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GARY GENSLER: Welcome
back to FinTech,

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Shaping the World of Finance.

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Today, we're going to
review developments

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in finance and technology
related to capital markets.

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And since there's so many
pieces with capital markets,

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I've chosen to take the time
to dig more deeply into two

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areas, online brokerage,
or really mobile brokerage

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applications, and wealth
advising through robo advising.

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But we'll touch upon the broader
capital markets as well as

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a little touch on
cryptocurrencies

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because some of the most
successful financial technology

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companies in the capital
markets have actually

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been crypto exchanges
and some of the endeavors

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around crypto markets.

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So if I just take a moment just
to share my screen and share

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some slides, and
we'll get going here.

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Online brokerage, this
is not a new tradition.

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It goes back actually
several decades.

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And so then the
question is, what's

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happened here in the
last six or eight years?

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What's happened that this
startup Robinhood and others

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have really just toppled
over the last remaining

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bits of the commission
structure that we've had?

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Robo advising and
then capital markets,

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FinTech startups more generally.

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We'll have to do a quick
survey there and then

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a little discussion
of what's happening

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in crypto exchanges and
decentralized finance,

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because it's really
the question,

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will that actually
transform finance,

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or will it stay as
it is right now,

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a more narrow niche, though,
still a $200 billion asset

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class environment?

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But will some of
those technologies

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come into mainstream finance?

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So the readings
again were mostly

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focused around those
two areas, robo advising

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and online brokerage, and
how Robinhood has transformed

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the industry, and how Charles
Schwab and others entered

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into by the late part of 2019
what some call the New Broker

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Wars, in part because of
this financial technology

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along the way.

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So just some lively questions
but a way to get us going here.

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And hopefully somebody
wants to chime in.

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How did online brokers
emerge during an earlier

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FinTech development
period, during the '80s,

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'90s, that sort of
internet technology,

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FinTech technology area?

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And then how Robinhood's
transformed maybe

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this more recent era.

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Romain, does anybody
want to dive in at all?

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ROMAIN: Let's see.

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Who will be the first
volunteer today?

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GARY GENSLER: I mean,
everybody, we'll be talking

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about this for the whole class.

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But I just-- if anybody wants to
offer their thoughts to start.

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ROMAIN: And we have Michael.

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AUDIENCE: Yeah.

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So when I think the
earlier FinTech startups,

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I think just thinking
of edge of the internet.

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I'm thinking like
PayPal, just ways

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you can do online payments
and online interfaces for--

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or sorry, not online brokers.

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I'm thinking of E*TRADE, but
ways to make it without having

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to call somebody on the phone.

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I guess it was probably more
inaccessible when you actually

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had to drive to the broker
directly or in-person.

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Robinhood definitely
was more starting

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to take the mobile-first
approach, started

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tackling weaknesses of
the larger platforms,

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such as user interface, make
it more accessible for somebody

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to really just
trade from anywhere.

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And then also the fee
structure was a huge part

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of that, too, for trading.

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GARY GENSLER: Yeah.

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But I'm glad--

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I'm actually glad
Michael raised PayPal,

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because there's
analogies, and that's

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what this class is really about.

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It's finding what's happening
from a strategic point of view.

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We're teaching finance,
technology, the intersection

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but about the strategies.

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And there's a lot of parallel.

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There we were in the 1990s.

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Some of it even started
a little earlier.

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And online brokerage started--

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E*TRADE, Ameritrade.

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We'll dive into a number
of these companies

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similar to PayPal
starting in 1998.

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So I thank you, Michael,
for pulling that together--

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PayPal starting in 1998.

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That earlier wave, the
internet, access rather than

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through bricks and mortar,
or physical checks,

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or an old credit card
system vis-a-vis the payment

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systems in PayPal, online
brokerage starts, emerges.

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Does it take off?

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Not entirely.

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But over time, it's a big
story in the capital markets,

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especially retail investing.

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And then we get to
this other period,

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a new form of technology,
largely about mobile phones,

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but not entirely about
mobile phones also related

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to open API and
access to the data.

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Robinhood comes along.

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And also in the
payment area-- we've

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talked about this already
a few classes ago-- a lot

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of these payment startups.

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And Robinhood GEN really
further transforms an industry.

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And by 2019, Robinhood had
almost as many members online

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through their mobile app
with just a handful of years

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as E*TRADE or many of
the brokerage firms.

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So it's got that
parallels, and we're

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going to dive into how
Robinhood pressed further.

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And I'm wondering, Michael, do
you have a Robinhood account?

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AUDIENCE: Yeah, but I
haven't really used it

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since I started paying loans.

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GARY GENSLER: Oh, no.

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I understand why you
might not be investing

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while you're in school
and why you might not

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have the money to do
it, but you actually

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have a Robinhood account.

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And while it's hard to
do it by a show of hands,

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but I imagine that many
other students in the class

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have downloaded the app.

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So then a little
bit different area

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that we're going to be chatting
about is robo advising.

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How has that transformed the
provision of retail investment

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management, and how is
big finance reacting?

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And I'm wondering if, Romain,
if anybody wants to just take

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a high level hit at that.

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ROMAIN: I hope so.

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We had great papers
on the topic.

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Any volunteers?

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Weiyi?

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AUDIENCE: Sure.

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So I guess from the robot
advisor perspective is sort of,

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I personally feel, is a how
to transform people's behavior

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from like now going to some
kind of financial advisors

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to actually you're
now going through more

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electronic platforms,
whereas traditionally,

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especially for maybe the younger
generations were a lot more

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used to doing things online.

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I think robot advisors
provide them a new way

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to construct their financial
portfolios rather than going

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to a financial advisor.

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So it's definitely feeling like
it's going to take a bite out

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of the existing financial
advisors, which are probably

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where we're talking about
from the retail asset manager

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perspective.

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Some of them are trying
to, I feel like, emerge

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or creating new platforms,
or either buying

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some of the existing
platforms, or having some kind

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of interaction with them.

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So the existing-- the asset
managers are definitely,

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I feel like, looking
more into how

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to incorporate more tools
to come to the [INAUDIBLE]

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on the [INAUDIBLE].

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GARY GENSLER: Right.

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So robo advising,
the ability to have

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an application on your laptop
or on your phones, of course.

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Robo advising,
having an application

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rather than having a
human but having analytics

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embedded in a program give you
advice about asset allocation,

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investing, in the like.

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And then secondly, as
you said, big finance.

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And big finance in this case
is asset managers, generally,

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but also the brokerage
firms reacting.

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What do they do?

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There's one other thing
that's similar to what

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we see on online
brokerage and Robinhood.

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And that's about costs.

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It's not just about
a delivery system.

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It's not just about
mobile phones,

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but it's also about a cost
point and a price point.

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And we'll dive into
that a little bit,

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but robo advisors giving access
to financial advice at lower

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costs, maybe in the range of
20 to 50 basis points a year.

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Asset management,
the whole field

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of asset management, the
business of asset management

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is accumulating assets
under management.

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And if you accumulate
$100 million

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of assets under management
and charge 1% fee,

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that's $1 million of revenue.

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If you only charge a quarter of
a point, that's only $250,000

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of revenues.

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Now, of course, you can multiply
because none of these firms

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really want to just be
at $100 million of assets

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under management.

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And the biggest, BlackRocks of
the world are at $5 trillion,

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$6 trillion, $7 trillion
of assets under management.

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But the robo advisors
have tucked in here

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at a lower cost point.

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And that is also true on
the online brokerage side.

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So it's delivery mechanisms.

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It's user interfaces.

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It's service, and it's also a
cost and, thus, price points.

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In essence, can you do something
better, quicker, cheaper?

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That's a very simplistic
way to think about it.

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But any other FinTech trends?

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There's a lot going on in
the capital markets that--

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Romain, you want to see if
somebody wants-- they just

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want to capture a couple of the
other trends beyond these two

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on the retail side?

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ROMAIN: Any volunteers?

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Come on, guys.

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Nikhil, go ahead.

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Thank you.

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AUDIENCE: Sorry.

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I was muted.

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I thought something
interesting was both Robinhood

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and Wealthfront are moving
towards cash management.

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So they enter the market
from the stock side of things

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and robo advisor side
of things, but they

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seem to converge to cash
management as a next product

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to roll out.

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So that's a big trend.

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GARY GENSLER: Yeah.

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And look, even
Betterment, which we'll

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talk about in the
robo advising space,

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Betterment is starting to enter
into the challenger bank area.

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They're not the only ones.

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You have TransferWise from
the payment side entering

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into the challenger bank side.

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But absolutely, some
of these platforms

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are then spreading out.

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So you could be robo
advisor first and then

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move into something else.

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Other trends, because
of data, we'll

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see there's a lot of
startups, dozens of startups

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in the FinTech
space around data,

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around infrastructure, about
what many investors think

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of as the back office side
of things that are connecting

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exchanges with the public.

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There are many startups
around asset management

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and trying to help
asset management out.

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And this would be big,
wholesale, institutional asset

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management and not
just the retail side.

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So let's dive into a little bit
the history of online company

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landscape and think
about this for a moment.

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Who really started
out this whole thing?

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And I put some of
the foundation dates

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and the number of customers.

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These are the
figures I could get.

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From time to time, I wasn't
able to online to find a figure.

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But Charles Schwab
and TD Ameritrade--

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you might think of
them as Ameritrade--

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both started back
in the early 1970s.

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Actually, free internet.

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00:13:14,320 --> 00:13:17,530
The idea was a lower
cost brokerage.

253
00:13:17,530 --> 00:13:21,390
But what was happening
in the early 1970s,

254
00:13:21,390 --> 00:13:26,030
a really important part of
this saga is, out of the 1960s,

255
00:13:26,030 --> 00:13:28,150
there was a movement
that was ultimately

256
00:13:28,150 --> 00:13:30,700
captured in congressional
action in the US.

257
00:13:30,700 --> 00:13:34,740
The US Congress got involved,
the Securities and Exchange

258
00:13:34,740 --> 00:13:40,060
got involved to repeal
fixed commission rates.

259
00:13:40,060 --> 00:13:43,810
You see, for decades, the
New York Stock Exchange

260
00:13:43,810 --> 00:13:47,620
had fixed commission rates set
by the members of the New York

261
00:13:47,620 --> 00:13:49,750
Stock Exchange.

262
00:13:49,750 --> 00:13:55,420
And the institutional
world, the larger investors,

263
00:13:55,420 --> 00:13:59,080
wanted discounts,
wanted cheaper rates.

264
00:13:59,080 --> 00:14:02,560
And in the early 1970s,
there was this movement

265
00:14:02,560 --> 00:14:08,110
to free that up, not to have
fixed set rates by the New York

266
00:14:08,110 --> 00:14:09,610
Stock Exchange.

267
00:14:09,610 --> 00:14:14,050
And around this time,
Schwab, Ameritrade

268
00:14:14,050 --> 00:14:18,760
started, later affiliated
with Toronto Dominion Bank

269
00:14:18,760 --> 00:14:21,070
and thus the TD.

270
00:14:21,070 --> 00:14:26,290
Each 50-some years later,
about 12 million users.

271
00:14:26,290 --> 00:14:30,160
E*TRADE starts in the
'80s, Firstrade later.

272
00:14:30,160 --> 00:14:34,750
Interactive Brokers,
a remarkable company,

273
00:14:34,750 --> 00:14:38,770
more on the institutional side,
little less than a million

274
00:14:38,770 --> 00:14:40,150
and so forth.

275
00:14:40,150 --> 00:14:44,200
Monex bought
TradeStation, but Monex

276
00:14:44,200 --> 00:14:48,130
from the '90s and even
TradeStation earlier.

277
00:14:48,130 --> 00:14:50,950
Each of these companies were
chipping away a little bit

278
00:14:50,950 --> 00:14:54,400
of the old concept of brokers.

279
00:14:54,400 --> 00:14:58,120
And there were many challenges
in the 1990s into the noughts

280
00:14:58,120 --> 00:15:03,100
between Schwab and Ameritrade,
and E*TRADE and traditional

281
00:15:03,100 --> 00:15:06,980
firms like Merrill
Lynch and the like.

282
00:15:06,980 --> 00:15:10,250
The asset managers themselves,
the big asset managers

283
00:15:10,250 --> 00:15:14,090
like Fidelity and Vanguard
pre-date all of this.

284
00:15:14,090 --> 00:15:16,520
But Fidelity and
Vanguard also were

285
00:15:16,520 --> 00:15:20,840
saying, how can we, in
addition to wealth management,

286
00:15:20,840 --> 00:15:23,540
offer online brokerage?

287
00:15:23,540 --> 00:15:26,330
And as we all know,
if you have an account

288
00:15:26,330 --> 00:15:28,250
with Fidelity or
Vanguard, or for that

289
00:15:28,250 --> 00:15:31,490
matter with T. Rowe Price or
other large asset managers

290
00:15:31,490 --> 00:15:37,160
in the US, at some point in
time in the last 20-ish years,

291
00:15:37,160 --> 00:15:40,670
some starting in the mid
'90s, some waiting all the way

292
00:15:40,670 --> 00:15:42,980
until the late
noughts, they started

293
00:15:42,980 --> 00:15:47,150
to say they're going to
compete with traditional Wall

294
00:15:47,150 --> 00:15:50,330
Street, the Merrill
Lynches and so forth.

295
00:15:50,330 --> 00:15:54,830
And they were going to compete
by offering an online ability

296
00:15:54,830 --> 00:15:56,990
to buy and sell stocks.

297
00:15:56,990 --> 00:15:59,070
Both got into the business.

298
00:15:59,070 --> 00:16:03,420
It's not that the big banks
didn't notice and everything.

299
00:16:03,420 --> 00:16:05,360
And some of them, even
in the last few years,

300
00:16:05,360 --> 00:16:10,040
started discount
retail packages.

301
00:16:10,040 --> 00:16:12,470
Merrill Lynch, which
I keep mentioning,

302
00:16:12,470 --> 00:16:16,760
Merrill Lynch Edge
2010 was a product

303
00:16:16,760 --> 00:16:19,450
after Merrill Lynch was
bought by Bank of America.

304
00:16:19,450 --> 00:16:22,940
And Bank of America is
thinking, OK, it's post-crisis.

305
00:16:22,940 --> 00:16:24,890
They buy Merrill Lynch.

306
00:16:24,890 --> 00:16:28,190
Merrill Lynch has this
remarkable multiple

307
00:16:28,190 --> 00:16:33,410
1,000-person
organization of brokers,

308
00:16:33,410 --> 00:16:36,560
but they do Edge to be online.

