Why tastytrade Thinks Retail Investors Can Beat Institutions

Ann Berry (00:00):
According to recent JP Morgan analysis, retail investors are playing an increasingly significant role in the stock market accounting for between 20 and 30% of total US trading volume. And as market participants evolve, platforms are adapting to support new generations of traders. tastytrade is one of them, providing educational content and tools for active retail investors as well as sur it's brokerage, allowing them to trade in stocks, options, futures, ETFs, crypto, and more. Today we are chatting with founder and CEO, Tom Sosnoff about his journey and the ups and downs of modern trading. Let's dive in and hear his story. Wow, Tom, brilliant to have you join at a time that it feels as though the market is just increasingly unpredictable. Before we get into the details though, of how you and the team at tastytrade are helping others to invest, tell us a bit about how you got started in your trading journey. 

Tom Sosnoff  (00:51):
I got started right out of college, actually. Now I'm old, so I've been around the block a few times. This is my 43rd year in this business, something like that. I started right out of school, got a job on Wall Street, left Wall Street after about six or eight months to move to Chicago to trade on the floor of the sibo. And I've never looked back. It's been 43 straight years in this business. 

Ann Berry (01:18):
And what got you there in the first place? Was it just one of those things where going to Wall Street was a cooling? Was it one of these things where, you know what, you want to get a good job out of school? How did you get there? 

Tom Sosnoff  (01:27):
I went to school in the late seventies and there were no jobs for graduates. I was a political science major. I was pretty sure I was going to be working in politics or government. And it turned out my first interview was on Wall Street and they offered me a job, so I took it. Never looked back. 

Ann Berry (01:43):
You've had some really big wins and you've had some tough losses over the years. So before we start and we talk about the journey of the investor, tell us about one of your most successful investments. 

Tom Sosnoff  (01:54):
Well, I mean, honestly, my most successful investments were the businesses that we built. I started and built a company called Thinkorswim, which is still one of the most popular trading platforms in the world. And then we started and built tastytrade, which is also one of the most popular trading platforms in the world. So I mean, from a success side, as an entrepreneur, I've done pretty well building financial software, building prop trading firms. It's kind of been, I dunno, I must have found something I was good at. So that part of my life, those are my biggest successes. 

Ann Berry (02:30):
Talk to us a little bit, Tom, about where tastytrade is at today. What kind of scale are we talking about here in terms of number of users or the quantum of capital that is flowing through the platform now? 

Tom Sosnoff  (02:42):
Tasty has, we're a firm where people go to trade, so we're brokerage firm, but people trade here. We're the largest trading boutique pretty much in the world boutique. But we specialize in options and futures, futures options, crypto, all that kind of stuff. But people come here, people use our technology mostly to trade. We do about somewhere around 3% plus of all the customer volume in derivatives, which is a lot actually. And we have, I want to say the neighborhood of a half a million customers, about 7 billion in customer capital. We make close to a million trades a day at this firm, customer only, no professionals. So we're a pretty active firm. 

Ann Berry (03:39):
And in terms of where you see your customers demonstrate the most interest by putting their money, where their interest is, what are some of the names, what are some of the stocks that you are seeing the most other direct activity in or derivative activity in? 

Tom Sosnoff  (03:56):
Well, we're not going to be that much different than the rest of the industry. So when you talk about in the equity world, I mean Tesla and Nvidia are the two biggest option traded stocks. And then you get into ETFs, so then you have s and p 500, the spy, the SPX, the Qs IWM, things like that. But generally it's kind of like the top seven to 10 stocks with Nvidia and Tesla kind of dominating the option scene. Occasionally you'll get some earnings plays and you'll get some other players that will come in for a day or so. But for the most part, those two stocks kind of dominate, at least for the last couple of months. 

Ann Berry (04:35):
It's interesting, Tom, there was an article in the Financial Times that cited a report saying that something like 70% of net single stock purchases made by retail investors of the Mag seven. And so with that level of concentrated activity, you've just referred to it in tastytrade, essentially, 

Tom Sosnoff  (04:52):
If 

Ann Berry (04:52):
Tessa and Nvidia are getting the most focused amongst your customer base, what is your perspective on signs that retail investors are not diversifying as much as conventional investing wisdom suggests perhaps they should be? 

