MI Rewind: Deep Dive into Stock Exchanges and Nasdaq w/ Kevin Kennedy

23:45And again, traders were sort of saying, That's not going to happen. That's not going to work. You need human interaction. The ISE did exceptionally well. They got off to a great start in 1999. They grew market share for 15 years, well, actually for about 12 or 13 years, up till about 2012, peaked there. Market share started to erode. And then ironically, in 2016, NASDAQ bought the ISE, which is now in my portfolio of products where my team runs the International Securities Exchange. So NASDAQ owns that. We paid 1.1 billion for it five years ago. Where are we today? Do we still have any physical trading floors?

24:22Do we still have any physical traders anywhere? Yeah, we do. And I love saying this. This is my favorite statement. The oldest stock exchange in the country is owned by NASDAQ. It's the Philadelphia Stock Exchange. We did a complete revamp. And the last day of the old stock exchange was right around March of 2017, which ironically was 30 years after I started and had my first interview in March of 2017. So I had great accomplishment personally for that. I felt really good about it. We created on the eighth floor of a building in Philadelphia, right near 30th Street Station, a brand new trading suite, trading floor, all the rules still intact, except that all the floor brokers have unbelievable technology that they walk around with handhelds and they can trade.

25:08And I call this like the deep sea fishing pier. They can trade these large orders and they can immediately put them right into the electronic market. So they respect the bid and offer. They have to trade within that bid and offer of all 16 options exchanges that are across the US. Nothing trades out of line. Customers get the best price. And we've done analysis on the trading floor. Generally, there's about 20 traders on that floor that come in and trade 4 ,000 stocks and the prices they get are so close to the midpoint and they're for very, very large orders. We feel really proud about the fact that we're getting investors really good prices there.

25:44So that exchange exists today. It's gotten a brand new refresh. We kept it open largely through the pandemic. We closed from March 18th, 2020 till June 3rd. And we put in all kinds of safety measures and it's thriving today. It's one of the best options floors out there. There are still three or four. CBOE still has their floor. The ICE, which owns the New York Stock Exchange, they have two floors, the Amex and the Old Pacific Stock Exchange, which they now call ARCA. And then the Boston Options Exchange actually has a trading floor in Chicago. So there are still a handful of floors, but the Philadelphia Stock Exchange is the oldest stock and or options exchange, older than one of our competitors in New York, which was founded in 1792.

26:27So we are the oldest. Robert Leonard Something I think about a lot is how today's stock market is functioning compared to how it has over history. And even back when the time period we're talking about, and even before then, some would argue that it's fiscal and monetary policy that is really driving why markets are acting differently today than they have historically with interest rates and other different policies that have been enacted. Some would argue that it's technology from things that changed in the 80s that you just talked about to where we are today. So when you study the markets, how they are now, have we seen a fundamental shift that makes these stock markets truly, quote unquote, different?

27:09Yeah. It's funny, right? You hear that phrase and I refuse to use that phrase. It's almost like if you say it's different this time, you're going to get in trouble, it's going to come back to bite you. Here's the way I look at it. I think the markets were going to evolve technologically. They just were, and they were going to be democratized. And I think three or four or five things really sped that up. And I would say monetary policy was one of those four or five or six things. So let's think about what they were. And the one is just the technology I laid out for you a couple of times so far on your podcast, which is just like things are getting better, more efficient, more market makers, more participants, and more competition.

27:48So the ISE right around 1999, 2000 really took volume up like double because of the competition. It's just a great reminder of what competition can do for an industry. But from 2000 and 2000, like through the crisis, options volume went up a few percent a year, like seven to 10 % a year, which was a great clip. And then it kind of leveled off from 2012 to 16. And then what happened since then is 2016 and on, we bought the ISE. I felt really good about the ISE because I had seen this. And a lot of times, and much like one of your other favorite asset classes, much like real estate, the options volume moves a lot like that.

28:25So I'd look at it as a staircase. It's like flat, flat, flat, flat, and then huge jump, and then flat, flat, flat, flat, and then a huge jump, which is what you generally, at least I've noticed in real estate. And we were flat from 2013, well after the crisis through 16. And I felt like, this is going to be a great time. So we doubled down. We literally went from three exchanges to six. And then a lot of weird, interesting things started to happen, like crypto became much more prevalent. And I think that democratized trading. We saw it overseas at first, and then eventually here. And people got used to taking risks.

