WEBVTT 00:00:00.968 --> 00:00:02.420 [SQUEAKING] 00:00:02.420 --> 00:00:03.872 [RUSTLING] 00:00:03.872 --> 00:00:05.808 [CLICKING] 00:00:10.164 --> 00:00:12.520 GARY GENSLER: Welcome back to FinTech, 00:00:12.520 --> 00:00:14.140 Shaping the World of Finance. 00:00:14.140 --> 00:00:18.980 Today, we're going to review developments 00:00:18.980 --> 00:00:22.130 in finance and technology related to capital markets. 00:00:22.130 --> 00:00:25.490 And since there's so many pieces with capital markets, 00:00:25.490 --> 00:00:30.170 I've chosen to take the time to dig more deeply into two 00:00:30.170 --> 00:00:36.120 areas, online brokerage, or really mobile brokerage 00:00:36.120 --> 00:00:41.460 applications, and wealth advising through robo advising. 00:00:41.460 --> 00:00:47.340 But we'll touch upon the broader capital markets as well as 00:00:47.340 --> 00:00:49.290 a little touch on cryptocurrencies 00:00:49.290 --> 00:00:53.430 because some of the most successful financial technology 00:00:53.430 --> 00:00:57.320 companies in the capital markets have actually 00:00:57.320 --> 00:01:02.270 been crypto exchanges and some of the endeavors 00:01:02.270 --> 00:01:05.550 around crypto markets. 00:01:05.550 --> 00:01:12.660 So if I just take a moment just to share my screen and share 00:01:12.660 --> 00:01:23.070 some slides, and we'll get going here. 00:01:23.070 --> 00:01:26.470 Online brokerage, this is not a new tradition. 00:01:26.470 --> 00:01:29.520 It goes back actually several decades. 00:01:29.520 --> 00:01:31.100 And so then the question is, what's 00:01:31.100 --> 00:01:33.350 happened here in the last six or eight years? 00:01:33.350 --> 00:01:37.450 What's happened that this startup Robinhood and others 00:01:37.450 --> 00:01:42.360 have really just toppled over the last remaining 00:01:42.360 --> 00:01:47.680 bits of the commission structure that we've had? 00:01:47.680 --> 00:01:50.650 Robo advising and then capital markets, 00:01:50.650 --> 00:01:52.360 FinTech startups more generally. 00:01:52.360 --> 00:01:55.990 We'll have to do a quick survey there and then 00:01:55.990 --> 00:01:57.910 a little discussion of what's happening 00:01:57.910 --> 00:02:00.975 in crypto exchanges and decentralized finance, 00:02:00.975 --> 00:02:02.350 because it's really the question, 00:02:02.350 --> 00:02:05.080 will that actually transform finance, 00:02:05.080 --> 00:02:07.840 or will it stay as it is right now, 00:02:07.840 --> 00:02:12.190 a more narrow niche, though, still a $200 billion asset 00:02:12.190 --> 00:02:14.590 class environment? 00:02:14.590 --> 00:02:16.360 But will some of those technologies 00:02:16.360 --> 00:02:19.780 come into mainstream finance? 00:02:19.780 --> 00:02:22.690 So the readings again were mostly 00:02:22.690 --> 00:02:26.320 focused around those two areas, robo advising 00:02:26.320 --> 00:02:30.190 and online brokerage, and how Robinhood has transformed 00:02:30.190 --> 00:02:34.810 the industry, and how Charles Schwab and others entered 00:02:34.810 --> 00:02:39.820 into by the late part of 2019 what some call the New Broker 00:02:39.820 --> 00:02:43.450 Wars, in part because of this financial technology 00:02:43.450 --> 00:02:46.040 along the way. 00:02:46.040 --> 00:02:51.340 So just some lively questions but a way to get us going here. 00:02:51.340 --> 00:02:55.600 And hopefully somebody wants to chime in. 00:02:55.600 --> 00:02:59.290 How did online brokers emerge during an earlier 00:02:59.290 --> 00:03:02.320 FinTech development period, during the '80s, 00:03:02.320 --> 00:03:05.650 '90s, that sort of internet technology, 00:03:05.650 --> 00:03:08.170 FinTech technology area? 00:03:08.170 --> 00:03:10.600 And then how Robinhood's transformed maybe 00:03:10.600 --> 00:03:13.390 this more recent era. 00:03:13.390 --> 00:03:17.180 Romain, does anybody want to dive in at all? 00:03:17.180 --> 00:03:18.020 ROMAIN: Let's see. 00:03:18.020 --> 00:03:19.940 Who will be the first volunteer today? 00:03:19.940 --> 00:03:22.098 GARY GENSLER: I mean, everybody, we'll be talking 00:03:22.098 --> 00:03:23.390 about this for the whole class. 00:03:23.390 --> 00:03:26.750 But I just-- if anybody wants to offer their thoughts to start. 00:03:26.750 --> 00:03:28.100 ROMAIN: And we have Michael. 00:03:31.264 --> 00:03:32.170 AUDIENCE: Yeah. 00:03:32.170 --> 00:03:35.320 So when I think the earlier FinTech startups, 00:03:35.320 --> 00:03:38.305 I think just thinking of edge of the internet. 00:03:38.305 --> 00:03:43.030 I'm thinking like PayPal, just ways 00:03:43.030 --> 00:03:48.370 you can do online payments and online interfaces for-- 00:03:48.370 --> 00:03:49.730 or sorry, not online brokers. 00:03:49.730 --> 00:03:53.500 I'm thinking of E*TRADE, but ways to make it without having 00:03:53.500 --> 00:03:55.782 to call somebody on the phone. 00:03:55.782 --> 00:03:58.240 I guess it was probably more inaccessible when you actually 00:03:58.240 --> 00:04:03.460 had to drive to the broker directly or in-person. 00:04:03.460 --> 00:04:06.640 Robinhood definitely was more starting 00:04:06.640 --> 00:04:08.590 to take the mobile-first approach, started 00:04:08.590 --> 00:04:12.450 tackling weaknesses of the larger platforms, 00:04:12.450 --> 00:04:14.950 such as user interface, make it more accessible for somebody 00:04:14.950 --> 00:04:17.642 to really just trade from anywhere. 00:04:17.642 --> 00:04:19.600 And then also the fee structure was a huge part 00:04:19.600 --> 00:04:21.440 of that, too, for trading. 00:04:21.440 --> 00:04:22.480 GARY GENSLER: Yeah. 00:04:22.480 --> 00:04:23.260 But I'm glad-- 00:04:23.260 --> 00:04:25.240 I'm actually glad Michael raised PayPal, 00:04:25.240 --> 00:04:28.720 because there's analogies, and that's 00:04:28.720 --> 00:04:30.500 what this class is really about. 00:04:30.500 --> 00:04:34.000 It's finding what's happening from a strategic point of view. 00:04:34.000 --> 00:04:37.090 We're teaching finance, technology, the intersection 00:04:37.090 --> 00:04:38.560 but about the strategies. 00:04:38.560 --> 00:04:40.690 And there's a lot of parallel. 00:04:40.690 --> 00:04:42.400 There we were in the 1990s. 00:04:42.400 --> 00:04:44.980 Some of it even started a little earlier. 00:04:44.980 --> 00:04:46.990 And online brokerage started-- 00:04:46.990 --> 00:04:49.030 E*TRADE, Ameritrade. 00:04:49.030 --> 00:04:51.520 We'll dive into a number of these companies 00:04:51.520 --> 00:04:54.450 similar to PayPal starting in 1998. 00:04:54.450 --> 00:04:57.730 So I thank you, Michael, for pulling that together-- 00:04:57.730 --> 00:04:59.710 PayPal starting in 1998. 00:04:59.710 --> 00:05:04.720 That earlier wave, the internet, access rather than 00:05:04.720 --> 00:05:07.510 through bricks and mortar, or physical checks, 00:05:07.510 --> 00:05:11.440 or an old credit card system vis-a-vis the payment 00:05:11.440 --> 00:05:15.460 systems in PayPal, online brokerage starts, emerges. 00:05:15.460 --> 00:05:17.530 Does it take off? 00:05:17.530 --> 00:05:18.460 Not entirely. 00:05:18.460 --> 00:05:21.910 But over time, it's a big story in the capital markets, 00:05:21.910 --> 00:05:24.740 especially retail investing. 00:05:24.740 --> 00:05:26.990 And then we get to this other period, 00:05:26.990 --> 00:05:30.810 a new form of technology, largely about mobile phones, 00:05:30.810 --> 00:05:33.980 but not entirely about mobile phones also related 00:05:33.980 --> 00:05:38.750 to open API and access to the data. 00:05:38.750 --> 00:05:40.350 Robinhood comes along. 00:05:40.350 --> 00:05:42.330 And also in the payment area-- we've 00:05:42.330 --> 00:05:44.850 talked about this already a few classes ago-- a lot 00:05:44.850 --> 00:05:46.740 of these payment startups. 00:05:46.740 --> 00:05:54.350 And Robinhood GEN really further transforms an industry. 00:05:54.350 --> 00:06:00.320 And by 2019, Robinhood had almost as many members online 00:06:00.320 --> 00:06:02.870 through their mobile app with just a handful of years 00:06:02.870 --> 00:06:06.860 as E*TRADE or many of the brokerage firms. 00:06:06.860 --> 00:06:09.500 So it's got that parallels, and we're 00:06:09.500 --> 00:06:14.190 going to dive into how Robinhood pressed further. 00:06:14.190 --> 00:06:18.194 And I'm wondering, Michael, do you have a Robinhood account? 00:06:18.194 --> 00:06:20.310 AUDIENCE: Yeah, but I haven't really used it 00:06:20.310 --> 00:06:22.355 since I started paying loans. 00:06:22.355 --> 00:06:23.460 GARY GENSLER: Oh, no. 00:06:23.460 --> 00:06:25.320 I understand why you might not be investing 00:06:25.320 --> 00:06:26.850 while you're in school and why you might not 00:06:26.850 --> 00:06:28.710 have the money to do it, but you actually 00:06:28.710 --> 00:06:31.260 have a Robinhood account. 00:06:31.260 --> 00:06:35.220 And while it's hard to do it by a show of hands, 00:06:35.220 --> 00:06:37.920 but I imagine that many other students in the class 00:06:37.920 --> 00:06:41.160 have downloaded the app. 00:06:41.160 --> 00:06:43.710 So then a little bit different area 00:06:43.710 --> 00:06:46.740 that we're going to be chatting about is robo advising. 00:06:46.740 --> 00:06:50.610 How has that transformed the provision of retail investment 00:06:50.610 --> 00:06:54.070 management, and how is big finance reacting? 00:06:54.070 --> 00:06:59.040 And I'm wondering if, Romain, if anybody wants to just take 00:06:59.040 --> 00:07:01.440 a high level hit at that. 00:07:01.440 --> 00:07:02.190 ROMAIN: I hope so. 00:07:02.190 --> 00:07:04.830 We had great papers on the topic. 00:07:04.830 --> 00:07:08.105 Any volunteers? 00:07:08.105 --> 00:07:10.991 Weiyi? 00:07:10.991 --> 00:07:12.120 AUDIENCE: Sure. 00:07:12.120 --> 00:07:16.430 So I guess from the robot advisor perspective is sort of, 00:07:16.430 --> 00:07:20.820 I personally feel, is a how to transform people's behavior 00:07:20.820 --> 00:07:24.060 from like now going to some kind of financial advisors 00:07:24.060 --> 00:07:26.640 to actually you're now going through more 00:07:26.640 --> 00:07:31.230 electronic platforms, whereas traditionally, 00:07:31.230 --> 00:07:34.680 especially for maybe the younger generations were a lot more 00:07:34.680 --> 00:07:36.680 used to doing things online. 00:07:36.680 --> 00:07:39.510 I think robot advisors provide them a new way 00:07:39.510 --> 00:07:43.810 to construct their financial portfolios rather than going 00:07:43.810 --> 00:07:45.430 to a financial advisor. 00:07:45.430 --> 00:07:52.620 So it's definitely feeling like it's going to take a bite out 00:07:52.620 --> 00:07:56.298 of the existing financial advisors, which are probably 00:07:56.298 --> 00:07:58.590 where we're talking about from the retail asset manager 00:07:58.590 --> 00:07:59.220 perspective. 00:07:59.220 --> 00:08:04.200 Some of them are trying to, I feel like, emerge 00:08:04.200 --> 00:08:07.770 or creating new platforms, or either buying 00:08:07.770 --> 00:08:12.180 some of the existing platforms, or having some kind 00:08:12.180 --> 00:08:13.390 of interaction with them. 00:08:13.390 --> 00:08:18.060 So the existing-- the asset managers are definitely, 00:08:18.060 --> 00:08:20.430 I feel like, looking more into how 00:08:20.430 --> 00:08:26.418 to incorporate more tools to come to the [INAUDIBLE] 00:08:26.418 --> 00:08:27.210 on the [INAUDIBLE]. 00:08:27.210 --> 00:08:28.043 GARY GENSLER: Right. 00:08:28.043 --> 00:08:33.270 So robo advising, the ability to have 00:08:33.270 --> 00:08:38.220 an application on your laptop or on your phones, of course. 00:08:38.220 --> 00:08:40.500 Robo advising, having an application 00:08:40.500 --> 00:08:43.710 rather than having a human but having analytics 00:08:43.710 --> 00:08:47.700 embedded in a program give you advice about asset allocation, 00:08:47.700 --> 00:08:49.780 investing, in the like. 00:08:49.780 --> 00:08:53.370 And then secondly, as you said, big finance. 00:08:53.370 --> 00:08:57.300 And big finance in this case is asset managers, generally, 00:08:57.300 --> 00:09:01.020 but also the brokerage firms reacting. 00:09:01.020 --> 00:09:03.180 What do they do? 00:09:03.180 --> 00:09:05.790 There's one other thing that's similar to what 00:09:05.790 --> 00:09:09.720 we see on online brokerage and Robinhood. 00:09:09.720 --> 00:09:12.380 And that's about costs. 00:09:12.380 --> 00:09:14.790 It's not just about a delivery system. 00:09:14.790 --> 00:09:16.500 It's not just about mobile phones, 00:09:16.500 --> 00:09:20.050 but it's also about a cost point and a price point. 00:09:20.050 --> 00:09:22.160 And we'll dive into that a little bit, 00:09:22.160 --> 00:09:27.020 but robo advisors giving access to financial advice at lower 00:09:27.020 --> 00:09:32.360 costs, maybe in the range of 20 to 50 basis points a year. 00:09:32.360 --> 00:09:34.670 Asset management, the whole field 00:09:34.670 --> 00:09:37.970 of asset management, the business of asset management 00:09:37.970 --> 00:09:41.270 is accumulating assets under management. 00:09:41.270 --> 00:09:43.880 And if you accumulate $100 million 00:09:43.880 --> 00:09:47.360 of assets under management and charge 1% fee, 00:09:47.360 --> 00:09:49.580 that's $1 million of revenue. 