How a former trader sold two companies for nearly $2 billion

Listen and subscribe to Stocks In Translation on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.

So far, 2024 has been an outlier year, with the S&P 500 hitting at least 41 new all-time highs, making it the index's best year since 1997.

In this episode of Stocks In Translation, Yahoo Finance's markets and data editor Jared Blikre and Yahoo Finance producer Sydnee Fried are joined by Tom Sosnoff, founder and CEO of tastylive and tastytrade.

Sosnoff, a veteran of the online brokerage industry, shares insights from his 20-year career as a pit trader on the Chicago Board Options Exchange. He also talks about his leap into entrepreneurship with thinkorswim, the company he sold to TD Ameritrade for $750 million, and his subsequent sale of tastytrade in 2021 for $1.1 billion.

When asked about the current market, the self-described contrarian suggests, “Maybe it’s a little frothy.” In a frothy market, prices rise rapidly due to speculation or investor excitement, often outpacing fundamental values. This can signal a potential market bubble.

The group goes on to discuss liquidity. “If something is liquid, it’s tradable, and it’s sufficient,” notes Sosnoff. “It's one of the great things about US markets is they're generally liquid across the board, you know, across the whole spectrum.”

Sosnoff also explains the relationship between volatility and risk. “In reality, when volatility goes up, the risk is less, not more… When volatility goes down, meaning when volatility contracts, the risk is greater,” adding. “It's the only true math equation in finance.”

When asked about the future of retail trading, Sosnoff suggests, “I think you're gonna see tokenization, we're gonna digitize everything. It's just a matter of time… “You'll be trading, you'd be able to trade virtually any product in a single currency anywhere in the world and clear it centrally.”

Twice a week, Stocks In Translation cuts through the market mayhem, noisy numbers and hyperbole to give you the information you need to make the right trade for your portfolio. You can find more episodes on our video hub or watch on your preferred streaming service.

This post was written by John Tejada.

Video Transcript

Welcome to Stocks and Translation.

I'm your host, Jared Blier, joined by the voice of the people.

As always, Sydney Freed, thank you for tuning in.

Uh Before we jump into the conversation, be sure to like, subscribe and comment on stocks in translation on Spotify, Apple Music, youtube, wherever you get the podcast.

And today we are welcoming Tom Sozo, a man who has been at the entrepreneurial for run of trading for decades uh from institutional to retail.

You might be trading with hi his Thinker Swim platform which he sold at TD Ameritrade back in 2009.

Uh these days, he is the Ceo of Tasty Live, which he also founded along with Tasty Trade and uh a ver a veritable me media mogul here.

I know you do uh daily market commentary which I've been watching.

And um I, you have some interesting ideas about the market and let me just recap.

We're full disclosure.

We're, we're recording this on the last day of September.

So the end of the third quarter stocks are up.

Um But we didn't really get that contrib contribution from NVIDIA, the chip stocks and so the r the rally broadened.

And what are you seeing in the markets right now?

I'm seeing a market that's um, well, again, remember I'm a little bit of a contrarian.

So you gotta be careful with me when you ask questions.

Um But I'm seeing a market that I maybe it's a little Frothy.

Little Frothy.

Can you define Frothy for our viewers?

Frothy to be fair?

Frothy just means that when you're a trader or an active participant in the markets, I think of Frothy as you have more like risk, velocity of risk to the downside than you do to the upside.

That's all it means to be fair.

I mean, this is the best year through September, I think we've seen since 97 in the S and P 500.

So it's an outlier.

It's doing even better than last year, which was a great year and last year we got that spurt to the end which really propelled things.

Uh but we're getting ahead of ourselves and we want to, uh we wanna tell everybody what is going to go on in this episode.

So our word of the day is liquidity.

We're gonna get to that definition in a second.

This episode is brought to you by the number 95 that is a percentage of trading that has moved off the floors of the exchanges to electronic trading and that's probably conservative.

And uh Tom we just got your big picture uh views on the market So I wanna get to liquidity here.

We've defined this before on the show.

And just as a refresher liquidity refers to how easily an asset can be quickly converted into cash without significantly affecting its market price.

And there are different orders based on liquidity.

You have market orders limit orders.

But just how do you think about liquidity?

I think about liquidity two ways.

I think about it as another word for efficiency, marketplace efficiency.

And I think about it um as we would define it as tradable.

OK.

So, so, so if something is liquid, it's tradable and it's efficient.

And when you're a customer, like I am like you are everybody um participate in the markets.

The most important thing is to, is to trade in liquid markets.

It's one of the great things about us markets is they're generally liquid across the board, you know, across the whole spectrum.

