an age of dramatically increasing adoption of just like investing among sort of the consumer population. Right, I think we've never seen a higher penetration of individual investment accounts among consumers in the US and that continues to grow healthily. You know, even though we had massive explosion in sort of 2020, 2021 with sort of the COVID era, I think we've continued to see really strong growth there and massive penetration. And the interesting thing is, like you're seeing that actually grow among younger cohorts to an even greater degree. I think if we like zoomed back to 2018, you know we would see that like sort of the millennial generation for prior, you know, sort of call 2009 to 2018 was massively underpenetrated in terms of investable assets and investment accounts. I think that script totally flipped from, really started in 2019, to be honest, but really 2019, 2020, 2021, we saw a massive growth in retail investment accounts among the millennial generation and now it far outpaces sort of prior generations in terms of adoption of sort of individual equities and investing and that tends to skew more self-directed.

Speaker 2: 5:55

Which comes to my second point, which is I think that sort of increase in self-directed investing is largely driven by the massive improvement in both like trading accessibility so better platforms, you know, lower costs, better products and the massive explosion in information available to retail investors, largely for free. I mean, I think if we zoomed out 15 years ago, you know, just getting like real time streamed quotes would have been something most brokers would charge for. You'd have to have a very high individual account minimum to get your sort of free quote stream right. Most everything was a sort of 15 minute delay. I remember my first brokerage account that I opened in the early 2000s, like I literally had to pay if I wanted to get real time quotes. Now that's like tick by tick, level, two data, et cetera, all available for retail investors for free at the, you know, on a variety of platforms with a $0 minimum investment amount.

Speaker 2: 6:51

And I think that proliferation of, like you know, better tools, better products and better information had made retail investors be more confident and ultimately have significantly better outcomes. And you know, I think there are a few proof points of that, again from the data I alluded to earlier about adoption of products. But, like, the one that I sort of intuitively like to point out is, like you know, there's a big narrative on sort of retail trading volumes and behaviors over the last several years. In aggregate, right, I think, in 2020 and 2021, you know sort of the retail percentage of the equities trading market grew dramatically and then really in 2022 and 2023, that's that fell, and that's true in the equities market, but in the options market it didn't fall Right and the retail sort of percentage of sort of options trading volume throughout 2022, 2023, and even into 2024 has stayed pretty consistent, which is interesting, right, I think, as we think about retail investors, you know we think about opt-in being the riskier product.

Speaker 2: 7:49

I think in a downturn and a tougher equities market, you would expect options penetration to actually decrease more than the equities perspective. I think that's what we had seen in sort of prior market cycles, but for this particular market cycle that hasn't been the case, and I think part of that is actually like retail investors are having you know when what we would broadly count as retail investors are actually having better outcomes trading more sophisticated instruments like actions and prior generations of sort of traders retail traders had.

Speaker 1: 8:18

The other part, of course, of this is the tremendous proliferation of interest in crypto really post 2020. The tremendous proliferation of interest in crypto really post 2020. And I know you're on the public side doing or give back to some crypto products. Let's talk about that because if you mentioned that, yeah, there's obviously been a younger cohort and, from my impression, a younger cohort likes crypto more than equities.

Speaker 2: 8:39

You know, I don't know that I would say a younger cohort likes one more than the other. I think you know crypto is broadly among younger cohorts going to be, you know, broadly more have a higher consideration, let's say, as retail investors, as younger retail investors approach their portfolios like certainly more likely to consider crypto as having a portion of their portfolio. I think we see those sort of trends. I don't know that. I would say it's like a binary preference of crypto markets over, you know, equities markets. I think they're both pretty well adopted in younger cohorts. You know, in the last, you know, this quarter or really since the start of the year, the crypto markets have certainly been interesting with the introduction of from the first Bitcoin ETFs spot, bitcoin ETFs and seeing the growth there and seeing retail investor behaviors when you do have, you know, sort of the equity style access to a crypto asset for the first time.

Speaker 1: 9:25

Let's get into the weeds as far as some of the things that you're seeing in terms of just broader activity from retail investors using public as a platform. You sent me a note saying that you're seeing, in general, an increase in speculative behavior, which I'm not surprised by, because that's what happens, especially towards you know top, I think, more often than not, especially towards you know top, I think, more often than not. Let's go through some of the more interesting observations that you've made as far as the activity on public by those that are, you know, maybe smaller account size, very retail and are very much sort of trading rather than investing.