28:57People got used to 24-hour trading. They got used to trading on screens. They got used to trading small lots at a time. And now you have retail sort of coming into our markets. The options markets then also created expirations that are weekly, the ability to have sort of instant gratification on hedging risk. And think back to that Quaker Oats example. I said, I need to hedge. Well, generally, I would look at the underlying, but now with weeklies, I would look at something that's going to hedge my risk for three or four days. And maybe that VIG, instead of being three to three and a quarter, in most weeklies, it's a penny wide or two pennies wide.

29:30So you get really good prices there. So you have a couple of things. You have the technology going in general, You have volume just starting to grow. You have cryptos becoming more prevalent. You have social media, people just educating people. We've seen the flattening of the world in the last 10 years specifically, but you can get options information very quickly on Twitter, on Instagram, on TikTok, even wherever, and you're just educating people. On top of that, it was November of 2019 that commissions for retail went to zero. They didn't go to zero in options, but they went to zero in equities, and they got really, really cheap in options.

30:07And I think if you trade enough, you can get down to zero. But that became another ingredient of why things started to go. And then on top of that, the creme de la creme, the final cherry on top for the growing of options to me was COVID. And COVID was a coming out party for many Peloton, for Zoom, for even Amazon, for Netflix. And I would throw the US options industry right in there. It was just, hey, I'm going to be at home. I'm getting a subsidy. I see things like Penn National Gaming, bringing more and more light to the markets. I have time to read and educate myself about options trading.

30:40It's a perfect storm of five or six things. And now we're sort of at that staircase. And to put it in perspective, so options volume from 2013 until about 17 was about 15 to 17 million options a day. And now this year, we're averaging 39 million options a day. It's coming in a little bit this month in the low 30s. But I think the last I looked, 15 of the largest volume option days in history were in 2021. So we used to be tied to volatility. Traders would go to a conference, they'd commiserate with other traders and say, we just need a volatility gauge. And Nasdaq has a great volatility gauge called VolQ that gauges the volatility of the Nasdaq 100.

31:20But we need VolQ to go up and just double and do this and do that. Well, vol has been coming down. Things have become less volatile and options volume is going up, which is an unbelievably healthy sign for the options industry. So will volumes come down in the next three, six, nine months as people go back to work, as we come out of COVID and people actually take vacations again? Absolutely. Will it go back to where it was in 2018 and 19? I don't think so. I think we're at the cusp of just a huge inflection point of unbelievable options trading over the next decade. And I'm super excited by it.

31:51Which has had a bigger impact on capital markets, fiscal and monetary policy, or retail investors' access to capital markets and education? I think it sped it up. Just like COVID did, I would say the latter, but I think fiscal policy played a part. If you don't have a place to put your money and get 3, 4, 5, 6, 7, 10 % when I started in the business in 1987, the broker loan rate was 10%. If you don't have a place for that, then you don't mind keeping it in Dogecoin or Bitcoin or Ethereum. So I think monetary policy has played a part, but it's not just the monetary policy. I think it's just a stagnation of economic growth over the whole world.

32:30So it definitely has played a part. I don't know that it's been the largest part, but I think it's a key part. Robert Leonard One of my personal concerns about the rise in popularity of options trading is that I'm seeing it anecdotally. So this is just from what I'm personally seeing, not research study or anything like that. But I'm seeing it come from a lot of brand new investors who don't fully understand what they're buying or why they're doing what they're doing, and specifically with options. Is the current growth in options trading sustainable? Is there going to be a point where this crumbles and backfires on speculative options traders?

33:06I think if we're not careful, that can happen. I mentioned it early on in 1987, 88, it did backfire. There was a lot of speculation in 86, 87, 88, and it did backfire. And this is where I would not say, oh, no, no, Robert, it's different this time. We have to be careful. We have to educate people. So things that would happen to Alex Kern, we have to make sure those things don't happen. We have a lot of work ahead of us to continue to educate. And you see this in cryptocurrency. There are a lot of good things in cryptocurrencies. And then you see some of the more speculative currencies that people just create bubbles.