But um the, the few, let's call it, the top 200 underlying are very liquid.

I'm interested to know then your approach to market.

How do you select trades if you're not a technician?

What are you looking at before you, if you're looking at price, you can, you can, I mean, I'm a junkie.

So that, that, so you're immersed in the market.

You got a feel only every day for the last 40 some odd years.

But um but I would say that the first thing is some people will look at things like it's it's subjective price extreme.

So for example, you know, you think something is expensive or you think something's cheap because there is no way of actually defining expensive or cheap.

So it's subjective price extreme.

And then I'm I'm a little bit of a volatility freak.

So we measure everything on liquidity and levels of volatility.

It it volatility in relation to to itself.

So the volatility, for example, on Amazon, on Intel, on NVIDIA relative to itself, meaning that is it high for that particular, that particular underlying?

Right?

Sometimes when I think about the word volatility, I also think about the word risk.

What does risk mean to you?

No risk is risk means opportunity.

So there there's no.

So volatility is is a fear gauge, right?

Essentially, I mean volatility indexes are roughly but volatility, the definition of volatility is expected move.

So when volatility goes up, the expected move is greater.

When volatility get contracts, the expected move is less.

And in reality, when volatility goes up, the risk is less, not more.

But when it goes down, when volatility goes down, meaning when volatility contracts, the risk is greater because volatility is the only indicator.

It it's the only true math equation in finance.

So in other words, price is not mean reverting, but volatility is mean reverting definition by the way, by the way is constructed, um can you tell us about your history?

You're you're kind of a serial entrepreneur here uh we talked about think or swim is a platform.

Um I happened to be using Trade Station back in the early two thousands.

And so that was mine, but it was um I'm very familiar with it and it's, it's um why did you get into this business in the first place?

Was it about democratizing finance?

Where, why, what were you trying to do?

Democratizing finance?

I think it's a relatively recent uh term invented by millennials for this.

But I, I didn't understand that term.

I mean, I didn't even know what entrepreneurship was.

Um uh I was a pit trader in Chicago in on the, in the S and P pit for about 20 years from 1981 to 1999 2000.

And as the, and I basically traded one product my entire career and I was a successful pitch trader.

Let's just leave it there.

And I traded index products.

And towards, as we're getting closer to 2000, the market was starting to go a lot more was going electronic and I could sense that we were gonna lose market share standing there.

We, we were, we were dinosaurs, pit traders were essentially dinosaurs.

And so I had this idea to build uh thinkers swim.

And we myself and my partner Scott Sheridan, we took um uh all the money we had made in the last, you know, 15 or 20 years before that.

And we rolled it into an idea a crazy idea called think or swim.

And we were, we, there was no such intent to democratize anything.

What we thought was, we had a certain level of know how about options that hadn't been popularized.

And we took that basically, we built technology around it and took it to the street and, you know, I mean, everybody told us we were crazy and it actually worked.

And so we built an amazing company.

So let me ask you, you've exited uh companies before including think or swim.

How long do you expect to hold on to tasty?

We sold tasty tasty.

But you're still in tasty.

Oh, yeah, it's the same thing.

11 is the, yeah, we, we sold Thinkers in 2009.

We were a public trade company and we sold it to TD Meri Trade for $750 million.

And then in 2021 we sold tasty for 1.1.

How do you make a decision to sell?

You get lots of buyers at the same time and then you don't have a choice.

You know, it's, it's a great question because as an entrepreneur, like, you know, first of all, it's a high class problem.

OK.

So let's not, it's a good problem to have.

And most times nobody ever wanted to touch us like we were like the black sheep of the industry.

And then all of a sudden when, when, when people get excited about you because they, they come after you whatever it is.

Somehow everybody knows about it.

I don't know how the investment banking world works.

But when we, when we built Dickerson, we had four offers at the same time.

And when we built Tasty, we had five at the same, but it took 10 years.

So we built it in 1999 2009, we got our first offer and then there was, you know, there was four, about four offers and maybe five and tasty, there was five offers and that took 10 years too.

We built it in 2011 in 2021.

I want to ask about retail trading.

We've seen just a tremendous change just in the dynamics of it.

And now we have more options, uh more zero day uh op options available just in general.

How, how do you think the game has changed?

And do you think it's affected the institutional side?

Where are things pretty much the way they were before the pandemic?

Um I mean, there has been some normalization in the industry but to be fair, I really don't care about the institutional side.

I mean, I'm an advocate for retail investing and for, you know, self direct investors, do it yourself, investors.