00:09:49.580 --> 00:09:54.080 If you only charge a quarter of a point, that's only $250,000 00:09:54.080 --> 00:09:54.740 of revenues. 00:09:54.740 --> 00:09:57.860 Now, of course, you can multiply because none of these firms 00:09:57.860 --> 00:10:00.380 really want to just be at $100 million of assets 00:10:00.380 --> 00:10:01.580 under management. 00:10:01.580 --> 00:10:05.570 And the biggest, BlackRocks of the world are at $5 trillion, 00:10:05.570 --> 00:10:08.840 $6 trillion, $7 trillion of assets under management. 00:10:08.840 --> 00:10:12.650 But the robo advisors have tucked in here 00:10:12.650 --> 00:10:14.780 at a lower cost point. 00:10:14.780 --> 00:10:20.720 And that is also true on the online brokerage side. 00:10:20.720 --> 00:10:22.760 So it's delivery mechanisms. 00:10:22.760 --> 00:10:24.350 It's user interfaces. 00:10:24.350 --> 00:10:31.350 It's service, and it's also a cost and, thus, price points. 00:10:31.350 --> 00:10:36.000 In essence, can you do something better, quicker, cheaper? 00:10:36.000 --> 00:10:40.010 That's a very simplistic way to think about it. 00:10:40.010 --> 00:10:43.050 But any other FinTech trends? 00:10:43.050 --> 00:10:46.062 There's a lot going on in the capital markets that-- 00:10:46.062 --> 00:10:48.270 Romain, you want to see if somebody wants-- they just 00:10:48.270 --> 00:10:52.980 want to capture a couple of the other trends beyond these two 00:10:52.980 --> 00:10:55.706 on the retail side? 00:10:55.706 --> 00:10:57.100 ROMAIN: Any volunteers? 00:11:02.777 --> 00:11:03.360 Come on, guys. 00:11:09.540 --> 00:11:11.340 Nikhil, go ahead. 00:11:11.340 --> 00:11:11.840 Thank you. 00:11:17.698 --> 00:11:18.365 AUDIENCE: Sorry. 00:11:18.365 --> 00:11:19.247 I was muted. 00:11:19.247 --> 00:11:21.330 I thought something interesting was both Robinhood 00:11:21.330 --> 00:11:23.640 and Wealthfront are moving towards cash management. 00:11:23.640 --> 00:11:27.482 So they enter the market from the stock side of things 00:11:27.482 --> 00:11:29.190 and robo advisor side of things, but they 00:11:29.190 --> 00:11:32.880 seem to converge to cash management as a next product 00:11:32.880 --> 00:11:34.740 to roll out. 00:11:34.740 --> 00:11:35.718 So that's a big trend. 00:11:35.718 --> 00:11:36.510 GARY GENSLER: Yeah. 00:11:36.510 --> 00:11:38.190 And look, even Betterment, which we'll 00:11:38.190 --> 00:11:40.600 talk about in the robo advising space, 00:11:40.600 --> 00:11:46.207 Betterment is starting to enter into the challenger bank area. 00:11:46.207 --> 00:11:47.290 They're not the only ones. 00:11:47.290 --> 00:11:50.140 You have TransferWise from the payment side entering 00:11:50.140 --> 00:11:51.970 into the challenger bank side. 00:11:51.970 --> 00:11:54.040 But absolutely, some of these platforms 00:11:54.040 --> 00:11:55.600 are then spreading out. 00:11:55.600 --> 00:11:59.230 So you could be robo advisor first and then 00:11:59.230 --> 00:12:02.080 move into something else. 00:12:02.080 --> 00:12:05.320 Other trends, because of data, we'll 00:12:05.320 --> 00:12:08.920 see there's a lot of startups, dozens of startups 00:12:08.920 --> 00:12:10.930 in the FinTech space around data, 00:12:10.930 --> 00:12:16.060 around infrastructure, about what many investors think 00:12:16.060 --> 00:12:20.470 of as the back office side of things that are connecting 00:12:20.470 --> 00:12:24.950 exchanges with the public. 00:12:24.950 --> 00:12:27.700 There are many startups around asset management 00:12:27.700 --> 00:12:31.570 and trying to help asset management out. 00:12:31.570 --> 00:12:35.650 And this would be big, wholesale, institutional asset 00:12:35.650 --> 00:12:38.600 management and not just the retail side. 00:12:38.600 --> 00:12:44.680 So let's dive into a little bit the history of online company 00:12:44.680 --> 00:12:49.000 landscape and think about this for a moment. 00:12:49.000 --> 00:12:51.130 Who really started out this whole thing? 00:12:51.130 --> 00:12:53.410 And I put some of the foundation dates 00:12:53.410 --> 00:12:56.290 and the number of customers. 00:12:56.290 --> 00:12:57.850 These are the figures I could get. 00:12:57.850 --> 00:13:01.570 From time to time, I wasn't able to online to find a figure. 00:13:01.570 --> 00:13:05.950 But Charles Schwab and TD Ameritrade-- 00:13:05.950 --> 00:13:08.320 you might think of them as Ameritrade-- 00:13:08.320 --> 00:13:12.130 both started back in the early 1970s. 00:13:12.130 --> 00:13:14.320 Actually, free internet. 00:13:14.320 --> 00:13:17.530 The idea was a lower cost brokerage. 00:13:17.530 --> 00:13:21.390 But what was happening in the early 1970s, 00:13:21.390 --> 00:13:26.030 a really important part of this saga is, out of the 1960s, 00:13:26.030 --> 00:13:28.150 there was a movement that was ultimately 00:13:28.150 --> 00:13:30.700 captured in congressional action in the US. 00:13:30.700 --> 00:13:34.740 The US Congress got involved, the Securities and Exchange 00:13:34.740 --> 00:13:40.060 got involved to repeal fixed commission rates. 00:13:40.060 --> 00:13:43.810 You see, for decades, the New York Stock Exchange 00:13:43.810 --> 00:13:47.620 had fixed commission rates set by the members of the New York 00:13:47.620 --> 00:13:49.750 Stock Exchange. 00:13:49.750 --> 00:13:55.420 And the institutional world, the larger investors, 00:13:55.420 --> 00:13:59.080 wanted discounts, wanted cheaper rates. 00:13:59.080 --> 00:14:02.560 And in the early 1970s, there was this movement 00:14:02.560 --> 00:14:08.110 to free that up, not to have fixed set rates by the New York 00:14:08.110 --> 00:14:09.610 Stock Exchange. 00:14:09.610 --> 00:14:14.050 And around this time, Schwab, Ameritrade 00:14:14.050 --> 00:14:18.760 started, later affiliated with Toronto Dominion Bank 00:14:18.760 --> 00:14:21.070 and thus the TD. 00:14:21.070 --> 00:14:26.290 Each 50-some years later, about 12 million users. 00:14:26.290 --> 00:14:30.160 E*TRADE starts in the '80s, Firstrade later. 00:14:30.160 --> 00:14:34.750 Interactive Brokers, a remarkable company, 00:14:34.750 --> 00:14:38.770 more on the institutional side, little less than a million 00:14:38.770 --> 00:14:40.150 and so forth. 00:14:40.150 --> 00:14:44.200 Monex bought TradeStation, but Monex 00:14:44.200 --> 00:14:48.130 from the '90s and even TradeStation earlier. 00:14:48.130 --> 00:14:50.950 Each of these companies were chipping away a little bit 00:14:50.950 --> 00:14:54.400 of the old concept of brokers. 00:14:54.400 --> 00:14:58.120 And there were many challenges in the 1990s into the noughts 00:14:58.120 --> 00:15:03.100 between Schwab and Ameritrade, and E*TRADE and traditional 00:15:03.100 --> 00:15:06.980 firms like Merrill Lynch and the like. 00:15:06.980 --> 00:15:10.250 The asset managers themselves, the big asset managers 00:15:10.250 --> 00:15:14.090 like Fidelity and Vanguard pre-date all of this. 00:15:14.090 --> 00:15:16.520 But Fidelity and Vanguard also were 00:15:16.520 --> 00:15:20.840 saying, how can we, in addition to wealth management, 00:15:20.840 --> 00:15:23.540 offer online brokerage? 00:15:23.540 --> 00:15:26.330 And as we all know, if you have an account 00:15:26.330 --> 00:15:28.250 with Fidelity or Vanguard, or for that 00:15:28.250 --> 00:15:31.490 matter with T. Rowe Price or other large asset managers 00:15:31.490 --> 00:15:37.160 in the US, at some point in time in the last 20-ish years, 00:15:37.160 --> 00:15:40.670 some starting in the mid '90s, some waiting all the way 00:15:40.670 --> 00:15:42.980 until the late noughts, they started 00:15:42.980 --> 00:15:47.150 to say they're going to compete with traditional Wall 00:15:47.150 --> 00:15:50.330 Street, the Merrill Lynches and so forth. 00:15:50.330 --> 00:15:54.830 And they were going to compete by offering an online ability 00:15:54.830 --> 00:15:56.990 to buy and sell stocks. 00:15:56.990 --> 00:15:59.070 Both got into the business. 00:15:59.070 --> 00:16:03.420 It's not that the big banks didn't notice and everything. 00:16:03.420 --> 00:16:05.360 And some of them, even in the last few years, 00:16:05.360 --> 00:16:10.040 started discount retail packages. 00:16:10.040 --> 00:16:12.470 Merrill Lynch, which I keep mentioning, 00:16:12.470 --> 00:16:16.760 Merrill Lynch Edge 2010 was a product 00:16:16.760 --> 00:16:19.450 after Merrill Lynch was bought by Bank of America. 00:16:19.450 --> 00:16:22.940 And Bank of America is thinking, OK, it's post-crisis. 00:16:22.940 --> 00:16:24.890 They buy Merrill Lynch. 00:16:24.890 --> 00:16:28.190 Merrill Lynch has this remarkable multiple 00:16:28.190 --> 00:16:33.410 1,000-person organization of brokers, 00:16:33.410 --> 00:16:36.560 but they do Edge to be online. 00:16:36.560 --> 00:16:41.540 And even Ally Bank, Ally Finance, 00:16:41.540 --> 00:16:44.300 which started in the auto lending business, 00:16:44.300 --> 00:16:50.630 was that first challenger bank in 2009, by 2016 is saying, 00:16:50.630 --> 00:16:53.040 we can get into this, too, online-- 00:16:53.040 --> 00:16:55.460 4 million members. 00:16:55.460 --> 00:16:58.210 But where are we on the startups? 00:16:58.210 --> 00:17:02.120 The startups, Robinhood in 2013 and all this package 00:17:02.120 --> 00:17:07.079 of startups in the last few years 00:17:07.079 --> 00:17:09.369 really have transformed things. 00:17:09.369 --> 00:17:15.000 So what I was saying is these FinTech startups, 00:17:15.000 --> 00:17:17.520 primarily we think of Robinhood, but there's a bunch 00:17:17.520 --> 00:17:20.609 of others within other markets. 00:17:20.609 --> 00:17:24.569 Like Freetrade, and Tastyworks, and Webull 00:17:24.569 --> 00:17:28.800 have come along partly because of mobile phones, 00:17:28.800 --> 00:17:33.090 partly because even the Schwabs and Ameritrades were still 00:17:33.090 --> 00:17:36.690 charging, whether it was a few pennies a share, 00:17:36.690 --> 00:17:39.660 but still charging $0.03 $0.04, $0.05 cents a share 00:17:39.660 --> 00:17:41.340 and so forth. 00:17:41.340 --> 00:17:49.040 User interface and cost provided some opportunity to move in. 00:17:49.040 --> 00:17:51.610 So I'm going to just talk a little bit about the large 00:17:51.610 --> 00:17:54.080 companies, that E*TRADEs, and Ameritrades, 00:17:54.080 --> 00:17:57.910 and Fidelities and the like for a moment because part of it is 00:17:57.910 --> 00:17:59.840 about mobile trading. 00:17:59.840 --> 00:18:03.310 And they each-- and this chart that I 00:18:03.310 --> 00:18:05.380 was able to get from StockBrokers.com, 00:18:05.380 --> 00:18:09.190 a comparison was just like, what are the apps? 00:18:09.190 --> 00:18:11.320 What is that user interface? 00:18:11.320 --> 00:18:12.860 And this was one example. 00:18:12.860 --> 00:18:16.600 But better believe that whether you're Merrill Lynch Edge 00:18:16.600 --> 00:18:19.870 or you're Robinhood, you're also thinking about, 00:18:19.870 --> 00:18:22.420 do I interface well with an iPhone, an Android, 00:18:22.420 --> 00:18:24.220 and so forth, and Apple Watch? 00:18:24.220 --> 00:18:28.900 I have to have that connectivity and that technology 00:18:28.900 --> 00:18:31.130 to be ready and used on all of these. 00:18:31.130 --> 00:18:33.580 And you can run your eye through, 00:18:33.580 --> 00:18:37.570 can I have trading on each of these products, mutual funds? 00:18:37.570 --> 00:18:41.320 And particularly electronic trading 00:18:41.320 --> 00:18:46.000 often is around ETFs but not only ETFs. 00:18:46.000 --> 00:18:49.550 And as the cryptocurrency space came up, a number of them said, 00:18:49.550 --> 00:18:52.060 well, can we trade cryptocurrencies as well? 00:18:52.060 --> 00:18:54.070 Not the E*TRADES and Ameritrades, 00:18:54.070 --> 00:18:59.050 but the Robinhoods and the disruptors were into that 00:18:59.050 --> 00:19:00.110 space. 00:19:00.110 --> 00:19:02.350 So it's just a little bit of a comparison 00:19:02.350 --> 00:19:04.990 in how some folks think. 00:19:04.990 --> 00:19:07.480 Recent developments are really important. 00:19:07.480 --> 00:19:11.410 And the biggest one was late in 2019, 00:19:11.410 --> 00:19:14.170 what's called the Broker Wars. 00:19:14.170 --> 00:19:16.270 What happened start was-- 00:19:16.270 --> 00:19:20.850 at the start was Robinhood was eating into this, 6 million, 00:19:20.850 --> 00:19:25.370 7 million, 8 million members, now maybe 10 million members. 00:19:25.370 --> 00:19:26.950 And as we saw the earlier numbers, 00:19:26.950 --> 00:19:30.480 Schwab and Ameritrade are only at about 12 million. 00:19:30.480 --> 00:19:34.110 And as that was happening, IBKR, which 00:19:34.110 --> 00:19:41.010 is that smaller but remarkable company, Institutional Brokers, 00:19:41.010 --> 00:19:43.530 in September of 2019 said they were 00:19:43.530 --> 00:19:47.630 going to go to free brokerage for some of their accounts. 00:19:47.630 --> 00:19:50.270 It wasn't 100%, but they were going to go. 00:19:50.270 --> 00:19:53.710 And within weeks, early in October 2019, 00:19:53.710 --> 00:19:58.510 Schwab finally said, zero commission. 00:19:58.510 --> 00:20:00.850 Now, what's fascinating, I think, 00:20:00.850 --> 00:20:04.090 is this is the challenge that we're in. 00:20:04.090 --> 00:20:06.580 We're in the challenge of, are there 00:20:06.580 --> 00:20:14.930 financial services that will move to zero top line pricing? 