Speaker 2: 9:58

Yeah, I mean, again, I think it's one I'll say, even on the public platform, right, we have millions of customers. It's hard to draw, you know, with a super broad brush. So, you know, caveat emptor here, like it's, you know, it is what it is. I'll give you my own impression, one I think you know, michael, you said something interesting which is, hey, seeing this trend towards might signal a top and so on. I don't really have an opinion of that, but to say, q1 was very different than sort of some of the you know, prior rallies that we'd seen call it, you know, in August of 2023, right, we'd had some decent, you know again, some decent rallies in the equities market and we didn't see those sort of pull through. In the same way, we didn't sort of see the same increase in sort of retail speculation and especially on sort of the most speculative end of the spectrum that we have in Q1 here. So I don't want to say, like you know, I don't want to nullify the point, I just want to say this was a little different than what we've seen in quite a long time from retail investors. And I think there are a few, you know, some sort of thematic macro explanations. Some are sort of idiosyncratic. Maybe we'll start with the idiosyncratic, because I think those are like a bit more interesting. First, I think we saw again the introduction of the Bitcoin ETFs, right, I think that drove a lot of just broad publicity and, you know, and awareness and familiarity of these products, which led to a lot of reach of interest and awareness and familiarity of these products which led to a lot of retail interest and it didn't, immediately upon launch, lead to a big Bitcoin price appreciation, but we have seen it lead to a Bitcoin price appreciation, you know, sort of over the last several months and I think we've seen that sort of reinvigorate.

Speaker 2: 11:32

You know the sort of crypto, the crypto markets and some of the speculation there and I think you know that has both been. Again, we are members can access crypto through a partnership we have with Baft, which is, you know, big publicly traded crypto as a service platform. Our customers, you know we've seen sort of what their behaviors you know with sort of the Baft products. I think we see there, you know it's sort of barbelled right now, right like either Bitcoin or the more speculative end of the spectrum with like the Doge coins and the Shiba Inu coins and so on. And so I think it's been interesting to see how, as we've seen, sort of you know, the rising tide of Bitcoin load all boats and crypto. You know we had seen some allocation and increasing allocation towards some of the more speculative tokens there. So that's one I think into a synchronic like, but I think that, you know, was sort of the first, the starting gun of some of the more speculative behavior we've seen.

Speaker 2: 12:20

And then, I think you know that, followed with a couple of like you know, with one interesting IPO. The Reddit IPO was obviously well followed among retail investors and particularly sort of the more trader end of the spectrum, and I think you know we saw a lot of interest in the Reddit IPO. And then, you know, on the heels of the Reddit IPO, we had the DWAC to DJT SPAC conversion and the price appreciation there, which led to a lot of volatility. And then the last thing we've seen more recently in the last couple of weeks is the introduction of this destiny 100 tech fund, dxyz, and that again has had massive volatility, price appreciation, selling offs, you know, and I think, like probably a truism and I said this in a different form a couple of weeks ago like you know a couple of things that we can predictably, you know, predictably drive retail interest and behavior. You know one is familiarity, so things they know and understand and see in the markets. So like again, bitcoin, bitcoin, etfs, reddit, everyone knows that like that's going to drive a lot of interest. Djt, certainly super well covered and I think that's going to drive interest. But the second is volatility. Right, and I think we see volatility and that's going to draw sort of again among the sort of trader profiles in the retail world that's going to draw a lot of interest.

Speaker 2: 13:27

I think, you know, we have seen sort of an interesting intersection of highly volatile instruments combined with things that retail investors tend to be familiar with, really leading to sort of, you know, increase in this sort of speculative behavior in Q1.

Speaker 2: 13:40

And again, I think that's sort of the idiosyncratic explanation and you know, sitting in a platform like I do, I tend to, like you know, see these things in real time and see the numbers move and see the charts go up into the right, and like that leads me to like sort of understand the micro of it.

Speaker 2: 13:54

But the macro of it is what you said, michael, which is, like you know, regardless of where you're looking across the equities market, we've seen a pretty strong rally to start the year and, you know, certainly we saw a lot of you know price appreciation and some of the large equity names you know mostly Nvidia, but at the same time you've got Apple and Tesla massively lagging sort of the year to date rally. So it's not really this like magnificent you know this pan magnificent seven seven rally, I think. At the same time as you've seen sort of that, you've also seen sort of the you know, I don't know the Russell IWM, sort of the long tail of public equities also catch up right, and I think it's been this sort of I don't want to say it's a total barbell outcome, but you've definitely seen sort of the small cap world outpace some of the large cap world in a way that we hadn't seen in prior rallies, and I think that also sort of you know that sort of encourages retail investment, especially in the more speculative end of the spectrum.

