ETF Edge - Live from the Piper Sandler Global Exchange Conference 6/5/24

Episode Date: June 5, 2024

We’re onsite at the Piper Sandler Global Exchange Conference. We talk with Forge Global CEO Kelly Rodriques about expanding private market investing to the masses and their recently launched index that lets investors get in on the market. Plus, IG North America CEO J.J. Kinahan weighs in on the market volatility, meme stock revival and what’s next for AI and markets.  Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, Supporting the Innovators Changing the World, Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange traded funds, oh, you are in the right place every week. We're bringing you interviews and analysis, and we're talking about the markets, breaking down what it all means for investors. I'm your host, Bob Pisani.

Our first guest is Kelly Rodriguez. He's the CEO of Forge Global, which is a financial technology company that operates a private securities marketplace and keeps a very close eye on the state of the IPO business, something that we've been covering for a long time. Kelly, let me start, first off, welcome to ETF Edge. Thank you, Bob. Nice to be here. Let me start with the IPO business. We've seen, I don't know how you characterize it. I'd say it's a modest reopening, considering what a disaster 2022 and 2023 was.

Reddit went public, Astero Labs went public, they're both trading above their initial prices. But when you consider that the market's at a new high, the S&P is at a new high, essentially up 11% a year, interest rates are relatively stable. I still say the reopening has been pretty modest. Why haven't we seen more IPOs? What's holding them back? Yeah, well, it's warming up for sure. I'd say the private markets are still dealing with a valuation overhang that is not completely cleared up. About 30% of the companies that we cover are up from their last funding rounds, but about 70% are trading below where they raise money back in 2021 and in 2020. So until that gets resolved, we're still in the Great Reset. So the valuation overhang hasn't been

resolved. Is there any sign recently that valuations are moving it up at all? Is there any sign this is bottoming out? Sure. The companies that are performing, that are throwing up good fundamentals in the private market that are growing, are doing well, raising capital, and if they were ready, they could go public. But everybody else is trying to grow out of the crazy multiples that they raise capital on in 2021. And so until that gets resolved and until interest rates probably clear up, we're probably not going to see a rush to the exits. What has to happen?

So one of the situations that I've seen is that the private equity companies that are involved, here, they're looking for an exit strategy at some point, right? I mean, they can't sit on investments for 10 or 15 years. Most of them have five-year investment horizons, don't they? I mean, aren't they under some pressure here to do something, or can they afford just to hold back, given that they don't like the valuations that they're getting? Well, there's been a tremendous shift in a trend over the last 10 years for companies to stay private longer. We've seen that expand to 12 to 15 years. So the average IPO company now is going out, between 12 and 15 years old.

And that's actually been extended by the last couple of years. But they are under pressure, but there's tremendous opportunities for liquidity in the private markets now. Part of what we see is companies trade and sell and get liquid before going public in the private market. So there used to be pressures. The employees want some exit strategy, right? They want to buy a house, and they've been there eight or nine years.

And so the pressure is on the company to go public. Are there ways now for those employees to sort of cash out without going public? Yes, this has been really picking up in the last five years. The last two years has exacerbated this. Companies are figuring out that if they want to retain high-value employees, they need to provide some level of access to liquidity. So there's a whole market that's developed that we're part of leading that makes that possible. And so let's talk about that.

So everybody wants access to these private markets because the IPO market is stalled out. you have a platform, right, for accredited investors to buy and sell shares of private companies. Explain how this works. So it works like a private market exchange. You can go in as an accredited investor and buy. And obviously, employees and companies that run programs can put those shares up for bid. Now, this is not accessible to everyday investors through an individual stock purchase yet. Right.

So you say the word accredited investors. So that's a very strict definition. Explain what exactly what that means. Well, so we see a world where the private market opens up and is accessible to any U.S. and global investor. Today, the regulations are such that you need to have a minimum net worth to meet the threshold of being accredited so you can make those investment decisions for yourself. But there is a future, and it's now where index products and other, financial innovations are making it possible for every investor to participate. I want to get the index products, but explain how this would work, though.