00:20:14.930 --> 00:20:16.370 And what we've found, whether it's 00:20:16.370 --> 00:20:22.400 in Facebook or in many, many online applications and outside 00:20:22.400 --> 00:20:26.900 of the financial world, it's a zero fee environment. 00:20:26.900 --> 00:20:30.580 And then the business model is earning money some other way. 00:20:30.580 --> 00:20:34.100 In Facebook's case, it's about marketing and advertising. 00:20:34.100 --> 00:20:36.380 90-plus% of their revenue is really 00:20:36.380 --> 00:20:38.360 about advertising and marketing if you 00:20:38.360 --> 00:20:41.720 look at that business model, that remarkable business model. 00:20:41.720 --> 00:20:43.590 But it may be on the data. 00:20:43.590 --> 00:20:45.440 It may be cross-selling and marketing. 00:20:45.440 --> 00:20:47.160 It may be on the data. 00:20:47.160 --> 00:20:48.330 It may be somewhere else. 00:20:48.330 --> 00:20:50.810 We're going to talk about the revenue model of Robinhood 00:20:50.810 --> 00:20:52.040 in a moment. 00:20:52.040 --> 00:20:55.700 But Charles Schwab reacted. 00:20:55.700 --> 00:21:00.560 E*TRADE, TD Ameritrade all within one week went to zero 00:21:00.560 --> 00:21:03.340 commission. 00:21:03.340 --> 00:21:05.980 And in fact, it led to Schwab being 00:21:05.980 --> 00:21:09.340 able to do the next thing, which was announce 00:21:09.340 --> 00:21:11.960 the purchase of Ameritrade. 00:21:11.960 --> 00:21:15.530 With collapsing revenues in Ameritrade, 00:21:15.530 --> 00:21:17.930 Schwab could actually say, we're-- 00:21:17.930 --> 00:21:20.540 they made him an offer, purchase for $26 billion. 00:21:20.540 --> 00:21:22.690 Morgan Stanley wasn't going to be outdone. 00:21:22.690 --> 00:21:25.580 And early in 2020, Morgan Stanley, 00:21:25.580 --> 00:21:28.970 one of the most venerable old-line investment banks 00:21:28.970 --> 00:21:31.150 dating all the way back to James-- 00:21:31.150 --> 00:21:36.680 to J.P. Morgan himself, the industrialist that though 00:21:36.680 --> 00:21:41.540 he's departed this world many decades ago has his name 00:21:41.540 --> 00:21:46.610 on Morgan Stanley and JP Morgan Chase, 00:21:46.610 --> 00:21:50.690 Morgan Stanley buys E*TRADE earlier this year. 00:21:50.690 --> 00:21:53.140 If you would have told the Morgan Stanley executives when 00:21:53.140 --> 00:21:57.070 E*TRADE started 30 years ago that some time they would 00:21:57.070 --> 00:21:59.590 in their future buy E*TRADE, they would have scratched 00:21:59.590 --> 00:22:02.020 their head and said, really? 00:22:02.020 --> 00:22:05.240 We're going to be a retail online brokerage firm? 00:22:05.240 --> 00:22:10.130 So it's an interesting change in this world. 00:22:10.130 --> 00:22:12.960 So what's the long road? 00:22:12.960 --> 00:22:16.290 What's the long road of commissions? 00:22:16.290 --> 00:22:20.500 This is the-- a much earlier chart, 00:22:20.500 --> 00:22:21.940 but if you look at this gray line, 00:22:21.940 --> 00:22:25.600 this commission rates from $0.25 a share 00:22:25.600 --> 00:22:31.270 down to about $0.03 cents a share in 2008 or 2009. 00:22:31.270 --> 00:22:35.740 I think this chart cuts off around 2008. 00:22:35.740 --> 00:22:39.890 This long march of competition in part 00:22:39.890 --> 00:22:42.620 is because of volumes as you can see on this, 00:22:42.620 --> 00:22:46.200 that volumes were going up and commissions were going down. 00:22:46.200 --> 00:22:48.590 So some of it is just efficiency, 00:22:48.590 --> 00:22:52.190 but it's also this competition that was coming in from E*TRADE 00:22:52.190 --> 00:22:56.620 and Ameritrade on the retail side. 00:22:56.620 --> 00:22:58.820 But Robinhood entered a world that 00:22:58.820 --> 00:23:02.480 still had $0.03, $0.04, $0.05 cents commission. 00:23:02.480 --> 00:23:07.480 Robinhood initially did an online app 00:23:07.480 --> 00:23:14.730 that was easy with a mobile phone to start an account. 00:23:14.730 --> 00:23:17.790 But what they also did is they said, we'll do it for free. 00:23:17.790 --> 00:23:22.058 Their business model from 2013 on, we'll do it for free. 00:23:22.058 --> 00:23:23.100 And how did they do that? 00:23:23.100 --> 00:23:25.050 What's the revenue model behind that? 00:23:25.050 --> 00:23:28.830 Anybody want to take a moment of pause, Romain? 00:23:28.830 --> 00:23:30.210 I will answer this question. 00:23:30.210 --> 00:23:33.330 I'm just saying, Romain, who amongst the class 00:23:33.330 --> 00:23:35.790 would think, how could you be so bold? 00:23:35.790 --> 00:23:38.640 As a startup venture capitalist, you 00:23:38.640 --> 00:23:43.230 start an entrepreneurial effort free online brokerage 00:23:43.230 --> 00:23:43.860 from day one. 00:23:47.724 --> 00:23:49.980 ROMAIN: Any volunteers? 00:23:49.980 --> 00:23:50.480 Victor. 00:23:53.462 --> 00:23:59.060 AUDIENCE: I guess you can either make a profit on lending money 00:23:59.060 --> 00:24:02.370 to traders so they can purchase stock. 00:24:02.370 --> 00:24:04.880 And you can also use some high-frequency trading, 00:24:04.880 --> 00:24:07.145 as some people said, that's probably what it's doing 00:24:07.145 --> 00:24:10.620 in order to before you sell, you actually go through a-- 00:24:10.620 --> 00:24:13.415 determine the area to make a profit out of. 00:24:13.415 --> 00:24:14.530 GARY GENSLER: OK. 00:24:14.530 --> 00:24:16.360 So Victor's raised two things. 00:24:16.360 --> 00:24:18.370 I'm going to focus on the second, 00:24:18.370 --> 00:24:23.170 was the relationship of these mobile platforms, 00:24:23.170 --> 00:24:27.870 Robinhood in particularly, and high-frequency trading. 00:24:27.870 --> 00:24:33.360 What Robinhood knew was that a feature of the capital markets 00:24:33.360 --> 00:24:37.560 was that there were firms that would pay for order flow. 00:24:37.560 --> 00:24:41.820 They would pay a very modest amount, maybe a penny a share, 00:24:41.820 --> 00:24:46.520 but they would pay just to receive the order flow. 00:24:46.520 --> 00:24:52.600 And this is a feature of the competitive markets, 00:24:52.600 --> 00:24:54.800 the competitive exchange markets. 00:24:54.800 --> 00:24:58.400 In the US, we have 50 to 70 individual exchanges. 00:24:58.400 --> 00:25:00.080 We think of the New York Stock Exchange. 00:25:00.080 --> 00:25:03.000 We think about NASDAQ and so forth, 00:25:03.000 --> 00:25:05.600 but there are many other electronic markets 00:25:05.600 --> 00:25:10.670 where transactions occur. 00:25:10.670 --> 00:25:15.380 And some people call them the dark markets. 00:25:15.380 --> 00:25:19.340 But all of those markets might pay for order flow. 00:25:19.340 --> 00:25:21.980 And then individual trading shops, 00:25:21.980 --> 00:25:24.890 high-frequency trading shops, might pay for order flow. 00:25:24.890 --> 00:25:28.700 What that means is they want to have a first look. 00:25:28.700 --> 00:25:31.640 They want to have those orders and to route them 00:25:31.640 --> 00:25:36.290 through their algorithms and into their either exchange 00:25:36.290 --> 00:25:39.620 engines, if it's an exchange that's paying for order flow, 00:25:39.620 --> 00:25:43.580 or a high-frequency trading shop that's paying for order flow. 00:25:43.580 --> 00:25:46.670 And the exchanges have different fee structures 00:25:46.670 --> 00:25:50.720 depending upon whether you make a bid or offer 00:25:50.720 --> 00:25:52.400 or you take a bid or offer. 00:25:52.400 --> 00:25:56.810 You will sometimes hear this called maker and taker rates. 00:25:56.810 --> 00:26:02.120 Making a bid or offer, putting a resting bid or a resting offer 00:26:02.120 --> 00:26:07.730 into an exchange engine is more valuable for the exchange 00:26:07.730 --> 00:26:11.870 because it brings other orders into the exchange. 00:26:11.870 --> 00:26:14.870 So what Robinhood figured out was 00:26:14.870 --> 00:26:19.430 they could offer the retail public something for free 00:26:19.430 --> 00:26:23.300 because they entered into two or three major contracts 00:26:23.300 --> 00:26:25.640 with hedge funds, with high-frequency trading 00:26:25.640 --> 00:26:28.820 shops saying, we will enter into something 00:26:28.820 --> 00:26:33.170 where we're selling you the order flow for a modest amount. 00:26:33.170 --> 00:26:34.910 I don't know the exact amount, but let's 00:26:34.910 --> 00:26:39.340 call it a penny a share inside the pricing of the $0.03 00:26:39.340 --> 00:26:43.210 or so to $0.05 that the online brokers were charging, 00:26:43.210 --> 00:26:46.930 but still very valuable over time for Robinhood. 00:26:46.930 --> 00:26:51.470 And then bingo, 6 or 8 million members later, 00:26:51.470 --> 00:26:55.930 account holders later and a good user face, 00:26:55.930 --> 00:26:59.110 we get into the Broker Wars where others drop their rates 00:26:59.110 --> 00:27:00.260 as well. 00:27:00.260 --> 00:27:03.370 And so then I go to this interesting zero commission 00:27:03.370 --> 00:27:08.630 model chart that talks about, well, 00:27:08.630 --> 00:27:13.240 how could you have the cost of financial advice be zero? 00:27:13.240 --> 00:27:15.370 Well, it's because of everything else. 00:27:15.370 --> 00:27:20.620 And the everything else model, whether it's for Morgan Stanley 00:27:20.620 --> 00:27:26.470 and E*TRADE, whether it's for Schwab, Charles Schwab, 00:27:26.470 --> 00:27:29.670 or whether it's for Robinhood, as Victor said, 00:27:29.670 --> 00:27:35.430 this is everything else that might be valuable for you. 00:27:35.430 --> 00:27:37.920 Picking up payment for order flow 00:27:37.920 --> 00:27:41.130 is the third one on this list, but margin interest, 00:27:41.130 --> 00:27:43.350 maintenance fees, transaction fees, 00:27:43.350 --> 00:27:47.640 saying once you have a client, there's a lot of other revenues 00:27:47.640 --> 00:27:49.770 that can be garnered. 00:27:49.770 --> 00:27:52.980 So once Facebook has your information, 00:27:52.980 --> 00:27:56.100 there are other revenues that Facebook can garner. 00:27:56.100 --> 00:28:00.260 But in the brokerage space, this is very well known. 00:28:00.260 --> 00:28:05.970 This was known in the 1960s and 1970s when the large investment 00:28:05.970 --> 00:28:08.700 banks would think, if I have a relationship 00:28:08.700 --> 00:28:14.720 with this big insurance company, I can earn money in other ways. 00:28:14.720 --> 00:28:18.380 It's what led in part in the early 1970s 00:28:18.380 --> 00:28:21.800 to break the old decades-old fixed commission 00:28:21.800 --> 00:28:24.200 rates because large investment banks wanted 00:28:24.200 --> 00:28:28.760 to discount and lower their rates for large institutions, 00:28:28.760 --> 00:28:32.060 not for the retail public but for large institutions. 00:28:32.060 --> 00:28:35.540 That was 50 years ago, but that was also 00:28:35.540 --> 00:28:39.320 because there's all this revenue potential, 00:28:39.320 --> 00:28:45.080 as this little graphic says, beneath the surface. 00:28:45.080 --> 00:28:47.990 Romain, questions if I can pause a little bit, because it's 00:28:47.990 --> 00:28:50.990 about the business models of brokerage 00:28:50.990 --> 00:28:53.906 and the business models of investment banking. 00:28:53.906 --> 00:28:56.390 ROMAIN: Let's wait a few seconds so people have the time. 00:28:56.390 --> 00:28:59.250 GARY GENSLER: [INAUDIBLE] lived at Goldman Sachs for 18 years, 00:28:59.250 --> 00:29:02.312 even though that feels like another era. 00:29:02.312 --> 00:29:03.820 ROMAIN: So we have a few questions. 00:29:03.820 --> 00:29:05.775 Let's take Luke and then Hassan. 00:29:05.775 --> 00:29:08.520 AUDIENCE: So I have one quick question 00:29:08.520 --> 00:29:11.970 when it comes to traders or trading platforms. 00:29:11.970 --> 00:29:17.040 Banks usually make money by holding deposits in daily basis 00:29:17.040 --> 00:29:19.920 because that's a revenue to the firm. 00:29:19.920 --> 00:29:21.960 It's especially hard to do so in US 00:29:21.960 --> 00:29:23.460 when interest rate is near zero. 00:29:23.460 --> 00:29:27.810 But in emerging markets, such as Korea, China, or India, 00:29:27.810 --> 00:29:30.810 they basically make the revenue if you have somebody's money. 00:29:30.810 --> 00:29:34.500 And you can lend it out in a net interest margin of positive. 00:29:34.500 --> 00:29:38.730 How do platforms like these, E*TRADE or Robinhood, 00:29:38.730 --> 00:29:42.510 make money when they transfer the money from deposit 00:29:42.510 --> 00:29:45.940 to their account and takes two, three days, 00:29:45.940 --> 00:29:48.630 and they can make money out of it besides these hedge fund 00:29:48.630 --> 00:29:50.180 deals that you have explained? 00:29:50.180 --> 00:29:53.980 GARY GENSLER: So a great question. 00:29:53.980 --> 00:29:58.700 So the classic what I would call commercial bank model 00:29:58.700 --> 00:30:00.650 is exactly what Luke said. 00:30:00.650 --> 00:30:04.190 To pot-- there's a net interest spread between the depositors' 00:30:04.190 --> 00:30:06.700 money and what you lended out. 00:30:06.700 --> 00:30:11.360 And whether you're a $1 trillion bank or a $100 million bank, 00:30:11.360 --> 00:30:14.123 it's basically that spread between the depositors' money 00:30:14.123 --> 00:30:15.290 and what you're lending out. 00:30:15.290 --> 00:30:18.870 That model has been around for centuries. 