Tom Sosnoff  (05:07):
Well, it's a difficult, here's the challenge because it's not as easy as that. So the challenge for individual investors is, on the one hand, you would love to be non-correlated, completely diversified, diversified by strategy, diversified by underlying statistics show that diversification by strategy and underlying can reduce portfolio risk by 30 plus percent in some cases 40, 45%. So there's a very strong statistical argument to be made for every type of diversification. The problem is a lot of people don't fully understand diversification because it's a little more complex than you realize with respect to correlations. And the other side to it is that you also cannot afford to sacrifice liquidity if you're a retail investor. So retail investors sometimes make the mistake of confusing the importance of liquidity with diversification. So the reason that people trade these top, let's say 80% of the trades are in the top, let's say 20 underlyings, including indexes and different equities, is because that's where the liquidity is. And when you're, you're trading in the derivative space, you have to have liquidity in order to be successful. 

Ann Berry (06:18):
Let's talk about some of the newer assets that have become available, not just on tastytrade, but more generally. Let's talk about digital assets and Bitcoin. What's your perspective on Bitcoin and the growth of crypto? 

Tom Sosnoff  (06:30):
I mean, of course I'm a huge supporter of all new products including digital assets. I mean, we've been investing in the digital asset space now for as long as I can remember in other companies and also in our own technology. I mean, we have, tasty has its own wallet. We support right now 14 different, as the SEC has kind of changed a little bit in the last couple of months. We're able to support more cryptocurrencies right now and we support transfer in of crypto, transfer out of crypto. So we are pretty forward thinking when it comes to digital assets. We're also the second largest investor in a company called Zeroh, which is a digital asset settlement company. So we support multiple market making firms with respect to where we send our customer orders. I think we've been one of the leaders, I'm a huge fan of the technology that's behind digital assets. I mean, we believe in, we think we're going to head in the direction of tokenization on a much broader scale to globalize tokenization over the next couple of years. So we want to be there and we're pretty close to accepting stable coins as a way to fund your account. So I think we're on the cutting edge of the digital asset space and we've been involved pretty much from the start. 

Ann Berry (07:59):
And what's your own personal view, Tom? And you can answer this either your own perspective or in your role as CEO of tastytrade. What's your perspective on certain digital assets that have effectively been called meme coins where there's a disconnect between fundamental valuation, it's inherently a difficult asset class to ascribe fundamental value to, but what is your view on meme coins and what that may be doing to investor appetite for Bitcoin and other digital assets? 

Tom Sosnoff  (08:29):
I mean, personally, I don't own any meme coins. I own plenty of digital currencies, but no meme coins, anything that that subjects a certain industry or asset class to people questioning the integrity of that asset class always scare me. I am a good faith person who believes strongly in the integrity of financial markets and meme coins. I mean, part of it is I don't necessarily get it. I don't understand the attraction that much. I don't, I sense more of a pump and dump game than I do a real asset class. So we tend to stay away from as a firm and we tend to stay away from talking about much about meme coins. So from the perspective of tastytrade and Tasty Live, which is our network, we really don't touch much on meme coins. We support, I think, one or two total on the platform, but that's just from customer demand. We don't really talk about it. It's not something that interests us that 

Ann Berry (09:43):
Much. And what about meme stocks? 

Tom Sosnoff  (09:47):
What about meme stocks? 

Ann Berry (09:48):
Yeah. What about meme stocks? You said that you, which an interesting point. Yeah. Similar GameStop or Blackberry. How do you feel about 

Tom Sosnoff  (09:55):
Those? It's a similar thing for me, the positive side of meme stocks, and this could be the positive side of meme coins too, is that they bring people into the game. So a lot of people that may never touch equities or touch derivatives or touch cryptocurrencies are attracted to the game because of meme stocks and meme coins. And for that reason, that's the one positive on the downside of meme stocks and of meme coins, it's not what I believe the future of finances. It's not what I believe the future of investing is. It's too gimmicky for me. It's one and done. It discourages people, they lose interest quickly after they get involved with that stuff. But again, it does attract people. It's a very good PR tool or marketing tool just to get people interested in investing. And for me, that is one of the biggest challenges we have is just, you know what? Let's increase the size of our 

Ann Berry (10:57):
Audience. Related to that note, I get asked this question a lot, Tom, I'm really curious to know from your seat what you see in terms of the demographics of your customer base. There is the stereotype that investing and particularly trading and active trading tends to skew mail, tends to skew a little younger. Is that reflected in your customer composition? And how do you think that the audience for investing, educated investing can be expanded? 