So I'm an employee of XYZ companies. I want to sell 1,000 shares. Would this be put up on your exchange? Does the company have a right of first refusal? How do I sell my shares if I'm an X, and how would I buy it if I'm an accredited investor? Yes, and yes. So you would go on to the platform. and open up an account and you could submit your shares.

And you don't need to be accredited to sell your shares. You need to be accredited to buy the shares. So much of what happens in this marketplace today is individual investors, accredited or not, employees, shareholders from earlier in a company's investment life cycle, put their shares up and they can sell them. And the buyers are typically high net worth individuals. And half the time on our platform, they're actually institutions that are buying for their fund or for their entity.

And so that is what's trading today on Fortune. And does the company get notified that the individual employees put up, pick a number of thousand shares? Do they have a right to buy that? Or is there a right of refusal for the company? Yes, yes. A hundred percent of the time a company is notified when their employees are trying to sell. And sometimes about 10% of the time in today's market, they decide to exercise the rofer and buy the shares back themselves. And are they buying it back and giving it or private equity investors,

original private equity investors, buying up the shares from the employees? I mean, who's buying the shares when the company's involved? So when the company's involved, they have typically brought in existing investors from their cap table that want to own more. That's typically what you see there. Otherwise, those same institutions will buy it in the open market on a platform. Now, you exist as a, you're really a trading platform.

I mean, how do you make money on this? Yeah, so we are an alternative trading system. We're regulated. And we make money by transaction volume trades. And we also have a revenue stream that's based on data. And the biggest trend in the market today is understanding what is traded before, at what price have things traded. And that's part of what we launched a couple of years ago called Forge Pro or Forge Intelligence.

Yeah. It's a tough business model, though. I mean, you went public in 2022. We've seen a big IPO downturn since then. We've seen the decline in private valuations it talked about. And you see what's happened to your stock price. You know, it's plummeted. It's what between $1.50 and $3 now and dramatically higher.

Is it that simple? You're tied to private market valuations, the IPO business. When they plummet, you go down, or is there something more complex going on with your own stock? In the current market structure, we're highly correlated to IPO success and that valuation overhang problem, I told you, that needs to work its way through the system for the transaction volumes to come back. Over time, more of our revenue will come from the data side and the index side and derived data. So that's part of the reason why you see the modern exchanges have diversified out of just listing fees into data. And if you heard

Adina's speech earlier today on NASDAQ, they're offering financial services products to diversify. We're no different. Yeah. So you mentioned index products. So the average investor is sitting there watching this and saying, what the heck? I can't get into the IPO business at all. It's closed. It seems like a bunch of rich people can get into private equity.

Why am I being left behind? So there's a lot of frustration, particularly on the part of our viewers. They've messaged me all the time. Why are a bunch of rich people getting into the private equity market? Explain how it's expanding out. I mean, you talk about these index products here. I mean, the average investor wants to know what's going on here. This is a major financial innovation that's just happening now.

We just launched the first investable index fund. Now it is only available for qualified investors and eventually accredited. But we see a world very soon where non-accredited investors come into a basket of index stocks and make a bet across 60, 70 names, thematics, the same way you do in the public market. And that will really open it up. When you say an investable index, there's what? How many companies are in this? Well, in today's investable index, it just launched by equidity.

There are 60 companies, 60 of the most liquid private names. Many of them very difficult to get into. You can get exposure through that fund today. Are these tech companies? They're generally tech companies, right? They're all high-growth tech. And they're in just about every sector you can think of, you know, AI, SaaS software, et cetera. Right.

So to buy into this index, is it equal-weighted? We get 60 equal weighted or market cap weighted? It's market cap weighted, the one that just came out. So it's like an ESMP 500, but for private valuations. But you can't buy into this unless you're accredited investor. Is that right? That's right today. But there are fund structures in place that will come and allow this to be accessible by the broader market.

We're really excited about this because we get a ton of inbound, Bob, as you can imagine. People say, hey, I want to buy this AI company or that or that SaaS company, and this will allow that to happen. So this is a step, I think. it sounds like where the private markets are broadening out to accept more investors. Is that a reasonable thing to say about the index? Absolutely. More access to everyday investors. And I think it'll change the capital dynamic for how private companies raise capital over time. What can we do to get more companies to go public in general? Maybe I'm asking an old school, old-fashioned question, but it is rather discouraging. You know, there used to be a Wilshire 5,000.