Speaker 1: 14:47

Do you get a sense that retail in general prefers individual story thought and doesn't really trade ETFs as much? I have to assume that's a part of sort of where the attention gets focused.

Speaker 2: 14:59

Again, hard to generalize, because there are certainly we have retail investors that love to trade individual sector ETFs or lever ETFs, right Like that. There are retail investors that pursue those strategies. I think generalizing right, if we were going to generalize, I think retail investors, long term investors, are going to focus on sort of broadly diversified index funds and then they're going to build a constellation of individual equities that they know and believe in Right, and they're going to hold those for longer. On the trader side, certainly I think we're going to see freighting more focused on individual equities than ETS equities than ETFs and sort of and again, individual equities and their you know option, the options on said individual equities, are going to be where retail investors express sort of their points of view, more so than sort of ETFs as a trading vehicle among the retail market.

Speaker 1: 16:24

Since you mentioned, volatility is a big part of this. When markets get more volatile, do you tend to see more shorting across the platform, more turnover? What's the response? I know I'm talking in generalizations, like all these other questions, but what do you typically find as sort of the response when there's high volatility?

Speaker 2: 16:41

Yeah, so it's interesting. So you know, we launched our option a bit of like context.

Speaker 2: 16:47

We launched our options platform in mid-January and that was really the first opportunity for public members to be able to take a short position right. We didn't allow sort of direct shorting of stocks for a variety of reasons, but you know, sort of long put buying was the first opportunity we gave our members to really sort of express those short positions, which is very interesting to watch and observe. Quick plug for, like you know, trading options on public. You know we built what we think is the best deal for options traders. Basically it's no fees, no commissions, and you know we rebate part of the payment for order flow we receive from sort of the exchanges or market makers. We rebate part of that on every single trade to our investors. So it literally, when you do the math on every trade there's cash. You know there's sort of a cash in the pocket outcome of trading out things versus paying you know 65 cent sort of contract charges and some of the larger brokers etc. So yeah, we've intentionally built a platform we think is great for options traders and does present the best deal in the market. So quick plug there I think what I've been really interested in over time is seeing all that mix of sort of put call buying exists Right and I think when we do see more volatility, we are certainly seeing increases in sort of put buying relative to call buying and you can sort of follow it on a day by day basis, right, and I think you know, especially when you look at it I think probably the right way to look at it is actually as a nominal matter rather than a contract matter and, like for sure, on days where we see down days, big red days, we do see retail investors following that negative momentum and increasing their put buying relative to their call buying and again, that continues to be true across individual names think it's more of a.

Speaker 2: 18:35

I do think we see a trend towards following the momentum, whichever direction that goes in, versus sort of fading fading the rally or fading the sell-off.

Speaker 1: 18:41

The other impression I have of retail investors is they tend to take concentrated bets, meaning it's not a sort of institutional mindset of asset allocation, diversification. Right, there's no, necessarily a hard limit as far as how much you would put in an individual stock. Am I off on that idea that there isn't sort of as much thought to how much concentrated risk to take in a position as a retail trader investor?

Speaker 2: 19:05

yeah, I think certainly it is not, you know. It's not at the extent of, you know, risk management that you would see from an institutional investor, that's for sure. True, but I think, think the thing to remember, I think and this is true of the vast majority of our members and so on is that retail and sort of I've been drawing this dichotomy between retail investors and retail traders and I think that's a little bit of like a simplification. I think the reality is most people using public, most retail investors to some degree, are both right. They both have positions that they view as sort of shorter term trades and then they have sort of longer term investments.

Speaker 2: 19:37

Certainly, there are people that do only one or the other, but the vast majority of people live somewhere in the middle and I think they all sit with sort of. You know, those people that sit in the middle sit on a foundation of, like you know, having a very well, well diversified core portfolio of index funds that you know sit in their individual brokerage account. It might get their 401k right. There are a lot of people who are sort of speculating in the equities market, you know, or with a portion of their assets, and they're willing to take more concentrated positions with those sort of marginal dollars right, but because they've got the comfort of sort of the broad sort of market exposure that they have through other vehicles.