33:39And that happens even in options, right? You are going to get a segment of population that shouldn't be an option. They need to be careful and we need to have those guardrails. I will tell you this, the wholesalers, the broker dealers, OCC, OIC, the exchanges, people largely do their part, but it's one of those things you always need to do more and we need to be careful. But I also would say that the new investor, while there's certainly a segment of the new investor that is likely in any time, likely in a little bit over their head, and we need to be careful, like just need to really do what we can to help and educate.

34:15The average retail investor, anecdotally, that I've seen, and we have a lot of really good interns at NASDAQ. I've come across just family members and their friends. People are educated. And a lot of that is the flattening of the world. So you see sometimes the pundits will say like, oh, retail, it's going to happen again. I would say that's not necessarily the case. There are a lot of really well-educated investors. The new retail aren't all traders. And in fact, you see it a little bit with like sort of the comical things that go on in Twitter land, but paper hands and diamond hands, like a lot of these people are in and could it backfire?

34:49Sure. Are they paying a high multiple? Sure. But in many things like Hertz, I've read recent articles that they've done well. So I think we have a responsibility, as we've always had, to continue to educate and continue to put protections in. But I think we need to be careful not to throw the baby out with the bathwater. The right answer isn't to just shut down options trading for retail. It's to be more thoughtful, to educate more, to provide some safeguards. I mean, I think Robinhood is doing that. I think Robinhood grew really, really quickly and has the opportunity to really help, much like others, and provide a lot of education.

35:22And we're learning a lot over the last year and a half of where we can do things better. Robert Leonard Leonard For those who don't quite have that education piece yet, and they are just kind of speculatively testing the waters, and they're doing it with bigger positions than they should be, what is it going to take for them to understand the difference between speculating and true investing, or just to at least get the right education for option trading? Is it going to take them to completely blow up their account and lose all that money that they have invested before they really take those steps?

35:53I certainly hope not, but you do learn by losing, right? You learn if you touch a hot stove, you learn when your hand hurts. And if you lose money, you learn quickly. What we want to do is to make sure that people use this acronym, right? YOLO. I hope that that's sort of an exaggeration. I'm sure it's not in many cases. And I hope that's not the case. Will there be people that are going to touch the hot stove when you tell them, don't touch the hot stove? Of course. But I think if the order flow providers provide the right mechanisms to make sure they can only lose X amount. And I'm in contact with a fair amount of CEOs of retail trading firms, and they're trying to take those steps.

36:27I think risk protection and risk mitigation is probably taken more seriously now than I've seen in my 34 to 35 years of trading. But Robert, you're right to be concerned. We'll always be concerned. No matter how good we are, we should have that concern. I think we're at a pretty good spot if we do the work. The work has to be done. But I see it. I see people are taking this seriously. I don't see the leaders in our industry saying, oh, no, it's fine. Everybody should have the right to lose whatever they want. No, they know they need to protect. We need to put the right protections in. I think those things are happening.

36:59You mentioned that the NASDAQ has six US options exchanges, and you lead all of them. Tell us a bit about the different options exchanges the NASDAQ has, and why six exchanges are even necessary. It's funny. We get this question a lot. And in fact, when we bought the ISE five years ago, and we had already had three exchanges, some people were saying, well, good, you're going to close the other two or three of the ISE. Well, why would we buy them to close them? But there's a huge amount of segmentation and differentiation. I know to the average investor, like the example that I just laid out in Quaker Oats, three to 325, like, why do I need six exchanges?

37:34But let's focus on the market maker for a second. You have certain market makers that invest in technology that they're really good at, they hire great engineers and they're really fast at providing that market. So instead of taking two and a half minutes like it did in 1987, instead of it taking 10 seconds like it did in 1999, instead of it taking like a half a second like it did five years ago, they can put a market up there and change it in a millisecond or a microsecond. And that provides better prices. So we have a segment of market makers that do that really, really well. And we cater to them on a place where maybe there's a platform where we get a lot of retail orders that come in.

38:09we want to make sure they get the best price quickly. So there's one example of a segment that like, wow, we have a really fast market maker. They provide really good prices. But then you have other liquidity out there from other market makers that say, I would love to provide liquidity. I think I can give a really good price. I didn't have the ability to spend$100 million on MIT engineers, but I can provide liquidity. We know the markets really well. So what we do is there's another segment that runs auctions and we run it for a hundred milliseconds. And that same, I'll stick to the same equation, That Quaker Oats market, which in 1987 was three bid at$3.25.