Tom Sosnoff  (11:31):
It can be, well, two questions there. The audience can be expanded by a couple things. One is we need academia to roll over and to essentially embrace what modern finance is and they need to move off of the old school fundamental approach, the old school fundamental curriculums with respect to just what's taught at university levels and everything. But we also have to embrace risk and we have to embrace decision-making, risk and finance at a completely different level, which is why I do like the new technology that's been introduced by digital assets. The challenge with young people is that they, in many cases, just a don't have enough extra capital that they can afford to and lose or they really don't understand because of just kind of much more traditional impressions of financial markets that being a self-directed investor is something that you should probably start at a very young age because it will change wealth creation for you over the course of a lifetime. 

(12:42)
And unfortunately, the majority of trades and investments are made mostly, and you're right, it's mostly like it's male dominated. It's 40 to 60-year-old males and 40 to 60-year-old white males. And that's the dominating part of this business. We're seeing a lot more women get involved now. We're seeing a lot more younger people get involved. So the demographics of people opening new accounts has broken down to about a third, a third, a third, which is really good. But the majority, the lion's share of the trading is still in that older demographic group. So that's what we have to work on the most. It's going to take a cultural change of people just to start embracing risk and embracing decision-making, embracing risk, and embracing this kind of new products. 

Ann Berry (13:29):
It's interesting to hear you talk about embracing risk, Tom, because I think about your background as an entrepreneur and I think about the kinds of companies and investing activity that gets a lot of mind share and investing or running or founding early stage companies. The glamor of startups does seem to have captured younger people's imaginations. And so it feels as there is appetite for risk, but perhaps just not at the pace that you see in the public market. What do you think of that? 

Tom Sosnoff  (13:59):
We've seen there's always interest in, I mean now there's different, there's undergraduate degrees in entrepreneurship, there's graduate degrees in entrepreneurship, which has definitely helped the challenge for younger people and in the world of just speaking just strictly as entrepreneurs 

(14:18)
And in fact just I'm doing, giving a speech in another week or two to a group of 800 high school students that are in an entrepreneurial program. So it's super cool. So there's definitely a movement in that direction. The challenge for younger people is a, it's, it's not having your full network in place. It's also difficult to raise capital when you're very young. And what we found is that, listen, we encourage a thousand percent, the success rates are a little bit lower, a lot lower with younger people. But we love the ideas. There's a gazillion great ideas executing something a little bit more difficult, but a gazillion great ideas, 

Ann Berry (15:05):
Really interesting perspective on that. Tom. There's also a different kind of risk that Ivy least observed is different between retail investors and institutional investors. And also access to what I'm about to present to you, which is the alternative space, whether it's private equity, whether it's venture capital, some asset classes which have produced pretty good returns when you compare them to the public markets over the years. How much is your customer base at tastytrade coming to you and saying, we want access to this. Help us find a way to be able to add this to our portfolio. 

Tom Sosnoff  (15:41):
Although I do think there's going to be a movement towards more crowdfunding opportunities, and I do think there's going to be a movement as we become more decentralized over time. There will be more like Reg cf, reg crowdfunding offerings and things like that, and there will be more opportunities for retail investors. But right now we don't get very much of that. We don't get very much demand for that at all. I mean, there's plenty of firms out there that deal with accredited investors and that deal with non-listed stuff and OTC stuff and things, opportunities that mostly venture or private equity firms get into. We don't see a lot of interest on that. On the retail level, we don't see very much interest at all. And most online brokerage firms have a very hard time getting into that marketplace because it's not a scalable, for us, it's a regulatory nightmare on many levels. And it's difficult because we can't really offer accredited products. It gets sloppy, it gets dirty. So we kind of stay out of that space, and I think every retail firm really stays out of that space. 

Ann Berry (16:58):
Talk to us a little bit, Tom, about another change in the retail investing arena or just the public market equity investing arena period, which is the rise in 24 hour trading. The NASDAQ just announced that they're targeting 2026 to have around the clock exchange activity. The New York Stock Exchange already sort of been there. How does that change the game for retail investors? 