Speaker 1: 20:18

That makes sense. Yeah, no, I think that's well articulated. Now, of course, the other part of this is how retail thinks, if at all, about interest rates. The narrative was that the market can't rally with rising rates. A market did large caps small caps obviously not so much. Talk about, from your perspective, what you're seeing in terms of investor understanding of what's happened in this cycle, right, how retail traders, investors, tend to respond to monetary policy shifts, what the mentality tends to be and how that can change.

Speaker 2: 20:43

Yeah, I think I mean it's a complicated thing and I think, as you think about real people investing real, you know we'll focus on like after-tax dollars just as a simplifying thing. I think, as you look at retail investors, I think you know most people are having this considered. You know internal dialogue of like how much should I be saving versus how much should I be investing, right, and I think most people we found, especially when we talked to our members, sort of separate those two things and you know people tend to think about savings in terms of obviously like lower risk sort of FDIC type accounts, you know, and what they're focused on is earning, you know, sort of a yield. But like, for most people, that is the default is actually to save and then the sort of decision becomes to invest and I think what we've seen in some places is a bias towards, you know, when interest rates rise and that risk-free rate rises, that has a dramatic impact on retail investors because the sort of opportunity cost of their investment dollars goes up. Right, and I think you know in a very like, you know it's intuitive but it's also like a very financial, financially sound theory, sort of take on the world. But like, when retail investors see that they can get you know on public, it's like a 5.1 percent high yield cash account or we have a treasury account. It's you know, I can't remember with six month t-bills. Six month t-bills are, I don't know, five, three, six. Right now, when they see those opportunities, they're like wait, I can get like 5.1 percent in a, you know, fdic insured account or I can get 5.3%, you know, lending money to the federal government, like you know, in a tax advantage way. Like I feel pretty, they feel pretty good about that and that does certainly like increases their proclivity to like take, you know, actually take less risk first right and view that as sort of part of their broader foundation.

Speaker 2: 22:27

And I think what we've seen is like, if we zoomed out on the whole cycle, like that was really dramatic in, you know, throughout late 2022 and early 2023. And we launched sort of the aforementioned treasury account into that market and it was by far the biggest sort of flow generating product for public in 2023. And like to a really dramatic degree. Now what we've seen is like as sort of, you know, the risk-free rate has stagnated around, you know, between five and five and a half percent and sort of the six-month T-bill rate has, like you know, between five and five and a half percent, and sort of the six month T-bill rate has, you know, mostly steadied in the five threes.

Speaker 2: 22:57

You know we've seen that become a little more ho-hum and I think, whereas in 2023, we saw retail investors be very excited about a five percent yield that they hadn't seen in, you know, basically a generation and for many of our investors, never in their adult lives, you know, myself included I think we saw them very excited about sort of taking advantage of those risk-free yields, but as the rates haven't gone up anymore, I think that's become less attractive and it's become, you know, less of a driving force in terms of where people are allocating.

Speaker 2: 23:25

That being said, I think where we at Public you know the other thing that we've launched recently is our, you know, bond trading platform, so our members can directly trade underlying bonds on public now, and I think that the selection of 10,000 bonds across the full sort of treasuries and corporate universe, and I think we've started to see retail investors now look at places where, okay, a 5% is ho-hum and maybe you know TBD, a few weeks ago I would have said, you know, we're going to get some.

Speaker 2: 23:51

We're going to get some cuts in that. Rates going to go down throughout the course this year Maybe not anymore, but I think what we're anticipating, and what we've started to see the early innings of, is retail investors actually starting to reach for yield and so I think, as they start to plan for rate going down, they're like oh, can I, like buy a two year treasury bond? Right, because I'm going to lock that in around five percent, right. Right, because I'm going to lock that in around 5%, right. I think like people are starting to see, you know, they got comfortable earning their 5% risk free and like they want to try and lock that in. And I think they're starting to express that within the Treasury's market and I fully expect, as rates actually do fall, I think reaching for some of that yield in the corporate market is going to be a really interesting dynamic and something that we're going to pay close attention to.

Speaker 2: 24:33

That we're going to pay close attention to because, again, you know earning. You know 5%, 6%, 7% yields on a fixed income instrument when most retail investors have been trained to sort of think about earning. You know 5% to 10% long-term compounding rates in the equities world like to get that in a fixed income instrument is novel and I think you know it does change the decision-making for retail investors.