38:42Today, I don't think Quaker Oats exists anymore. But in a symbol, it would be three bid at$3.04. So now your spreads have tightened and you get a retail order from Robert Leonard that wants to come in and buy 10 at the market. And what happens is we've sort of like run a Kmart special, a blue light, a little indicator goes on on everybody connected to the exchange and says, wow, there's an order to buy 10 call options. And much like 1987, when I was standing in the crowd, anybody connected, whether you're a market maker or a customer, you can get that indication if you connect to the system, see that there's 10 contracts to buy.

39:18And you could say, I'll sell these at$3.03. And that happens all within 100 milliseconds. And we call that price improvement mechanism. So every exchange brands it a little bit differently. But then all of a sudden, that customer paid$303 instead of$304. That's a big segment. And we have various ones that have little nuances and they run on our different exchanges. Then we have the trading floor. So that's a whole different, what I call the deep sea fishing pier, 2000 contracts at a time representing notional value of$10 million or$30 million. So we have that segment. Then we have one of our exchanges, ISC, that we bought five years ago is really, really strong in complex orders.

39:55They've built a really good complex order. And when I say complex order, think of a spread, right? It's somebody that wants to buy like the April 60 calls and lay out$3, but they also want to offset that and they'll sell the April 65 calls for a dollar so that they're financing their purchase. And they'll have what they call vertical bull spread, call spread, a vertical bull spread. And they can put that order in on one of our exchanges as a complex single order. And then we have other market makers. I'll walk down the streets of Chicago where many of our market making firms are, and you'll see some that are really good at pricing volatility and want to show extra size at certain prices that are active, and then we'll reward them for giving them a bigger percentage of the trade.

40:36They may be not the fastest, but they're really confident in their volatility numbers, those old sheets that I had. And they'll look at that and they'll provide deep liquidity. And we want to cater to that. So of our six exchanges, they all cater to a different segment. I'll tell you the success story for me is when we bought the ISE, the NASDAQ owned three exchanges. I had the Philadelphia Stock Exchange, I had the NASDAQ Options Market, and I had something called BX Options. And then the ISE had three and we bought the ISE Stock Exchange, something called GemX or Gemini. And then the last one was something we called Mercury.

41:10And Mercury and BX Options were both literally like 0.1 % market share. And we got sort of taken a task by some clients and some industry groups and said, what are you doing? You're causing connectivity problems. People now have to connect to your exchange. What are you going to do? And I said, we're going to grow it is what we're going to do. And now both of those exchanges are approaching combined 2.5 % to 3 % on any given day. And we're providing real value because another piece of the pie that I didn't mention to you is if you're somebody that's going to be out there. So when I was a market maker, Robert, I could leave in the middle of the day and go to the movies and be done.

41:45Like, all right, yeah, I was three bid at 325, but I'm out of here. I'm going to go catch Jurassic Park and leave. And a lot of market makers did that. Now, market makers can still kind of unplug and if they have to reset their systems or do whatever, but then you could have a void in liquidity. So what we do on a handful of our exchanges is we run what we call lead market maker or a specialist system. And for that, we make sure that market maker is there over 99 % of the day and they're there and they're providing that liquidity. So let's say you want to be the specialist or the lead market maker in Apple.

42:15Well, that spot may have already been taken And then we may have a good market maker. This is why I'd love to do that. And we said, well, we have actually another venue for you. And you can be on BX Options and you can be the lead market maker there. And then you're feeding, you're growing that entire ecosystem. You're allowing other market makers to become a specialist or a lead market maker, which is just helping the liquidity. I think overall, the industry, not just NASDAQ, the industry has done an incredible job about building out that ecosystem over the years. And that's a long-winded way of saying why we have six exchanges.

42:45They all cater differently. or we wouldn't get the market share. It would just all go to one or two venues. But we at NASDAQ provide really six valid reasons, if not more, to differentiate between order flow. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you. We've got a handful of other shows for you to explore, from learning about Bitcoin to embracing a richer, wiser, happier lifestyle. Just go into your podcast app and type in We Study Billionaires to find our collection of shows.