We don't even support institutional traders, we don't even take them on our platform so we could care less.

Um The industry itself has, has grown leaps and bounds because one, we popularized, you know, derivatives and the cool thing about derivatives.

It's just about capital efficiency.

There is no difference between trading stocks options or futures.

It's just about how much capital does it take to do this?

Virtually the same thing.

Yeah.

And just for the viewers, uh derivatives can, can include stock options.

They can include derivatives based on which our futures um contracts for difference contracts.

I guess they have contracts for difference, not legal in the US, not no, but those that's, that would be for a UK audience that would and that um just in general, like how do you see the options for retail traders expanding maybe into the future?

Do you think anything new is coming down?

Sure.

I think you're gonna see, um you know, we've had some really important transformational periods like, you know, obviously 2020 2021.

Um But I think you're going to see a broadening of underlying that you can trade.

Like I think you're going to see everything from event based, obviously politics, but eventually sports, I think you're gonna see tokenization.

We're gonna digitize everything.

It's just a matter of time and um we're gonna tokenize everything.

So you'll be trading, you'll be able to trade virtually any product in a single currency anywhere in the world and clear it centrally.

So um not, doesn't have to necessarily be cleared, you know, it doesn't even, it might not even be have to be cleared on a Blockchain.

So I think all that stuff that's really fascinating.

Does, do there need to be a lot of legal and regulatory changes?

Do we need changes in state betting laws or do we have the framework necessary to implement sports possibly need changes in state betting laws?

But nothing else.

And I think that what you're seeing now is that in, in the world of options we call rate of change gamma and the rate of change in just everything in the world now is lightning fast compared to the way it was and probably going up.

So what used to take maybe five or 10 years to organically change is now changing almost instantly.

So, you know, the thought of, oh, could we really get to tokenization in some way?

And the answer is, well, 10 years ago, I would have said it would take 20 years.

Now, I'm thinking, you know, it can happen in three months.

Are there risks in that moving so fast now?

There's no risk because the only risk is not doing it because somebody else will do it.

Like in the US, we control this massive pool of liquidity, which is why the whole world trades here.

And it's why, you know, it's why we're here doing this.

That's why every, we have so much stuff to talk about.

That's why you have all these different stocks.

We have a lot to talk about.

I mean, we have, you know, it's why our marketplace is, you know, bigger than the rest of the world multiple times over.

And we don't wanna fall behind.

We don't wanna be disrupted by somebody else even though nobody's close.

And so the answer is II, I think it happens fast.

I think it happens here.

Let's leave it there.

Want to bring that up in a minute, but we need to take a short break coming up.

We're gonna talk about the great migration and trading off of the floor to server racks plus uh who wore it better?

That will get your active versus passive juices going.

And we are back this episode brought to you by the number 95 which is the percentage of trading that is now conducted online and there are pros and cons as with anything.

So big pro is speed um for some a big con is speed but also you don't have a human pilot with the um with electronic trading.

That's something that I hear on the floor sometimes from some of the old school traders there.

Do we need any of the remnants from the old system or have we just demonstrated since the pandemic that we can be fully electronic now?

Oh, we don't need any of the old remnants unless you need somebody to go grab lunch for you.

I mean, this is, we do not need to go backwards one bit.

There is no risk in speed, there is no risk in in fully there.

We don't need what we had before.

If you're thinking about negotiated orders and stuff like that again, you know, our concern should not be, you know, what some in, you know, worrying about some institution getting a penny worse on their fill.

Our concern should be, you know, a retail investor getting, you know, down to the 10th of pennies and we're there.

And so I think that no, faster, faster, bigger, stronger.

Um It's all great for the customer.

What about the flash crash?

Is that just because the system has not been implemented?

Um as well as it could have been, we've seen these throughout the market in various forms over the years, not only in indices but individual stocks.

So is that just because we did a bad job of implementing things?

Remember you're talking 2010, but we're still seeing some remnants of that.

You're the flash crash was 2010 and the technology in 2010 could not support the amount of data that, that we can support today.

It's, it's, it's, it's not a comparison.

There's no comparison.

And um now are there gonna be times when legacy systems fail?

Yeah, and that's, it's really incumbent upon um retail brokerage firms and institutional firms to build better technology.

It's inexcusable today that the money that they spend more money on marketing, they spend on building technology.

And so, you know, our philosophy is very different.

That's why we don't have any issues when there's, when there's a, when there's a tech problem in most other firms.

But I really think that it's inexcusable now and the firms should be able to handle, you know, whatever, whatever the market brings to you.

Are there any downsides to high frequency trading?

No best thing that ever happened for customers.