Speaker 1: 24:51

Just to reset the room for the remaining 20 minutes. Folks, please make sure you follow Stephen Sykes here on X. If any of you want to come up and ask questions, click that bottom left micro request button and, as always, this will be a podcast under Lead Lag Live on all of your favorite platforms. I am curious just given the access to those 10,000 bonds because, again, I don't necessarily think of retail as wanting to play with the corporate credit bond market side, because there's a lot more action in stocks as opposed to bonds. As you know, has there been some good adoption there? Have you seen more and more retail investors on Pollux platform going and selecting individual bond securities to put money to work in?

Speaker 2: 25:28

Yeah, totally, we're seeing strong adoption and we're happy with the progress of the product so far. I think there are a couple like caveat One. I think you're exactly right. Right, this is not an asset class that retail investors have directly accessed before right, typically, you know, I think, as we look at the numbers, the percent of retail investors that directly hold the bond is something like single digit percentage points, right, I think. As you look at exposure to the asset class, though, I think we see a much higher percentage.

Speaker 2: 25:53

But most people invest in sort of bonds through a bond fund and what we've started to see in the started with the treasury account we launched and sort of underpinned this hypothesis is actually like retail investors like bonds are just like weird and like as weird as like bonds are actually bond funds are weirder and they're harder to understand and people don't understand what yield to expect and so on. So retail and again this is a little bit of a truism has historic, especially self-directed retail has been historically under allocated toward the bond market relative to the equities market of our mission where we've started is to actually make accessing those 10,000 bonds and again a nice liquid part of the bond world as easy to access, understand and trade as sort of the equities market. I think we are in the early innings of doing that. We're starting to see a bunch of retail interest in doing so. I think the next big thing for us I think one of the barriers to the retail market is, like you know, the bonds trade in you know sort of denominations of par, which is usually $1,000, face value right, and so I mean, you know most bonds are going to trade at a minimum ticket size of 1000 bucks and like, hey, you know, we have a large force in our membership that can easily allocate towards you know $1,000, towards individual position. But to do that and try and build a diversified portfolio and do it across an asset class that's less familiar and a trading experience that's less familiar, certainly like a higher barrier to entry. So one of the things we've announced and should be rolling out in the next couple of weeks will be sort of fractional access to a portion of that 10,000 bond portfolio. So you know, call it, you know, $50, $100 minimum ticket size rather than sort of $1,000 or $5,000, as can sometimes be the case across the bond market. So we're trying to see, hey, how does giving sort of slightly better or much better, much better accessibility, much lower price point. Allow retail investors to, you know, learn by doing within the asset class and build sort of more diverse portfolios of bonds and you know that are more sort of tailored to their duration and risk needs relative to otherwise. By the way, the other, the story I do like to tell here and like this is unfortunately we didn't have the products live for the Fexterium, but like this is the sort of thing I'm looking forward to in the future.

Speaker 2: 28:01

I don't know if you followed, or how many of your listeners followed, sort of the AMC, amc Theater's journey over the last couple of years, but the short version is AMC Theater's massive meme stock needed to raise money because of challenges financial challenges coming out of COVID, but they were unable to increase their share authorization count in the state of Delaware because they couldn't get, you know, sufficient of their retail shareholders to vote in the proxy, even though it won as a percentage of people that voted. They couldn't get to the majority of shareholders voting their shares and so they were left in this weird position where, you know, they needed to sell stock but they couldn't do it. They ultimately figured out a workaround with this sort of second preferred share class called Apes. And what happened? When AMC started issuing, you know, apes and ultimately issued equity to shore up its balance sheet, all of the retail shareholders that own the equity, you know, lost a lot. The equity, I think, fell somewhere on the order of like 90 plus percent in value.

Speaker 2: 28:57

As sort of this.

Speaker 2: 28:58

You know, fundraising took place in the capital markets for AMC. So that's what happened on the equity side. The equities lost, you know, 80, 90, 95 percent of value, depending on exactly when the retail investors entered. But what happened on the fixed income side? What happened on the bond side of the balance sheet? What happened on the credit side of the balance sheet? As AMC, you know, raised all of this money, the risk on the risk to the credit, the risk to the bonds, went down dramatically because AMC was suddenly in a much better financial position as a company and those bonds rallied.