There's less than 3,000 stocks that are, I think, in the Wilshire, where there might be But the point is, there's been a dramatic decline in public companies in the last 20 years. I think what you're going to see in the next five years is more investing through private structures like the ones we're talking about. Because look, if a private company can stay private for 12 or 13 years and raise a half a billion dollars privately, they're not going to go public and incur the cost until they're really big and really stable. That's just going to push their private existence longer and longer. Well, I guess what's the issue? I've heard regulatory burdens. I've heard easy money.

Why should I go public when I can, I get plenty of funding that's going on? Is there anything we can do, the government can do, to encourage? Wouldn't you agree with the general idea? It's better to have people public than hiding in private markets? I fundamentally have a view that private markets getting bigger and more accessible actually solves that problem. Because if you think about it, you're going to either invest through a publicly listed exchange or you can invest through a privately listed exchange where there's still information and a level of disclosure and there's still price discovery. But some companies want to remain focused on long-term success. And today's public market is highly focused on short-term success.

My own stock price is an example of this. I'm building something for the next decade and I'm not getting rewarded for it. Yeah, so you, well, that's an interesting point. You think people are revolting against the short-termism that's inherent in public markets. But public markets have been short-termism since they started. Right. Is there something that's changed in the last 10 years? What's changed is companies that are changing the world and need to raise a lot of capital

and aren't prepared to deliver quarter over-quarter results, need another 10 years to build an Amazon. I'll give you an example. Amazon went public when they're worth half a billion. 12 years later, they put 50 billion of value. Airbnb put the entire 50 billion of value into their shareholders while being private. Yeah. Let me, I just want to end by asking about artificial intelligence. People have been waiting from some big AI IPOs to come out.

Yes. Something besides Nvidia to talk about. What's on the horizon that interests you? Is there anything out there? Well, I mean, all these big LLM players and large language model. Yes, large language model players. are raising incredible amounts of cash at big valuations, and they are investable. And so the valuations there are skyrocketing.

But they're the most interesting companies in the private market to trade in today. Yeah, okay. Well, we'll keep an eye on some of them. I guess, you know, you mentioned these indexes. Why, you know, it's seen this simple thing. People have asked me, why don't we just have an ETF to do this? Why wouldn't it be possible just do a basket of these companies that are out there and make an ETF out of it? Describe what the problem is here?

It's the evolution of liquidity for these companies that will allow that ultimately to happen. I think you're going to start with the index side and over the course of time in a world where there's a robust liquid private market with all the infrastructure built. Then you could eventually have an ETF structure in place. I guess there would also be problems holding, how do you amass enough to have an ETA? in these companies, too. There's a technical problem. There are some technical problems, but the valuations and capitalizations of these private companies are getting really, really big now. So it's just a matter of time. It's not if. Okay. All right. Kelly, thank you very much for joining us. It's been very interesting topic,

and we'll have you back again. Kelly Rodriguez, of course, the CEO of Forge Global. So we're talking about a lot of different subjects here at the Piper-Sandler Global Exchange Conference. One of the issues I want to move on to now is the whole issue about the markets and what's going on. We've seen a rather low volatility for a long time. The VIX is sitting at 13. We've had stable interest rates to a certain extent. Rising markets, that's certainly helping a lot. I want to turn now to our second guest.

He's an old friend of mine and one of the great experts on the stock market. J.J. Kinnahan is the CEO of the North American Division of IG Group. This is a UK-based online trading provider. J.J. runs the whole parts of this, the tasty trade, you might be aware of. That's a U.S. retail brokerage for options and futures and crypto as well. So, JJ, thank you very much for joining us. Really appreciate you being here. I want to talk a little bit about the markets, but you're a pretty broad guy here. You have your finger on the pulse of retail trading, I think. Give me a sense of what's going on with retail trading. What are your clients doing right now? You're talking to them. What are they fear? What are they optimistic about right now? Well, I think they are both fearful and optimistic of the elections, if you will, Bob. They see opportunity through volatility. But, you know, the news constantly changing there.

