A confession. In 2011, when Tom Sosnoff and friends launched a site for videos about financial strategies called Tastytrade, with a cherry logo and marketing full of culinary references, I shrugged it off. Would they be doing trading tutorials or cooking shows?
People wanting to educate themselves about stock trading and its intimidating relative, options, got the gimmick. Tastytrade’s hours of daily content became popular free resources. It made money by selling leads to TD Ameritrade and other brokerages. In 2017, Tastytrade grew to include its own brokerage, Tastyworks.
Last month, London-based IG Group Holdings said it was scooping up those businesses for $1 billion. So much for my early call on this Chicago startup.
Anyway, I had to reach out to Sosnoff about the market uproar over everyday investors bringing some hedge funds to heel. The regular folks sent shares of GameStop, AMC Entertainment and other ugly-duckling companies to soaring heights. The funds had been shorting the stocks, meaning they were betting the stock prices would fall. Higher prices would force the funds to cover their bets at a loss.
Sosnoff, founder and co-CEO of Tastytrade, has espoused the benefits of education, tools and more trading opportunities for the average investor. He was a market maker at the Chicago Board Options Exchange for more than 20 years. Did he see the volatility as a perverse outcome of what he believes in?
“In the end, this will go down in history as a huge positive event,” he said. “This is a transformational coming out movement for the passive-to-active investor transition, and I think it’s going to be viewed as a huge momentum change in the world of self-directed investing.”
People stoked the GameStop trading on Reddit. The platform is anonymous, so it’s vulnerable to manipulation. Sosnoff said it’s no different from other plots, such as the Hunt brothers’ attempt to corner silver about 40 years ago, only more egalitarian. He said the markets handled GameStop well, taking only three days to normalize.
“It is very hard to manipulate something when there is way more money out there that believes in efficiency,” he said. “The integrity of the system every once in a while gets called into question with events like this. It’s the ability to bounce back that gives us all faith.”
Some analysts have said GameStop was suited for a kind of internet flash mob. It was a widely shorted stock, thinly traded, and the business itself tugged at the memories of millennials or Gen-Zers stuck inside from the pandemic. (Ah, remember your first game console?) Sosnoff thinks it will be hard to repeat the affair.
Yes, Sosnoff agreed, more people lost money than profited. But the benefit, in his view, is that people participated and learned. He said most Americans, especially through their prime working years, have been “essentially financially illiterate forever.” The GameStop frenzy “brought people in a participatory role into financial markets, which to me is a game-changer.”
Did he get caught up in it? Yes, Sosnoff said he was “annihilated” on GameStop’s up move but made it back. “I scratched the entire trade on the down move. I guess I’m happy I broke even, but it wasn’t worth it.”
He said Tastyworks does only about 2% of its business in stocks — the rest is in options, futures and options on futures. So the brokerage had a limited impact from the event other than options activity.
Sosnoff said Tastyworks did not impose trading limits unlike other brokerages. He blamed the limits on outdated rules imposed by regulators and the exchanges. “We should have same-day or next-day settlement [of trades], and all these problems go away.” The current settlement standard is two business days after the trade.
I wondered if the episode made him regret selling Tastytrade when he did. The sale was announced Jan. 21 and is expected to close this spring. Might his billion-dollar deal have been more valuable after GameStop stirred up trading?
“In hindsight, I wish I was that good,” he said. Sosnoff said there were other offers worth more, but IG Group gives him a global reach and the freedom to keep everyone working at Tastytrade and Tastyworks. He has about 160 employees, almost all in Chicago.
Some had equity stakes and are now millionaires. As for the rest, Sosnoff said he and his partners have set aside “tens of millions of dollars” in retention bonuses and other awards for workers who helped him build the operation.
It’s similar to his 2009 sale of the Thinkorswim trading platform to TD Ameritrade when he said he doled out $20 million to employees. “This is something I don’t think I’ve seen any other firm do.”
Sharing the wealth is, to borrow a trading term, a contrarian move. Maybe other CEOs can try it.