309
00:16:36,560 --> 00:16:41,540
And even Ally
Bank, Ally Finance,

310
00:16:41,540 --> 00:16:44,300
which started in the
auto lending business,

311
00:16:44,300 --> 00:16:50,630
was that first challenger bank
in 2009, by 2016 is saying,

312
00:16:50,630 --> 00:16:53,040
we can get into
this, too, online--

313
00:16:53,040 --> 00:16:55,460
4 million members.

314
00:16:55,460 --> 00:16:58,210
But where are we
on the startups?

315
00:16:58,210 --> 00:17:02,120
The startups, Robinhood in
2013 and all this package

316
00:17:02,120 --> 00:17:07,079
of startups in
the last few years

317
00:17:07,079 --> 00:17:09,369
really have transformed things.

318
00:17:09,369 --> 00:17:15,000
So what I was saying is
these FinTech startups,

319
00:17:15,000 --> 00:17:17,520
primarily we think of
Robinhood, but there's a bunch

320
00:17:17,520 --> 00:17:20,609
of others within other markets.

321
00:17:20,609 --> 00:17:24,569
Like Freetrade, and
Tastyworks, and Webull

322
00:17:24,569 --> 00:17:28,800
have come along partly
because of mobile phones,

323
00:17:28,800 --> 00:17:33,090
partly because even the Schwabs
and Ameritrades were still

324
00:17:33,090 --> 00:17:36,690
charging, whether it was
a few pennies a share,

325
00:17:36,690 --> 00:17:39,660
but still charging $0.03
$0.04, $0.05 cents a share

326
00:17:39,660 --> 00:17:41,340
and so forth.

327
00:17:41,340 --> 00:17:49,040
User interface and cost provided
some opportunity to move in.

328
00:17:49,040 --> 00:17:51,610
So I'm going to just talk a
little bit about the large

329
00:17:51,610 --> 00:17:54,080
companies, that E*TRADEs,
and Ameritrades,

330
00:17:54,080 --> 00:17:57,910
and Fidelities and the like for
a moment because part of it is

331
00:17:57,910 --> 00:17:59,840
about mobile trading.

332
00:17:59,840 --> 00:18:03,310
And they each-- and
this chart that I

333
00:18:03,310 --> 00:18:05,380
was able to get from
StockBrokers.com,

334
00:18:05,380 --> 00:18:09,190
a comparison was just
like, what are the apps?

335
00:18:09,190 --> 00:18:11,320
What is that user interface?

336
00:18:11,320 --> 00:18:12,860
And this was one example.

337
00:18:12,860 --> 00:18:16,600
But better believe that whether
you're Merrill Lynch Edge

338
00:18:16,600 --> 00:18:19,870
or you're Robinhood,
you're also thinking about,

339
00:18:19,870 --> 00:18:22,420
do I interface well with
an iPhone, an Android,

340
00:18:22,420 --> 00:18:24,220
and so forth, and Apple Watch?

341
00:18:24,220 --> 00:18:28,900
I have to have that
connectivity and that technology

342
00:18:28,900 --> 00:18:31,130
to be ready and used
on all of these.

343
00:18:31,130 --> 00:18:33,580
And you can run
your eye through,

344
00:18:33,580 --> 00:18:37,570
can I have trading on each of
these products, mutual funds?

345
00:18:37,570 --> 00:18:41,320
And particularly
electronic trading

346
00:18:41,320 --> 00:18:46,000
often is around ETFs
but not only ETFs.

347
00:18:46,000 --> 00:18:49,550
And as the cryptocurrency space
came up, a number of them said,

348
00:18:49,550 --> 00:18:52,060
well, can we trade
cryptocurrencies as well?

349
00:18:52,060 --> 00:18:54,070
Not the E*TRADES
and Ameritrades,

350
00:18:54,070 --> 00:18:59,050
but the Robinhoods and the
disruptors were into that

351
00:18:59,050 --> 00:19:00,110
space.

352
00:19:00,110 --> 00:19:02,350
So it's just a little
bit of a comparison

353
00:19:02,350 --> 00:19:04,990
in how some folks think.

354
00:19:04,990 --> 00:19:07,480
Recent developments
are really important.

355
00:19:07,480 --> 00:19:11,410
And the biggest one
was late in 2019,

356
00:19:11,410 --> 00:19:14,170
what's called the Broker Wars.

357
00:19:14,170 --> 00:19:16,270
What happened start was--

358
00:19:16,270 --> 00:19:20,850
at the start was Robinhood was
eating into this, 6 million,

359
00:19:20,850 --> 00:19:25,370
7 million, 8 million members,
now maybe 10 million members.

360
00:19:25,370 --> 00:19:26,950
And as we saw the
earlier numbers,

361
00:19:26,950 --> 00:19:30,480
Schwab and Ameritrade are
only at about 12 million.

362
00:19:30,480 --> 00:19:34,110
And as that was
happening, IBKR, which

363
00:19:34,110 --> 00:19:41,010
is that smaller but remarkable
company, Institutional Brokers,

364
00:19:41,010 --> 00:19:43,530
in September of
2019 said they were

365
00:19:43,530 --> 00:19:47,630
going to go to free brokerage
for some of their accounts.

366
00:19:47,630 --> 00:19:50,270
It wasn't 100%, but
they were going to go.

367
00:19:50,270 --> 00:19:53,710
And within weeks,
early in October 2019,

368
00:19:53,710 --> 00:19:58,510
Schwab finally said,
zero commission.

369
00:19:58,510 --> 00:20:00,850
Now, what's
fascinating, I think,

370
00:20:00,850 --> 00:20:04,090
is this is the
challenge that we're in.

371
00:20:04,090 --> 00:20:06,580
We're in the challenge
of, are there

372
00:20:06,580 --> 00:20:14,930
financial services that will
move to zero top line pricing?

373
00:20:14,930 --> 00:20:16,370
And what we've
found, whether it's

374
00:20:16,370 --> 00:20:22,400
in Facebook or in many, many
online applications and outside

375
00:20:22,400 --> 00:20:26,900
of the financial world,
it's a zero fee environment.

376
00:20:26,900 --> 00:20:30,580
And then the business model is
earning money some other way.

377
00:20:30,580 --> 00:20:34,100
In Facebook's case, it's about
marketing and advertising.

378
00:20:34,100 --> 00:20:36,380
90-plus% of their
revenue is really

379
00:20:36,380 --> 00:20:38,360
about advertising
and marketing if you

380
00:20:38,360 --> 00:20:41,720
look at that business model,
that remarkable business model.

381
00:20:41,720 --> 00:20:43,590
But it may be on the data.

382
00:20:43,590 --> 00:20:45,440
It may be cross-selling
and marketing.

383
00:20:45,440 --> 00:20:47,160
It may be on the data.

384
00:20:47,160 --> 00:20:48,330
It may be somewhere else.

385
00:20:48,330 --> 00:20:50,810
We're going to talk about the
revenue model of Robinhood

386
00:20:50,810 --> 00:20:52,040
in a moment.

387
00:20:52,040 --> 00:20:55,700
But Charles Schwab reacted.

388
00:20:55,700 --> 00:21:00,560
E*TRADE, TD Ameritrade all
within one week went to zero

389
00:21:00,560 --> 00:21:03,340
commission.

390
00:21:03,340 --> 00:21:05,980
And in fact, it
led to Schwab being

391
00:21:05,980 --> 00:21:09,340
able to do the next
thing, which was announce

392
00:21:09,340 --> 00:21:11,960
the purchase of Ameritrade.

393
00:21:11,960 --> 00:21:15,530
With collapsing
revenues in Ameritrade,

394
00:21:15,530 --> 00:21:17,930
Schwab could
actually say, we're--

395
00:21:17,930 --> 00:21:20,540
they made him an offer,
purchase for $26 billion.

396
00:21:20,540 --> 00:21:22,690
Morgan Stanley wasn't
going to be outdone.

397
00:21:22,690 --> 00:21:25,580
And early in 2020,
Morgan Stanley,

398
00:21:25,580 --> 00:21:28,970
one of the most venerable
old-line investment banks

399
00:21:28,970 --> 00:21:31,150
dating all the way
back to James--

400
00:21:31,150 --> 00:21:36,680
to J.P. Morgan himself, the
industrialist that though

401
00:21:36,680 --> 00:21:41,540
he's departed this world
many decades ago has his name

402
00:21:41,540 --> 00:21:46,610
on Morgan Stanley
and JP Morgan Chase,

403
00:21:46,610 --> 00:21:50,690
Morgan Stanley buys
E*TRADE earlier this year.

404
00:21:50,690 --> 00:21:53,140
If you would have told the
Morgan Stanley executives when

405
00:21:53,140 --> 00:21:57,070
E*TRADE started 30 years ago
that some time they would

406
00:21:57,070 --> 00:21:59,590
in their future buy E*TRADE,
they would have scratched

407
00:21:59,590 --> 00:22:02,020
their head and said, really?

408
00:22:02,020 --> 00:22:05,240
We're going to be a retail
online brokerage firm?

409
00:22:05,240 --> 00:22:10,130
So it's an interesting
change in this world.

410
00:22:10,130 --> 00:22:12,960
So what's the long road?

411
00:22:12,960 --> 00:22:16,290
What's the long
road of commissions?

412
00:22:16,290 --> 00:22:20,500
This is the-- a
much earlier chart,

413
00:22:20,500 --> 00:22:21,940
but if you look
at this gray line,

414
00:22:21,940 --> 00:22:25,600
this commission rates
from $0.25 a share

415
00:22:25,600 --> 00:22:31,270
down to about $0.03 cents
a share in 2008 or 2009.

416
00:22:31,270 --> 00:22:35,740
I think this chart
cuts off around 2008.

417
00:22:35,740 --> 00:22:39,890
This long march of
competition in part

418
00:22:39,890 --> 00:22:42,620
is because of volumes
as you can see on this,

419
00:22:42,620 --> 00:22:46,200
that volumes were going up and
commissions were going down.

420
00:22:46,200 --> 00:22:48,590
So some of it is
just efficiency,

421
00:22:48,590 --> 00:22:52,190
but it's also this competition
that was coming in from E*TRADE

422
00:22:52,190 --> 00:22:56,620
and Ameritrade on
the retail side.

423
00:22:56,620 --> 00:22:58,820
But Robinhood
entered a world that

424
00:22:58,820 --> 00:23:02,480
still had $0.03, $0.04,
$0.05 cents commission.

425
00:23:02,480 --> 00:23:07,480
Robinhood initially
did an online app

426
00:23:07,480 --> 00:23:14,730
that was easy with a mobile
phone to start an account.

427
00:23:14,730 --> 00:23:17,790
But what they also did is they
said, we'll do it for free.

428
00:23:17,790 --> 00:23:22,058
Their business model from
2013 on, we'll do it for free.

429
00:23:22,058 --> 00:23:23,100
And how did they do that?

430
00:23:23,100 --> 00:23:25,050
What's the revenue
model behind that?

431
00:23:25,050 --> 00:23:28,830
Anybody want to take a
moment of pause, Romain?

432
00:23:28,830 --> 00:23:30,210
I will answer this question.

433
00:23:30,210 --> 00:23:33,330
I'm just saying, Romain,
who amongst the class

434
00:23:33,330 --> 00:23:35,790
would think, how
could you be so bold?

435
00:23:35,790 --> 00:23:38,640
As a startup venture
capitalist, you

436
00:23:38,640 --> 00:23:43,230
start an entrepreneurial
effort free online brokerage

437
00:23:43,230 --> 00:23:43,860
from day one.

438
00:23:47,724 --> 00:23:49,980
ROMAIN: Any volunteers?

439
00:23:49,980 --> 00:23:50,480
Victor.

440
00:23:53,462 --> 00:23:59,060
AUDIENCE: I guess you can either
make a profit on lending money

441
00:23:59,060 --> 00:24:02,370
to traders so they
can purchase stock.

442
00:24:02,370 --> 00:24:04,880
And you can also use some
high-frequency trading,

443
00:24:04,880 --> 00:24:07,145
as some people said, that's
probably what it's doing

444
00:24:07,145 --> 00:24:10,620
in order to before you sell,
you actually go through a--

445
00:24:10,620 --> 00:24:13,415
determine the area to
make a profit out of.

446
00:24:13,415 --> 00:24:14,530
GARY GENSLER: OK.

447
00:24:14,530 --> 00:24:16,360
So Victor's raised two things.

448
00:24:16,360 --> 00:24:18,370
I'm going to focus
on the second,

449
00:24:18,370 --> 00:24:23,170
was the relationship of
these mobile platforms,

450
00:24:23,170 --> 00:24:27,870
Robinhood in particularly,
and high-frequency trading.

451
00:24:27,870 --> 00:24:33,360
What Robinhood knew was that a
feature of the capital markets

452
00:24:33,360 --> 00:24:37,560
was that there were firms
that would pay for order flow.

453
00:24:37,560 --> 00:24:41,820
They would pay a very modest
amount, maybe a penny a share,

454
00:24:41,820 --> 00:24:46,520
but they would pay just
to receive the order flow.

455
00:24:46,520 --> 00:24:52,600
And this is a feature of
the competitive markets,

456
00:24:52,600 --> 00:24:54,800
the competitive
exchange markets.

457
00:24:54,800 --> 00:24:58,400
In the US, we have 50 to
70 individual exchanges.

458
00:24:58,400 --> 00:25:00,080
We think of the New
York Stock Exchange.

459
00:25:00,080 --> 00:25:03,000
We think about
NASDAQ and so forth,

460
00:25:03,000 --> 00:25:05,600
but there are many
other electronic markets

461
00:25:05,600 --> 00:25:10,670
where transactions occur.

462
00:25:10,670 --> 00:25:15,380
And some people call
them the dark markets.

463
00:25:15,380 --> 00:25:19,340
But all of those markets
might pay for order flow.

464
00:25:19,340 --> 00:25:21,980
And then individual
trading shops,

465
00:25:21,980 --> 00:25:24,890
high-frequency trading shops,
might pay for order flow.

466
00:25:24,890 --> 00:25:28,700
What that means is they
want to have a first look.

467
00:25:28,700 --> 00:25:31,640
They want to have those
orders and to route them

468
00:25:31,640 --> 00:25:36,290
through their algorithms and
into their either exchange

469
00:25:36,290 --> 00:25:39,620
engines, if it's an exchange
that's paying for order flow,

470
00:25:39,620 --> 00:25:43,580
or a high-frequency trading shop
that's paying for order flow.

471
00:25:43,580 --> 00:25:46,670
And the exchanges have
different fee structures

472
00:25:46,670 --> 00:25:50,720
depending upon whether
you make a bid or offer

473
00:25:50,720 --> 00:25:52,400
or you take a bid or offer.

474
00:25:52,400 --> 00:25:56,810
You will sometimes hear this
called maker and taker rates.