Who's going to win? Who's not going to win? I think that that's something that may help the markets throughout the summer, to be honest with you. I think one of the really interesting things going on in the market right now, I'm actually, as I look at the market, one of the things that tends to have, happen is you go to the path of least resistance. If I continue to see what the path of least resistance is right now, it seems to be a bit higher. Why? Think about this. You and I have been doing this so long. How many times in these bull markets where we've seen moves like this, have you been

at cocktail parties or whatever and people want to talk to you about the market? That's not happening right now. Actually, if they want to talk to you, they're like, oh my God, should I buy this stock? I'm not sure. I'm kind of afraid. And as long as people continue to stay afraid, we can continue. It's such an interesting thing that people are afraid, yet the VIX doesn't really move. Yeah, I mentioned this. Can you explain why the VIX is 13? Yeah, I think I can. By the way, the long-term VIX is about 20 is the average. So we are way below. We are way below average, and we see that reflected in some of the ETS, particularly the VXX, and what our clients are doing. But why do I think this is happening? Because they're not necessarily selling what they have.

They've seen that they've have great returns. If you look at people's 401Ks, buy in large, Many have probably done very well over the last year or a year and a half. They don't necessarily want to sell what they have. What they're more fearful of is buying new things. So you've talked a lot over the last year about short-term options, et cetera. One of the reasons that short-term options have been successful, people are afraid to go too far out in time right now. It's one of the reasons I think that besides that, you know,

you look at the Magnificent Seven, whatever, those names, interesting thing about them, Bob, They're trading not much in the individual equities, but you do see some diversity in terms of where people are willing to go on options because it's less of a capital commitment. Yeah, that's very interesting. I know the world is really hot on Nvidia and AI, but one of the things that you've been saying recently that people have been very bullish on old-school Dow stocks, for example. Now, what do you mean when you say old-school doubt? Are we talking McDonald's? Exactly. So if I look at three of the most bullish stocks right now that I will say over the last week and a half.

What constitutes being bullish? So if you think about retail flow, most retail flow is about 53% to the bullish side, 47, or let's say 52, 46, 2% kind of back and forth, all right? So people buy, they sell, most people are a little bit bullish on the retail side because they tend to hold things a little bit longer. But when I see McDonald's with 75% bullish activity right now, I see Pepsi with 72% bullish activity right now. GE with 72% bullish activity right now. That's unusual activity.

And what it's, GE has been fairly bullish over the last of a while. The other two McDonald's and Pepsi have literally just started over the last two weeks. So what does that mean for the ETF? As you would relate that then to the ETF? DIA. The Dow Jones Industrial ETA, DIA Diamond. Yep. And so when I look at the ETF that stands out to me from an index perspective,

if I look at Spider, Q's, IWM, nothing really unusual there. DIA, bullish activities picked up significantly over the last two weeks. So to me, you're going to the Dow, a bit more, you know, obviously they've added some newer stocks, but that's a bit more of an old-school investment. Now, GE is not the same GE you and I followed for years. It's certainly a different company. And if I said to you those three names, you'd be like, is this in 1994? And so it really is interesting how the retail...

But you see more bearishness on tech stocks, for example. I don't think nobody seems bearish on Nvidia or Microsoft. No, it's not the magnificent seven where you're seeing any of the bearish activity, et cetera. One that just recently popped up, and I didn't even say any, you know, Costco after their big move in the last couple of days. We've seen a bit more bearish activity happening there. So some of the oil names, et cetera. So it's been really interesting how that's gone as compared to from the bullish side. And let's talk about derivative trading.

The move, it's been quite extraordinary to watch the explosion and activity in options. It's been happening over the last decade, but particularly in the last few years and particularly in the last year with zero data exploration options. and the futures business has been exploding as well. And your thoughts on that? I think too many people think it's a really terrible thing. I would disagree 100%. I think there's always part of people's portfolio where, A, they may want to speculate.

And in my opinion, this is a smarter way for those who are going to speculate because one of the wonderful things about options, I think that people are learning is that it's much less of a capital commitment And the biggest thing that retail traders, Bob, have been underrated for for so many years is how well they manage their capital. When I traded on the floor, I never thought for a minute, do I have enough money to make this trade?