00:30:18.870 --> 00:30:20.690 And as Luke said, it's a little bit more 00:30:20.690 --> 00:30:23.300 challenging in different interest rate environments, 00:30:23.300 --> 00:30:24.680 but that's been there. 00:30:24.680 --> 00:30:27.110 The brokerage business traditionally 00:30:27.110 --> 00:30:30.410 was making money on commissions, and commissions 00:30:30.410 --> 00:30:33.230 was a big part of that revenue model all the way 00:30:33.230 --> 00:30:36.350 through the 1960s and '70s. 00:30:36.350 --> 00:30:39.780 But there's other pieces of it as well 00:30:39.780 --> 00:30:42.600 beyond just the commission of, as we 00:30:42.600 --> 00:30:45.750 saw on that chart, $0.25 a share long ago or $0.03 00:30:45.750 --> 00:30:48.480 or $0.05 a share more recently. 00:30:48.480 --> 00:30:54.210 Beyond that, it's also, when you buy and sell securities, 00:30:54.210 --> 00:30:56.920 you-- there is what's known as a bid-offer spread, 00:30:56.920 --> 00:30:59.340 the difference between the bid side 00:30:59.340 --> 00:31:01.240 and where somebody is offering. 00:31:01.240 --> 00:31:03.450 And a market maker can be in the middle 00:31:03.450 --> 00:31:05.400 and provide liquidity to the market, 00:31:05.400 --> 00:31:07.740 get paid for taking risks. 00:31:07.740 --> 00:31:10.800 It's a risk-return business. 00:31:10.800 --> 00:31:13.200 But first, Luke, is the bid-offer spread, 00:31:13.200 --> 00:31:16.170 just being in the flow. 00:31:16.170 --> 00:31:18.480 In Robinhood's case, Robinhood said, 00:31:18.480 --> 00:31:20.580 we don't have a balance sheet. 00:31:20.580 --> 00:31:23.790 We're not going to pay for the bid-ask spread. 00:31:23.790 --> 00:31:26.010 But we will enter into transactions 00:31:26.010 --> 00:31:28.020 with high-frequency trading shops 00:31:28.020 --> 00:31:34.170 and effectively give them access to this flow of transactions. 00:31:34.170 --> 00:31:36.930 And so that's payment for order flow. 00:31:36.930 --> 00:31:38.760 And the high-frequency trading shops 00:31:38.760 --> 00:31:43.080 are, in essence, trying to tap into that bid-offer spread. 00:31:43.080 --> 00:31:45.660 So that's a dominant part of it. 00:31:45.660 --> 00:31:48.090 In addition, just to name one other, but there 00:31:48.090 --> 00:31:49.410 are many others-- 00:31:49.410 --> 00:31:52.320 in addition, Charles Schwab and others-- 00:31:52.320 --> 00:31:55.170 Merrill Lynch figured this out decades ago. 00:31:55.170 --> 00:31:57.930 Once you have that customer relationship, 00:31:57.930 --> 00:32:01.480 that customer relationship will come to you for other things, 00:32:01.480 --> 00:32:04.440 and they will come to you to do margin lending, which 00:32:04.440 --> 00:32:06.780 is a form of borrowing. 00:32:06.780 --> 00:32:10.470 And so you have maybe then that customer there 00:32:10.470 --> 00:32:13.080 who you can actually use your balance sheet 00:32:13.080 --> 00:32:16.560 and lend them money, usually what's called margin lending. 00:32:16.560 --> 00:32:18.960 So I'm just mentioning two of them. 00:32:18.960 --> 00:32:22.830 Bid-ask spread, Robinhood was not taking that themselves. 00:32:22.830 --> 00:32:24.930 They were selling that access. 00:32:24.930 --> 00:32:27.060 And then the relationship that you 00:32:27.060 --> 00:32:32.083 can have when using your balance sheet and lending money. 00:32:32.083 --> 00:32:34.500 AUDIENCE: Can you tell us a little bit about the kickbacks 00:32:34.500 --> 00:32:35.747 in the presentation? 00:32:35.747 --> 00:32:36.830 GARY GENSLER: What's that? 00:32:36.830 --> 00:32:38.413 AUDIENCE: Can you tell us a little bit 00:32:38.413 --> 00:32:40.220 about the kickbacks in the presentation you 00:32:40.220 --> 00:32:41.460 have here in the small letters? 00:32:41.460 --> 00:32:43.252 GARY GENSLER: Well, these are not my words. 00:32:43.252 --> 00:32:46.880 These are Jason Wenk of Altruist. 00:32:46.880 --> 00:32:50.720 But in essence, there's so many different ways 00:32:50.720 --> 00:32:56.950 that you might take a customer's order flow 00:32:56.950 --> 00:33:03.630 and sell access to that, or you might be the front end model. 00:33:03.630 --> 00:33:06.360 You could be-- I'm not saying Robinhood or Schwab are 00:33:06.360 --> 00:33:09.660 doing this, but you can be that front end model. 00:33:09.660 --> 00:33:13.560 And then somebody else will pay you, pay the Schwab, 00:33:13.560 --> 00:33:15.660 pay the Robinhood. 00:33:15.660 --> 00:33:18.090 And so I think what Jason Wenk, who wrote this, 00:33:18.090 --> 00:33:19.530 is calling that a kickback. 00:33:19.530 --> 00:33:24.300 But it's a contractual arrangement 00:33:24.300 --> 00:33:27.810 to be-- have access to that customer and that order flow. 00:33:27.810 --> 00:33:31.430 AUDIENCE: Can I safely assume that they're selling our data 00:33:31.430 --> 00:33:33.305 as well as Google is doing? 00:33:33.305 --> 00:33:35.720 GARY GENSLER: So data is really important, 00:33:35.720 --> 00:33:39.220 and data is really important for multiple reasons. 00:33:39.220 --> 00:33:43.150 One, the better data you have, the better trading 00:33:43.150 --> 00:33:45.070 algorithms you can create. 00:33:45.070 --> 00:33:47.470 So part of the payment for order flow 00:33:47.470 --> 00:33:49.120 is to capture bid-ask spread. 00:33:49.120 --> 00:33:51.700 Part of the payment for order flow 00:33:51.700 --> 00:33:55.180 is the data so that you can build your algorithms. 00:33:55.180 --> 00:33:59.030 You have more data for your machine learning, absolutely. 00:33:59.030 --> 00:34:02.150 There's also other relevant data, 00:34:02.150 --> 00:34:05.770 but fundamentally the data is to be a better market 00:34:05.770 --> 00:34:07.257 maker and a better investor. 00:34:07.257 --> 00:34:09.340 I think Romain, there was somebody else that still 00:34:09.340 --> 00:34:10.630 had a question before I go on. 00:34:10.630 --> 00:34:12.625 ROMAIN: Yes, Hassan. 00:34:12.625 --> 00:34:13.730 AUDIENCE: Hi, Professor. 00:34:13.730 --> 00:34:14.230 Yeah. 00:34:14.230 --> 00:34:18.630 My question is about the bid-ask margin. 00:34:18.630 --> 00:34:22.690 And I'm just wondering, I mean, so for instance 00:34:22.690 --> 00:34:27.260 like Robinhood, they-- 00:34:27.260 --> 00:34:29.880 so because they had many customers, 00:34:29.880 --> 00:34:33.560 they could get better deals, and they 00:34:33.560 --> 00:34:38.060 could benefit from the flow of customers that they have. 00:34:38.060 --> 00:34:39.620 Is this how they make money? 00:34:39.620 --> 00:34:40.535 I'm just wondering. 00:34:40.535 --> 00:34:43.639 GARY GENSLER: Well, so actually, the way they made money is they 00:34:43.639 --> 00:34:47.480 were getting paid for that flow because their business model 00:34:47.480 --> 00:34:50.330 early on, and others like them now, 00:34:50.330 --> 00:34:56.510 said we will go to the investing public and zero commission. 00:34:56.510 --> 00:35:01.300 And somebody else will pay us. 00:35:01.300 --> 00:35:03.490 A fraction of a penny at this point in time 00:35:03.490 --> 00:35:06.970 would be enough, but a fraction of a penny. 00:35:06.970 --> 00:35:09.820 That other party would pay us to, 00:35:09.820 --> 00:35:14.200 in essence, route those transactions to the stock 00:35:14.200 --> 00:35:15.860 exchanges. 00:35:15.860 --> 00:35:19.480 And so one company that does pay for order flow 00:35:19.480 --> 00:35:22.630 is a large hedge fund high-frequency shop 00:35:22.630 --> 00:35:26.050 from Chicago called Citadel, which 00:35:26.050 --> 00:35:27.670 I don't know its current size, but it 00:35:27.670 --> 00:35:31.060 used to be about a $20 billion hedge fund asset management 00:35:31.060 --> 00:35:36.880 shop and very active in high-frequency trading. 00:35:36.880 --> 00:35:40.000 It's very public that it is. 00:35:40.000 --> 00:35:43.930 And so Citadel is one of those vendors on the other side 00:35:43.930 --> 00:35:47.200 of the Robinhood app. 00:35:47.200 --> 00:35:51.040 And then they find a way, as we were talking with Luke. 00:35:51.040 --> 00:35:54.320 They find the Citadels of the world, not just Citadel. 00:35:54.320 --> 00:35:58.570 They find that order flow is then valuable for them. 00:35:58.570 --> 00:36:02.050 They're routing some of it to the Stock Exchange, 00:36:02.050 --> 00:36:04.240 and that could still be worth something. 00:36:04.240 --> 00:36:06.130 They're putting it into their analytics. 00:36:06.130 --> 00:36:08.740 They then get better sophisticated machine 00:36:08.740 --> 00:36:12.250 learning on the analytics. 00:36:12.250 --> 00:36:14.600 And that order flow is also something 00:36:14.600 --> 00:36:19.250 that can be very valuable to an operator of a dark market, one 00:36:19.250 --> 00:36:22.850 of these small electronic markets, 00:36:22.850 --> 00:36:24.200 because you're all competing. 00:36:24.200 --> 00:36:27.590 If there's 60 or 70 of these small dark markets, 00:36:27.590 --> 00:36:31.220 they're all competing for volume and market share. 00:36:31.220 --> 00:36:33.260 And then all of the sudden, Robinhood has not 00:36:33.260 --> 00:36:37.220 just a few 100,000 customers, but they have 5 million or 10 00:36:37.220 --> 00:36:38.120 million customers. 00:36:38.120 --> 00:36:42.290 Then they can provide a lot of order flow 00:36:42.290 --> 00:36:47.850 and a lot of market coverage for somebody on the other side. 00:36:47.850 --> 00:36:51.770 Now, as it relates to Schwab, Schwab and some of the earlier 00:36:51.770 --> 00:36:55.070 online brokers, they got into the business of collecting 00:36:55.070 --> 00:36:56.750 assets under management. 00:36:56.750 --> 00:37:01.370 They got into the asset under management custodial side 00:37:01.370 --> 00:37:02.660 of the business as well. 00:37:02.660 --> 00:37:06.830 There's a lot of other revenue streams, transaction fees, 00:37:06.830 --> 00:37:12.360 account maintenance fees, and even advisory fees 00:37:12.360 --> 00:37:13.070 in those shops. 00:37:15.950 --> 00:37:18.200 I want to move on now to wealth management. 00:37:18.200 --> 00:37:21.950 I think you'll see merging between the wealth 00:37:21.950 --> 00:37:26.820 management fees and the brokerage fees, 00:37:26.820 --> 00:37:29.300 which is exactly what we've seen over time 00:37:29.300 --> 00:37:30.860 in the traditional brokerage field. 00:37:30.860 --> 00:37:33.560 In the traditional brokerage field for decades, 00:37:33.560 --> 00:37:35.990 a broker earned commissions. 00:37:35.990 --> 00:37:40.070 And then they started by the late 1990s, 00:37:40.070 --> 00:37:42.650 with some support from the regulators, 00:37:42.650 --> 00:37:44.550 to change their revenue models. 00:37:44.550 --> 00:37:46.520 The traditional Merrill Lynch broker 00:37:46.520 --> 00:37:51.680 from the 1930s to the 1980s was a commission-based broker. 00:37:51.680 --> 00:37:56.330 But by the 1990s, they started to charge advisory fees, 00:37:56.330 --> 00:37:59.870 meaning for instance, maybe 1% of the assets 00:37:59.870 --> 00:38:01.650 that you left with them. 00:38:01.650 --> 00:38:04.280 And if you leave $1 million, if you're wealthy enough 00:38:04.280 --> 00:38:05.780 to have that $1 million, that means 00:38:05.780 --> 00:38:10.310 that they're earning $10,000 a year on your account. 00:38:12.920 --> 00:38:15.110 If you obviously had more, that would even 00:38:15.110 --> 00:38:17.270 be better for Merrill Lynch and worse for you 00:38:17.270 --> 00:38:20.390 because you'd be leaving them a lot of money to just 00:38:20.390 --> 00:38:25.220 be a custodian for your account largely 00:38:25.220 --> 00:38:28.040 and to give you advice from time to time. 00:38:28.040 --> 00:38:32.060 And that's the set up for the next discussion. 00:38:32.060 --> 00:38:34.550 Romain, any questions? 00:38:34.550 --> 00:38:35.270 ROMAIN: No. 00:38:35.270 --> 00:38:36.522 All good. 00:38:36.522 --> 00:38:39.240 GARY GENSLER: So robo advisory-- and Hassan sort of 00:38:39.240 --> 00:38:40.718 helped me set this up. 00:38:40.718 --> 00:38:42.510 I'm going to do the same sort of landscape. 00:38:42.510 --> 00:38:46.560 We have the same groups, retail brokers, asset managers, 00:38:46.560 --> 00:38:48.030 and the banks. 00:38:48.030 --> 00:38:51.750 Advisory work, brokerage advisory was largely, 00:38:51.750 --> 00:38:55.050 for many decades, the domain of investment banks 00:38:55.050 --> 00:38:58.740 and broker dealers, Merrill Lynch, Smith Barney, 00:38:58.740 --> 00:39:04.020 Paine Webber, many, many companies across the land, 00:39:04.020 --> 00:39:05.550 small and large. 00:39:05.550 --> 00:39:07.980 And they were a commission-based business. 00:39:07.980 --> 00:39:10.470 By the 1990s, as I mentioned, they 00:39:10.470 --> 00:39:17.690 started to move to a financial advisory commission number. 00:39:17.690 --> 00:39:20.880 And I can't remember exactly what year it was in the 1990s. 00:39:20.880 --> 00:39:23.160 Even the Securities and Exchange Commission 00:39:23.160 --> 00:39:25.950 changed some rules to facilitate some of that. 00:39:28.980 --> 00:39:31.890 Coming from the other side, the big asset managers 00:39:31.890 --> 00:39:36.210 managing pension money and managing big pools of money 00:39:36.210 --> 00:39:38.250 through mutual funds also started 00:39:38.250 --> 00:39:41.580 to get into the retail advisory space. 