475
00:25:56,810 --> 00:26:02,120
Making a bid or offer, putting
a resting bid or a resting offer

476
00:26:02,120 --> 00:26:07,730
into an exchange engine is
more valuable for the exchange

477
00:26:07,730 --> 00:26:11,870
because it brings other
orders into the exchange.

478
00:26:11,870 --> 00:26:14,870
So what Robinhood
figured out was

479
00:26:14,870 --> 00:26:19,430
they could offer the retail
public something for free

480
00:26:19,430 --> 00:26:23,300
because they entered into
two or three major contracts

481
00:26:23,300 --> 00:26:25,640
with hedge funds, with
high-frequency trading

482
00:26:25,640 --> 00:26:28,820
shops saying, we will
enter into something

483
00:26:28,820 --> 00:26:33,170
where we're selling you the
order flow for a modest amount.

484
00:26:33,170 --> 00:26:34,910
I don't know the exact
amount, but let's

485
00:26:34,910 --> 00:26:39,340
call it a penny a share inside
the pricing of the $0.03

486
00:26:39,340 --> 00:26:43,210
or so to $0.05 that the
online brokers were charging,

487
00:26:43,210 --> 00:26:46,930
but still very valuable
over time for Robinhood.

488
00:26:46,930 --> 00:26:51,470
And then bingo, 6 or 8
million members later,

489
00:26:51,470 --> 00:26:55,930
account holders later
and a good user face,

490
00:26:55,930 --> 00:26:59,110
we get into the Broker Wars
where others drop their rates

491
00:26:59,110 --> 00:27:00,260
as well.

492
00:27:00,260 --> 00:27:03,370
And so then I go to this
interesting zero commission

493
00:27:03,370 --> 00:27:08,630
model chart that
talks about, well,

494
00:27:08,630 --> 00:27:13,240
how could you have the cost
of financial advice be zero?

495
00:27:13,240 --> 00:27:15,370
Well, it's because
of everything else.

496
00:27:15,370 --> 00:27:20,620
And the everything else model,
whether it's for Morgan Stanley

497
00:27:20,620 --> 00:27:26,470
and E*TRADE, whether it's
for Schwab, Charles Schwab,

498
00:27:26,470 --> 00:27:29,670
or whether it's for
Robinhood, as Victor said,

499
00:27:29,670 --> 00:27:35,430
this is everything else that
might be valuable for you.

500
00:27:35,430 --> 00:27:37,920
Picking up payment
for order flow

501
00:27:37,920 --> 00:27:41,130
is the third one on this
list, but margin interest,

502
00:27:41,130 --> 00:27:43,350
maintenance fees,
transaction fees,

503
00:27:43,350 --> 00:27:47,640
saying once you have a client,
there's a lot of other revenues

504
00:27:47,640 --> 00:27:49,770
that can be garnered.

505
00:27:49,770 --> 00:27:52,980
So once Facebook has
your information,

506
00:27:52,980 --> 00:27:56,100
there are other revenues
that Facebook can garner.

507
00:27:56,100 --> 00:28:00,260
But in the brokerage space,
this is very well known.

508
00:28:00,260 --> 00:28:05,970
This was known in the 1960s and
1970s when the large investment

509
00:28:05,970 --> 00:28:08,700
banks would think, if
I have a relationship

510
00:28:08,700 --> 00:28:14,720
with this big insurance company,
I can earn money in other ways.

511
00:28:14,720 --> 00:28:18,380
It's what led in part
in the early 1970s

512
00:28:18,380 --> 00:28:21,800
to break the old
decades-old fixed commission

513
00:28:21,800 --> 00:28:24,200
rates because large
investment banks wanted

514
00:28:24,200 --> 00:28:28,760
to discount and lower their
rates for large institutions,

515
00:28:28,760 --> 00:28:32,060
not for the retail public
but for large institutions.

516
00:28:32,060 --> 00:28:35,540
That was 50 years
ago, but that was also

517
00:28:35,540 --> 00:28:39,320
because there's all
this revenue potential,

518
00:28:39,320 --> 00:28:45,080
as this little graphic
says, beneath the surface.

519
00:28:45,080 --> 00:28:47,990
Romain, questions if I can
pause a little bit, because it's

520
00:28:47,990 --> 00:28:50,990
about the business
models of brokerage

521
00:28:50,990 --> 00:28:53,906
and the business models
of investment banking.

522
00:28:53,906 --> 00:28:56,390
ROMAIN: Let's wait a few
seconds so people have the time.

523
00:28:56,390 --> 00:28:59,250
GARY GENSLER: [INAUDIBLE] lived
at Goldman Sachs for 18 years,

524
00:28:59,250 --> 00:29:02,312
even though that feels
like another era.

525
00:29:02,312 --> 00:29:03,820
ROMAIN: So we have
a few questions.

526
00:29:03,820 --> 00:29:05,775
Let's take Luke and then Hassan.

527
00:29:05,775 --> 00:29:08,520
AUDIENCE: So I have
one quick question

528
00:29:08,520 --> 00:29:11,970
when it comes to traders
or trading platforms.

529
00:29:11,970 --> 00:29:17,040
Banks usually make money by
holding deposits in daily basis

530
00:29:17,040 --> 00:29:19,920
because that's a
revenue to the firm.

531
00:29:19,920 --> 00:29:21,960
It's especially
hard to do so in US

532
00:29:21,960 --> 00:29:23,460
when interest rate is near zero.

533
00:29:23,460 --> 00:29:27,810
But in emerging markets, such
as Korea, China, or India,

534
00:29:27,810 --> 00:29:30,810
they basically make the revenue
if you have somebody's money.

535
00:29:30,810 --> 00:29:34,500
And you can lend it out in a
net interest margin of positive.

536
00:29:34,500 --> 00:29:38,730
How do platforms like
these, E*TRADE or Robinhood,

537
00:29:38,730 --> 00:29:42,510
make money when they transfer
the money from deposit

538
00:29:42,510 --> 00:29:45,940
to their account and
takes two, three days,

539
00:29:45,940 --> 00:29:48,630
and they can make money out
of it besides these hedge fund

540
00:29:48,630 --> 00:29:50,180
deals that you have explained?

541
00:29:50,180 --> 00:29:53,980
GARY GENSLER: So
a great question.

542
00:29:53,980 --> 00:29:58,700
So the classic what I would
call commercial bank model

543
00:29:58,700 --> 00:30:00,650
is exactly what Luke said.

544
00:30:00,650 --> 00:30:04,190
To pot-- there's a net interest
spread between the depositors'

545
00:30:04,190 --> 00:30:06,700
money and what you lended out.

546
00:30:06,700 --> 00:30:11,360
And whether you're a $1 trillion
bank or a $100 million bank,

547
00:30:11,360 --> 00:30:14,123
it's basically that spread
between the depositors' money

548
00:30:14,123 --> 00:30:15,290
and what you're lending out.

549
00:30:15,290 --> 00:30:18,870
That model has been
around for centuries.

550
00:30:18,870 --> 00:30:20,690
And as Luke said,
it's a little bit more

551
00:30:20,690 --> 00:30:23,300
challenging in different
interest rate environments,

552
00:30:23,300 --> 00:30:24,680
but that's been there.

553
00:30:24,680 --> 00:30:27,110
The brokerage
business traditionally

554
00:30:27,110 --> 00:30:30,410
was making money on
commissions, and commissions

555
00:30:30,410 --> 00:30:33,230
was a big part of that
revenue model all the way

556
00:30:33,230 --> 00:30:36,350
through the 1960s and '70s.

557
00:30:36,350 --> 00:30:39,780
But there's other
pieces of it as well

558
00:30:39,780 --> 00:30:42,600
beyond just the
commission of, as we

559
00:30:42,600 --> 00:30:45,750
saw on that chart, $0.25
a share long ago or $0.03

560
00:30:45,750 --> 00:30:48,480
or $0.05 a share more recently.

561
00:30:48,480 --> 00:30:54,210
Beyond that, it's also, when
you buy and sell securities,

562
00:30:54,210 --> 00:30:56,920
you-- there is what's known
as a bid-offer spread,

563
00:30:56,920 --> 00:30:59,340
the difference
between the bid side

564
00:30:59,340 --> 00:31:01,240
and where somebody is offering.

565
00:31:01,240 --> 00:31:03,450
And a market maker
can be in the middle

566
00:31:03,450 --> 00:31:05,400
and provide liquidity
to the market,

567
00:31:05,400 --> 00:31:07,740
get paid for taking risks.

568
00:31:07,740 --> 00:31:10,800
It's a risk-return business.

569
00:31:10,800 --> 00:31:13,200
But first, Luke, is
the bid-offer spread,

570
00:31:13,200 --> 00:31:16,170
just being in the flow.

571
00:31:16,170 --> 00:31:18,480
In Robinhood's case,
Robinhood said,

572
00:31:18,480 --> 00:31:20,580
we don't have a balance sheet.

573
00:31:20,580 --> 00:31:23,790
We're not going to pay
for the bid-ask spread.

574
00:31:23,790 --> 00:31:26,010
But we will enter
into transactions

575
00:31:26,010 --> 00:31:28,020
with high-frequency
trading shops

576
00:31:28,020 --> 00:31:34,170
and effectively give them access
to this flow of transactions.

577
00:31:34,170 --> 00:31:36,930
And so that's payment
for order flow.

578
00:31:36,930 --> 00:31:38,760
And the high-frequency
trading shops

579
00:31:38,760 --> 00:31:43,080
are, in essence, trying to tap
into that bid-offer spread.

580
00:31:43,080 --> 00:31:45,660
So that's a dominant part of it.

581
00:31:45,660 --> 00:31:48,090
In addition, just to
name one other, but there

582
00:31:48,090 --> 00:31:49,410
are many others--

583
00:31:49,410 --> 00:31:52,320
in addition, Charles
Schwab and others--

584
00:31:52,320 --> 00:31:55,170
Merrill Lynch figured
this out decades ago.

585
00:31:55,170 --> 00:31:57,930
Once you have that
customer relationship,

586
00:31:57,930 --> 00:32:01,480
that customer relationship will
come to you for other things,

587
00:32:01,480 --> 00:32:04,440
and they will come to you
to do margin lending, which

588
00:32:04,440 --> 00:32:06,780
is a form of borrowing.

589
00:32:06,780 --> 00:32:10,470
And so you have maybe
then that customer there

590
00:32:10,470 --> 00:32:13,080
who you can actually
use your balance sheet

591
00:32:13,080 --> 00:32:16,560
and lend them money, usually
what's called margin lending.

592
00:32:16,560 --> 00:32:18,960
So I'm just mentioning
two of them.

593
00:32:18,960 --> 00:32:22,830
Bid-ask spread, Robinhood was
not taking that themselves.

594
00:32:22,830 --> 00:32:24,930
They were selling that access.

595
00:32:24,930 --> 00:32:27,060
And then the
relationship that you

596
00:32:27,060 --> 00:32:32,083
can have when using your
balance sheet and lending money.

597
00:32:32,083 --> 00:32:34,500
AUDIENCE: Can you tell us a
little bit about the kickbacks

598
00:32:34,500 --> 00:32:35,747
in the presentation?

599
00:32:35,747 --> 00:32:36,830
GARY GENSLER: What's that?

600
00:32:36,830 --> 00:32:38,413
AUDIENCE: Can you
tell us a little bit

601
00:32:38,413 --> 00:32:40,220
about the kickbacks in
the presentation you

602
00:32:40,220 --> 00:32:41,460
have here in the small letters?

603
00:32:41,460 --> 00:32:43,252
GARY GENSLER: Well,
these are not my words.

604
00:32:43,252 --> 00:32:46,880
These are Jason
Wenk of Altruist.

605
00:32:46,880 --> 00:32:50,720
But in essence, there's
so many different ways

606
00:32:50,720 --> 00:32:56,950
that you might take a
customer's order flow

607
00:32:56,950 --> 00:33:03,630
and sell access to that, or you
might be the front end model.

608
00:33:03,630 --> 00:33:06,360
You could be-- I'm not saying
Robinhood or Schwab are

609
00:33:06,360 --> 00:33:09,660
doing this, but you can
be that front end model.

610
00:33:09,660 --> 00:33:13,560
And then somebody else will
pay you, pay the Schwab,

611
00:33:13,560 --> 00:33:15,660
pay the Robinhood.

612
00:33:15,660 --> 00:33:18,090
And so I think what Jason
Wenk, who wrote this,

613
00:33:18,090 --> 00:33:19,530
is calling that a kickback.

614
00:33:19,530 --> 00:33:24,300
But it's a contractual
arrangement

615
00:33:24,300 --> 00:33:27,810
to be-- have access to that
customer and that order flow.

616
00:33:27,810 --> 00:33:31,430
AUDIENCE: Can I safely assume
that they're selling our data

617
00:33:31,430 --> 00:33:33,305
as well as Google is doing?

618
00:33:33,305 --> 00:33:35,720
GARY GENSLER: So data
is really important,

619
00:33:35,720 --> 00:33:39,220
and data is really important
for multiple reasons.

620
00:33:39,220 --> 00:33:43,150
One, the better data you
have, the better trading

621
00:33:43,150 --> 00:33:45,070
algorithms you can create.

622
00:33:45,070 --> 00:33:47,470
So part of the
payment for order flow

623
00:33:47,470 --> 00:33:49,120
is to capture bid-ask spread.

624
00:33:49,120 --> 00:33:51,700
Part of the payment
for order flow

625
00:33:51,700 --> 00:33:55,180
is the data so that you
can build your algorithms.

626
00:33:55,180 --> 00:33:59,030
You have more data for your
machine learning, absolutely.

627
00:33:59,030 --> 00:34:02,150
There's also other
relevant data,

628
00:34:02,150 --> 00:34:05,770
but fundamentally the data
is to be a better market

629
00:34:05,770 --> 00:34:07,257
maker and a better investor.

630
00:34:07,257 --> 00:34:09,340
I think Romain, there was
somebody else that still

631
00:34:09,340 --> 00:34:10,630
had a question before I go on.

632
00:34:10,630 --> 00:34:12,625
ROMAIN: Yes, Hassan.

633
00:34:12,625 --> 00:34:13,730
AUDIENCE: Hi, Professor.

634
00:34:13,730 --> 00:34:14,230
Yeah.

635
00:34:14,230 --> 00:34:18,630
My question is about
the bid-ask margin.

636
00:34:18,630 --> 00:34:22,690
And I'm just wondering,
I mean, so for instance

637
00:34:22,690 --> 00:34:27,260
like Robinhood, they--

638
00:34:27,260 --> 00:34:29,880
so because they
had many customers,

639
00:34:29,880 --> 00:34:33,560
they could get better
deals, and they

640
00:34:33,560 --> 00:34:38,060
could benefit from the flow
of customers that they have.

641
00:34:38,060 --> 00:34:39,620
Is this how they make money?