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46:20All right, back to the show. Robert Leonard What I find interesting, and what a lot of people I think listening that probably don't realize is that even though NASDAQ is a stock exchange, it's a publicly traded company. And the same with New York Stock Exchange. How and why is a company or an exchange like NASDAQ publicly traded? I think somebody listening might be like, well, they're just providing a service for two parties to exchange goods. Why are they not not-for-profit or non-profit? How is this a publicly traded for-profit business? where does NASDAQ make money? Yeah. I mean, look, we're a very large business that caters to a lot of different segments.

46:58So not only does our options business cater to different types of market makers, we at NASDAQ are a fintech company that provides great governance and listing services for our list of companies. We provide market technology overseas, over 100 stock exchanges. We provide back office solutions for people. We trade the equities market. So we have various reasons for ample opportunity to cater to investors. And I think we've done a terrific job. I wasn't always with NASDAQ as I laid out. I've been here about 12 years now. But since exchanges have demutualized, the competition has been incredible. It's not driven...

47:37I lived in a world where it was driven by the members and the members' profitability. That's not good. Being pushed to be efficient and come up with technological solutions and innovation and compete among other public companies and other exchanges. And largely most of the exchanges now are public companies. A few are not. But CBOE, the largest are CBOE and NASDAQ and New York Stock Exchange, not to mention CME and ICE. I think the record is clear. If you're catering to members like we did in the 80s and 90s, when customers never traded anything for free, customers would pay 35 cents a contract, maybe 50 cents a contract.

48:11I think the innovation has been exponential being part of the public ecosystem. Of course, I don't expect you to disclose anything proprietary or that can't be shared with the public yet, but sharing what you're allowed to, where does the NASDAQ and the crypto world collide in general? And then where does the world of, and specifically your world, of options collide with crypto? Okay. Really good questions. Things that we think very often about and have been for years. There are a couple avenues. None of this is something that we haven't discussed. So there's a lot of listings, I mean, publicly.

48:49There are a lot of ETF applications down at the SEC now. I think that crypto world is craving some type of regulation and clarity towards regulation. And if ETFs are approved, I think you'll see Nasdaq play in that space as well. We have a business that we've re-energized in the ETP business, and we're kind of leveraging off the derivative success we've had in options and we're re-engaging there. So I think clearly ETP could play a role depending on what Chairman Gensler decides to do over the next coming six months to 18 months. But one of the strengths of NASDAQ is in market surveillance. And I'll be careful here.

49:23I'm not sure what we disclose, but I don't think it's any secret that we are exceptional in regulation and surveillance. And that is something that I think the crypto world would benefit from, transparency, surveillance, making sure that that world as regulated as possible as more and more people, as it becomes more democratized. So I'd say that two pieces of low-hanging fruit are just on the surveillance and regulation side and in the ETP business, both of which are public obvious statements that we can do. Now, whether we do more than that, we're watching it closely. I mean, look, it's a$1.6 trillion market, which sounds huge.

49:55On the other hand, it's equivalent to just one of many NASDAQ stocks that have accelerated in value over the last few years. So I think there's room for tremendous growth. I think it's still super early and I think NASDAQ will be playing a part. So many ways for us to add value there. What do you see as the future of capital markets? More democratization, without a doubt. You're already hearing it and seeing it. And in a way that I didn't hear it in the 90s. Like 90s, it was about like, hey, I'm into this stock thing. Now I think it's just people taking for granted that you need to be an investor.

50:26You need to be a longtime investor as opposed to trader. I think the capital markets will continue to attract new money and more comfort value from investors, knowing that the best place for their money over a long period of time, much like the Buffett approach, is in the capital markets. I think we will become more competitive against things like crypto. I think we need to evolve as an industry. We need to be in the cloud and everywhere that we can. We need to continue to democratize and allow access to more and more participants on the liquidity side, what I call the market making, just providing liquidity throughout the day.

51:02I think eventually, you'll probably get maybe a bit of extended hours trading. We already have that today in our equities markets, and there's just not a lot of interest, but I think you might see an uptick there. I think there'll be more and more automation, and it'll just be easier to interact with the markets. So you and I have discussed this throughout, the two and a half minutes down to a microsecond. But I think you'll be able to say, look at your portfolio very quickly and interact with AI and just create something that you want to do. I'm not a very, very innovative person, so probably a little bit over my head, but I think you're going to see continued unbelievable innovation, things that we can't even think of just yet.