00:39:41.580 --> 00:39:43.590 And thirdly, you had the brokers, 00:39:43.590 --> 00:39:45.850 the Schwabs and so forth. 00:39:45.850 --> 00:39:48.930 Now, I've put some names here like Charles Schwab Intelligent 00:39:48.930 --> 00:39:54.810 Portfolios, which is a more recent rollout, that branding, 00:39:54.810 --> 00:39:57.780 Intelligent Portfolios or TD America's 00:39:57.780 --> 00:40:00.480 Ameritrade's Essential Portfolios, 00:40:00.480 --> 00:40:03.150 more recent roll out for them. 00:40:03.150 --> 00:40:06.780 And they've been reacting to this crowd, 00:40:06.780 --> 00:40:12.930 this remarkable, entrepreneurial, mobile app 00:40:12.930 --> 00:40:14.030 robo advisors. 00:40:17.560 --> 00:40:23.540 And these companies span the globe in Europe, US, and Asia. 00:40:23.540 --> 00:40:27.590 But what Betterment, or Nutmeg, and others are doing 00:40:27.590 --> 00:40:32.760 is they're saying, we can give more financial inclusion, 00:40:32.760 --> 00:40:37.170 and we can do it in a better user interface and a lower cost 00:40:37.170 --> 00:40:38.730 structure. 00:40:38.730 --> 00:40:42.090 By and large, the asset management fees 00:40:42.090 --> 00:40:45.870 for an account in the traditional brokerage 00:40:45.870 --> 00:40:48.990 environment was hovering close to 1%. 00:40:48.990 --> 00:40:50.940 There was some price compression. 00:40:50.940 --> 00:40:55.890 Some of it was coming down into the 3/4 of 1% to 1% area. 00:40:55.890 --> 00:41:00.300 That means, again, if you were fortunate enough to have-- 00:41:00.300 --> 00:41:04.650 let's just say that you had $500,000, 00:41:04.650 --> 00:41:07.830 and you were able to have somebody invest it for you 00:41:07.830 --> 00:41:09.560 or advise you. 00:41:09.560 --> 00:41:12.300 1% of $500,000 is $5,000. 00:41:12.300 --> 00:41:16.410 That's $400 a month that you were paying, in essence, 00:41:16.410 --> 00:41:19.500 for somebody to give you occasional advice 00:41:19.500 --> 00:41:23.210 and be your custodian for your electronic securities, 00:41:23.210 --> 00:41:25.540 because everything was digital by this point in time. 00:41:25.540 --> 00:41:28.380 It was no longer those earlier days where 00:41:28.380 --> 00:41:31.590 you had physical certificates. 00:41:31.590 --> 00:41:33.150 This group came along and said, maybe 00:41:33.150 --> 00:41:35.760 we could do it at a different price point, a better user 00:41:35.760 --> 00:41:39.350 interface, maybe better analytics and service, 00:41:39.350 --> 00:41:43.280 generally somewhere between 30 to 50 basis points or a quarter 00:41:43.280 --> 00:41:44.135 to a half a percent. 00:41:44.135 --> 00:41:49.730 That same $500,000, if you were to have that $500,000, 00:41:49.730 --> 00:41:53.630 all of the sudden doesn't cost you $5,000 or $4,000 a year, 00:41:53.630 --> 00:41:57.860 but it's costing maybe $1,500 a year or $100 a month. 00:41:57.860 --> 00:42:00.350 Now, you don't get a bill for the $100 a month. 00:42:00.350 --> 00:42:07.070 It just comes out each month out of your account, 00:42:07.070 --> 00:42:11.000 and it's charged as a fee per se. 00:42:11.000 --> 00:42:14.420 But there's generally a different price point. 00:42:14.420 --> 00:42:18.020 We haven't gone all the way that we went with online brokerage, 00:42:18.020 --> 00:42:22.520 to mobile brokerage, to zero accounts, zero fees. 00:42:22.520 --> 00:42:25.250 But one of the great pressures that have happened here 00:42:25.250 --> 00:42:31.410 as well, which is off this page, is asset management fees 00:42:31.410 --> 00:42:34.200 have been coming down as well and particularly 00:42:34.200 --> 00:42:36.870 around a product called exchange traded funds. 00:42:36.870 --> 00:42:39.630 And to understand the field of robo advisors, 00:42:39.630 --> 00:42:42.000 I just want to mention something about exchange traded 00:42:42.000 --> 00:42:46.140 funds, which is an invention of the late 1990s. 00:42:46.140 --> 00:42:50.010 That was a FinTech of its time that somebody came up 00:42:50.010 --> 00:42:53.610 with the idea, I can have a mutual fund. 00:42:53.610 --> 00:42:58.600 I can have a mutual fund that invests in the entire market, 00:42:58.600 --> 00:43:01.390 and I can do it at a low cost. 00:43:01.390 --> 00:43:04.340 And I can package it through a security. 00:43:04.340 --> 00:43:06.400 So let me unpack that. 00:43:06.400 --> 00:43:10.680 The first innovation was an innovation of the early 1970s. 00:43:10.680 --> 00:43:15.730 Jack Bogle, who was the key innovator behind Vanguard, 00:43:15.730 --> 00:43:19.630 said, wouldn't it be great if we gave America at the time 00:43:19.630 --> 00:43:22.660 a product they can invest in the whole stock market 00:43:22.660 --> 00:43:24.910 a little bit of each company? 00:43:24.910 --> 00:43:26.990 And we're not going to manage it for them. 00:43:26.990 --> 00:43:30.850 We're just going to algorithmically, arithmetically 00:43:30.850 --> 00:43:33.310 pick a little bit of every stock. 00:43:33.310 --> 00:43:35.230 And it was called an index fund. 00:43:35.230 --> 00:43:37.300 We take it for granted, but that was 00:43:37.300 --> 00:43:41.860 an innovation, a remarkable innovation of the 1970s. 00:43:41.860 --> 00:43:45.640 Everybody could have a piece of the stock market at a low cost. 00:43:45.640 --> 00:43:49.540 And to this day, Vanguard is still not a publicly traded 00:43:49.540 --> 00:43:50.800 for-profit company. 00:43:50.800 --> 00:43:52.060 It's a mutual company. 00:43:52.060 --> 00:43:55.740 Vanguard is held and owned by its mutual funds 00:43:55.740 --> 00:44:00.980 that are held and owned by us if we're a part of Vanguard. 00:44:00.980 --> 00:44:03.080 That innovation then led to an innovation 00:44:03.080 --> 00:44:05.180 in the 1990s that said, what can we 00:44:05.180 --> 00:44:07.790 do to make this even more efficient? 00:44:07.790 --> 00:44:11.700 What if we take an index mutual fund 00:44:11.700 --> 00:44:13.860 and take the interest in the mutual funds 00:44:13.860 --> 00:44:15.810 and make those securities? 00:44:15.810 --> 00:44:18.510 Took a little change in some regulations, 00:44:18.510 --> 00:44:21.030 but all of the sudden, we had this thing called exchange 00:44:21.030 --> 00:44:25.410 traded funds, these low-cost ways to participate 00:44:25.410 --> 00:44:27.930 in the stock market, the bond market, 00:44:27.930 --> 00:44:30.720 some in the gold and silver markets-- 00:44:30.720 --> 00:44:33.630 exchange traded funds. 00:44:33.630 --> 00:44:39.300 All of these robo advisors in their packaging have said, 00:44:39.300 --> 00:44:42.420 we can get you into this and get you out 00:44:42.420 --> 00:44:46.050 of this, into this market or out of this market, 00:44:46.050 --> 00:44:49.030 and use exchange traded funds. 00:44:49.030 --> 00:44:52.810 The second big innovation for robo advisors, of course, 00:44:52.810 --> 00:44:56.400 is everything we talked about out of artificial intelligence 00:44:56.400 --> 00:45:00.970 and natural language programming, processing, 00:45:00.970 --> 00:45:06.550 the ability to take voice or take digital and transfer that 00:45:06.550 --> 00:45:12.680 into machine language, computer language, and the reverse. 00:45:12.680 --> 00:45:17.300 So robo advisors came along at a point in time 00:45:17.300 --> 00:45:20.990 where you could basically automate us humans a bit, 00:45:20.990 --> 00:45:25.100 not entirely, but we could step back. 00:45:25.100 --> 00:45:29.210 Humans step back, and robo advice goes in. 00:45:29.210 --> 00:45:31.370 And you could do it a lower price point. 00:45:31.370 --> 00:45:34.280 And the third innovation was basically 00:45:34.280 --> 00:45:37.580 some simple analytics-- 00:45:37.580 --> 00:45:42.170 not machine learning, but simple analytics on portfolio 00:45:42.170 --> 00:45:44.270 and asset allocation. 00:45:44.270 --> 00:45:46.730 Some of it's related to, if you're in your 20s 00:45:46.730 --> 00:45:48.450 and you're saving for retirement, 00:45:48.450 --> 00:45:49.520 you could take more risk. 00:45:49.520 --> 00:45:52.940 You could have a higher equity share versus a bond share. 00:45:52.940 --> 00:45:55.820 If you're in your 60s, and you're about to retire, 00:45:55.820 --> 00:45:59.030 you should be more stable, a little less risk, maybe 00:45:59.030 --> 00:46:01.280 more bonds and less equities. 00:46:01.280 --> 00:46:03.650 Some of it's that simple, but they were 00:46:03.650 --> 00:46:07.640 able to basically take that. 00:46:07.640 --> 00:46:09.650 And so the Betterment started, and they 00:46:09.650 --> 00:46:15.660 could find really readily available software 00:46:15.660 --> 00:46:17.580 for asset allocation. 00:46:17.580 --> 00:46:21.390 They could use products like exchange traded funds. 00:46:21.390 --> 00:46:23.460 Mobile phones were around already. 00:46:23.460 --> 00:46:26.630 So they had a good platform. 00:46:26.630 --> 00:46:31.090 And they say, all right, we'll go to a lower fee point. 00:46:31.090 --> 00:46:34.180 And all of the sudden, we start to see a real change of things. 00:46:34.180 --> 00:46:36.461 Questions, Romain? 00:46:36.461 --> 00:46:38.980 ROMAIN: While we wait for questions on this topic, 00:46:38.980 --> 00:46:41.560 we have a question in the chat about Robinhood's business 00:46:41.560 --> 00:46:44.380 model from George. 00:46:44.380 --> 00:46:46.300 Do you see Robinhood and other startups 00:46:46.300 --> 00:46:48.400 starting their own high-frequency trading 00:46:48.400 --> 00:46:50.980 operations instead of selling the order flows? 00:46:50.980 --> 00:46:54.280 And then Devin asks whether maybe Citadel 00:46:54.280 --> 00:46:58.830 or any other hedge fund should just buy Robinhood outright. 00:46:58.830 --> 00:47:01.810 GARY GENSLER: These are two really great questions 00:47:01.810 --> 00:47:02.620 about the future. 00:47:02.620 --> 00:47:11.500 I think that in both ways will the front end platform-- 00:47:11.500 --> 00:47:15.240 and that's really, in a sense, Robinhood and, even in this 00:47:15.240 --> 00:47:18.470 robo advisor space, the Betterments of the world-- 00:47:18.470 --> 00:47:21.830 is a front end user interface platform 00:47:21.830 --> 00:47:25.230 that tend not to have balance sheets. 00:47:25.230 --> 00:47:28.800 And they tend to let somebody else handle that capital 00:47:28.800 --> 00:47:32.490 markets risk behind it. 00:47:32.490 --> 00:47:36.570 But the question here is, do I see the front end 00:47:36.570 --> 00:47:39.610 building balance sheet and moving into the capital market 00:47:39.610 --> 00:47:40.110 side? 00:47:40.110 --> 00:47:43.800 And do I see the capital market side, the balance sheet 00:47:43.800 --> 00:47:46.890 risk taking, moving into the front end side? 00:47:46.890 --> 00:47:48.930 And we don't know, but history tells 00:47:48.930 --> 00:47:51.450 us that tends to happen at some point, 00:47:51.450 --> 00:47:55.500 that there's some sort of what you might 00:47:55.500 --> 00:48:00.540 call vertical integration. 00:48:00.540 --> 00:48:06.060 And if you really think about these slices on this page, 00:48:06.060 --> 00:48:10.890 the JP Morgan building you invest in 2018 or Merrill Edge 00:48:10.890 --> 00:48:12.150 in an earlier time-- 00:48:12.150 --> 00:48:14.590 and if I go back to the brokerage side, 00:48:14.590 --> 00:48:17.010 they're named products there, too-- 00:48:17.010 --> 00:48:20.520 that's balance sheet coupled with front end. 00:48:20.520 --> 00:48:23.370 That's the fully integrated model. 00:48:23.370 --> 00:48:26.160 But then if you look at the asset managers, the asset 00:48:26.160 --> 00:48:28.230 managers, the BlackRocks of the world 00:48:28.230 --> 00:48:33.020 are not actually acting as a principal. 00:48:33.020 --> 00:48:36.990 They're acting as an advisor, a pure advisor, a pure agency 00:48:36.990 --> 00:48:37.510 business. 00:48:37.510 --> 00:48:41.100 So one of the things is, do you just want to stay as an agent, 00:48:41.100 --> 00:48:43.380 or do you actually want to invest 00:48:43.380 --> 00:48:45.150 your capital in the markets? 00:48:45.150 --> 00:48:47.970 And that big business decision separates 00:48:47.970 --> 00:48:51.780 some of the asset managers and then, as you mentioned, 00:48:51.780 --> 00:48:54.580 the high-frequency traders. 00:48:54.580 --> 00:48:56.740 I think that if Robinhood is going to be bought, 00:48:56.740 --> 00:48:59.410 it could be bought by high-frequency trading shop. 00:48:59.410 --> 00:49:04.180 But the challenge there is, will they 00:49:04.180 --> 00:49:06.640 still get as big a customer base, 00:49:06.640 --> 00:49:09.250 I mean 10 million customers? 00:49:09.250 --> 00:49:14.440 Or is Robinhood more valuable for one of the large banks 00:49:14.440 --> 00:49:17.050 to buy or one of the large asset managers? 00:49:17.050 --> 00:49:19.060 I think if you look out three to five years, 00:49:19.060 --> 00:49:26.110 it's quite likely that Robinhood gets merged up into something, 00:49:26.110 --> 00:49:29.870 as you saw Morgan Stanley buying E*TRADE as well. 00:49:29.870 --> 00:49:31.310 Another question? 