You know, you gotta remember that the high frequency trading has, has transformed the entire industry and we're not a high frequency firm.

We have a high frequency, we use high frequency middleware for retail customers.

So they can route on really fast systems, but we're not a market maker.

So we just, we just fill them and build them.

We just send to different high frequency firms.

Our order flow exchanges are not competitive with high frequency firms.

So as much as people want to hate, you know, the Citadels and Susquehanna and, and the Wolverines and, and the IM CS of the world, the reality is the exchanges can't compete.

And so um the reason Citadel gets the order flow is not because they pay for it.

It's because they're better and we get our customers get better fills and they get faster fills and they're also accountable for what they do.

So, high frequency trading has actually been what's blown up this industry as far as its ability to just facilitate so much business.

What would you say to people who say retail traders who say well, I'm getting front run in my orders.

You know, I put an order in.

Ridiculous, ridiculous.

Not even a retail customer on our platform fills an order in, you know, 20 just about 20 plus milliseconds.

I mean, I don't know what they're getting front run on, what's front run.

Well, that's good.

Uh, so you put, you put an order in and somebody steps in front of you and they run with your order in front of them.

It doesn't happen.

I mean, the average size of our orders are 3, 3.5 or four contracts or, you know, 200 shares of stock or one future.

There's, there's nothing to step in front of.

No, no high frequency firm is, they don't even, they facilitate millions of orders a day, literally millions of orders.

There is no human interaction.

It's all electronic in the movie Dumb Money.

I don't, did you see it?

Ok. Um There are some inferences in there, you know, some behind the scenes stuff might have happened between Citadel securities and uh Melbourne capital management.

Do, do you think there's any merit to any of that?

Does it even matter?

No.

And I'm not a huge listen, I'm not a spokesperson from Citadel either.

They're just, they're a trading partner of ours, but I've had my, you know, my, my good stuff and bad stuff with Ken and, and everybody else.

Um I think, you know, they're amazing at what they do.

But I think that that was a movie, you know, they have to have a little fun with it.

And plus, remember the whole meme stock thing was, it was a crazy couple of days.

It was insane.

I, I couldn't believe it while I was, I, I couldn't either.

So I think that they, a lot of people were shocked, including, you know, including Citadel, including Robin Hood, including, you know, Melvin Capital.

I mean, it was, it was a weird couple days.

It was, we wanna get to uh our final segment of the day who wore it better and we are setting up an old rivalry that we rivalry that we've tackled before and today we're doing it with a twist.

So this is active versus passive investing.

On one side, we have active investing hands on risk, defined hopefully with a plan but executed by a human with discretionary input and on the other, we have set it and forget it.

Passive investing so easy that Ron Pupil himself maybe might have a plug or two for it.

But Tom, we want your opinion today, don't even go there with me.

You know, I, I know, you know, you go some place interesting, so active or passive.

I know you're in the act.

I mean, I mean, I am, I'm, I'm a spokesperson for the active trader.

I mean, I'm the, I'm the poster child but is there anything wrong with passive?

Um, there's nothing wrong with passive investing at all.

The, the there's nothing wrong with it at um on the surface.

The problem with passive investing is that when you start past investing, when you're young, let's say you're in your, you know, twenties or thirties, whatever it is and then you close your eyes, you take a nap, you wake up, you're 55 or 60 then you go, you haven't made any, where the hell did my life go?

And I don't even know what these markets do or how they work.

The whole concept of active trading is you learn how to make decisions.

You learn how to take risk.

You learn how to assess probabilities.

You learn how to invest strategically if you want to and then if you don't want to, you can always go back and passively invest, but you don't learn how to take risk as a past investor.

And I think that's the biggest.

If, if you're gonna go somewhere in life, you have to learn to take risk.

But then you also have to have some sort of financial literacy, be self taught about the markets, not everybody is taught these things in school.

So what's kind of your take on financial literacy?

Well, the beautiful thing is so I am not a financial literacy person either because I don't believe, what do you mean?

You're not a financial literacy person?

I tell you because, because I don't believe in investor education, I believe that markets, like I said before are efficient.

Therefore, somebody that's been doing this their whole life like me and somebody that may have never even participated in markets before ever.

We are exactly equal when it comes to deciding what's gonna happen in XYZ stock tonight, tomorrow, next week or next month.

There is absolutely no difference between two of us.

You could think.

I know a lot, but the reality is, I don't know what's gonna happen next.

So the concept of doing is essentially financial literacy in, by, by an old school definition.

What about money management though?