51:39Could you see crypto forcing traditional financial stock exchanges to extend their trading hours? You mentioned it briefly there, but crypto is 24 hours a day. Retail investors, younger investors that are going to lead the market over the next decade, they're going to be used to that because of the crypto world. That's what they've grown up with, right? Is that going to become more prevalent in the financial world that we're used to, the traditional world? I think about it a lot. As you know, I'm a former trader and traders like to trade. And as an exchange operator, I want to maximize our opportunity.

52:10The thing that you have to weigh is clearing and settlement. So one of the things that have come out of this sort of what I call the Reddit GME scenario early this year is that settlement is at T plus two, meaning it takes two days after the trade for equity trades to settle, is too long. So right now there's a push and depending on what the SEC direction they provide, we're likely to shorten that cycle. I think as things shorten, then it becomes easier to be open for the whole day or bigger part of the day. Things you have to weigh in though are like things like corporate actions. So in the corporate listings world, you have a lot more things that affecting that price and things where you need to pause the markets for things like earnings, things like a dividend that may be a special dividend.

52:54So there are those factors, but will we get to more extended hours? Probably. I mean, I don't know that it's coming in two to three years because we have a lot of work ahead of us as far as just education and sort of getting on track with all the things that were exacerbated during this last crisis, things we did exceptionally well on one hand. And then on another hand, things like settlement and maybe increase surveillance. I'd like to get our act together there specifically and make sure that we have everything buttoned down and then we can continue to grow. Because think about it, you can trade equities after hours today.

53:23And they trade on certain days, but they're not through the roof busy. So I think it could eventually happen, but I don't think it's just around the corner, not just yet. Having run your own trading firm and being a derivatives trader, what lessons did you learn as a trader that those listening today can learn from? What What major mistakes did you make? I made a lot. One is to realize it's okay to make mistakes. And two, much like anything, just try to limit them. So I use a phrase a lot, sort of like the trading world. And then there's the, you're millennial investors world. Let me talk first about what I tell young investors.

54:00I spend a fair amount of time with college students at my alma mater on their finance clubs, and they come in for visits and close to a few professors there that we keep in contact with. Just as far as an investor, I would stress, don't fumble in the red zone. And what I mean by that is just, if you want to be a little more aggressive, you're investing fine, but don't all of a sudden put 90 % of your assets in Dogecoin because you just feel really good, like Elon Musk is going on Saturday Night Live. Have a plan, have a long plan. It needs to be 80 % Warren Buffett and 20 % like just some sort of Jim Cramer, I'll call it, like a little more aggressive.

54:40And I think if you keep that balance and just try not to give into that impulse of doing something that you know doesn't sound right because you're getting a little greedy, then you're going to have a really successful investing career. And I would say just it really is sort of that broad based diversified portfolio in for the long haul and just put it away and hope that the market goes down a little bit. If you're an early investor for the long-term and you buy, let's say you're working, you're out of college a year or two, and you put$100 a paycheck and you get 26 paychecks a year and you put$2 ,600 in the market, do you want the market to be up 10 % next year or down 10 %?

55:19I kind of think you want it to be down 10 % next year because you're in it for 30 years. And it's kind of nice to have those ups and downs and dollar cost average. And maybe you step on the gas a little bit when the market's down five, hits a correction of five or 10%, but just have a plan. and stick to the plan and try not to over-speculate. You might need to speculate a bit to just kind of learn because you do learn by losing a little bit of money. But if you speculate, the odds are you're going to lose. Regarding trading, Robert, I could go on forever about bad trades that I've made. When I golf, I can't remember the haul before me.

55:49I golf with golfers who are like, I can't believe I hit that out of the trap and I should have done this and I should have done that. I'm like, wow, I've already forgotten that last haul. When it comes to trading, I think I remember every bad trade I ever made. And there literally are like thousands. I could probably list you 200 right here in about 10 seconds. It's okay to lose money and just try not to be emotional, do the right thing. And here's the one bit of advice I would have. If you do have a position that you're just thinking too much about, or you're just not sure what to do, there's nothing wrong with selling a quarter to a half of it.