Tom Sosnoff  (17:23):
Anytime there's new products or there's any kind of expansion in the offerings, it's obviously something good for retail investors. Now remember, we've had 24 5 trading in the futures world. We're the third largest futures firm in the US and we've had 24 5 futures trading now for the last decade and a half. So 24 hour trading is not something new because virtually every one of our customers has access to markets 24 5 in the futures world, futures and futures options. And in the crypto world, it's already 24 7. So those markets exist. What the sibo, the nasdaq, the New York Stock Exchange are all going to is 24 hour stock trading, which already exists today, but it's done a little bit off exchange. These are the exchanges finally doing it. We're all in favor of it. We think it's going to be great. I think you'll see incredibly light volumes. I don't think you'll be a lot of trade, but just knowing that it's there and knowing that it's accessible electronically, it's a great thing to have. I think the top 20 stocks will have a little bit of liquidity. The top five stocks will have enough liquidity. It's going to be hard to move options into that space, and it's going to be hard to find really good market makers that want to go 24 hours a day. 

Ann Berry (18:43):
But just to challenge you a little bit on that, Tom, one of the hypotheses out there is that retail investors are disadvantaged by information asymmetry that very sophisticated institutional investors perhaps have access to better information and they have access to it faster and they have the technology to act on it more quickly. 

Tom Sosnoff  (19:01):
I completely disagree, 

Ann Berry (19:03):
Dude. Tell me why. I love that. Tell me why you completely 

Tom Sosnoff  (19:05):
Disagree. I completely disagree. First of all, institutional investors, they don't have the technology. The technology on the retail customers. The technology for retail investors absolutely blows away the technology for institutional investors. Now, I'm not talking about high frequency firms like high frequency firms. Obviously they have great technology, but the retail investor technology that you could use, that I use, that any customer in the world can use blows away any of the institutional technology that's available today. 

Ann Berry (19:32):
What's a specific example of that? What's a specific example of where it's superior for the retail investor vis-a-vis the institutional one? 

Tom Sosnoff  (19:40):
I'll just use tastytrade. tastytrade is built on high frequency middleware. Our execution times are about, I don't know, 23 to 25 milliseconds. The average institutional platform is probably still in the five to 600 millisecond range. And the front end technology they have in the feature sets, they have can't even compare with what you can do on a retail platform. We can route to any single marketplace with any strategy, with any combination of spreads. You can do anything you want strategically in any single product. You can't even touch that on an institutional level. It doesn't even exist because the clearing firms can't handle it. And the front end technology is all old legacy. So no, it doesn't exist. The retail investor has lower rates and has better front end technology and has access to more marketplaces and access to more strategies, and it's not even close. 

(20:33)
And then the second piece you said, which was on the information, it depends how you view information. I view traditional financial media and that information as having no value at all. And I look at the information like the hundreds of thousands of hours of content that think tanks like us produce, helping understand how to optimize strategies and optimize the approach to investing as so much more valuable than anything else that the institutional side has that I don't even think of it as a comparison. And then lastly, individual investors can do whatever they want to do because they're small enough so they have access to every single marketplace and they can trade in any product that they want and do whatever they want because their trade size is very small. Institutional investors are limited to only the largest, most liquid underlyings that have enough volume and that are able to facilitate their trades. So their universe of trading vehicles is tiny compared to retail investors. So the retail investor to me, has every edge in the world except against the high frequency firms who are actually the market makers 

Ann Berry (21:49):
And against the high frequency firms. In a 24 5 equity trading environment. Looking at your crystal ball, do you think this shakes anything up? What NASDAQ's set to do? 

Tom Sosnoff  (22:00):
I don't think it shakes that much up because those firms, I don't think that the firms making markets 24 hours a day really are that. I think everybody's doing it as a convenience because it's good for the business. And so I think they're all going to be, it's going to be challenging for everybody because it is very expensive to staff 24 hours a day. It's very expensive to make markets 24 hours a day, and it's very expensive when you have nowhere to lay off those trades. See, during the regular trading hours, you can lay off the trades 

(22:31)
On many different marketplaces. And essentially this is a game of scale. The whole high frequency game, the whole market making game is all a game of scale. And when you don't have scale, which is the middle of the night, things like that, it's much more challenging. So I think you can learn from what the CME has done the last 20 years or so and what the Bitcoin market makers have done. It's challenging in the overnight sessions. So really what you want to do is you want to survive and then wait until the market's open. You're providing a service and a convenience, and you're essentially, you're supporting the integrity of the entire business. And that's important. That's why they're doing it. 