642
00:34:39,620 --> 00:34:40,535
I'm just wondering.

643
00:34:40,535 --> 00:34:43,639
GARY GENSLER: Well, so actually,
the way they made money is they

644
00:34:43,639 --> 00:34:47,480
were getting paid for that flow
because their business model

645
00:34:47,480 --> 00:34:50,330
early on, and others
like them now,

646
00:34:50,330 --> 00:34:56,510
said we will go to the investing
public and zero commission.

647
00:34:56,510 --> 00:35:01,300
And somebody else will pay us.

648
00:35:01,300 --> 00:35:03,490
A fraction of a penny
at this point in time

649
00:35:03,490 --> 00:35:06,970
would be enough, but
a fraction of a penny.

650
00:35:06,970 --> 00:35:09,820
That other party
would pay us to,

651
00:35:09,820 --> 00:35:14,200
in essence, route those
transactions to the stock

652
00:35:14,200 --> 00:35:15,860
exchanges.

653
00:35:15,860 --> 00:35:19,480
And so one company that
does pay for order flow

654
00:35:19,480 --> 00:35:22,630
is a large hedge fund
high-frequency shop

655
00:35:22,630 --> 00:35:26,050
from Chicago called
Citadel, which

656
00:35:26,050 --> 00:35:27,670
I don't know its
current size, but it

657
00:35:27,670 --> 00:35:31,060
used to be about a $20 billion
hedge fund asset management

658
00:35:31,060 --> 00:35:36,880
shop and very active in
high-frequency trading.

659
00:35:36,880 --> 00:35:40,000
It's very public that it is.

660
00:35:40,000 --> 00:35:43,930
And so Citadel is one of those
vendors on the other side

661
00:35:43,930 --> 00:35:47,200
of the Robinhood app.

662
00:35:47,200 --> 00:35:51,040
And then they find a way, as
we were talking with Luke.

663
00:35:51,040 --> 00:35:54,320
They find the Citadels of
the world, not just Citadel.

664
00:35:54,320 --> 00:35:58,570
They find that order flow
is then valuable for them.

665
00:35:58,570 --> 00:36:02,050
They're routing some of
it to the Stock Exchange,

666
00:36:02,050 --> 00:36:04,240
and that could still
be worth something.

667
00:36:04,240 --> 00:36:06,130
They're putting it
into their analytics.

668
00:36:06,130 --> 00:36:08,740
They then get better
sophisticated machine

669
00:36:08,740 --> 00:36:12,250
learning on the analytics.

670
00:36:12,250 --> 00:36:14,600
And that order flow
is also something

671
00:36:14,600 --> 00:36:19,250
that can be very valuable to an
operator of a dark market, one

672
00:36:19,250 --> 00:36:22,850
of these small
electronic markets,

673
00:36:22,850 --> 00:36:24,200
because you're all competing.

674
00:36:24,200 --> 00:36:27,590
If there's 60 or 70 of
these small dark markets,

675
00:36:27,590 --> 00:36:31,220
they're all competing for
volume and market share.

676
00:36:31,220 --> 00:36:33,260
And then all of the
sudden, Robinhood has not

677
00:36:33,260 --> 00:36:37,220
just a few 100,000 customers,
but they have 5 million or 10

678
00:36:37,220 --> 00:36:38,120
million customers.

679
00:36:38,120 --> 00:36:42,290
Then they can provide
a lot of order flow

680
00:36:42,290 --> 00:36:47,850
and a lot of market coverage
for somebody on the other side.

681
00:36:47,850 --> 00:36:51,770
Now, as it relates to Schwab,
Schwab and some of the earlier

682
00:36:51,770 --> 00:36:55,070
online brokers, they got into
the business of collecting

683
00:36:55,070 --> 00:36:56,750
assets under management.

684
00:36:56,750 --> 00:37:01,370
They got into the asset under
management custodial side

685
00:37:01,370 --> 00:37:02,660
of the business as well.

686
00:37:02,660 --> 00:37:06,830
There's a lot of other revenue
streams, transaction fees,

687
00:37:06,830 --> 00:37:12,360
account maintenance fees,
and even advisory fees

688
00:37:12,360 --> 00:37:13,070
in those shops.

689
00:37:15,950 --> 00:37:18,200
I want to move on now
to wealth management.

690
00:37:18,200 --> 00:37:21,950
I think you'll see
merging between the wealth

691
00:37:21,950 --> 00:37:26,820
management fees and
the brokerage fees,

692
00:37:26,820 --> 00:37:29,300
which is exactly what
we've seen over time

693
00:37:29,300 --> 00:37:30,860
in the traditional
brokerage field.

694
00:37:30,860 --> 00:37:33,560
In the traditional
brokerage field for decades,

695
00:37:33,560 --> 00:37:35,990
a broker earned commissions.

696
00:37:35,990 --> 00:37:40,070
And then they started
by the late 1990s,

697
00:37:40,070 --> 00:37:42,650
with some support
from the regulators,

698
00:37:42,650 --> 00:37:44,550
to change their revenue models.

699
00:37:44,550 --> 00:37:46,520
The traditional
Merrill Lynch broker

700
00:37:46,520 --> 00:37:51,680
from the 1930s to the 1980s
was a commission-based broker.

701
00:37:51,680 --> 00:37:56,330
But by the 1990s, they started
to charge advisory fees,

702
00:37:56,330 --> 00:37:59,870
meaning for instance,
maybe 1% of the assets

703
00:37:59,870 --> 00:38:01,650
that you left with them.

704
00:38:01,650 --> 00:38:04,280
And if you leave $1 million,
if you're wealthy enough

705
00:38:04,280 --> 00:38:05,780
to have that $1
million, that means

706
00:38:05,780 --> 00:38:10,310
that they're earning $10,000
a year on your account.

707
00:38:12,920 --> 00:38:15,110
If you obviously had
more, that would even

708
00:38:15,110 --> 00:38:17,270
be better for Merrill
Lynch and worse for you

709
00:38:17,270 --> 00:38:20,390
because you'd be leaving
them a lot of money to just

710
00:38:20,390 --> 00:38:25,220
be a custodian for
your account largely

711
00:38:25,220 --> 00:38:28,040
and to give you advice
from time to time.

712
00:38:28,040 --> 00:38:32,060
And that's the set up
for the next discussion.

713
00:38:32,060 --> 00:38:34,550
Romain, any questions?

714
00:38:34,550 --> 00:38:35,270
ROMAIN: No.

715
00:38:35,270 --> 00:38:36,522
All good.

716
00:38:36,522 --> 00:38:39,240
GARY GENSLER: So robo
advisory-- and Hassan sort of

717
00:38:39,240 --> 00:38:40,718
helped me set this up.

718
00:38:40,718 --> 00:38:42,510
I'm going to do the
same sort of landscape.

719
00:38:42,510 --> 00:38:46,560
We have the same groups,
retail brokers, asset managers,

720
00:38:46,560 --> 00:38:48,030
and the banks.

721
00:38:48,030 --> 00:38:51,750
Advisory work, brokerage
advisory was largely,

722
00:38:51,750 --> 00:38:55,050
for many decades, the
domain of investment banks

723
00:38:55,050 --> 00:38:58,740
and broker dealers, Merrill
Lynch, Smith Barney,

724
00:38:58,740 --> 00:39:04,020
Paine Webber, many, many
companies across the land,

725
00:39:04,020 --> 00:39:05,550
small and large.

726
00:39:05,550 --> 00:39:07,980
And they were a
commission-based business.

727
00:39:07,980 --> 00:39:10,470
By the 1990s, as
I mentioned, they

728
00:39:10,470 --> 00:39:17,690
started to move to a financial
advisory commission number.

729
00:39:17,690 --> 00:39:20,880
And I can't remember exactly
what year it was in the 1990s.

730
00:39:20,880 --> 00:39:23,160
Even the Securities
and Exchange Commission

731
00:39:23,160 --> 00:39:25,950
changed some rules to
facilitate some of that.

732
00:39:28,980 --> 00:39:31,890
Coming from the other side,
the big asset managers

733
00:39:31,890 --> 00:39:36,210
managing pension money and
managing big pools of money

734
00:39:36,210 --> 00:39:38,250
through mutual
funds also started

735
00:39:38,250 --> 00:39:41,580
to get into the
retail advisory space.

736
00:39:41,580 --> 00:39:43,590
And thirdly, you
had the brokers,

737
00:39:43,590 --> 00:39:45,850
the Schwabs and so forth.

738
00:39:45,850 --> 00:39:48,930
Now, I've put some names here
like Charles Schwab Intelligent

739
00:39:48,930 --> 00:39:54,810
Portfolios, which is a more
recent rollout, that branding,

740
00:39:54,810 --> 00:39:57,780
Intelligent Portfolios
or TD America's

741
00:39:57,780 --> 00:40:00,480
Ameritrade's
Essential Portfolios,

742
00:40:00,480 --> 00:40:03,150
more recent roll out for them.

743
00:40:03,150 --> 00:40:06,780
And they've been
reacting to this crowd,

744
00:40:06,780 --> 00:40:12,930
this remarkable,
entrepreneurial, mobile app

745
00:40:12,930 --> 00:40:14,030
robo advisors.

746
00:40:17,560 --> 00:40:23,540
And these companies span the
globe in Europe, US, and Asia.

747
00:40:23,540 --> 00:40:27,590
But what Betterment, or
Nutmeg, and others are doing

748
00:40:27,590 --> 00:40:32,760
is they're saying, we can
give more financial inclusion,

749
00:40:32,760 --> 00:40:37,170
and we can do it in a better
user interface and a lower cost

750
00:40:37,170 --> 00:40:38,730
structure.

751
00:40:38,730 --> 00:40:42,090
By and large, the
asset management fees

752
00:40:42,090 --> 00:40:45,870
for an account in the
traditional brokerage

753
00:40:45,870 --> 00:40:48,990
environment was
hovering close to 1%.

754
00:40:48,990 --> 00:40:50,940
There was some
price compression.

755
00:40:50,940 --> 00:40:55,890
Some of it was coming down
into the 3/4 of 1% to 1% area.

756
00:40:55,890 --> 00:41:00,300
That means, again, if you were
fortunate enough to have--

757
00:41:00,300 --> 00:41:04,650
let's just say that
you had $500,000,

758
00:41:04,650 --> 00:41:07,830
and you were able to have
somebody invest it for you

759
00:41:07,830 --> 00:41:09,560
or advise you.

760
00:41:09,560 --> 00:41:12,300
1% of $500,000 is $5,000.

761
00:41:12,300 --> 00:41:16,410
That's $400 a month that
you were paying, in essence,

762
00:41:16,410 --> 00:41:19,500
for somebody to give
you occasional advice

763
00:41:19,500 --> 00:41:23,210
and be your custodian for
your electronic securities,

764
00:41:23,210 --> 00:41:25,540
because everything was
digital by this point in time.

765
00:41:25,540 --> 00:41:28,380
It was no longer those
earlier days where

766
00:41:28,380 --> 00:41:31,590
you had physical certificates.

767
00:41:31,590 --> 00:41:33,150
This group came
along and said, maybe

768
00:41:33,150 --> 00:41:35,760
we could do it at a different
price point, a better user

769
00:41:35,760 --> 00:41:39,350
interface, maybe better
analytics and service,

770
00:41:39,350 --> 00:41:43,280
generally somewhere between 30
to 50 basis points or a quarter

771
00:41:43,280 --> 00:41:44,135
to a half a percent.

772
00:41:44,135 --> 00:41:49,730
That same $500,000, if you
were to have that $500,000,

773
00:41:49,730 --> 00:41:53,630
all of the sudden doesn't cost
you $5,000 or $4,000 a year,

774
00:41:53,630 --> 00:41:57,860
but it's costing maybe $1,500
a year or $100 a month.

775
00:41:57,860 --> 00:42:00,350
Now, you don't get a bill
for the $100 a month.

776
00:42:00,350 --> 00:42:07,070
It just comes out each
month out of your account,

777
00:42:07,070 --> 00:42:11,000
and it's charged
as a fee per se.

778
00:42:11,000 --> 00:42:14,420
But there's generally a
different price point.

779
00:42:14,420 --> 00:42:18,020
We haven't gone all the way that
we went with online brokerage,

780
00:42:18,020 --> 00:42:22,520
to mobile brokerage, to
zero accounts, zero fees.

781
00:42:22,520 --> 00:42:25,250
But one of the great pressures
that have happened here

782
00:42:25,250 --> 00:42:31,410
as well, which is off this
page, is asset management fees

783
00:42:31,410 --> 00:42:34,200
have been coming down
as well and particularly

784
00:42:34,200 --> 00:42:36,870
around a product called
exchange traded funds.

785
00:42:36,870 --> 00:42:39,630
And to understand the
field of robo advisors,

786
00:42:39,630 --> 00:42:42,000
I just want to mention
something about exchange traded

787
00:42:42,000 --> 00:42:46,140
funds, which is an
invention of the late 1990s.

788
00:42:46,140 --> 00:42:50,010
That was a FinTech of its
time that somebody came up

789
00:42:50,010 --> 00:42:53,610
with the idea, I can
have a mutual fund.

790
00:42:53,610 --> 00:42:58,600
I can have a mutual fund that
invests in the entire market,

791
00:42:58,600 --> 00:43:01,390
and I can do it at a low cost.

792
00:43:01,390 --> 00:43:04,340
And I can package it
through a security.

793
00:43:04,340 --> 00:43:06,400
So let me unpack that.

794
00:43:06,400 --> 00:43:10,680
The first innovation was an
innovation of the early 1970s.

795
00:43:10,680 --> 00:43:15,730
Jack Bogle, who was the key
innovator behind Vanguard,

796
00:43:15,730 --> 00:43:19,630
said, wouldn't it be great if
we gave America at the time

797
00:43:19,630 --> 00:43:22,660
a product they can invest
in the whole stock market

798
00:43:22,660 --> 00:43:24,910
a little bit of each company?

799
00:43:24,910 --> 00:43:26,990
And we're not going
to manage it for them.

800
00:43:26,990 --> 00:43:30,850
We're just going to
algorithmically, arithmetically

801
00:43:30,850 --> 00:43:33,310
pick a little bit
of every stock.

802
00:43:33,310 --> 00:43:35,230
And it was called an index fund.

803
00:43:35,230 --> 00:43:37,300
We take it for
granted, but that was

804
00:43:37,300 --> 00:43:41,860
an innovation, a remarkable
innovation of the 1970s.

805
00:43:41,860 --> 00:43:45,640
Everybody could have a piece of
the stock market at a low cost.

806
00:43:45,640 --> 00:43:49,540
And to this day, Vanguard is
still not a publicly traded

807
00:43:49,540 --> 00:43:50,800
for-profit company.