As a retail trader, you have a very limited amount of money. So you're putting 3% or 5%, or whatever it may be per trade, so they're managing that. The other thing, and if they want to play something like earnings, they do so. We see many of our clients, I actually think our clients probably trade a little bit less of them than some of our competitors. A lot of our clients will do is buy a longer term option, sell a shorter term option against it to collect a premium to pay for a longer term option. So again, there's nothing wrong with this type of activity.

And I think what it's showing is that back to where we started this conversation, at the moment with all the uncertainty about conflict geopolitically, an election coming up, people are a little more drawn in the nearer term to some shorter dated plays because they're a little bit nervous of the longer term plays and longer term unfortunately right now means six months. Yeah. Let me tell you the, I call it the mini meme stock rally that we've had. You and I were both around in 2021. How does this recent activity compared to 2021? I mean, has customer behavior around meme stocks changed at all? The echo seems to be a little more smaller than it was in 2020. I think it's significantly smaller and I'll tell you if you look at retail activity and I don't

think we're an exception here. This was not a retail event. And what I mean by that was day one, there was a Monday, Sunday night the news came out, trading on Monday and Tuesday were really the big days. And then Wednesday it tapered off. Monday, our clients really didn't start trading it until near the end of the day. And I think that that's, as I talked to some other folks, I think you were seeing that a lot with retail. Why? At the beginning, they kind of didn't believe it. So they're like, we've been burned before, let's see. As the price, and I'm particularly talking about GameStop, because it was the one with the most volume.

So as the price went up, people came in and they say, okay, on Monday we'll trade. On Tuesday we saw significantly more trading back and forth, both ways. And then Wednesday it sort of died again. So to me, that says retail didn't necessarily start this rally, if you will. I think it was a lot of forces coming together. Whereas if you look back in 2021, that was a retail event. So were there less short positions here? I'm just trying to figure out.

Well, there's less short positions for sure. Are some of the retail people might have been involved older and wiser? Something seems different here than 2021. Something does seem different. I don't know quite what it is. You know, from a retail point of view, and from anybody's point of view, it's really difficult to be short that stock anyways because it was hard to borrow, so you have to pay a lot of money to be short that stock. The other thing was, I just don't think that you had the chatboard stuff this time like you did. last time that was culmination of a that wasn't just a one day where all of a sudden everybody did it if you followed the chat board messages etc that was a culmination

of quite a few days weeks of people doing it and there was also a let's get the man element to that one that I didn't see in this one artificial intelligence a very hot topic here about the influence on trading writing algorithms how do you think artificial intelligence might affect trading might affect algorithms, I'll give you a simple example. The average viewer frequently asked me, I'm waiting for a personal digital assistant, you know, Bob Pisani 2.0, that can trade stocks,

and hopefully it will do better than I do, and I will make a lot of money trading against people. It seems to be a little bit of an intellectual fallacy. Your information is not going to be better than anybody else's, right? No, because at the end of the day, if it could be, why wouldn't it be already? And, you know, it'll become commoditized quickly, those trading firms that employ some of the smartest people in the world.

They already, I mean, if you think about the algorithms, they used, they're already a form of AI, right? What I would say for the average person is, in theory, you may think you want someone to trade for you. In reality, for most people, it's a very different experience. It's like, oh, I'm nervous about that trade or, oh, I'm nervous about that. I think the biggest thing most people, you know, most viewers who are retail traders, by and large, make, Bob, is that they don't think about risk first. And if you have AI, it certainly may not think about risk first. Where I do think it will help people significantly is as they're using their charting packages, as they're doing their research, et cetera, I think you'll be able to scale that

really well toward a personalized experience. It's a lot of the things we're working on right now so that it really suits your personality. It really suits your risk. And that might be a little harder to achieve. You know, there may be an algorithm that says for you, these trades make the most sense, but I don't know that, you know, and we'll also have to see there may be some regulatory issues there. The regulators have to catch up with what's going on there because this is just moving so quickly. I know you're very big in Europe, IG Group. What's your sense of the European market right now? I mean, the trading is, it seems like Europe is sort of like we are in, I don't know, 2006. So, I mean, there's got to be some opportunities to expand over there.