Ann Berry (23:13):
Tom, we're going to round out now with some rapid fire questions. So we've got three coming at you. The first 

Tom Sosnoff  (23:19):
Fire, fire away. 

Ann Berry (23:20):
The first one is, if you could hold only one stock for the rest of your life, which one would it be? 

Tom Sosnoff  (23:29):
I did not think you were going to go there. Of course, we're a publicly traded, but I'm not going to say our own company. If I could hold one stock, which stock would it be? That's really interesting. You're absolutely going to despise my answer. 

Ann Berry (23:49):
I would never despise your answer. What you got, Tom, 

Tom Sosnoff  (23:53):
If you could only buy one stock, you would have to buy a broad-based index. In other words, because every single other industry is going to be disrupted or they're going to be disrupted or there's going to be rotation. And I don't like any specific individual stock for the rest of time. If I had to buy something for the rest of the time, I would buy an s and p index. It was for the rest of time. I don't do that though, but that's not how I trade. But if I had to, that's what I would do. 

Ann Berry (24:25):
Second question for you. What is the single biggest downside risk to the US equity markets right now? 

Tom Sosnoff  (24:37):
The biggest risk right now, and this is a risk we haven't faced in a while, but the biggest risk is just we have a very dysfunctional political situation in America right now, and we burned a lot of bridges. That took a long time to build the risk. The biggest risk to our equity markets is that we lose our leadership role. And America is, the US markets are the single greatest pool of liquidity in the whole world multiple times over. The biggest risk to our markets is that we lose our leadership role as kind of the king of liquidity, and we lose our leadership role as being the place where everybody goes to essentially raise capital and to raise capital, to build new companies and to take their companies public. 

Ann Berry (25:36):
And the last question for you, Tom, what is one company other than your own? So tastytrade is not a permissible answer. One company you look up to other than yours. 

Tom Sosnoff  (25:49):
Oh, I have a lot of companies that in my mind I really respect as both entrepreneurs and the way they run their business and stuff like that. I've, I've always loved Uber. I know that sounds crazy, but I've always loved Uber. I've always been a huge Costco fan. I mean, I have to respect certain companies like Nvidia and some of the things that they've done have just been incredible. But if you really want to talk about companies that were, I love the entrepreneurial side and some of the ways that they've changed my life and things like that, I kind of always put, if we're looking over the last 10 years or something, Costco and Uber would be my two top. 

Ann Berry (26:34):
And last question for you, last question for you this time, Tom, what's the worst investment you've ever made? You talked us about the best one. Top of the show. You talked about investing in the businesses that you have founded, built, what about one that didn't work out well? 

Tom Sosnoff  (26:46):
I have a lot that didn't work out so well. So one of the things about risk takers are I actually did a tour, a speaking tour across America for a whole year that I called it The Bad Trader Tour. And I talked about all my bad investments. I had a streak of about 40 in a row that didn't work out like private investments, just places where we were invested money. I would think that it's a combination. For me, it's a lot of venture deals. So let me just explain for a quick second, because somebody took a shot with me when I wanted to build businesses. I have always felt that an obligation to do the same with young entrepreneurs, young traders, things like that. And so I have probably made 40 or 50 investments where they've gone from some number to zero. So I have a ton. Worst investment ever would probably be a restaurant, a WW wrestler, an oil well in Texas that didn't exist, a gas well in Oklahoma that didn't exist, things like that. So lots of investments. A real estate building that burned down. We got no money out of things like that. Over the years, I've made lots of bad investments. I wear 'em as a badge of honor. 

Ann Berry (28:12):
But of note, none of those, none that you cited actually public publicly traded. So perhaps in keeping with what we've been talking about today, Tom Sosnoff, founder and CEO of tastytrade, thank you so much for joining. Appreciated all your insights and your time. I'm Ann Berry. Thank you for tuning into After Earnings, the show that brings you up close and personal with the executives behind the world's most interesting publicly traded companies. If you learn something today, don't forget to like, subscribe, and share with your friends. Upcoming episodes will feature CEOs and CFOs from companies like Adobe and Roblox. So do come back and we'll see you soon.