808
00:43:50,800 --> 00:43:52,060
It's a mutual company.

809
00:43:52,060 --> 00:43:55,740
Vanguard is held and
owned by its mutual funds

810
00:43:55,740 --> 00:44:00,980
that are held and owned by us
if we're a part of Vanguard.

811
00:44:00,980 --> 00:44:03,080
That innovation then
led to an innovation

812
00:44:03,080 --> 00:44:05,180
in the 1990s that
said, what can we

813
00:44:05,180 --> 00:44:07,790
do to make this
even more efficient?

814
00:44:07,790 --> 00:44:11,700
What if we take an
index mutual fund

815
00:44:11,700 --> 00:44:13,860
and take the interest
in the mutual funds

816
00:44:13,860 --> 00:44:15,810
and make those securities?

817
00:44:15,810 --> 00:44:18,510
Took a little change
in some regulations,

818
00:44:18,510 --> 00:44:21,030
but all of the sudden, we had
this thing called exchange

819
00:44:21,030 --> 00:44:25,410
traded funds, these
low-cost ways to participate

820
00:44:25,410 --> 00:44:27,930
in the stock market,
the bond market,

821
00:44:27,930 --> 00:44:30,720
some in the gold
and silver markets--

822
00:44:30,720 --> 00:44:33,630
exchange traded funds.

823
00:44:33,630 --> 00:44:39,300
All of these robo advisors
in their packaging have said,

824
00:44:39,300 --> 00:44:42,420
we can get you into
this and get you out

825
00:44:42,420 --> 00:44:46,050
of this, into this market
or out of this market,

826
00:44:46,050 --> 00:44:49,030
and use exchange traded funds.

827
00:44:49,030 --> 00:44:52,810
The second big innovation
for robo advisors, of course,

828
00:44:52,810 --> 00:44:56,400
is everything we talked about
out of artificial intelligence

829
00:44:56,400 --> 00:45:00,970
and natural language
programming, processing,

830
00:45:00,970 --> 00:45:06,550
the ability to take voice or
take digital and transfer that

831
00:45:06,550 --> 00:45:12,680
into machine language, computer
language, and the reverse.

832
00:45:12,680 --> 00:45:17,300
So robo advisors came
along at a point in time

833
00:45:17,300 --> 00:45:20,990
where you could basically
automate us humans a bit,

834
00:45:20,990 --> 00:45:25,100
not entirely, but
we could step back.

835
00:45:25,100 --> 00:45:29,210
Humans step back, and
robo advice goes in.

836
00:45:29,210 --> 00:45:31,370
And you could do it
a lower price point.

837
00:45:31,370 --> 00:45:34,280
And the third
innovation was basically

838
00:45:34,280 --> 00:45:37,580
some simple analytics--

839
00:45:37,580 --> 00:45:42,170
not machine learning, but
simple analytics on portfolio

840
00:45:42,170 --> 00:45:44,270
and asset allocation.

841
00:45:44,270 --> 00:45:46,730
Some of it's related to,
if you're in your 20s

842
00:45:46,730 --> 00:45:48,450
and you're saving
for retirement,

843
00:45:48,450 --> 00:45:49,520
you could take more risk.

844
00:45:49,520 --> 00:45:52,940
You could have a higher equity
share versus a bond share.

845
00:45:52,940 --> 00:45:55,820
If you're in your 60s, and
you're about to retire,

846
00:45:55,820 --> 00:45:59,030
you should be more stable,
a little less risk, maybe

847
00:45:59,030 --> 00:46:01,280
more bonds and less equities.

848
00:46:01,280 --> 00:46:03,650
Some of it's that
simple, but they were

849
00:46:03,650 --> 00:46:07,640
able to basically take that.

850
00:46:07,640 --> 00:46:09,650
And so the Betterment
started, and they

851
00:46:09,650 --> 00:46:15,660
could find really readily
available software

852
00:46:15,660 --> 00:46:17,580
for asset allocation.

853
00:46:17,580 --> 00:46:21,390
They could use products
like exchange traded funds.

854
00:46:21,390 --> 00:46:23,460
Mobile phones were
around already.

855
00:46:23,460 --> 00:46:26,630
So they had a good platform.

856
00:46:26,630 --> 00:46:31,090
And they say, all right,
we'll go to a lower fee point.

857
00:46:31,090 --> 00:46:34,180
And all of the sudden, we start
to see a real change of things.

858
00:46:34,180 --> 00:46:36,461
Questions, Romain?

859
00:46:36,461 --> 00:46:38,980
ROMAIN: While we wait for
questions on this topic,

860
00:46:38,980 --> 00:46:41,560
we have a question in the chat
about Robinhood's business

861
00:46:41,560 --> 00:46:44,380
model from George.

862
00:46:44,380 --> 00:46:46,300
Do you see Robinhood
and other startups

863
00:46:46,300 --> 00:46:48,400
starting their own
high-frequency trading

864
00:46:48,400 --> 00:46:50,980
operations instead of
selling the order flows?

865
00:46:50,980 --> 00:46:54,280
And then Devin asks
whether maybe Citadel

866
00:46:54,280 --> 00:46:58,830
or any other hedge fund should
just buy Robinhood outright.

867
00:46:58,830 --> 00:47:01,810
GARY GENSLER: These are
two really great questions

868
00:47:01,810 --> 00:47:02,620
about the future.

869
00:47:02,620 --> 00:47:11,500
I think that in both ways
will the front end platform--

870
00:47:11,500 --> 00:47:15,240
and that's really, in a sense,
Robinhood and, even in this

871
00:47:15,240 --> 00:47:18,470
robo advisor space, the
Betterments of the world--

872
00:47:18,470 --> 00:47:21,830
is a front end user
interface platform

873
00:47:21,830 --> 00:47:25,230
that tend not to
have balance sheets.

874
00:47:25,230 --> 00:47:28,800
And they tend to let somebody
else handle that capital

875
00:47:28,800 --> 00:47:32,490
markets risk behind it.

876
00:47:32,490 --> 00:47:36,570
But the question here is,
do I see the front end

877
00:47:36,570 --> 00:47:39,610
building balance sheet and
moving into the capital market

878
00:47:39,610 --> 00:47:40,110
side?

879
00:47:40,110 --> 00:47:43,800
And do I see the capital
market side, the balance sheet

880
00:47:43,800 --> 00:47:46,890
risk taking, moving
into the front end side?

881
00:47:46,890 --> 00:47:48,930
And we don't know,
but history tells

882
00:47:48,930 --> 00:47:51,450
us that tends to
happen at some point,

883
00:47:51,450 --> 00:47:55,500
that there's some
sort of what you might

884
00:47:55,500 --> 00:48:00,540
call vertical integration.

885
00:48:00,540 --> 00:48:06,060
And if you really think about
these slices on this page,

886
00:48:06,060 --> 00:48:10,890
the JP Morgan building you
invest in 2018 or Merrill Edge

887
00:48:10,890 --> 00:48:12,150
in an earlier time--

888
00:48:12,150 --> 00:48:14,590
and if I go back to
the brokerage side,

889
00:48:14,590 --> 00:48:17,010
they're named
products there, too--

890
00:48:17,010 --> 00:48:20,520
that's balance sheet
coupled with front end.

891
00:48:20,520 --> 00:48:23,370
That's the fully
integrated model.

892
00:48:23,370 --> 00:48:26,160
But then if you look at the
asset managers, the asset

893
00:48:26,160 --> 00:48:28,230
managers, the
BlackRocks of the world

894
00:48:28,230 --> 00:48:33,020
are not actually
acting as a principal.

895
00:48:33,020 --> 00:48:36,990
They're acting as an advisor,
a pure advisor, a pure agency

896
00:48:36,990 --> 00:48:37,510
business.

897
00:48:37,510 --> 00:48:41,100
So one of the things is, do you
just want to stay as an agent,

898
00:48:41,100 --> 00:48:43,380
or do you actually
want to invest

899
00:48:43,380 --> 00:48:45,150
your capital in the markets?

900
00:48:45,150 --> 00:48:47,970
And that big business
decision separates

901
00:48:47,970 --> 00:48:51,780
some of the asset managers
and then, as you mentioned,

902
00:48:51,780 --> 00:48:54,580
the high-frequency traders.

903
00:48:54,580 --> 00:48:56,740
I think that if Robinhood
is going to be bought,

904
00:48:56,740 --> 00:48:59,410
it could be bought by
high-frequency trading shop.

905
00:48:59,410 --> 00:49:04,180
But the challenge
there is, will they

906
00:49:04,180 --> 00:49:06,640
still get as big
a customer base,

907
00:49:06,640 --> 00:49:09,250
I mean 10 million customers?

908
00:49:09,250 --> 00:49:14,440
Or is Robinhood more valuable
for one of the large banks

909
00:49:14,440 --> 00:49:17,050
to buy or one of the
large asset managers?

910
00:49:17,050 --> 00:49:19,060
I think if you look out
three to five years,

911
00:49:19,060 --> 00:49:26,110
it's quite likely that Robinhood
gets merged up into something,

912
00:49:26,110 --> 00:49:29,870
as you saw Morgan Stanley
buying E*TRADE as well.

913
00:49:29,870 --> 00:49:31,310
Another question?

914
00:49:31,310 --> 00:49:31,970
ROMAIN: Yes.

915
00:49:31,970 --> 00:49:33,335
Let's go with Camillo.

916
00:49:33,335 --> 00:49:36,290
GARY GENSLER: And then I'm going
to do a few more slides here

917
00:49:36,290 --> 00:49:38,862
on robo advisors.

918
00:49:38,862 --> 00:49:40,060
AUDIENCE: Hi, Gary.

919
00:49:40,060 --> 00:49:45,790
I wonder why platforms such
as Acorns and Betterment

920
00:49:45,790 --> 00:49:50,610
that you were just talking about
have a mixed business model,

921
00:49:50,610 --> 00:49:56,240
because in one way, they are
a robo advisor business model.

922
00:49:56,240 --> 00:49:58,733
But then they have savings
and checking accounts.

923
00:49:58,733 --> 00:49:59,650
GARY GENSLER: Correct.

924
00:49:59,650 --> 00:50:02,720
AUDIENCE: They're stepping
a foot into a banking model.

925
00:50:02,720 --> 00:50:05,722
What's the reason to merge
the two spaces into one?

926
00:50:05,722 --> 00:50:07,930
GARY GENSLER: I think because
they have the front end

927
00:50:07,930 --> 00:50:10,930
customer relationship,
and they have some trust.

928
00:50:10,930 --> 00:50:15,580
And this helps set something up.

929
00:50:15,580 --> 00:50:18,340
This is a chart on users.

930
00:50:18,340 --> 00:50:20,440
And it's got some
predictions here.

931
00:50:20,440 --> 00:50:23,000
We don't know if these
predictions will hold.

932
00:50:23,000 --> 00:50:25,840
But if you see the
use of robo advisors,

933
00:50:25,840 --> 00:50:28,120
it's just getting
much more comfortable

934
00:50:28,120 --> 00:50:30,280
that folks are being--
and this, I believe,

935
00:50:30,280 --> 00:50:34,540
also includes the robo
advisors at the big shops

936
00:50:34,540 --> 00:50:36,580
as well as the startups.

937
00:50:36,580 --> 00:50:39,680
But just as if you have
that user interface--

938
00:50:39,680 --> 00:50:41,950
and remember we talked
about challenger banks

939
00:50:41,950 --> 00:50:44,500
as well, Camillo,
the challenger banks

940
00:50:44,500 --> 00:50:48,410
last session, a lot of
it's about trust as well.

941
00:50:48,410 --> 00:50:50,230
Once you have that
user interface,

942
00:50:50,230 --> 00:50:54,350
there's a certain trust and,
frankly, stickiness to it.

943
00:50:54,350 --> 00:50:57,130
So if Betterment, which is
looking to become a challenger

944
00:50:57,130 --> 00:51:01,890
bank, can use that
customer relationship,

945
00:51:01,890 --> 00:51:03,810
then you can build the platform.

946
00:51:03,810 --> 00:51:07,320
And back to the
economics of platforms,

947
00:51:07,320 --> 00:51:10,740
the economics of platforms
is as you layer activities

948
00:51:10,740 --> 00:51:15,920
on top of a platform, and if
you can grow your user base,

949
00:51:15,920 --> 00:51:19,340
you get more data, you
get more centrality.

950
00:51:19,340 --> 00:51:23,430
There's not going to
be 10 years from now

951
00:51:23,430 --> 00:51:25,170
this many advisory platforms.

952
00:51:25,170 --> 00:51:27,960
And in fact, in the blue,
the advisory platforms,

953
00:51:27,960 --> 00:51:30,150
I picked the ones
that are large.

954
00:51:30,150 --> 00:51:33,780
There's 50 to 100 others
that I haven't listed.

955
00:51:33,780 --> 00:51:35,730
So there is going
to be consolidation.

956
00:51:35,730 --> 00:51:39,700
As sure as we're
here at this moment,

957
00:51:39,700 --> 00:51:42,400
there's going to be
consolidation in this space.

958
00:51:42,400 --> 00:51:46,890
And so they're trying to build
classic platform economics,

959
00:51:46,890 --> 00:51:48,630
build activities,
build user bases.

960
00:51:51,960 --> 00:51:53,880
And this is assets
under management,

961
00:51:53,880 --> 00:51:59,950
the same website behind this.

962
00:51:59,950 --> 00:52:04,260
But as of a few days ago, just
a sense of, what are the assets?

963
00:52:04,260 --> 00:52:05,820
This is in billions.

964
00:52:05,820 --> 00:52:13,890
So in 2020, $1.2 trillion
of assets under management

965
00:52:13,890 --> 00:52:16,110
somehow associated
with robo advisors.

966
00:52:16,110 --> 00:52:19,650
So even a 1/4%
fee on this starts

967
00:52:19,650 --> 00:52:22,620
to be a real revenue model.

968
00:52:22,620 --> 00:52:25,300
Possible evolution, I
like thinking about,

969
00:52:25,300 --> 00:52:27,990
where could this
go in the future?

970
00:52:27,990 --> 00:52:30,630
Where did robo advising start,
all the way on the left?

971
00:52:30,630 --> 00:52:32,490
It's just an online
questionnaire

972
00:52:32,490 --> 00:52:36,840
about asset allocation largely,
and an online questionnaire,

973
00:52:36,840 --> 00:52:42,540
a mobile questionnaire about
products and risk and how--

974
00:52:42,540 --> 00:52:44,820
and then usually
a list of exchange

975
00:52:44,820 --> 00:52:47,010
traded funds, some bonds.

976
00:52:47,010 --> 00:52:53,920
So simple but very accessible,
broadening financial inclusion

977
00:52:53,920 --> 00:52:55,210
for lower rates.