Speaker 2: 29:30

And so if retail investors, again priori, if they had said, hey, I want to support amc, I can do that both by buying the equity, or I can and or I can support them by buying the bond, if they had built, say, a 60 40 portfolio of those two things over the same time period, they would be far better off than they were, just you know, exclusively exposed to the equity.

Speaker 2: 29:53

And again, I want to see those sorts of opportunities play out for retail investors in a way that hasn't been possible before. And so, again, that's just an example of one situation where, hey, it makes sense intuitively, in the you know sort of the microcosm of a single company, to play both sides of the balance sheet, to own a diversified exposure to sort of the company's outcome, whether it be as a creditor or an equity holder. And I think you know there's a strong reason for retail investors to do that. And, mike, if you ask you know the management team at AMC, they would have been just as happy to have retail investors supporting the bond in the bond market as supporting the equity in the equities market. Right, they would have been completely neutral to those two things. And I think the company you know would have been better off for having, you know, sort of a retail bondholder base in addition to a retail shareholder base.

Speaker 1: 31:00

Yeah, that's actually a very interesting way of framing an example. On AMC, I am the concern that I would have with a screener and you know the easily which somebody can buy a bond is. I can easily imagine a whole bunch of people basically just pre-in, they just trade for the top yielding individual bond and then buy that with no regard for default risk, credit risk, all this stuff. I don't know if you have any visibility of the clicks that happen on that page, but how do people even go about trying to figure out among these 10,000 bonds which one to pick? It's a lot easier to do with individual stocks because headlines, there's clear momentum, there's winners. You don't have the same kind of movement that causes a bond to rise to the top like you do with stocks.

Speaker 2: 31:40

Yeah, so interestingly I had again I have the same concern, right, I think, like one, I think, you know, thinking about this as a self-directed platform. We've talked about this a fair amount, right, retail investors are going, you know, do often allocate towards more speculative end of the equities spectrum, for instance, and the truth is like we're dealing in an asset class that is definitionally lower risk than sort of some of those same speculative bet made in the equities world. So, even the more, you know, even the riskier end of the fixed income spectrum, probably a much less risky instrument. Again, in every circumstance a little different, it's probably much less risky than sort of the marginal speculative investment that happens, you know, on the tails of the equities world. So, starting from a place of like, we're talking about a much lower risk asset generally just because of where it sits in the cap table of these companies. But at the same time I had the same question, which is like hey, are we going to see retail investors broadly skewing to like just sort by yield and just like buying the highest risk?

Speaker 2: 32:32

You know, high yield bond, they can, and the truth is they're not actually where we see most of the dollars going into from a bond perspective. You know, unsurprisingly, treasury's market and then maybe a little more surprisingly, it could be in sort of large, large retail equities names. So we're seeing a lot of allocation towards, you know, the investment grade. Microsoft, apple, amazon, nvidia, those are the names where we're actually seeing increasing bond buying Again, because I think you know, retail investors are viewing that sort of investment grade opportunity as OK, I know what I can get in sort of six month T-bills, ok, I can find a sort of short duration instrument in one of the MAG-7, et cetera, investment grade bond and I can capture the 20, 30, 40 basis points of spread there and get a little bit better with, you know, managed credit risk.

Speaker 2: 33:20

And I think that that sort of buying behavior is mostly what we're seeing. We're seeing sort of a rational focus on capturing the spread to treasuries that investment grade can present. So certainly we do see some of the speculative high yield bond buying, but that's not the majority by any stretch.

Speaker 1: 33:35

So our industry, as you know, is very cyclical, right, and it's all functional sort of, whether you're in an expansion or recession. I would make the assumption that sitting in your seat or sitting in you know an executive type of level at a brokerage or asset management firm, you'll see things earlier than the headline will report, and what I mean by that is you'd see more and more additions to accounts or more and more redemptions, right in terms of money going in to be traded or money going out used for paying expenses. What are some of the broader trends in terms of in aggregate money flow Meaning? Are you seeing that a lot of the investors on public are actively adding to their accounts, that they're so flushed from income sources that they're able to just kind of increase their portfolio? Or are you seeing, maybe at the margin, you know, some people pulling money out, maybe because they just can't afford things as easily as they used to?