Risk management, you not, you might be on equal footing saying, OK, the S and P 500 is gonna do this tomorrow and somebody else has a different guess.

But you have, you have decades of experience with money management, you know that you know how to keep yourself from blowing up and not everybody has that.

So I'm gonna teach you how to keep yourself from blowing up.

One second, you stay small, stay small.

The whole key to you, you cannot risk is one of the most overblown, overblown topics in all.

Finance risk is something you can't control.

It's almost like you can't control another car if it hits you type of thing, you know, there's certain things you can control and in life control what you can control and don't worry about the stuff you can't control.

So the only thing you can control in finance is actually what you do.

And if you keep your size small, which means it means a lot of different things to different people.

But if you keep your size small and you diversify, meaning you don't put too much money into any single one underlying because you don't know what that's gonna do.

You've essentially defended your position, you've defined your risk and that is the definition of risk and, and anybody can do it and then you learn along the way and then you learn along.

So you're essentially saying, learn by doing, don't just don't learn like online, just learn by physically doing it.

You can learn any, any way that you get engaged, like any way that you're able to engage in decision making.

I don't care if you're, if I don't care if you go to some site and you buy or sell trading cards, you know, like, I don't care what you do, but any time you make decisions, it changes the way your whole perspective on risk.

So even if you went to a gambling site, it doesn't matter to me, you know, of course, the financial markets are far more efficient because instead of a 10% give up, there's, you know, a fraction of a penny.

So anywhere you go to make decisions about that involve risk, whether it's emotional, whether it's monetary, whatever it is, that's how you get better at taking risk.

Do you think, um, that brokers a lot of times just kind of pass.

Well, I know, so I come from a regulatory background and so I know that you gotta check th certain things off if you're a broker.

And one of those happens to be investor education.

And a lot of times I think it just seems like a substitute for actually helping their customers or providing better services is that, you know, whatever they paste on their website in terms of investor education is meant to be a substitute for that, but it's just a poor one.

I do you have any thoughts on the whole concept of suitability?

I think you're going down the suitability route there.

I, I think the whole concept of suitability is, is very, is a misunderstood one.

I think it's, it's a legacy concept.

Uh and it's been around for, you know, you have accredited investors and then, well, a credit investors on that only with, with um uh non exchange with stuff that's often private, yeah, private offerings and stuff like that.

There's no in the world of online trading, there's no such thing as an accredited investor, but there are um there are people like with us, we don't care how much money you have.

So whether you have $2000 or you have $2 million or $20 million you can all do the same stuff and we don't care what kind of account you have, whether it's an IRA account or a regular margin account, whatever it is.

So we try to break down those barriers and I think there, it's long overdue.

It's almost like, you know, we don't want to tell people what they can and can't do.

So, I think that that whole suitability thing is going away and it should have gone away a long time.

You, you are a self identified contrarian.

I wanna get right now.

Your biggest contrarian take in the markets.

Biggest contrarian take.

Well, I probably wouldn't buy A I stocks here.

It looks like they're coming back a little bit close to records.

I, I know and they're, they're up.

I, I just, I don't like things, I don't like things that I think are, um, Frothy.

A little frothy.

Yes.

I mean, my biggest contrarian take, I guess right now I was just look at the market, just think about what's super rich out there right now.

I would say probably, you know, if you want to pick a specific thing, I would say probably gold, gold and all the precious metals seem rich to me.

Gold, silver, copper, those kind of things.

Um, but um, also some of the A I socks seem really rich to me.

I think we have time for one more.

You have an event, you have an event coming up and you're also traveling.

You do a lot of like you give a lot of speeches, I think building a complex portfolio and active traders path to success.

Tell us a little bit.

It's coming up in October, October 19th L A.

Well, this is the ne we've done eight of those this year all around the country.

So it's, that's, well, tell us about a little bit about the series, that series.

Yeah, the next one's in L A and then there's one more in Dallas after that, but we've done, we did New York was our first stop this year.

Um This has six speakers and what we do is we build a portfolio.

It's about two hours and 45 minutes long.

And we start with um building all the little aspects of a portfolio and then tied together at the end with an active trading portfolio that we just like um like we, we synthetically put together a portfolio that includes stock options, futures, futures, options, pas trades, digital assets, cash, everything.

So like we build uh just a a sample portfolio, but we have six different speakers to women for four men and everybody covers different stuff.

Like some people cover futures, futures options, other people cover options, stocks, everything.

All right, everyone check it out.

We have run out of time.

Surprisingly, it happens every episode.

Make sure to like us on all your favorite podcast platforms.

We gotta check out, keep your dial tuned to Yahoo Finance.