978
00:52:55,210 --> 00:52:57,670
And it helps a lot of
people, a lot of investors

979
00:52:57,670 --> 00:52:59,440
sleep well at night.

980
00:52:59,440 --> 00:53:02,230
It lowers their uncertainty.

981
00:53:02,230 --> 00:53:05,620
I'm getting some good advice
about asset allocation,

982
00:53:05,620 --> 00:53:08,350
some risks, some life events.

983
00:53:08,350 --> 00:53:09,797
But could move it move further?

984
00:53:09,797 --> 00:53:10,630
That's the question.

985
00:53:10,630 --> 00:53:12,130
Can it move further?

986
00:53:12,130 --> 00:53:15,910
And exactly like Camillo said
and Luke's earlier question

987
00:53:15,910 --> 00:53:20,110
about other revenues, can robo
advisors-- like Betterment

988
00:53:20,110 --> 00:53:22,860
say, well, we'll actually
be the fund manager.

989
00:53:22,860 --> 00:53:25,080
We'll start to actually
manage the funds

990
00:53:25,080 --> 00:53:28,590
rather than just doing
these low-cost ETFs.

991
00:53:28,590 --> 00:53:30,630
And maybe we'll
start to actually do

992
00:53:30,630 --> 00:53:33,960
something more
with regard to risk

993
00:53:33,960 --> 00:53:35,850
based portfolio allocation.

994
00:53:35,850 --> 00:53:37,710
Maybe we'll start in
this third column,

995
00:53:37,710 --> 00:53:39,690
do a little bit of algorithms.

996
00:53:39,690 --> 00:53:43,440
Maybe, in fact, we'll
start to do trading and be

997
00:53:43,440 --> 00:53:48,150
principals rather than just
an agent and an advisor

998
00:53:48,150 --> 00:53:49,050
and the like.

999
00:53:49,050 --> 00:53:54,570
So there's going to be more
sophisticated algorithmic AI

1000
00:53:54,570 --> 00:53:55,560
or machine learning.

1001
00:53:55,560 --> 00:53:58,350
But I don't think it's going to
be highly sophisticated machine

1002
00:53:58,350 --> 00:54:03,000
learning because there's
a certain commoditization

1003
00:54:03,000 --> 00:54:04,980
about the advice.

1004
00:54:04,980 --> 00:54:09,720
But it is quite possible
as we move forward

1005
00:54:09,720 --> 00:54:12,450
that somebody will figure
out what risk I should

1006
00:54:12,450 --> 00:54:14,030
take versus somebody else.

1007
00:54:14,030 --> 00:54:17,300
Andrew Lo, a faculty
member at MIT,

1008
00:54:17,300 --> 00:54:20,520
thinks that you can
take machine learning

1009
00:54:20,520 --> 00:54:24,180
and embed it in even an
index fund, that you could

1010
00:54:24,180 --> 00:54:28,350
have inside of an index fund--

1011
00:54:28,350 --> 00:54:32,100
what Andy talks about is
called "the freakout factor,"

1012
00:54:32,100 --> 00:54:34,500
that we all have
different risk profiles.

1013
00:54:34,500 --> 00:54:37,890
When the stock market
goes out, down,

1014
00:54:37,890 --> 00:54:42,240
how likely are we to, quote, as
he says, "freak out" and want

1015
00:54:42,240 --> 00:54:43,530
to sell?

1016
00:54:43,530 --> 00:54:48,120
And that we could, based upon
other aspects of our lives,

1017
00:54:48,120 --> 00:54:50,280
put that into a
machine learning model

1018
00:54:50,280 --> 00:54:56,300
and have it automatically
adjust up and down.

1019
00:54:56,300 --> 00:54:59,210
Questions before I think
I'm going to go to the--

1020
00:54:59,210 --> 00:55:02,620
broadly the capital
markets piece?

1021
00:55:07,430 --> 00:55:08,710
ROMAIN: We have a question.

1022
00:55:08,710 --> 00:55:10,460
GARY GENSLER: So we've
sort of covered--

1023
00:55:10,460 --> 00:55:12,590
I'm pausing here for a
second, but we've sort of

1024
00:55:12,590 --> 00:55:16,190
covered the online
brokerage, robo advisor,

1025
00:55:16,190 --> 00:55:20,480
those two big pieces as captured
by Robinhood and Betterment,

1026
00:55:20,480 --> 00:55:25,790
might be the two companies
that are the leads of the pack,

1027
00:55:25,790 --> 00:55:26,990
but they're not alone.

1028
00:55:26,990 --> 00:55:30,000
And in the wealth
management side,

1029
00:55:30,000 --> 00:55:35,460
it's much more evenly split,
whereas in the mobile side,

1030
00:55:35,460 --> 00:55:37,910
in the mobile brokerage
side, Robinhood

1031
00:55:37,910 --> 00:55:44,667
seemed to really sort of
punched high and done well.

1032
00:55:44,667 --> 00:55:46,250
ROMAIN: The only
question we have here

1033
00:55:46,250 --> 00:55:47,900
is from the chat from Luke.

1034
00:55:47,900 --> 00:55:50,150
What kind of US
regulation is [INAUDIBLE]

1035
00:55:50,150 --> 00:55:52,820
the likes of Robinhood
to expand globally

1036
00:55:52,820 --> 00:55:57,665
or to attract
capital from abroad?

1037
00:55:57,665 --> 00:56:01,320
GARY GENSLER: Well, this
is a highly regulated

1038
00:56:01,320 --> 00:56:05,520
space in both the advisory
side and the brokerage side.

1039
00:56:05,520 --> 00:56:08,970
And Robinhood would certainly
need to be aware of that

1040
00:56:08,970 --> 00:56:15,120
and register appropriately as
a broker dealer here in the US.

1041
00:56:15,120 --> 00:56:17,870
And then on the asset
management side,

1042
00:56:17,870 --> 00:56:21,480
there's a little bit different
regulation but also regulated

1043
00:56:21,480 --> 00:56:22,350
here.

1044
00:56:22,350 --> 00:56:26,190
Attracting capital
from overseas,

1045
00:56:26,190 --> 00:56:28,680
if the capital is just
investing in Robinhood,

1046
00:56:28,680 --> 00:56:35,130
in one of their venture
rounds, BCD rounds,

1047
00:56:35,130 --> 00:56:38,430
because these are probably
private placements largely

1048
00:56:38,430 --> 00:56:40,800
speaking, other than
the usual regulations

1049
00:56:40,800 --> 00:56:44,040
around sanctions and
anti-money laundering,

1050
00:56:44,040 --> 00:56:45,520
it'd be straightforward.

1051
00:56:45,520 --> 00:56:50,630
If it's actually customers
using the platform,

1052
00:56:50,630 --> 00:56:53,670
then a Robinhood would have
to be aware of the regulations

1053
00:56:53,670 --> 00:56:56,880
in that jurisdiction, whether
it's the regulations in Europe

1054
00:56:56,880 --> 00:57:00,570
or in your home country,
Luke,-- in Korea, that they'd--

1055
00:57:00,570 --> 00:57:05,190
those customer-facing
applications, Robinhood Korea

1056
00:57:05,190 --> 00:57:08,340
would have to think, do they
register as a broker dealer

1057
00:57:08,340 --> 00:57:12,880
in Korea or Japan and the
like, as they are, in fact,

1058
00:57:12,880 --> 00:57:18,690
just a mobile application
for a traditional investment

1059
00:57:18,690 --> 00:57:19,440
brokerage firm?

1060
00:57:22,140 --> 00:57:26,570
So again trying to
capture capital markets.

1061
00:57:26,570 --> 00:57:31,060
Capital markets is a
vast array of activities

1062
00:57:31,060 --> 00:57:37,160
from accessing capital to
trading platforms and the like.

1063
00:57:37,160 --> 00:57:39,700
And this slide
from McKinsey just

1064
00:57:39,700 --> 00:57:42,045
captures an earlier
stage of, where

1065
00:57:42,045 --> 00:57:44,340
is FinTech in each of these?

1066
00:57:44,340 --> 00:57:46,690
And I'm not going to go
through each of these buckets,

1067
00:57:46,690 --> 00:57:52,780
but part of why I have this is
it's so many little buckets.

1068
00:57:52,780 --> 00:57:55,580
We talked about two
on the retail side.

1069
00:57:55,580 --> 00:57:58,510
There are crowdfunding
platforms, literally platforms

1070
00:57:58,510 --> 00:58:01,210
that help companies raise money.

1071
00:58:01,210 --> 00:58:04,480
There's trade execution, and
I'm going to talk about a couple

1072
00:58:04,480 --> 00:58:07,600
in a minute,
decentralized trading

1073
00:58:07,600 --> 00:58:11,860
platforms like cryptocurrencies,
but also centralized trading

1074
00:58:11,860 --> 00:58:13,420
platforms and cryptocurrencies.

1075
00:58:13,420 --> 00:58:16,180
But even in the last
few years, a firm

1076
00:58:16,180 --> 00:58:20,200
called IEX is a startup
in trade execution.

1077
00:58:20,200 --> 00:58:23,020
It's a new trading platform.

1078
00:58:23,020 --> 00:58:25,580
There's post-trade services.

1079
00:58:25,580 --> 00:58:28,630
There's a lot of
infrastructure and operations.

1080
00:58:28,630 --> 00:58:32,830
The capital markets are a vast
multi-trillion dollar business

1081
00:58:32,830 --> 00:58:36,470
globally in terms of revenues.

1082
00:58:36,470 --> 00:58:40,590
So I'm just going to
quickly touch upon some

1083
00:58:40,590 --> 00:58:43,180
in these next couple of slides.

1084
00:58:43,180 --> 00:58:46,300
You can see, I picked
some dozen or so firms

1085
00:58:46,300 --> 00:58:49,880
that were just ones I kind
of like to watch and follow.

1086
00:58:49,880 --> 00:58:54,040
We can take any questions
about each of these,

1087
00:58:54,040 --> 00:58:57,672
but there are a number of them
in the wealth management space.

1088
00:58:57,672 --> 00:59:00,130
And one of the things in wealth
management we talked about,

1089
00:59:00,130 --> 00:59:04,060
like Betterment, is
facing the retail public.

1090
00:59:04,060 --> 00:59:07,420
But there are startups that are
in the wealth management space

1091
00:59:07,420 --> 00:59:09,220
facing financial advisors.

1092
00:59:09,220 --> 00:59:13,440
These tens of thousands
of financial advisors

1093
00:59:13,440 --> 00:59:15,750
want better software.

1094
00:59:15,750 --> 00:59:18,720
And Addepar and a
number of others

1095
00:59:18,720 --> 00:59:22,560
are actually platforms for
the financial advisors,

1096
00:59:22,560 --> 00:59:26,100
that financial advisor that's
trying to build a business

1097
00:59:26,100 --> 00:59:31,250
wants software and access
to the capital market.

1098
00:59:31,250 --> 00:59:35,280
So it's an interface
between the two.

1099
00:59:35,280 --> 00:59:42,560
There's a bunch that are in the
area of collateral management

1100
00:59:42,560 --> 00:59:46,220
and infrastructure, CloudMargin.

1101
00:59:46,220 --> 00:59:49,790
Literally, collateral
management means the collateral

1102
00:59:49,790 --> 00:59:52,580
that you're moving
on derivatives

1103
00:59:52,580 --> 00:59:55,070
in the institutional
market or collateral

1104
00:59:55,070 --> 00:59:58,700
that you're moving even
as it relates to loans.

1105
00:59:58,700 --> 01:00:01,520
And why not start
a platform that

1106
01:00:01,520 --> 01:00:03,620
might be a little better
for collateral management

1107
01:00:03,620 --> 01:00:07,630
and take some of the back
office cost out of it?

1108
01:00:07,630 --> 01:00:09,260
And not to be outdone,
you could have

1109
01:00:09,260 --> 01:00:12,500
digital fixed-income brokers
as well as equity brokers.

1110
01:00:12,500 --> 01:00:15,590
What we were talking about
earlier was the stock market

1111
01:00:15,590 --> 01:00:19,010
and this company
called Elephant.

1112
01:00:19,010 --> 01:00:22,790
I mentioned IEX started in 2012.

1113
01:00:22,790 --> 01:00:25,980
It's to be a competitive
stock market to NASDAQ,

1114
01:00:25,980 --> 01:00:30,860
New York Stock Exchange
started by a bunch of buy side

1115
01:00:30,860 --> 01:00:34,270
institutions, for instance.

1116
01:00:34,270 --> 01:00:36,550
And sometimes,
it's just research.

1117
01:00:36,550 --> 01:00:40,650
PitchBook and others
like PitchBook

1118
01:00:40,650 --> 01:00:43,380
put together a
remarkable data base

1119
01:00:43,380 --> 01:00:48,930
on the financial business of
venture capital, for instance.

1120
01:00:48,930 --> 01:00:52,650
So it could be a lot
of different spaces.

1121
01:00:52,650 --> 01:00:56,220
Back to thinking about the
different aspects of capital

1122
01:00:56,220 --> 01:01:00,972
markets, crowdfunding
platforms, trade execution,

1123
01:01:00,972 --> 01:01:04,220
the post-trade side of it.

1124
01:01:04,220 --> 01:01:07,580
I don't do this to be like a
full course on capital markets,

1125
01:01:07,580 --> 01:01:12,740
but it's to open your
thinking to it's not just

1126
01:01:12,740 --> 01:01:14,360
the retail interface.

1127
01:01:14,360 --> 01:01:19,700
It's not just using a mobile
phone, good data, good user

1128
01:01:19,700 --> 01:01:21,780
delivery, and lower cost.

1129
01:01:21,780 --> 01:01:25,480
And that's really the
Robinhood, Betterment side.

1130
01:01:25,480 --> 01:01:28,840
It's also a lot of taking
the paper flows out

1131
01:01:28,840 --> 01:01:33,340
of it, old processes
out of the back office,

1132
01:01:33,340 --> 01:01:37,390
and trying to provide a
service to the capital

1133
01:01:37,390 --> 01:01:38,860
markets in a better way.

1134
01:01:42,040 --> 01:01:43,015
Romain, any--

1135
01:01:45,985 --> 01:01:47,835
ROMAIN: Any hands raised?

1136
01:01:47,835 --> 01:01:49,335
Anyone has a question
on this topic?

1137
01:01:52,310 --> 01:01:52,810
No.

1138
01:01:52,810 --> 01:01:53,795
I think we can move on.

1139
01:01:53,795 --> 01:01:56,170
GARY GENSLER: Let me just
close out crypto markets a bit.

1140
01:01:56,170 --> 01:01:59,150
And some of you take the
crypto finance course,

1141
01:01:59,150 --> 01:02:00,970
so it may be a little
bit repetitive.