Speaker 2: 34:27

Yeah, and so this one's a hard one to answer because it's really difficult to separate, you know, sort of the nuances of public as a platform and all of the work we do to create a great investment experience like which, again, we find always help, you know, increases the amount of flows that we see in the market. Right, we make changes, we improve the platform, we offer new products that are going to increase sort of the inflow. So it's very hard to like separate that from like what is truly the macro driver. But I'll tell you, I think, as we look at it, as I think about it intuitively, on, like you know, a quote, unquote, same store sales basis, right, if we were just looking at the same, the same cohort, the same set of products, et cetera. I think Q1 was, you know, saw massive inflows, right, I think we saw a lot of retail investors, both, you know, increasing their savings rate into products like our high yield cash account and the treasury account. I think we've seen, again, massive inflows into, you know, large retail equities index funds and so on, and I think we started to see some inflows into sort of the speculative and the speculative we talked about earlier. But I think, broadly speaking, sort of Q1 was a phenomenal flows quarter. I think we did see, you know, some of the usual CAC day headwinds that you can expect among sort of self-directed retail brokers, as some subset of the population had capital gains in their brokerage account from 2023. And you know, oh to tax bill to Uncle Sam, and so that does on the margins when I drive out flows for a few weeks. But generally speaking, as we look at sort of the total inflows and total net flows of the platform again, some of this being specific to public I think we see a really healthy consumer right and I think that echoes what we've seen as the macro data around the job market and income.

Speaker 2: 36:04

You know, I think, a couple other things that are interesting. One you know, we are monitoring sort of this long-term trend of the health of consumer balance sheets. I think there's in macro circles there are a lot of conversations about the surplus savings that you know sort of the average American developed over the course of 2020 and 2021 and how that sort of started to burn down over the last several years and we are still at a place of sort of saving surplus within the sort of consumer economy. But I think all of the sort of pretty chart that's seen from the large macro. I think we're seeing that start to taper out from the large macro. We're seeing that start to taper out and so we're going to be interested to see how much that sort of balance sheet, that surplus savings disappearing and getting back to sort of 2019 trend we're starting to see like, okay, how does that impact flows on an ongoing basis.

Speaker 2: 36:48

Again, haven't seen any evidence there, but we're paying close attention. So I think that's where we're at more broadly is still a very healthy, strong consumer and especially in like our again, we, our target segment is certainly upmarket, right, we are going to deal, you know, look at sort of the top quartile, so the top 25% of consumers within every sort of age and geographic age, demographic and geographic area. We're going to sort of view toward that top 25%. But I think that within that category at least, we're seeing continued strength and actually increasing flows on an ongoing basis.

Speaker 1: 37:24

Talk about the education side for a bit. You mentioned options trading. You can get into a lot of trouble if you're not aware of how options work, and we've seen those stories kind of periodically come out in the media. What are some of the things that, on the public side, you're doing to get retail to understand what exactly they're doing with their accounts?

Speaker 2: 37:44

Yeah, I mean, I think there are a couple of things, you know, factors that are important here. One I will start from a place of like keeping it real, which is my lived experience. I've been doing this for, you know, call it 10 years of watching retail investors. They learn by doing the vast majority right. And so I think, as we thought about constructing the options platform, I think if we start from the inside of retail investors learn by doing.

Speaker 2: 38:06

There are two things that we built very specifically to help retail investors along.

Speaker 2: 38:11

First, I think of the strict suitability criteria, which means for every member that comes in and requests access to options, they have to tell us a bit about their investment goals and experience and then we decide sort of what level is appropriate for them.

Speaker 2: 38:25

And the truth is, at this point, I think, fewer than 60 percent somewhere between 55 and 65 percent of the investors on public that apply for option access are not granted any level of option access and instead they're sort of put on a, you know, they're sort of put on a drip campaign of helpful educational materials that we want to see them sort of consume over a period of time before you know they can reapply and call three, six, nine, 12 months and gain access right.

Speaker 2: 38:52

So I think that's first and foremost like having that strict suitability criteria to make sure that really people that are using the product do have some experience and some reason to be doing so and have the capability to understand. The second is, for all retail investors that come through and enable options, we have the option for them to have, you know, we call it education mode, which basically delivers a bunch of overlays on the options experience for the first few times people go through it so they can see what each of the you know, what all the Greeks mean, what all of the sort of trading functions are and so on, and just make sure, as they're doing, we sort of put the right learning materials in the way. And, of course, underneath all of that there's a, you know, a robust education center focused on options, where we've got incredibly, you know, high quality, well produced videos explaining all of the options, strategies and what everything means no-transcript.