I'm asking you an industry question, but it's a very different business. I'm glad to use that line because that's exactly what I've been saying. We're exactly like the UK, I'll start with because that's, I think, the market where a lot of us see the most opportunity. And in fact, we started tasty at IG, as we call it. So Tasty Trade started trading there on Monday. And so we're very excited about it. I'm headed to London right after this conference. And so with that, one of the things that's exciting there is if you think about 2006 and, you know,

know, that's when people were like, options, there's something there. I'm not sure what it is, but I need to be educated. So we want to take the education over there so people really start to understand the capital efficiency and most important a way to define risk using options. Let me talk to you about what's going on next. It's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast. Now, today we're going to have J.J. Kinnaham, the CEO of the North American Division of IG Group. That's a UK-based online trading provider speak with us. Jay-J, thanks very much for sticking around. We talked a lot about where the markets were going on the

ETF Edge broadcast. I want to get your thoughts on some specific ETFs right now. You follow sector ETFs very carefully. You follow flows. You follow trading patterns. Is there any sectors right now that are exhibiting very notable, bullish, bearish trading patterns? Well, I'm going to start with energy, Bob, because it's a tale of two cities. Really interesting in what's going on there. U.S.O., which is the one that's more based towards oil,

seeing a lot of bullish activity over the last week. Now, as we've seen oil start to fall, so my belief, as many of our clients, are, I hate to say catching a falling knife, but saying this doesn't make sense. Think oil's about to bounce back. So whether then necessarily play it through futures or whatever they are using the ETF in order to do this.

On the other side, natural gas, UNG, we're seeing a lot of our clients taking bearish positions on that one. So kind of interesting that you have a dichotomy between two commodities and commodity ETFs that people see as being so related. How about China? I mean, we've seen an extraordinary turnaround in China recently. I'm struggling to explain exactly why, but suddenly it's sort of back. There must be some bullish patterns in some of the ETFs there. Yeah, great question. You saw it with Baba earnings, et cetera.

FXI over the last three weeks or so, just incredibly... FXI is a broad, large cap China index. I'm sorry, thank you, ETF. And so with that, over the last three weeks, we've seen incredible bullish activity. So a way to help folks understand that. Normally, bullish activity for retail traders is just over 50-50 to the bullish side. Retail traders tend to be a little bit more of buyers, but then they sell things out, et cetera. Now, with this one, the activity we've seen over the last three weeks, Bob, has been about 70% bullish.

That is highly abnormal to see. Usually doesn't last a super long time, but it's lasted almost three weeks now. People have really woken up, as you said, to the fact that there seems to be some turnaround wrong going on there. Yeah. It certainly, it is by low, sell high. I mean, China stocks have been just a horrible investment for a decade, essentially. How about banks recently?

What's going on there? Yeah, so KRE, which is a, you know, mid-cap bank. It's regional banks. Regional banks. Yeah, a better way to say it. A basket of regional banks. Yeah. And so that's been one where we've seen our clients be sellers and take bearish activity.

there, which is really interesting because those of you who follow the Russell 2000, people may or may not realize that the second largest sector in the Russell is financials. So people are always like, why is the Russell trading so badly? Isn't that usually the index that leads us higher, et cetera? Well, when people aren't buying those banks with being the second largest component of the ETF, you have a tough time going higher. And financials have been won. Again, the interest rate picture is, you know, you're reporting on constantly.

It's a different, are we going to get rate cuts? Are we going to get rate cuts every single day? And I just think that people who have had positions there are lightening up on them or just getting rid of them because there continues to be this question of what's going to happen with rates. And they don't necessarily want to have their money in the regional banks for that reason. Yeah. And most people don't know that the Russell is very heavily weighted towards financials. That was your point there.

It's the second largest sector. Yeah, second largest sector. and Russell 2000 is the financial sector. All right. JJ, I really appreciate you coming by. Thanks for having you. Thanks very much for chatting. Always a pleasure to be with you. That does it for the ETF Edge. The podcast, thanks again for listening.

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