56:17And then you'll be happy no matter what it goes, or you'll be miserable no matter what it goes. So I'm going to give you one example. So somebody owns 2 ,000 shares of a stock they bought a few years ago at$5. They put$10 ,000 into it, 2 ,000 shares. And they look at it, they've done all those right things. They haven't been sweating it out, but now it's like 60. And now they're like, they're thinking about buying a house. They kind of want the money, but they want to stay in the market. So they own 2 ,000 shares at 60. It's$120 ,000. And they're thinking the market's toppy. I'm just not sure what to do, but I really want to be in the market.

56:48So you sell half. If you're really close to pulling the trigger and you're just not sure, you sell half. So you sell 1 ,000 at 60. Now, the next day, it's going to move$5. Do you want it to go up or down? If it goes up, you're miserable that you sold a thousand shares yesterday and you gave up$5 ,000 opportunity. If it goes down, you're miserable that you didn't sell the whole thing, which is what I say, welcome to being a trader. So you're an investor at$5 at 60 because you're willing, now you need to make a decision in the next couple of days or the next couple of months because you're thinking about buying a house and putting a down payment down.

57:21Now you've gone from investor to trader. And no matter what you do, you'll be miserable. Wherever it moves, you can beat yourself up. My advice, don't beat yourself up because hopefully that illustrates that depending on whether you're an optimist or a pessimist or how you compartmentalize trading, you just need to move on. You need to be even-tempered, make a decision, move on, and lowering risk is an okay thing. This doesn't necessarily work in the case that you just mentioned when you need the money for something like buying a house. But one of my favorite ways to approach what you just mentioned is sell the principal.

57:52So in that case, I would take$10 ,000 out. Everything else that's in there, just let it ride. Essentially free money, right? If you lose it, I mean, obviously that's going to suck, but... That's part one. That's really the first thing you should do. I mean, while you're debating on how much to sell, get the principal back. If something just weird or bizarre happens in the home market, you at least got that. There's never anything wrong with getting the principal back. I think that's great advice. Yeah. I do that. And then, or even just lock in a certain return that you want to have, doubled your money, you take out 20 grand, at least you got 100 % return.

58:24Something that you're like, okay, even if I lost everything else that's remaining, I'm okay because I doubled my money or whatever the return is. It could be 7 % a year, whatever it might be. If you were an options trader today, how would you approach these markets? How would your approach be different today than it was back in the 80s, 90s, and early 2000s when you were a trader? Robert Leonard Yeah, I love that question. I'm glad you asked it because I want to get into something that I think is really, really important for your listeners. One, the liquidity in most of the options that are trading is exceptional.

58:56So that like three to three and a quarter, yeah, you might see three to three and a quarter if you hit up a stock right now on Starbucks or something. It's like, what's Kevin Kennedy talking about? There's still three to three and a quarter. The bottom line is if you watch them for a minute and look at that midpoint of the bid and the ask, and you cross that midpoint by about a penny or two, you're going to get a fill. So if somebody, one of your listeners does set up a market and it's three to three 30, that midpoint being three 15, if you bid like three 17, you're going to get filled. And then if all of a sudden you didn't mean to buy that and you need to sell it and nothing else has changed, you're going to sell it at like three 13.

59:28You're not going to have to pay three 25 or three 30 and then sell it at three. So because of that, I would say you must trade upgrade options as a tool for anything you're doing. So to me, stock is a blunt instrument and options are a tool, but much like using a chainsaw in your backyard, you need to use it correctly. You need to read the instruction manual. You need to educate yourself, but you should use it. Don't try to cut that tree down in your backyard with a hammer or an ax, like probably use an ax, but a chainsaw is going to work a lot better. So here's my example. I haven't looked at Starbucks in a while, but you have a listener that just says, yeah, I really wanted to buy Starbucks at the beginning of the pandemic or the middle of the pandemic, and I missed it.

1:00:10And now it's$80. I'm not sure where it is. I'm going to get back in if it's 70 in the next month or two. Okay. Well, go sell. How many shares would you buy? Well, I'd buy one. I'd buy a hundred shares. I have$7 ,000 that I would love to put the work in Starbucks. Go sell one put. Don't chase the stock at 80. Go find a strike. You'll collect a premium and collect a couple hundred dollars in premium. You sell one, not 20, not 50, one, because you're willing to put$7 ,000 of work of the 70 strike put, you'll collect a couple hundred dollars. It may never get the 70 and you'll never get put that stock, but you've given an insurance policy to somebody who might want to dump it at 70.