Speaker 1: 40:00

Getting more involved on the Reddit side and spending some time there. I think a lot of people are still of the mindset that a lot of retail are these in quotes, DGens that are just Reddit players and you know, yoloing into options, into individual positions. What's right and what's wrong in terms of the narrative?

Speaker 2: 40:15

Yeah, I mean, I think the biggest one is that, right, which is like painting with a broad brush, and I think I've said multiple times, like very hard to generalize, about the retail market.

Speaker 2: 40:23

There are tons of different, you know, profiles and behaviors and goals and strategies that retail, that all fit under that retail umbrella and I think you know too often folks are willing to paint with a broad brush and I think, generally, the second thing is that broad brush tends to paint retail as being you said the words earlier like dumb money and I think you know, listen, it's almost a truism to say that retail investors aren't going to know as much about the capital markets as somebody who does it for a living. Right, you show up to the office and you spend 12 hours a day thinking about investing. Right, like you're a professional, like you are going to have, you know, hopefully it's not wasting your life You're going to have some kind of incremental impact on your ability to make good investment decisions. That is for sure. True, and that should be a truism. Right, it's the same as, like you know, any profession, right, where you've got people who are sort of you know, doing it part-time or as a hobby, versus people that are doing it professionally. There's obviously going to be a difference there. I think the thing that I think is under-accounted for is that playing field is leveling over time. Retail investors, again, will never be professionals, right? They don't spend the time 12 hours a day thinking about it for the most part. Again, if they do, I think those that do invest that amount of time uniquely nowadays have a much smaller information availability gap than they used to. So the capability is there for retail investors to match sort of that level of sophistication as a professional. But even for those that are sort of that level of sophistication as a professional, but even for those that are, even for those that are doing it, you know, part-time or as a hobby or it's just like you know something they're interested in and want to stay engaged with the markets, the amount of information available to them and the ease with which you can consume quite a lot of information in a short period of time is way different than it's ever been before. And I think painting retail as a broad dumb money brush with a broad dumb money brushes is probably, is probably inaccurate. And you know there's another interesting group point that I said earlier that I think retail investors are. I'm going to get real. I'm gonna get real like industry wonky here, but, like you know, I think you'll find it interesting.

Speaker 2: 42:26

You know I said earlier about retail investors and how options trading volume among retail has stayed largely consistent, while equities trading volume for retail has gone down over the last several years.

Speaker 2: 42:36

So that's one trend that we've seen in sort of industry data.

Speaker 2: 42:38

The second trend we've seen in industry data is the large I won't name any but the large retail brokers have started to see, you know, their options payment for order rate or option payment for order flow rates fall over time and there are a couple of driving factors that I'm not going to get into detail.

Speaker 2: 42:57

But one of the driving factors of that is actually retail investors are having better outcomes on their options trade than before, right, and so the better retail investors are executing profitable options trade, the harder it is for those sort of payment for order flow mechanics work to make sense, because generally, you know, through the entire sort of the sort of market structure, somebody is taking that risk on the other side of that options trade and the more retail wins, the harder it is.

Speaker 2: 43:24

You know, the more money that comes out of the system and the harder it is for those payment for order flow rebates to stay super high. And so I think we've seen sort of at those large retail platforms, we've seen those rates fall dramatically we're talking like 40 or 50% over the course of the last two years and I think that the you know again hard to say specifically, again, I don't work at those platforms, I haven't been in this business for a long time but one of the driving there are many driving forces, but one of the driving forces of that is, in my opinion, the quality. You know, the outcomes of retail investors in the options market are improving.

Speaker 1: 43:56

Stephen, for those who want to track more of your thoughts or learn more about public, where would you point to?

Speaker 2: 44:00

Yeah, follow me on Twitter. Stephen Sykes underscore, because you know Twitter hasn't figured out suspended accounts for people to claim the super desirable handles anymore. That's one on Twitter and then on Reddit. I'm just public on Reddit. So those are the two places where you know you'll mostly find me in the community. But again, generally if you reach out to our, if you ever have a need, and you reach out to public customer support, you can always ask for somebody to send a message Stephen's way, et cetera. So a bunch of ways to get me. I try to do my best to be out there and you know interacting with our members and helping our members out and you know trying to convince people to give us a shot. So if you're interested in public, please reach out. Happy to help you get set up.

Speaker 1: 44:37

Appreciate those that joined here. Please make sure you follow Steven. I appreciate it, steven. All right, thanks, michael.