1142
01:02:00,970 --> 01:02:03,640
But let me just say, one
thing that's interesting

1143
01:02:03,640 --> 01:02:07,570
is this crypto
market came along.

1144
01:02:07,570 --> 01:02:10,386
Is there a question here?

1145
01:02:10,386 --> 01:02:12,300
ROMAIN: Luke has
his hand raised.

1146
01:02:12,300 --> 01:02:15,140
GARY GENSLER: Let me hold Luke
because he's had a lot here.

1147
01:02:15,140 --> 01:02:17,130
So let me just say
something on crypto markets,

1148
01:02:17,130 --> 01:02:20,340
and then we'll definitely
take Luke's question.

1149
01:02:20,340 --> 01:02:26,020
But the crypto markets came
along about a dozen years ago.

1150
01:02:26,020 --> 01:02:29,850
And by an early stage of these
markets, somebody said, how

1151
01:02:29,850 --> 01:02:32,630
can you buy and sell Bitcoin?

1152
01:02:32,630 --> 01:02:36,470
And they created exchanges,
a new form of exchange,

1153
01:02:36,470 --> 01:02:39,140
not for equities,
not for bonds, not

1154
01:02:39,140 --> 01:02:41,930
for foreign currencies
or Fiat currencies,

1155
01:02:41,930 --> 01:02:43,490
but cryptocurrencies.

1156
01:02:43,490 --> 01:02:47,270
And these exchanges act
as agents matching buyers

1157
01:02:47,270 --> 01:02:51,100
and sellers like
traditional exchanges,

1158
01:02:51,100 --> 01:02:53,110
but they also act
as market makers.

1159
01:02:53,110 --> 01:02:56,590
We talked earlier about
capturing bid-ask spread.

1160
01:02:56,590 --> 01:02:59,620
These exchanges could also
buy and sell from customers.

1161
01:02:59,620 --> 01:03:01,780
Not all of them
do, but they could.

1162
01:03:01,780 --> 01:03:04,210
Traditional exchanges did not.

1163
01:03:04,210 --> 01:03:07,480
And they also acted as a
custody and held your funds.

1164
01:03:07,480 --> 01:03:11,320
And even to this day, if you
trade on a crypto exchange,

1165
01:03:11,320 --> 01:03:14,560
you're moving your
asset through the use

1166
01:03:14,560 --> 01:03:17,630
of what's called a private key.

1167
01:03:17,630 --> 01:03:21,050
But you're moving your asset
to the crypto exchange,

1168
01:03:21,050 --> 01:03:22,430
and they're the custody.

1169
01:03:22,430 --> 01:03:25,340
They're the custodian.

1170
01:03:25,340 --> 01:03:28,290
The public has direct access.

1171
01:03:28,290 --> 01:03:29,900
And this is a very
different model

1172
01:03:29,900 --> 01:03:31,310
than traditional exchanges.

1173
01:03:31,310 --> 01:03:32,810
And the question
will be, will this

1174
01:03:32,810 --> 01:03:36,050
come to traditional markets?

1175
01:03:36,050 --> 01:03:38,950
And that's why I wanted
to focus on this minute.

1176
01:03:38,950 --> 01:03:42,760
In traditional markets built
upon a business model that's

1177
01:03:42,760 --> 01:03:46,000
multiple centuries
old, you and I

1178
01:03:46,000 --> 01:03:49,000
are not members directly of
the New York Stock Exchange.

1179
01:03:49,000 --> 01:03:51,530
We have to go through somebody
to get to the New York Stock

1180
01:03:51,530 --> 01:03:52,030
Exchange.

1181
01:03:52,030 --> 01:03:53,283
That's called a broker.

1182
01:03:53,283 --> 01:03:55,450
It's called a member of the
New York Stock Exchange,

1183
01:03:55,450 --> 01:03:59,260
or the London Stock Exchange,
or the Shanghai Stock Exchange.

1184
01:03:59,260 --> 01:04:02,560
But in these markets,
in these crypto markets

1185
01:04:02,560 --> 01:04:05,980
everybody can access
directly the markets.

1186
01:04:05,980 --> 01:04:08,380
The markets actually,
interestingly,

1187
01:04:08,380 --> 01:04:16,362
have to have a much more robust
API for the retail public.

1188
01:04:16,362 --> 01:04:18,570
The New York Stock Exchange
and London Stock Exchange

1189
01:04:18,570 --> 01:04:23,310
have to have a robust API,
application program interface,

1190
01:04:23,310 --> 01:04:24,540
for institutions.

1191
01:04:24,540 --> 01:04:28,540
And it has to be very high
volume, very resilient.

1192
01:04:28,540 --> 01:04:30,960
But it can be
limited to hundreds

1193
01:04:30,960 --> 01:04:33,870
or, at most, a couple
thousands of users

1194
01:04:33,870 --> 01:04:37,030
even if the volumes are high.

1195
01:04:37,030 --> 01:04:40,180
These exchanges have to be
open to millions of people

1196
01:04:40,180 --> 01:04:43,540
from their home laptops
and mobile phones--

1197
01:04:43,540 --> 01:04:47,410
a very different architecture
where it's disintermediated

1198
01:04:47,410 --> 01:04:48,520
the broker dealers.

1199
01:04:48,520 --> 01:04:52,810
And the question I have, which
is unanswerable right now,

1200
01:04:52,810 --> 01:04:55,180
will this be something
moving forward?

1201
01:04:55,180 --> 01:04:58,980
Will we see a
direct access model

1202
01:04:58,980 --> 01:05:01,090
at any exchange
around the globe,

1203
01:05:01,090 --> 01:05:03,400
or will we stay in the
intermediated access?

1204
01:05:03,400 --> 01:05:05,140
There's a lot of
regulatory reasons

1205
01:05:05,140 --> 01:05:07,710
we'd stay in the
intermediated access.

1206
01:05:07,710 --> 01:05:10,210
There's some competitive
reasons brokers wouldn't want

1207
01:05:10,210 --> 01:05:13,300
to have folks going directly.

1208
01:05:13,300 --> 01:05:15,790
But on the other
hand, the technology

1209
01:05:15,790 --> 01:05:19,870
now exists that you
could go directly.

1210
01:05:19,870 --> 01:05:24,550
And so these markets, by the
way, are not well regulated.

1211
01:05:24,550 --> 01:05:28,628
And they're rife with fraud,
and scams, and manipulation.

1212
01:05:28,628 --> 01:05:29,920
So I just want to mention that.

1213
01:05:29,920 --> 01:05:32,470
I see a few hands in
addition to Luke's hand.

1214
01:05:32,470 --> 01:05:33,865
So maybe we should pause.

1215
01:05:33,865 --> 01:05:35,846
ROMAIN: Yes, Carlos?

1216
01:05:35,846 --> 01:05:37,910
GARY GENSLER: And we
have to get Luke's, too.

1217
01:05:37,910 --> 01:05:39,425
But, Carlos, all right.

1218
01:05:39,425 --> 01:05:41,430
AUDIENCE: So what do
you think would happen

1219
01:05:41,430 --> 01:05:45,210
if the big banks started holding
more crypto on their balance

1220
01:05:45,210 --> 01:05:45,870
sheets, right?

1221
01:05:45,870 --> 01:05:49,350
If they start acting as market
makers in crypto markets,

1222
01:05:49,350 --> 01:05:52,860
then would it-- for example,
under current regulation,

1223
01:05:52,860 --> 01:05:55,110
would this asset go
under Dodd-Frank as well

1224
01:05:55,110 --> 01:05:56,940
and therefore limit
proprietary trading,

1225
01:05:56,940 --> 01:05:59,360
or do you think it
would be different?

1226
01:05:59,360 --> 01:06:02,750
GARY GENSLER: So there's a
lot of questions in there.

1227
01:06:02,750 --> 01:06:05,330
The large banks
around the globe today

1228
01:06:05,330 --> 01:06:09,620
have not been active
in this asset class.

1229
01:06:09,620 --> 01:06:12,410
The asset class is
about $225 billion

1230
01:06:12,410 --> 01:06:15,960
as of this morning,
which is small.

1231
01:06:15,960 --> 01:06:19,710
The worldwide capital markets
are between $300 trillion

1232
01:06:19,710 --> 01:06:24,410
and $400 trillion when you add
equities and bonds worldwide

1233
01:06:24,410 --> 01:06:26,100
and debt.

1234
01:06:26,100 --> 01:06:28,830
So this is quite
small in comparison.

1235
01:06:28,830 --> 01:06:32,430
But for regulatory reasons and
for customer interest reasons,

1236
01:06:32,430 --> 01:06:34,190
the large banks
haven't really gone in.

1237
01:06:34,190 --> 01:06:36,500
If they were to get in, to
answer answer your question

1238
01:06:36,500 --> 01:06:39,170
on the regulatory
side, yes, it would

1239
01:06:39,170 --> 01:06:42,830
be just like any other asset
they have, any commodity.

1240
01:06:42,830 --> 01:06:44,930
So if you hold
Bitcoin, you might

1241
01:06:44,930 --> 01:06:50,240
think if you're JP Morgan,
I'm now holding it.

1242
01:06:50,240 --> 01:06:51,530
I'm Barclays bank.

1243
01:06:51,530 --> 01:06:52,670
I'm now holding it.

1244
01:06:52,670 --> 01:06:53,960
What regulations?

1245
01:06:53,960 --> 01:06:56,600
If it's Bitcoin, it would be
very similar to the regulations

1246
01:06:56,600 --> 01:06:58,880
around holding gold or silver.

1247
01:06:58,880 --> 01:07:04,130
Maybe you would hold gold or
silver futures or contracts,

1248
01:07:04,130 --> 01:07:06,150
but holding gold, silver.

1249
01:07:06,150 --> 01:07:09,350
And to the extent
that there was a--

1250
01:07:09,350 --> 01:07:11,840
you mentioned Dodd-Frank.

1251
01:07:11,840 --> 01:07:14,390
If there were any rules and
regulations out of Dodd-Frank

1252
01:07:14,390 --> 01:07:16,890
that were generally applicable
to trading accounts,

1253
01:07:16,890 --> 01:07:19,550
it would be applicable to
these trading accounts.

1254
01:07:19,550 --> 01:07:23,630
The one big challenge for
big institutions is custody.

1255
01:07:23,630 --> 01:07:26,090
Custody has been a challenge.

1256
01:07:26,090 --> 01:07:30,050
And what's interesting is
Fidelity, one of the largest

1257
01:07:30,050 --> 01:07:31,970
asset managers in
the world, started

1258
01:07:31,970 --> 01:07:35,420
something called Fidelity
Digital Asset holding--

1259
01:07:35,420 --> 01:07:37,400
I believe that's the name--

1260
01:07:37,400 --> 01:07:40,400
where they are providing
a custody solution.

1261
01:07:40,400 --> 01:07:43,610
Coinbase, which is a
large crypto exchange,

1262
01:07:43,610 --> 01:07:45,530
has a custody solution.

1263
01:07:45,530 --> 01:07:48,440
The owner of the New York
Stock Exchange Intercontinental

1264
01:07:48,440 --> 01:07:51,860
Exchange started
Bakkt, B-A-K-K-T.

1265
01:07:51,860 --> 01:07:56,360
Bakkt is trading crypto markets
but also providing a custody

1266
01:07:56,360 --> 01:07:57,550
solution.

1267
01:07:57,550 --> 01:07:59,810
And why I'm focusing
on custody is

1268
01:07:59,810 --> 01:08:04,250
one of the challenges in
this small asset class is

1269
01:08:04,250 --> 01:08:06,800
how to hold the digital asset.

1270
01:08:06,800 --> 01:08:11,750
In the traditional
markets, there

1271
01:08:11,750 --> 01:08:17,960
are centralized
organizations that

1272
01:08:17,960 --> 01:08:20,510
operate as
clearinghouses but also

1273
01:08:20,510 --> 01:08:22,550
as the ultimate
digital custodian.

1274
01:08:22,550 --> 01:08:25,729
In the US, it's called DTCC.

1275
01:08:25,729 --> 01:08:28,490
And other countries
have different names.

1276
01:08:28,490 --> 01:08:34,220
But how do you make sure that,
in essence, the cryptocurrency

1277
01:08:34,220 --> 01:08:35,689
isn't stolen?

1278
01:08:35,689 --> 01:08:40,880
These crypto exchanges have had
lots of stolen cryptocurrency

1279
01:08:40,880 --> 01:08:42,380
because once you
steal what's called

1280
01:08:42,380 --> 01:08:46,100
the private key,
effectively the password,

1281
01:08:46,100 --> 01:08:49,740
you have the digital asset.

1282
01:08:49,740 --> 01:08:51,862
What was Luke's
question earlier?

1283
01:08:51,862 --> 01:08:54,550
AUDIENCE: Speaking
of cryptocurrency,

1284
01:08:54,550 --> 01:08:58,165
I know you teach in H4, the
cryptocurrency class, which

1285
01:08:58,165 --> 01:08:59,540
I don't have the
luxury of taking

1286
01:08:59,540 --> 01:09:01,529
but [INAUDIBLE]
have the opportunity

1287
01:09:01,529 --> 01:09:05,520
to take next semester
or next year.

1288
01:09:05,520 --> 01:09:08,649
My question is then, is
that because of the security

1289
01:09:08,649 --> 01:09:12,420
that Robinhood does
not implement customers

1290
01:09:12,420 --> 01:09:16,500
the option to buy US
equity with Bitcoin

1291
01:09:16,500 --> 01:09:18,029
overseas, because
they would allow

1292
01:09:18,029 --> 01:09:21,180
them to jump over its
respective nations

1293
01:09:21,180 --> 01:09:23,970
ethics regulations, i.e.

1294
01:09:23,970 --> 01:09:26,069
Chinese customers
or Korean customers

1295
01:09:26,069 --> 01:09:27,662
who want to invest in ONG--

1296
01:09:27,662 --> 01:09:28,370
GARY GENSLER: I--

1297
01:09:28,370 --> 01:09:29,990
AUDIENCE: --buy low,
sell high with Bitcoin?

1298
01:09:29,990 --> 01:09:30,240
GARY GENSLER: Yes, Luke.

1299
01:09:30,240 --> 01:09:31,620
I'm going to answer briefly.

1300
01:09:31,620 --> 01:09:36,240
I think the regulation for any
one platform like Robinhood

1301
01:09:36,240 --> 01:09:40,260
around cryptocurrencies
is a bit challenging

1302
01:09:40,260 --> 01:09:45,600
because in many
jurisdictions, we have not

1303
01:09:45,600 --> 01:09:47,160
gotten to a place
where you can feel

1304
01:09:47,160 --> 01:09:51,689
confident we have a
robust investor protection

1305
01:09:51,689 --> 01:09:53,640
regime on cryptocurrency.