1:00:45But if you were willing to own it anyway, go sell a put there. You'll collect a little bit of premium. So that's just one example. Let's go back to our other example where we said the stock was 60. You bought it a five. Let's say you did what you said. You got your principal back. And now instead of 2 ,000 shares, you own 1 ,600 shares or something. And maybe you're not buying the house yet, but you're not sure, but you're thinking about exiting and you're saying, well, if it gets to 70, I think I'm going to get out. Well, don't just put a limit order at 70. Go sell the 70 strike calls. Give somebody else the right to buy it from you at 70.

1:01:16They will pay you a healthy premium for that. And if the stock just happens to sit around 60 or 55 or 65, you're going to collect that premium and you will have done nothing. And if it rallies up to 60, 70, 70, the 80, you're going to get pulled on the stock, which you would have gotten out anyway. So I think if you look at the market and you have a plan, which we referred to earlier, you can put the limited amount of options. And again, within your parameters, you can put some options to work and make a tiny bit of money and find entry points and exit points. Options are an exceptional tool, which is why I think if we do all those things, not only to educate for safety purposes, but to educate for our growth, we're going to have explosive growth in options in the next decade.

1:01:56You've had a successful career, a couple of different careers, I guess I would say, but as an active trader and a successful career, more on the corporate side of things, what is a piece of advice you've received? It could be about investing, business, your career, or even just life in general that has had a big impact on you. So really two different answers I have. One is, I think by creating not an exceptional amount of overhead by committing to certain things, whether it's running an apartment or with a couple of friends or moving out or taking that job at a startup that's not maybe the money that you could have gotten somewhere, but committing to something, having a little overhead, having a little drive and risk is going to take you a long way.

1:02:36But most important, I would say, is to stay really close to mentors and to people you trust and people who are really smart. That's what has been... When I look back at my career, I've been around really, really smart people. And I listened to everything they could possibly say. Didn't always agree with them when I say listen to them. I didn't act on everything they said, but I spent a lot of time. And then at the flip side of that, I tried to give back and do the same thing. I spent a fair amount of time with younger people because honestly, I think a lot of them are way better investors than I am.

1:03:08So not only am I learning from the really smart people who are older than I am, I'm learning from the other side, the younger people. But that always wasn't the same, I didn't have that. When I was 20, 25, I didn't have that group. I wasn't listening to a bunch of 14-year-olds. However, by being close and spending time with those people who you know are going to be successful, I'd say having a really good, trustful network and just keeping your ears open. And I can't tell you that there's probably five to 10 people who I was really close to really, really helped my career because they just knew I listened, I cared, I worked hard.

1:03:41And it's another long-winded way of saying, create a network. And I don't mean an Instagram network or a LinkedIn network. I mean, a network of close people you can confide in, ask advice for, and just maintain trust with those people. Kevin, thanks for joining me on the show today. For those listening that want to learn more about you or just various different topics that we've talked about, where's the best place for them to go? LinkedIn, it's not bad. I usually respond to LinkedIn if they say, I heard you on the Robert Leonard podcast. I'm happy to connect with them. And when I can, things get exceptionally busy at times, but happy to just try to give some advice.

1:04:18Again, people have helped me so much in my career. I've had conversations with people of LinkedIn that I've never met. And if I have the time to do it, I'm happy to try to help it. And it all helps, right? The more we do for our industry, it's an unbelievable industry. Things you're doing, Robert, listening to a few of those podcasts, they're so exceptionally helpful to growing out everything we do. And then even, like I said, financial literacy, you've had some guests, Jed Collins, just great. Those things all help and they're really, really important. So you're a big part of that. And I'm happy to try to LinkedIn, I'm happy to try to provide any help I can do.

1:04:51I appreciate those kind words, Kevin. And anyone that's interested in talking to him, I recommend you reach out to Kevin on LinkedIn, take him up on his offer. Even if they don't, Kevin, you've made an impact today. I know you've helped and educated tens of thousands of people who will listen to this episode. So you can leave this interview feeling good about that, even if nobody reaches out. Thanks so much for your time. All right. Thanks, Robert. Really nice to be here. Thank you. All right, guys. That's all I had for this week's episode of Millennial Investing. I'll see you again next week.

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