00:49:31.310 --> 00:49:31.970 ROMAIN: Yes. 00:49:31.970 --> 00:49:33.335 Let's go with Camillo. 00:49:33.335 --> 00:49:36.290 GARY GENSLER: And then I'm going to do a few more slides here 00:49:36.290 --> 00:49:38.862 on robo advisors. 00:49:38.862 --> 00:49:40.060 AUDIENCE: Hi, Gary. 00:49:40.060 --> 00:49:45.790 I wonder why platforms such as Acorns and Betterment 00:49:45.790 --> 00:49:50.610 that you were just talking about have a mixed business model, 00:49:50.610 --> 00:49:56.240 because in one way, they are a robo advisor business model. 00:49:56.240 --> 00:49:58.733 But then they have savings and checking accounts. 00:49:58.733 --> 00:49:59.650 GARY GENSLER: Correct. 00:49:59.650 --> 00:50:02.720 AUDIENCE: They're stepping a foot into a banking model. 00:50:02.720 --> 00:50:05.722 What's the reason to merge the two spaces into one? 00:50:05.722 --> 00:50:07.930 GARY GENSLER: I think because they have the front end 00:50:07.930 --> 00:50:10.930 customer relationship, and they have some trust. 00:50:10.930 --> 00:50:15.580 And this helps set something up. 00:50:15.580 --> 00:50:18.340 This is a chart on users. 00:50:18.340 --> 00:50:20.440 And it's got some predictions here. 00:50:20.440 --> 00:50:23.000 We don't know if these predictions will hold. 00:50:23.000 --> 00:50:25.840 But if you see the use of robo advisors, 00:50:25.840 --> 00:50:28.120 it's just getting much more comfortable 00:50:28.120 --> 00:50:30.280 that folks are being-- and this, I believe, 00:50:30.280 --> 00:50:34.540 also includes the robo advisors at the big shops 00:50:34.540 --> 00:50:36.580 as well as the startups. 00:50:36.580 --> 00:50:39.680 But just as if you have that user interface-- 00:50:39.680 --> 00:50:41.950 and remember we talked about challenger banks 00:50:41.950 --> 00:50:44.500 as well, Camillo, the challenger banks 00:50:44.500 --> 00:50:48.410 last session, a lot of it's about trust as well. 00:50:48.410 --> 00:50:50.230 Once you have that user interface, 00:50:50.230 --> 00:50:54.350 there's a certain trust and, frankly, stickiness to it. 00:50:54.350 --> 00:50:57.130 So if Betterment, which is looking to become a challenger 00:50:57.130 --> 00:51:01.890 bank, can use that customer relationship, 00:51:01.890 --> 00:51:03.810 then you can build the platform. 00:51:03.810 --> 00:51:07.320 And back to the economics of platforms, 00:51:07.320 --> 00:51:10.740 the economics of platforms is as you layer activities 00:51:10.740 --> 00:51:15.920 on top of a platform, and if you can grow your user base, 00:51:15.920 --> 00:51:19.340 you get more data, you get more centrality. 00:51:19.340 --> 00:51:23.430 There's not going to be 10 years from now 00:51:23.430 --> 00:51:25.170 this many advisory platforms. 00:51:25.170 --> 00:51:27.960 And in fact, in the blue, the advisory platforms, 00:51:27.960 --> 00:51:30.150 I picked the ones that are large. 00:51:30.150 --> 00:51:33.780 There's 50 to 100 others that I haven't listed. 00:51:33.780 --> 00:51:35.730 So there is going to be consolidation. 00:51:35.730 --> 00:51:39.700 As sure as we're here at this moment, 00:51:39.700 --> 00:51:42.400 there's going to be consolidation in this space. 00:51:42.400 --> 00:51:46.890 And so they're trying to build classic platform economics, 00:51:46.890 --> 00:51:48.630 build activities, build user bases. 00:51:51.960 --> 00:51:53.880 And this is assets under management, 00:51:53.880 --> 00:51:59.950 the same website behind this. 00:51:59.950 --> 00:52:04.260 But as of a few days ago, just a sense of, what are the assets? 00:52:04.260 --> 00:52:05.820 This is in billions. 00:52:05.820 --> 00:52:13.890 So in 2020, $1.2 trillion of assets under management 00:52:13.890 --> 00:52:16.110 somehow associated with robo advisors. 00:52:16.110 --> 00:52:19.650 So even a 1/4% fee on this starts 00:52:19.650 --> 00:52:22.620 to be a real revenue model. 00:52:22.620 --> 00:52:25.300 Possible evolution, I like thinking about, 00:52:25.300 --> 00:52:27.990 where could this go in the future? 00:52:27.990 --> 00:52:30.630 Where did robo advising start, all the way on the left? 00:52:30.630 --> 00:52:32.490 It's just an online questionnaire 00:52:32.490 --> 00:52:36.840 about asset allocation largely, and an online questionnaire, 00:52:36.840 --> 00:52:42.540 a mobile questionnaire about products and risk and how-- 00:52:42.540 --> 00:52:44.820 and then usually a list of exchange 00:52:44.820 --> 00:52:47.010 traded funds, some bonds. 00:52:47.010 --> 00:52:53.920 So simple but very accessible, broadening financial inclusion 00:52:53.920 --> 00:52:55.210 for lower rates. 00:52:55.210 --> 00:52:57.670 And it helps a lot of people, a lot of investors 00:52:57.670 --> 00:52:59.440 sleep well at night. 00:52:59.440 --> 00:53:02.230 It lowers their uncertainty. 00:53:02.230 --> 00:53:05.620 I'm getting some good advice about asset allocation, 00:53:05.620 --> 00:53:08.350 some risks, some life events. 00:53:08.350 --> 00:53:09.797 But could move it move further? 00:53:09.797 --> 00:53:10.630 That's the question. 00:53:10.630 --> 00:53:12.130 Can it move further? 00:53:12.130 --> 00:53:15.910 And exactly like Camillo said and Luke's earlier question 00:53:15.910 --> 00:53:20.110 about other revenues, can robo advisors-- like Betterment 00:53:20.110 --> 00:53:22.860 say, well, we'll actually be the fund manager. 00:53:22.860 --> 00:53:25.080 We'll start to actually manage the funds 00:53:25.080 --> 00:53:28.590 rather than just doing these low-cost ETFs. 00:53:28.590 --> 00:53:30.630 And maybe we'll start to actually do 00:53:30.630 --> 00:53:33.960 something more with regard to risk 00:53:33.960 --> 00:53:35.850 based portfolio allocation. 00:53:35.850 --> 00:53:37.710 Maybe we'll start in this third column, 00:53:37.710 --> 00:53:39.690 do a little bit of algorithms. 00:53:39.690 --> 00:53:43.440 Maybe, in fact, we'll start to do trading and be 00:53:43.440 --> 00:53:48.150 principals rather than just an agent and an advisor 00:53:48.150 --> 00:53:49.050 and the like. 00:53:49.050 --> 00:53:54.570 So there's going to be more sophisticated algorithmic AI 00:53:54.570 --> 00:53:55.560 or machine learning. 00:53:55.560 --> 00:53:58.350 But I don't think it's going to be highly sophisticated machine 00:53:58.350 --> 00:54:03.000 learning because there's a certain commoditization 00:54:03.000 --> 00:54:04.980 about the advice. 00:54:04.980 --> 00:54:09.720 But it is quite possible as we move forward 00:54:09.720 --> 00:54:12.450 that somebody will figure out what risk I should 00:54:12.450 --> 00:54:14.030 take versus somebody else. 00:54:14.030 --> 00:54:17.300 Andrew Lo, a faculty member at MIT, 00:54:17.300 --> 00:54:20.520 thinks that you can take machine learning 00:54:20.520 --> 00:54:24.180 and embed it in even an index fund, that you could 00:54:24.180 --> 00:54:28.350 have inside of an index fund-- 00:54:28.350 --> 00:54:32.100 what Andy talks about is called "the freakout factor," 00:54:32.100 --> 00:54:34.500 that we all have different risk profiles. 00:54:34.500 --> 00:54:37.890 When the stock market goes out, down, 00:54:37.890 --> 00:54:42.240 how likely are we to, quote, as he says, "freak out" and want 00:54:42.240 --> 00:54:43.530 to sell? 00:54:43.530 --> 00:54:48.120 And that we could, based upon other aspects of our lives, 00:54:48.120 --> 00:54:50.280 put that into a machine learning model 00:54:50.280 --> 00:54:56.300 and have it automatically adjust up and down. 00:54:56.300 --> 00:54:59.210 Questions before I think I'm going to go to the-- 00:54:59.210 --> 00:55:02.620 broadly the capital markets piece? 00:55:07.430 --> 00:55:08.710 ROMAIN: We have a question. 00:55:08.710 --> 00:55:10.460 GARY GENSLER: So we've sort of covered-- 00:55:10.460 --> 00:55:12.590 I'm pausing here for a second, but we've sort of 00:55:12.590 --> 00:55:16.190 covered the online brokerage, robo advisor, 00:55:16.190 --> 00:55:20.480 those two big pieces as captured by Robinhood and Betterment, 00:55:20.480 --> 00:55:25.790 might be the two companies that are the leads of the pack, 00:55:25.790 --> 00:55:26.990 but they're not alone. 00:55:26.990 --> 00:55:30.000 And in the wealth management side, 00:55:30.000 --> 00:55:35.460 it's much more evenly split, whereas in the mobile side, 00:55:35.460 --> 00:55:37.910 in the mobile brokerage side, Robinhood 00:55:37.910 --> 00:55:44.667 seemed to really sort of punched high and done well. 00:55:44.667 --> 00:55:46.250 ROMAIN: The only question we have here 00:55:46.250 --> 00:55:47.900 is from the chat from Luke. 00:55:47.900 --> 00:55:50.150 What kind of US regulation is [INAUDIBLE] 00:55:50.150 --> 00:55:52.820 the likes of Robinhood to expand globally 00:55:52.820 --> 00:55:57.665 or to attract capital from abroad? 00:55:57.665 --> 00:56:01.320 GARY GENSLER: Well, this is a highly regulated 00:56:01.320 --> 00:56:05.520 space in both the advisory side and the brokerage side. 00:56:05.520 --> 00:56:08.970 And Robinhood would certainly need to be aware of that 00:56:08.970 --> 00:56:15.120 and register appropriately as a broker dealer here in the US. 00:56:15.120 --> 00:56:17.870 And then on the asset management side, 00:56:17.870 --> 00:56:21.480 there's a little bit different regulation but also regulated 00:56:21.480 --> 00:56:22.350 here. 00:56:22.350 --> 00:56:26.190 Attracting capital from overseas, 00:56:26.190 --> 00:56:28.680 if the capital is just investing in Robinhood, 00:56:28.680 --> 00:56:35.130 in one of their venture rounds, BCD rounds, 00:56:35.130 --> 00:56:38.430 because these are probably private placements largely 00:56:38.430 --> 00:56:40.800 speaking, other than the usual regulations 00:56:40.800 --> 00:56:44.040 around sanctions and anti-money laundering, 00:56:44.040 --> 00:56:45.520 it'd be straightforward. 00:56:45.520 --> 00:56:50.630 If it's actually customers using the platform, 00:56:50.630 --> 00:56:53.670 then a Robinhood would have to be aware of the regulations 00:56:53.670 --> 00:56:56.880 in that jurisdiction, whether it's the regulations in Europe 00:56:56.880 --> 00:57:00.570 or in your home country, Luke,-- in Korea, that they'd-- 00:57:00.570 --> 00:57:05.190 those customer-facing applications, Robinhood Korea 00:57:05.190 --> 00:57:08.340 would have to think, do they register as a broker dealer 00:57:08.340 --> 00:57:12.880 in Korea or Japan and the like, as they are, in fact, 00:57:12.880 --> 00:57:18.690 just a mobile application for a traditional investment 00:57:18.690 --> 00:57:19.440 brokerage firm? 00:57:22.140 --> 00:57:26.570 So again trying to capture capital markets. 00:57:26.570 --> 00:57:31.060 Capital markets is a vast array of activities 00:57:31.060 --> 00:57:37.160 from accessing capital to trading platforms and the like. 00:57:37.160 --> 00:57:39.700 And this slide from McKinsey just 00:57:39.700 --> 00:57:42.045 captures an earlier stage of, where 00:57:42.045 --> 00:57:44.340 is FinTech in each of these? 00:57:44.340 --> 00:57:46.690 And I'm not going to go through each of these buckets, 00:57:46.690 --> 00:57:52.780 but part of why I have this is it's so many little buckets. 00:57:52.780 --> 00:57:55.580 We talked about two on the retail side. 00:57:55.580 --> 00:57:58.510 There are crowdfunding platforms, literally platforms 00:57:58.510 --> 00:58:01.210 that help companies raise money. 00:58:01.210 --> 00:58:04.480 There's trade execution, and I'm going to talk about a couple 00:58:04.480 --> 00:58:07.600 in a minute, decentralized trading 00:58:07.600 --> 00:58:11.860 platforms like cryptocurrencies, but also centralized trading 00:58:11.860 --> 00:58:13.420 platforms and cryptocurrencies. 00:58:13.420 --> 00:58:16.180 But even in the last few years, a firm 00:58:16.180 --> 00:58:20.200 called IEX is a startup in trade execution. 00:58:20.200 --> 00:58:23.020 It's a new trading platform. 00:58:23.020 --> 00:58:25.580 There's post-trade services. 00:58:25.580 --> 00:58:28.630 There's a lot of infrastructure and operations. 00:58:28.630 --> 00:58:32.830 The capital markets are a vast multi-trillion dollar business 00:58:32.830 --> 00:58:36.470 globally in terms of revenues. 00:58:36.470 --> 00:58:40.590 So I'm just going to quickly touch upon some 00:58:40.590 --> 00:58:43.180 in these next couple of slides. 00:58:43.180 --> 00:58:46.300 You can see, I picked some dozen or so firms 00:58:46.300 --> 00:58:49.880 that were just ones I kind of like to watch and follow. 00:58:49.880 --> 00:58:54.040 We can take any questions about each of these, 00:58:54.040 --> 00:58:57.672 but there are a number of them in the wealth management space. 00:58:57.672 --> 00:59:00.130 And one of the things in wealth management we talked about, 00:59:00.130 --> 00:59:04.060 like Betterment, is facing the retail public. 00:59:04.060 --> 00:59:07.420 But there are startups that are in the wealth management space 00:59:07.420 --> 00:59:09.220 facing financial advisors. 00:59:09.220 --> 00:59:13.440 These tens of thousands of financial advisors 00:59:13.440 --> 00:59:15.750 want better software. 00:59:15.750 --> 00:59:18.720 And Addepar and a number of others 00:59:18.720 --> 00:59:22.560 are actually platforms for the financial advisors, 00:59:22.560 --> 00:59:26.100 that financial advisor that's trying to build a business 00:59:26.100 --> 00:59:31.250 wants software and access to the capital market. 