1306
01:09:53,640 --> 01:09:56,070
And in fact, in
most jurisdictions,

1307
01:09:56,070 --> 01:09:57,570
it's pretty shaky.

1308
01:09:57,570 --> 01:10:01,590
It's pretty still undeveloped.

1309
01:10:01,590 --> 01:10:03,570
I'm talking about
investor protection.

1310
01:10:03,570 --> 01:10:06,180
So Robinhood may
have made a choice,

1311
01:10:06,180 --> 01:10:08,640
look, if you're going
to trade, you're

1312
01:10:08,640 --> 01:10:14,430
going to trade Fiat currency
versus buying and selling

1313
01:10:14,430 --> 01:10:15,330
stocks.

1314
01:10:15,330 --> 01:10:17,850
And that would be an
appropriate business decision

1315
01:10:17,850 --> 01:10:20,970
that they made until
there is a much more

1316
01:10:20,970 --> 01:10:25,920
robust and satisfactory
both investor protection

1317
01:10:25,920 --> 01:10:30,180
and also guarding
against illicit activity.

1318
01:10:30,180 --> 01:10:32,820
Cryptocurrency started
and emanated out

1319
01:10:32,820 --> 01:10:38,700
of a little bit of an off
the grid cypherpunk movement.

1320
01:10:38,700 --> 01:10:40,130
And I use the word accurately.

1321
01:10:40,130 --> 01:10:43,740
Cypherpunk was a mailing
list that Satoshi Nakamoto

1322
01:10:43,740 --> 01:10:47,880
uploaded that eight-page
paper on 12 years ago.

1323
01:10:47,880 --> 01:10:53,650
And though you can track
Bitcoin transactions,

1324
01:10:53,650 --> 01:10:56,590
a lot of use of Bitcoin
and other cryptocurrencies

1325
01:10:56,590 --> 01:11:01,210
has been to avoid the
censorship and the watchful eyes

1326
01:11:01,210 --> 01:11:02,920
of the official sector.

1327
01:11:02,920 --> 01:11:05,770
And so I would imagine--

1328
01:11:05,770 --> 01:11:07,540
I've not talked to
Robinhood-- that they

1329
01:11:07,540 --> 01:11:09,170
would be aware of that.

1330
01:11:09,170 --> 01:11:12,700
And they would just feel
as both a legal matter

1331
01:11:12,700 --> 01:11:15,640
and for reputational
reasons, better not

1332
01:11:15,640 --> 01:11:17,800
to go there unless
there is a more

1333
01:11:17,800 --> 01:11:21,560
robust support for that system.

1334
01:11:21,560 --> 01:11:24,060
ROMAIN: And Nadia had
her hand up for a while.

1335
01:11:24,060 --> 01:11:27,917
GARY GENSLER: [INAUDIBLE]

1336
01:11:27,917 --> 01:11:29,602
ROMAIN: Nadia?

1337
01:11:29,602 --> 01:11:30,800
AUDIENCE: Yeah.

1338
01:11:30,800 --> 01:11:34,280
I actually have two questions
on wealth management FinTech.

1339
01:11:34,280 --> 01:11:36,190
So the first
question, what do you

1340
01:11:36,190 --> 01:11:39,580
think more important for wealth
management FinTech to grow?

1341
01:11:39,580 --> 01:11:41,350
Is it the inclusion
part, meaning

1342
01:11:41,350 --> 01:11:45,160
like low minimum deposit,
or the user experience part?

1343
01:11:45,160 --> 01:11:47,260
That is for the first questions.

1344
01:11:47,260 --> 01:11:49,990
And for the second
question, given the growth

1345
01:11:49,990 --> 01:11:53,170
of past management
feature like Wealthfront,

1346
01:11:53,170 --> 01:11:56,890
do you think now customers
prefer a simpler product rather

1347
01:11:56,890 --> 01:11:58,907
than more complicated product?

1348
01:11:58,907 --> 01:12:00,740
GARY GENSLER: So there's
a lot there, Nadia.

1349
01:12:00,740 --> 01:12:02,540
I'm not sure what--

1350
01:12:02,540 --> 01:12:07,430
but I think that the Betterments
and the robo advisors,

1351
01:12:07,430 --> 01:12:09,080
I can't separate the two.

1352
01:12:09,080 --> 01:12:11,570
When you're saying, is it
more about user interface,

1353
01:12:11,570 --> 01:12:17,210
is it more about pricing, maybe
somebody better than I could,

1354
01:12:17,210 --> 01:12:18,680
but I think it's about both.

1355
01:12:18,680 --> 01:12:20,030
I really do think that.

1356
01:12:20,030 --> 01:12:27,280
I think that they have provided
a lower price point, which

1357
01:12:27,280 --> 01:12:28,550
is really important.

1358
01:12:28,550 --> 01:12:31,120
But if it were only that,
if somebody had just

1359
01:12:31,120 --> 01:12:33,820
put out an advertisement,
I'm going to give you

1360
01:12:33,820 --> 01:12:36,700
wealth advice for a
quarter of a point,

1361
01:12:36,700 --> 01:12:38,740
I don't think you could
have gotten adoption.

1362
01:12:38,740 --> 01:12:41,260
I think you had to have
that user interface.

1363
01:12:41,260 --> 01:12:46,910
And I think the two of them
together are really important.

1364
01:12:46,910 --> 01:12:50,290
So it's not just doing
something cheaper,

1365
01:12:50,290 --> 01:12:52,090
because a lot of people
could say, listen,

1366
01:12:52,090 --> 01:12:55,090
I'll give you wealth advice
for a quarter of a point.

1367
01:12:55,090 --> 01:12:58,450
I think the user experience--

1368
01:12:58,450 --> 01:13:00,310
these are very private matters.

1369
01:13:00,310 --> 01:13:02,890
Sometimes it's just
frankly a little easier.

1370
01:13:02,890 --> 01:13:06,970
It's interesting to just
go to a drop down menu,

1371
01:13:06,970 --> 01:13:10,310
answer some questions, feel
that I'm getting the advice,

1372
01:13:10,310 --> 01:13:13,060
feel that I'm, yes,
getting low-cost ETFs

1373
01:13:13,060 --> 01:13:14,710
and low-cost advisory fees.

1374
01:13:14,710 --> 01:13:18,200
But I think the user
experience goes hand in hand.

1375
01:13:18,200 --> 01:13:20,890
And I can't easily
separate them.

1376
01:13:20,890 --> 01:13:22,420
Let me just try to wrap up.

1377
01:13:22,420 --> 01:13:26,620
And then, Nadia, remind me the
second half of your question

1378
01:13:26,620 --> 01:13:28,840
as I wrap up, because I
want to make a-- we only

1379
01:13:28,840 --> 01:13:29,870
have about 3 minutes.

1380
01:13:29,870 --> 01:13:34,660
So I want to just make a point
beyond these crypto exchanges.

1381
01:13:34,660 --> 01:13:37,240
There's a bunch of crypto
lending and borrowing.

1382
01:13:37,240 --> 01:13:40,270
And why I raise this
is this market, just

1383
01:13:40,270 --> 01:13:42,430
like the capital markets,
is starting to say,

1384
01:13:42,430 --> 01:13:44,140
can I lend to crypto?

1385
01:13:44,140 --> 01:13:46,550
Can I borrow crypto?

1386
01:13:46,550 --> 01:13:48,530
And why would you do that?

1387
01:13:48,530 --> 01:13:50,480
Same reason in the
capital markets.

1388
01:13:50,480 --> 01:13:53,180
You lend and borrow
stock sometimes

1389
01:13:53,180 --> 01:13:55,670
because you want to buy
the stocks on margin.

1390
01:13:55,670 --> 01:13:57,200
Or sometimes you
lend it because you

1391
01:13:57,200 --> 01:14:01,410
need to borrow against your
assets to do something else.

1392
01:14:01,410 --> 01:14:04,160
So these markets are
developing that way,

1393
01:14:04,160 --> 01:14:05,990
but the thing that
I wanted to mention

1394
01:14:05,990 --> 01:14:08,570
was this question of
decentralized finance

1395
01:14:08,570 --> 01:14:11,170
versus centralized finance.

1396
01:14:11,170 --> 01:14:13,880
Centralized
traditional finance--

1397
01:14:13,880 --> 01:14:19,370
this is a slide that I created
in the last eight months--

1398
01:14:19,370 --> 01:14:22,130
has proprietary software,
central clearing,

1399
01:14:22,130 --> 01:14:24,230
all the attributes
that I list here.

1400
01:14:24,230 --> 01:14:28,100
The question is, is there
a market just like we

1401
01:14:28,100 --> 01:14:33,290
talked about in lending for peer
to peer decentralized finance?

1402
01:14:33,290 --> 01:14:37,190
And what we found in
LendingClub and other companies,

1403
01:14:37,190 --> 01:14:39,590
they really haven't
stayed decentralized.

1404
01:14:39,590 --> 01:14:41,630
They started with this
concept that we'll

1405
01:14:41,630 --> 01:14:44,090
be peers lending to peers.

1406
01:14:44,090 --> 01:14:46,940
And then what we found is
they've become more marketplace

1407
01:14:46,940 --> 01:14:48,050
platforms.

1408
01:14:48,050 --> 01:14:50,840
And platform economics
have taken over.

1409
01:14:50,840 --> 01:14:53,150
But there's been this
question, can there

1410
01:14:53,150 --> 01:14:57,770
be an open source software built
on blockchain technology that's

1411
01:14:57,770 --> 01:14:59,130
truly peer to peer?

1412
01:14:59,130 --> 01:15:02,420
And you will hear
this time and again.

1413
01:15:02,420 --> 01:15:05,270
It's a business
concept that I just

1414
01:15:05,270 --> 01:15:08,690
want to prepare you for,
decentralized finance

1415
01:15:08,690 --> 01:15:11,450
versus traditional
finance, usually used

1416
01:15:11,450 --> 01:15:14,150
in the context of
blockchain technology.

1417
01:15:14,150 --> 01:15:18,920
And the advocates say blockchain
technology facilitates--

1418
01:15:18,920 --> 01:15:21,770
we can get rid of the big banks.

1419
01:15:21,770 --> 01:15:23,570
That is what they might say.

1420
01:15:23,570 --> 01:15:26,060
That's what Satoshi
Nakamoto wrote

1421
01:15:26,060 --> 01:15:29,750
in some of the early emails
and so forth, that we

1422
01:15:29,750 --> 01:15:33,170
can disintermediate both
banks and central banks

1423
01:15:33,170 --> 01:15:36,770
around cryptocurrency
and the like.

1424
01:15:36,770 --> 01:15:38,600
That's the dream.

1425
01:15:38,600 --> 01:15:41,600
But the question is
whether network economics--

1426
01:15:41,600 --> 01:15:44,450
whether there's a reason in
capital markets and finance

1427
01:15:44,450 --> 01:15:47,810
that you have a hub and
spoke approach rather

1428
01:15:47,810 --> 01:15:49,370
than a decentralized approach.

1429
01:15:49,370 --> 01:15:52,160
When I say "hub and spoke,"
the New York Stock Exchange

1430
01:15:52,160 --> 01:15:55,460
or London Stock Exchange is
in the middle of the market,

1431
01:15:55,460 --> 01:15:58,470
that the banks, back to
Luke's earlier question,

1432
01:15:58,470 --> 01:16:02,090
are sitting there collecting
a net interest margin

1433
01:16:02,090 --> 01:16:06,110
and why LendingClub is moved
into a marketplace platform

1434
01:16:06,110 --> 01:16:08,270
rather than that peer to peer.

1435
01:16:08,270 --> 01:16:11,150
And so this debate and
this business concept

1436
01:16:11,150 --> 01:16:15,830
is a relatively important one,
and it basically goes well

1437
01:16:15,830 --> 01:16:17,735
beyond cryptocurrencies.

1438
01:16:17,735 --> 01:16:18,860
And I wanted to mention it.

1439
01:16:18,860 --> 01:16:22,640
But in cryptocurrencies-- and
this is my last little bit--

1440
01:16:22,640 --> 01:16:25,670
is that there are
DeFi platforms,

1441
01:16:25,670 --> 01:16:30,770
decentralized finance
where you can peer to peer

1442
01:16:30,770 --> 01:16:32,310
use a crypto exchange.

1443
01:16:32,310 --> 01:16:35,670
Binance, IDEX, Uniswap,
others basically say,

1444
01:16:35,670 --> 01:16:39,750
we're not going to have a
central exchange or, more

1445
01:16:39,750 --> 01:16:42,660
technically, a central
limit order book.

1446
01:16:42,660 --> 01:16:44,860
But Nadia and I could trade.

1447
01:16:44,860 --> 01:16:47,120
And later Nadia could
trade with Luke,

1448
01:16:47,120 --> 01:16:48,930
and Camillo could trade
with somebody else,

1449
01:16:48,930 --> 01:16:51,120
but it's not all centralized.

1450
01:16:51,120 --> 01:16:53,310
And similarly,
there's platforms--

1451
01:16:53,310 --> 01:16:55,770
Maker DAO, and
Compound, and Synthetix

1452
01:16:55,770 --> 01:16:57,240
are the three big ones--

1453
01:16:57,240 --> 01:17:00,540
that are trying to do that on
crypto lending and borrowing.

1454
01:17:00,540 --> 01:17:04,530
There is even prediction
marking markets

1455
01:17:04,530 --> 01:17:09,490
that are trying to say Nadia can
trade with Luke and make a bet.

1456
01:17:09,490 --> 01:17:12,390
Now, the regulatory environment
for these prediction markets

1457
01:17:12,390 --> 01:17:16,500
is highly challenged,
and they might

1458
01:17:16,500 --> 01:17:20,340
be doing things that are
not strictly within the law.

1459
01:17:20,340 --> 01:17:26,310
But these decentralized
markets are very small.

1460
01:17:26,310 --> 01:17:29,310
None of these projects
are really big.

1461
01:17:29,310 --> 01:17:31,440
But some of these projects
have a few billion

1462
01:17:31,440 --> 01:17:33,060
dollars in their
crypto lending and.

1463
01:17:33,060 --> 01:17:34,830
Borrowing some of
these exchanges

1464
01:17:34,830 --> 01:17:38,130
have a few hundred thousand
dollars a day of trading.

1465
01:17:38,130 --> 01:17:39,510
They're not big.

1466
01:17:39,510 --> 01:17:42,480
But back-- it raises
this central question

1467
01:17:42,480 --> 01:17:46,050
of traditional finance
versus decentralized finance.

1468
01:17:46,050 --> 01:17:50,040
And I just wanted to capture
that before we signed off

1469
01:17:50,040 --> 01:17:51,590
today.