00:59:31.250 --> 00:59:35.280 So it's an interface between the two. 00:59:35.280 --> 00:59:42.560 There's a bunch that are in the area of collateral management 00:59:42.560 --> 00:59:46.220 and infrastructure, CloudMargin. 00:59:46.220 --> 00:59:49.790 Literally, collateral management means the collateral 00:59:49.790 --> 00:59:52.580 that you're moving on derivatives 00:59:52.580 --> 00:59:55.070 in the institutional market or collateral 00:59:55.070 --> 00:59:58.700 that you're moving even as it relates to loans. 00:59:58.700 --> 01:00:01.520 And why not start a platform that 01:00:01.520 --> 01:00:03.620 might be a little better for collateral management 01:00:03.620 --> 01:00:07.630 and take some of the back office cost out of it? 01:00:07.630 --> 01:00:09.260 And not to be outdone, you could have 01:00:09.260 --> 01:00:12.500 digital fixed-income brokers as well as equity brokers. 01:00:12.500 --> 01:00:15.590 What we were talking about earlier was the stock market 01:00:15.590 --> 01:00:19.010 and this company called Elephant. 01:00:19.010 --> 01:00:22.790 I mentioned IEX started in 2012. 01:00:22.790 --> 01:00:25.980 It's to be a competitive stock market to NASDAQ, 01:00:25.980 --> 01:00:30.860 New York Stock Exchange started by a bunch of buy side 01:00:30.860 --> 01:00:34.270 institutions, for instance. 01:00:34.270 --> 01:00:36.550 And sometimes, it's just research. 01:00:36.550 --> 01:00:40.650 PitchBook and others like PitchBook 01:00:40.650 --> 01:00:43.380 put together a remarkable data base 01:00:43.380 --> 01:00:48.930 on the financial business of venture capital, for instance. 01:00:48.930 --> 01:00:52.650 So it could be a lot of different spaces. 01:00:52.650 --> 01:00:56.220 Back to thinking about the different aspects of capital 01:00:56.220 --> 01:01:00.972 markets, crowdfunding platforms, trade execution, 01:01:00.972 --> 01:01:04.220 the post-trade side of it. 01:01:04.220 --> 01:01:07.580 I don't do this to be like a full course on capital markets, 01:01:07.580 --> 01:01:12.740 but it's to open your thinking to it's not just 01:01:12.740 --> 01:01:14.360 the retail interface. 01:01:14.360 --> 01:01:19.700 It's not just using a mobile phone, good data, good user 01:01:19.700 --> 01:01:21.780 delivery, and lower cost. 01:01:21.780 --> 01:01:25.480 And that's really the Robinhood, Betterment side. 01:01:25.480 --> 01:01:28.840 It's also a lot of taking the paper flows out 01:01:28.840 --> 01:01:33.340 of it, old processes out of the back office, 01:01:33.340 --> 01:01:37.390 and trying to provide a service to the capital 01:01:37.390 --> 01:01:38.860 markets in a better way. 01:01:42.040 --> 01:01:43.015 Romain, any-- 01:01:45.985 --> 01:01:47.835 ROMAIN: Any hands raised? 01:01:47.835 --> 01:01:49.335 Anyone has a question on this topic? 01:01:52.310 --> 01:01:52.810 No. 01:01:52.810 --> 01:01:53.795 I think we can move on. 01:01:53.795 --> 01:01:56.170 GARY GENSLER: Let me just close out crypto markets a bit. 01:01:56.170 --> 01:01:59.150 And some of you take the crypto finance course, 01:01:59.150 --> 01:02:00.970 so it may be a little bit repetitive. 01:02:00.970 --> 01:02:03.640 But let me just say, one thing that's interesting 01:02:03.640 --> 01:02:07.570 is this crypto market came along. 01:02:07.570 --> 01:02:10.386 Is there a question here? 01:02:10.386 --> 01:02:12.300 ROMAIN: Luke has his hand raised. 01:02:12.300 --> 01:02:15.140 GARY GENSLER: Let me hold Luke because he's had a lot here. 01:02:15.140 --> 01:02:17.130 So let me just say something on crypto markets, 01:02:17.130 --> 01:02:20.340 and then we'll definitely take Luke's question. 01:02:20.340 --> 01:02:26.020 But the crypto markets came along about a dozen years ago. 01:02:26.020 --> 01:02:29.850 And by an early stage of these markets, somebody said, how 01:02:29.850 --> 01:02:32.630 can you buy and sell Bitcoin? 01:02:32.630 --> 01:02:36.470 And they created exchanges, a new form of exchange, 01:02:36.470 --> 01:02:39.140 not for equities, not for bonds, not 01:02:39.140 --> 01:02:41.930 for foreign currencies or Fiat currencies, 01:02:41.930 --> 01:02:43.490 but cryptocurrencies. 01:02:43.490 --> 01:02:47.270 And these exchanges act as agents matching buyers 01:02:47.270 --> 01:02:51.100 and sellers like traditional exchanges, 01:02:51.100 --> 01:02:53.110 but they also act as market makers. 01:02:53.110 --> 01:02:56.590 We talked earlier about capturing bid-ask spread. 01:02:56.590 --> 01:02:59.620 These exchanges could also buy and sell from customers. 01:02:59.620 --> 01:03:01.780 Not all of them do, but they could. 01:03:01.780 --> 01:03:04.210 Traditional exchanges did not. 01:03:04.210 --> 01:03:07.480 And they also acted as a custody and held your funds. 01:03:07.480 --> 01:03:11.320 And even to this day, if you trade on a crypto exchange, 01:03:11.320 --> 01:03:14.560 you're moving your asset through the use 01:03:14.560 --> 01:03:17.630 of what's called a private key. 01:03:17.630 --> 01:03:21.050 But you're moving your asset to the crypto exchange, 01:03:21.050 --> 01:03:22.430 and they're the custody. 01:03:22.430 --> 01:03:25.340 They're the custodian. 01:03:25.340 --> 01:03:28.290 The public has direct access. 01:03:28.290 --> 01:03:29.900 And this is a very different model 01:03:29.900 --> 01:03:31.310 than traditional exchanges. 01:03:31.310 --> 01:03:32.810 And the question will be, will this 01:03:32.810 --> 01:03:36.050 come to traditional markets? 01:03:36.050 --> 01:03:38.950 And that's why I wanted to focus on this minute. 01:03:38.950 --> 01:03:42.760 In traditional markets built upon a business model that's 01:03:42.760 --> 01:03:46.000 multiple centuries old, you and I 01:03:46.000 --> 01:03:49.000 are not members directly of the New York Stock Exchange. 01:03:49.000 --> 01:03:51.530 We have to go through somebody to get to the New York Stock 01:03:51.530 --> 01:03:52.030 Exchange. 01:03:52.030 --> 01:03:53.283 That's called a broker. 01:03:53.283 --> 01:03:55.450 It's called a member of the New York Stock Exchange, 01:03:55.450 --> 01:03:59.260 or the London Stock Exchange, or the Shanghai Stock Exchange. 01:03:59.260 --> 01:04:02.560 But in these markets, in these crypto markets 01:04:02.560 --> 01:04:05.980 everybody can access directly the markets. 01:04:05.980 --> 01:04:08.380 The markets actually, interestingly, 01:04:08.380 --> 01:04:16.362 have to have a much more robust API for the retail public. 01:04:16.362 --> 01:04:18.570 The New York Stock Exchange and London Stock Exchange 01:04:18.570 --> 01:04:23.310 have to have a robust API, application program interface, 01:04:23.310 --> 01:04:24.540 for institutions. 01:04:24.540 --> 01:04:28.540 And it has to be very high volume, very resilient. 01:04:28.540 --> 01:04:30.960 But it can be limited to hundreds 01:04:30.960 --> 01:04:33.870 or, at most, a couple thousands of users 01:04:33.870 --> 01:04:37.030 even if the volumes are high. 01:04:37.030 --> 01:04:40.180 These exchanges have to be open to millions of people 01:04:40.180 --> 01:04:43.540 from their home laptops and mobile phones-- 01:04:43.540 --> 01:04:47.410 a very different architecture where it's disintermediated 01:04:47.410 --> 01:04:48.520 the broker dealers. 01:04:48.520 --> 01:04:52.810 And the question I have, which is unanswerable right now, 01:04:52.810 --> 01:04:55.180 will this be something moving forward? 01:04:55.180 --> 01:04:58.980 Will we see a direct access model 01:04:58.980 --> 01:05:01.090 at any exchange around the globe, 01:05:01.090 --> 01:05:03.400 or will we stay in the intermediated access? 01:05:03.400 --> 01:05:05.140 There's a lot of regulatory reasons 01:05:05.140 --> 01:05:07.710 we'd stay in the intermediated access. 01:05:07.710 --> 01:05:10.210 There's some competitive reasons brokers wouldn't want 01:05:10.210 --> 01:05:13.300 to have folks going directly. 01:05:13.300 --> 01:05:15.790 But on the other hand, the technology 01:05:15.790 --> 01:05:19.870 now exists that you could go directly. 01:05:19.870 --> 01:05:24.550 And so these markets, by the way, are not well regulated. 01:05:24.550 --> 01:05:28.628 And they're rife with fraud, and scams, and manipulation. 01:05:28.628 --> 01:05:29.920 So I just want to mention that. 01:05:29.920 --> 01:05:32.470 I see a few hands in addition to Luke's hand. 01:05:32.470 --> 01:05:33.865 So maybe we should pause. 01:05:33.865 --> 01:05:35.846 ROMAIN: Yes, Carlos? 01:05:35.846 --> 01:05:37.910 GARY GENSLER: And we have to get Luke's, too. 01:05:37.910 --> 01:05:39.425 But, Carlos, all right. 01:05:39.425 --> 01:05:41.430 AUDIENCE: So what do you think would happen 01:05:41.430 --> 01:05:45.210 if the big banks started holding more crypto on their balance 01:05:45.210 --> 01:05:45.870 sheets, right? 01:05:45.870 --> 01:05:49.350 If they start acting as market makers in crypto markets, 01:05:49.350 --> 01:05:52.860 then would it-- for example, under current regulation, 01:05:52.860 --> 01:05:55.110 would this asset go under Dodd-Frank as well 01:05:55.110 --> 01:05:56.940 and therefore limit proprietary trading, 01:05:56.940 --> 01:05:59.360 or do you think it would be different? 01:05:59.360 --> 01:06:02.750 GARY GENSLER: So there's a lot of questions in there. 01:06:02.750 --> 01:06:05.330 The large banks around the globe today 01:06:05.330 --> 01:06:09.620 have not been active in this asset class. 01:06:09.620 --> 01:06:12.410 The asset class is about $225 billion 01:06:12.410 --> 01:06:15.960 as of this morning, which is small. 01:06:15.960 --> 01:06:19.710 The worldwide capital markets are between $300 trillion 01:06:19.710 --> 01:06:24.410 and $400 trillion when you add equities and bonds worldwide 01:06:24.410 --> 01:06:26.100 and debt. 01:06:26.100 --> 01:06:28.830 So this is quite small in comparison. 01:06:28.830 --> 01:06:32.430 But for regulatory reasons and for customer interest reasons, 01:06:32.430 --> 01:06:34.190 the large banks haven't really gone in. 01:06:34.190 --> 01:06:36.500 If they were to get in, to answer answer your question 01:06:36.500 --> 01:06:39.170 on the regulatory side, yes, it would 01:06:39.170 --> 01:06:42.830 be just like any other asset they have, any commodity. 01:06:42.830 --> 01:06:44.930 So if you hold Bitcoin, you might 01:06:44.930 --> 01:06:50.240 think if you're JP Morgan, I'm now holding it. 01:06:50.240 --> 01:06:51.530 I'm Barclays bank. 01:06:51.530 --> 01:06:52.670 I'm now holding it. 01:06:52.670 --> 01:06:53.960 What regulations? 01:06:53.960 --> 01:06:56.600 If it's Bitcoin, it would be very similar to the regulations 01:06:56.600 --> 01:06:58.880 around holding gold or silver. 01:06:58.880 --> 01:07:04.130 Maybe you would hold gold or silver futures or contracts, 01:07:04.130 --> 01:07:06.150 but holding gold, silver. 01:07:06.150 --> 01:07:09.350 And to the extent that there was a-- 01:07:09.350 --> 01:07:11.840 you mentioned Dodd-Frank. 01:07:11.840 --> 01:07:14.390 If there were any rules and regulations out of Dodd-Frank 01:07:14.390 --> 01:07:16.890 that were generally applicable to trading accounts, 01:07:16.890 --> 01:07:19.550 it would be applicable to these trading accounts. 01:07:19.550 --> 01:07:23.630 The one big challenge for big institutions is custody. 01:07:23.630 --> 01:07:26.090 Custody has been a challenge. 01:07:26.090 --> 01:07:30.050 And what's interesting is Fidelity, one of the largest 01:07:30.050 --> 01:07:31.970 asset managers in the world, started 01:07:31.970 --> 01:07:35.420 something called Fidelity Digital Asset holding-- 01:07:35.420 --> 01:07:37.400 I believe that's the name-- 01:07:37.400 --> 01:07:40.400 where they are providing a custody solution. 01:07:40.400 --> 01:07:43.610 Coinbase, which is a large crypto exchange, 01:07:43.610 --> 01:07:45.530 has a custody solution. 01:07:45.530 --> 01:07:48.440 The owner of the New York Stock Exchange Intercontinental 01:07:48.440 --> 01:07:51.860 Exchange started Bakkt, B-A-K-K-T. 01:07:51.860 --> 01:07:56.360 Bakkt is trading crypto markets but also providing a custody 01:07:56.360 --> 01:07:57.550 solution. 01:07:57.550 --> 01:07:59.810 And why I'm focusing on custody is 01:07:59.810 --> 01:08:04.250 one of the challenges in this small asset class is 01:08:04.250 --> 01:08:06.800 how to hold the digital asset. 01:08:06.800 --> 01:08:11.750 In the traditional markets, there 01:08:11.750 --> 01:08:17.960 are centralized organizations that 01:08:17.960 --> 01:08:20.510 operate as clearinghouses but also 01:08:20.510 --> 01:08:22.550 as the ultimate digital custodian. 01:08:22.550 --> 01:08:25.729 In the US, it's called DTCC. 01:08:25.729 --> 01:08:28.490 And other countries have different names. 01:08:28.490 --> 01:08:34.220 But how do you make sure that, in essence, the cryptocurrency 01:08:34.220 --> 01:08:35.689 isn't stolen? 01:08:35.689 --> 01:08:40.880 These crypto exchanges have had lots of stolen cryptocurrency 01:08:40.880 --> 01:08:42.380 because once you steal what's called 01:08:42.380 --> 01:08:46.100 the private key, effectively the password, 01:08:46.100 --> 01:08:49.740 you have the digital asset. 01:08:49.740 --> 01:08:51.862 What was Luke's question earlier? 01:08:51.862 --> 01:08:54.550 AUDIENCE: Speaking of cryptocurrency, 01:08:54.550 --> 01:08:58.165 I know you teach in H4, the cryptocurrency class, which 01:08:58.165 --> 01:08:59.540 I don't have the luxury of taking 01:08:59.540 --> 01:09:01.529 but [INAUDIBLE] have the opportunity 01:09:01.529 --> 01:09:05.520 to take next semester or next year. 01:09:05.520 --> 01:09:08.649 My question is then, is that because of the security 01:09:08.649 --> 01:09:12.420 that Robinhood does not implement customers 01:09:12.420 --> 01:09:16.500 the option to buy US equity with Bitcoin 01:09:16.500 --> 01:09:18.029 overseas, because they would allow 01:09:18.029 --> 01:09:21.180 them to jump over its respective nations 01:09:21.180 --> 01:09:23.970 ethics regulations, i.e. 01:09:23.970 --> 01:09:26.069 Chinese customers or Korean customers 01:09:26.069 --> 01:09:27.662 who want to invest in ONG-- 01:09:27.662 --> 01:09:28.370 GARY GENSLER: I-- 01:09:28.370 --> 01:09:29.990 AUDIENCE: --buy low, sell high with Bitcoin? 01:09:29.990 --> 01:09:30.240 GARY GENSLER: Yes, Luke. 01:09:30.240 --> 01:09:31.620 I'm going to answer briefly. 01:09:31.620 --> 01:09:36.240 I think the regulation for any one platform like Robinhood 01:09:36.240 --> 01:09:40.260 around cryptocurrencies is a bit challenging 01:09:40.260 --> 01:09:45.600 because in many jurisdictions, we have not 01:09:45.600 --> 01:09:47.160 gotten to a place where you can feel 01:09:47.160 --> 01:09:51.689 confident we have a robust investor protection 01:09:51.689 --> 01:09:53.640 regime on cryptocurrency. 01:09:53.640 --> 01:09:56.070 And in fact, in most jurisdictions, 01:09:56.070 --> 01:09:57.570 it's pretty shaky. 01:09:57.570 --> 01:10:01.590 It's pretty still undeveloped. 01:10:01.590 --> 01:10:03.570 I'm talking about investor protection. 01:10:03.570 --> 01:10:06.180 So Robinhood may have made a choice, 01:10:06.180 --> 01:10:08.640 look, if you're going to trade, you're 01:10:08.640 --> 01:10:14.430 going to trade Fiat currency versus buying and selling 01:10:14.430 --> 01:10:15.330 stocks. 01:10:15.330 --> 01:10:17.850 And that would be an appropriate business decision 01:10:17.850 --> 01:10:20.970 that they made until there is a much more 01:10:20.970 --> 01:10:25.920 robust and satisfactory both investor protection 01:10:25.920 --> 01:10:30.180 and also guarding against illicit activity. 01:10:30.180 --> 01:10:32.820 Cryptocurrency started and emanated out 01:10:32.820 --> 01:10:38.700 of a little bit of an off the grid cypherpunk movement. 01:10:38.700 --> 01:10:40.130 And I use the word accurately. 01:10:40.130 --> 01:10:43.740 Cypherpunk was a mailing list that Satoshi Nakamoto 01:10:43.740 --> 01:10:47.880 uploaded that eight-page paper on 12 years ago. 01:10:47.880 --> 01:10:53.650 And though you can track Bitcoin transactions, 01:10:53.650 --> 01:10:56.590 a lot of use of Bitcoin and other cryptocurrencies 01:10:56.590 --> 01:11:01.210 has been to avoid the censorship and the watchful eyes 01:11:01.210 --> 01:11:02.920 of the official sector. 01:11:02.920 --> 01:11:05.770 And so I would imagine-- 01:11:05.770 --> 01:11:07.540 I've not talked to Robinhood-- that they 01:11:07.540 --> 01:11:09.170 would be aware of that. 01:11:09.170 --> 01:11:12.700 And they would just feel as both a legal matter 01:11:12.700 --> 01:11:15.640 and for reputational reasons, better not 01:11:15.640 --> 01:11:17.800 to go there unless there is a more 01:11:17.800 --> 01:11:21.560 robust support for that system. 01:11:21.560 --> 01:11:24.060 ROMAIN: And Nadia had her hand up for a while. 01:11:24.060 --> 01:11:27.917 GARY GENSLER: [INAUDIBLE] 01:11:27.917 --> 01:11:29.602 ROMAIN: Nadia? 01:11:29.602 --> 01:11:30.800 AUDIENCE: Yeah. 01:11:30.800 --> 01:11:34.280 I actually have two questions on wealth management FinTech. 01:11:34.280 --> 01:11:36.190 So the first question, what do you 01:11:36.190 --> 01:11:39.580 think more important for wealth management FinTech to grow? 01:11:39.580 --> 01:11:41.350 Is it the inclusion part, meaning 01:11:41.350 --> 01:11:45.160 like low minimum deposit, or the user experience part? 01:11:45.160 --> 01:11:47.260 That is for the first questions. 01:11:47.260 --> 01:11:49.990 And for the second question, given the growth 01:11:49.990 --> 01:11:53.170 of past management feature like Wealthfront, 01:11:53.170 --> 01:11:56.890 do you think now customers prefer a simpler product rather 01:11:56.890 --> 01:11:58.907 than more complicated product? 01:11:58.907 --> 01:12:00.740 GARY GENSLER: So there's a lot there, Nadia. 01:12:00.740 --> 01:12:02.540 I'm not sure what-- 01:12:02.540 --> 01:12:07.430 but I think that the Betterments and the robo advisors, 01:12:07.430 --> 01:12:09.080 I can't separate the two. 01:12:09.080 --> 01:12:11.570 When you're saying, is it more about user interface, 01:12:11.570 --> 01:12:17.210 is it more about pricing, maybe somebody better than I could, 01:12:17.210 --> 01:12:18.680 but I think it's about both. 01:12:18.680 --> 01:12:20.030 I really do think that. 01:12:20.030 --> 01:12:27.280 I think that they have provided a lower price point, which 01:12:27.280 --> 01:12:28.550 is really important. 01:12:28.550 --> 01:12:31.120 But if it were only that, if somebody had just 01:12:31.120 --> 01:12:33.820 put out an advertisement, I'm going to give you 01:12:33.820 --> 01:12:36.700 wealth advice for a quarter of a point, 01:12:36.700 --> 01:12:38.740 I don't think you could have gotten adoption. 01:12:38.740 --> 01:12:41.260 I think you had to have that user interface. 01:12:41.260 --> 01:12:46.910 And I think the two of them together are really important. 01:12:46.910 --> 01:12:50.290 So it's not just doing something cheaper, 01:12:50.290 --> 01:12:52.090 because a lot of people could say, listen, 01:12:52.090 --> 01:12:55.090 I'll give you wealth advice for a quarter of a point. 01:12:55.090 --> 01:12:58.450 I think the user experience-- 01:12:58.450 --> 01:13:00.310 these are very private matters. 01:13:00.310 --> 01:13:02.890 Sometimes it's just frankly a little easier. 01:13:02.890 --> 01:13:06.970 It's interesting to just go to a drop down menu, 01:13:06.970 --> 01:13:10.310 answer some questions, feel that I'm getting the advice, 01:13:10.310 --> 01:13:13.060 feel that I'm, yes, getting low-cost ETFs 01:13:13.060 --> 01:13:14.710 and low-cost advisory fees. 01:13:14.710 --> 01:13:18.200 But I think the user experience goes hand in hand. 01:13:18.200 --> 01:13:20.890 And I can't easily separate them. 01:13:20.890 --> 01:13:22.420 Let me just try to wrap up. 01:13:22.420 --> 01:13:26.620 And then, Nadia, remind me the second half of your question 01:13:26.620 --> 01:13:28.840 as I wrap up, because I want to make a-- we only 01:13:28.840 --> 01:13:29.870 have about 3 minutes. 01:13:29.870 --> 01:13:34.660 So I want to just make a point beyond these crypto exchanges. 01:13:34.660 --> 01:13:37.240 There's a bunch of crypto lending and borrowing. 01:13:37.240 --> 01:13:40.270 And why I raise this is this market, just 01:13:40.270 --> 01:13:42.430 like the capital markets, is starting to say, 01:13:42.430 --> 01:13:44.140 can I lend to crypto? 01:13:44.140 --> 01:13:46.550 Can I borrow crypto? 01:13:46.550 --> 01:13:48.530 And why would you do that? 01:13:48.530 --> 01:13:50.480 Same reason in the capital markets. 01:13:50.480 --> 01:13:53.180 You lend and borrow stock sometimes 01:13:53.180 --> 01:13:55.670 because you want to buy the stocks on margin. 01:13:55.670 --> 01:13:57.200 Or sometimes you lend it because you 01:13:57.200 --> 01:14:01.410 need to borrow against your assets to do something else. 01:14:01.410 --> 01:14:04.160 So these markets are developing that way, 01:14:04.160 --> 01:14:05.990 but the thing that I wanted to mention 01:14:05.990 --> 01:14:08.570 was this question of decentralized finance 01:14:08.570 --> 01:14:11.170 versus centralized finance. 01:14:11.170 --> 01:14:13.880 Centralized traditional finance-- 01:14:13.880 --> 01:14:19.370 this is a slide that I created in the last eight months-- 01:14:19.370 --> 01:14:22.130 has proprietary software, central clearing, 01:14:22.130 --> 01:14:24.230 all the attributes that I list here. 01:14:24.230 --> 01:14:28.100 The question is, is there a market just like we 01:14:28.100 --> 01:14:33.290 talked about in lending for peer to peer decentralized finance? 01:14:33.290 --> 01:14:37.190 And what we found in LendingClub and other companies, 01:14:37.190 --> 01:14:39.590 they really haven't stayed decentralized. 01:14:39.590 --> 01:14:41.630 They started with this concept that we'll 01:14:41.630 --> 01:14:44.090 be peers lending to peers. 01:14:44.090 --> 01:14:46.940 And then what we found is they've become more marketplace 01:14:46.940 --> 01:14:48.050 platforms. 01:14:48.050 --> 01:14:50.840 And platform economics have taken over. 01:14:50.840 --> 01:14:53.150 But there's been this question, can there 01:14:53.150 --> 01:14:57.770 be an open source software built on blockchain technology that's 01:14:57.770 --> 01:14:59.130 truly peer to peer? 01:14:59.130 --> 01:15:02.420 And you will hear this time and again. 01:15:02.420 --> 01:15:05.270 It's a business concept that I just 01:15:05.270 --> 01:15:08.690 want to prepare you for, decentralized finance 01:15:08.690 --> 01:15:11.450 versus traditional finance, usually used 01:15:11.450 --> 01:15:14.150 in the context of blockchain technology. 01:15:14.150 --> 01:15:18.920 And the advocates say blockchain technology facilitates-- 01:15:18.920 --> 01:15:21.770 we can get rid of the big banks. 01:15:21.770 --> 01:15:23.570 That is what they might say. 01:15:23.570 --> 01:15:26.060 That's what Satoshi Nakamoto wrote 01:15:26.060 --> 01:15:29.750 in some of the early emails and so forth, that we 01:15:29.750 --> 01:15:33.170 can disintermediate both banks and central banks 01:15:33.170 --> 01:15:36.770 around cryptocurrency and the like. 01:15:36.770 --> 01:15:38.600 That's the dream. 01:15:38.600 --> 01:15:41.600 But the question is whether network economics-- 01:15:41.600 --> 01:15:44.450 whether there's a reason in capital markets and finance 01:15:44.450 --> 01:15:47.810 that you have a hub and spoke approach rather 01:15:47.810 --> 01:15:49.370 than a decentralized approach. 01:15:49.370 --> 01:15:52.160 When I say "hub and spoke," the New York Stock Exchange 01:15:52.160 --> 01:15:55.460 or London Stock Exchange is in the middle of the market, 01:15:55.460 --> 01:15:58.470 that the banks, back to Luke's earlier question, 01:15:58.470 --> 01:16:02.090 are sitting there collecting a net interest margin 01:16:02.090 --> 01:16:06.110 and why LendingClub is moved into a marketplace platform 01:16:06.110 --> 01:16:08.270 rather than that peer to peer. 01:16:08.270 --> 01:16:11.150 And so this debate and this business concept 01:16:11.150 --> 01:16:15.830 is a relatively important one, and it basically goes well 01:16:15.830 --> 01:16:17.735 beyond cryptocurrencies. 01:16:17.735 --> 01:16:18.860 And I wanted to mention it. 01:16:18.860 --> 01:16:22.640 But in cryptocurrencies-- and this is my last little bit-- 01:16:22.640 --> 01:16:25.670 is that there are DeFi platforms, 01:16:25.670 --> 01:16:30.770 decentralized finance where you can peer to peer 01:16:30.770 --> 01:16:32.310 use a crypto exchange. 01:16:32.310 --> 01:16:35.670 Binance, IDEX, Uniswap, others basically say, 01:16:35.670 --> 01:16:39.750 we're not going to have a central exchange or, more 01:16:39.750 --> 01:16:42.660 technically, a central limit order book. 01:16:42.660 --> 01:16:44.860 But Nadia and I could trade. 01:16:44.860 --> 01:16:47.120 And later Nadia could trade with Luke, 01:16:47.120 --> 01:16:48.930 and Camillo could trade with somebody else, 01:16:48.930 --> 01:16:51.120 but it's not all centralized. 01:16:51.120 --> 01:16:53.310 And similarly, there's platforms-- 01:16:53.310 --> 01:16:55.770 Maker DAO, and Compound, and Synthetix 01:16:55.770 --> 01:16:57.240 are the three big ones-- 01:16:57.240 --> 01:17:00.540 that are trying to do that on crypto lending and borrowing. 01:17:00.540 --> 01:17:04.530 There is even prediction marking markets 01:17:04.530 --> 01:17:09.490 that are trying to say Nadia can trade with Luke and make a bet. 01:17:09.490 --> 01:17:12.390 Now, the regulatory environment for these prediction markets 01:17:12.390 --> 01:17:16.500 is highly challenged, and they might 01:17:16.500 --> 01:17:20.340 be doing things that are not strictly within the law. 01:17:20.340 --> 01:17:26.310 But these decentralized markets are very small. 01:17:26.310 --> 01:17:29.310 None of these projects are really big. 01:17:29.310 --> 01:17:31.440 But some of these projects have a few billion 01:17:31.440 --> 01:17:33.060 dollars in their crypto lending and. 01:17:33.060 --> 01:17:34.830 Borrowing some of these exchanges 01:17:34.830 --> 01:17:38.130 have a few hundred thousand dollars a day of trading. 01:17:38.130 --> 01:17:39.510 They're not big. 01:17:39.510 --> 01:17:42.480 But back-- it raises this central question 01:17:42.480 --> 01:17:46.050 of traditional finance versus decentralized finance. 01:17:46.050 --> 01:17:50.040 And I just wanted to capture that before we signed off 01:17:50.040 --> 01:17:51.590 today.