James Kostulias, Head of Trading Services at Charles Schwab, speaks with Traders Magazine about the firm’s trading capabilities, challenges for retail brokers and the evolution of trading technology.
Please tell us about Charles Schwab and its trading desk. What are your average daily trading volumes?
Schwab has an incredibly active and lively trading desk, and each day we facilitate about 6 million trades. Over the past few years we’ve seen – as has the whole industry – a tremendous growth in retail trading, particularly spurred by the flood of entrants who gravitated to the markets during the Covid-19 pandemic, and that has really changed the game.
What trading capabilities do you offer?
With Schwab, clients can trade stocks and ETFs, options (index and equity) futures, and forex. They can also invest in bonds and fixed income products, money market funds, mutual funds, index funds, international equities, and gain indirect access to cryptocurrency via related funds, crypto coin trusts, stocks, futures and spot Bitcoin ETFs.
Schwab offers its trading experience under the brand “Schwab Trading Powered by Ameritrade™,” which reflects its unique heritage. Schwab announced its intention to purchase Ameritrade in 2019, and we’ve spent the better part of the last four years combining the best of the Schwab and Ameritrade to create something exceptional. With Schwab Trading Powered by Ameritrade, we’ve tied together the award-winning thinkorswim trading platforms with Schwab’s trading capabilities on Schwab.com and Schwab Mobile, alongside extensive trading education and specialized service.
What retail trading trends/themes do you see?
Right now, we’re seeing strong retail engagement with the markets; as of our Q1 ’24 earnings, trading volumes and margin balances were up 15% and 9%, respectively, from the previous quarter.
One way we keep a pulse on retail trading trends is through our monthly Schwab Trading Activity Index™, or STAX, report. What sets the STAX apart from other indicators is that it’s based on behavior; each month, we analyze retail investor portfolios and trading activity from Schwab’s millions of client accounts to illuminate what investors were actually doing and how they were positioned in the markets. From that analysis, we come up with a score for the month, and the up-or-down movement in that behavioral score serves as a gauge for retail investor sentiment.
For example, in our April STAX report, the score fell into the moderate-low range compared to historical averages. Schwab clients net bought equities, but they were discerning with the names they bought, gravitating towards companies with strong fundamentals and especially those with compelling generative AI solutions. AI-related names continue to rank near the top of our client buy lists.
Finally, a trend that we’ve seen (as has the industry in general) over the past few years is the rise in derivatives among retail traders. People turn to derivatives for a number of reasons – increasing leverage, controlling their risk, etc. But derivatives can also be an avenue for providing strategic exposure, particularly for accounts that can benefit from the capital efficiency these products offer. Because derivatives come with unique risks, we have made them a significant area of focus within our education offer. Between the improvements in platforms and education that surround options, there’s never been more to support the retail trader.
What are the current challenges for retail brokers?
We all live in the information age, and the impact of the internet and social media on our daily lives can’t be over-stated. The same can be said for investing. But while there’s a glut of information and guidance out there when it comes to investing and the financial markets, it’s not all created equal, and finding trustworthy information from expert sources has never been more important.
So, for brokers, it’s critical for us and for the financial well-being of our clients that we serve that role and help investors cut through the noise. I am immensely proud of Schwab’s education offer, which is beyond extensive. In addition to exclusive market commentary from our experts at the Schwab Center for Financial Research (SCFR), we offer a wide array of articles, videos, client-exclusive courses and learning pathways, coaching, live and virtual events, podcasts, email newsletters and even the Schwab Network, our media affiliate offering broadcast market commentary, analysis, and insights from industry professionals.
This rich education ecosystem empowers our clients to learn about the topics they want to know more about, in the ways and via the channels that suit them best.
What is your view on the evolution of trading technology and the impact of AI? / How does your team adapt to new technologies?
AI is something we are keeping a careful eye on. There are various ways AI may be useful for our clients and we are already doing some testing-and-learning to see what might be possible.
For example, AI may be able to help answer questions like: How can we enable our front-line associates to serve clients faster? Or better yet, how can we answer clients’ questions proactively, so they don’t have to call in at all? The answers would be informed by factors like current market activity or real-time insights into what are clients calling in about. Armed with that kind of knowledge, we could probably serve up relevant content within the hour.
Another example is education. Based on what we see clients searching for or trading, we can eventually help guide clients to the best next steps in their investing by serving up educational resources on trading strategies or by making service recommendations.
But the benefit of these projects won’t just be the content we serve up, the revolutionary piece will be the speed of delivery – how quickly can we serve up relevant information that leads to insightful trade ideas. For example, most market commentary happens ahead of the market of after, can we identify trends during the day? That’s the kind of thing that will make a big difference for our clients when the time comes.
What is you view on the electronification of the markets? / What trends do you see emerging or advancing?
The more we can democratize investing and educate investors to take control of their financial futures, the better, and electronification plays a big role in that. It is better for our clients – and better for the marketplace – when there are more participants.
We’re seeing younger participants in the market these days, which is a great thing. Trading and market education is becoming much more common in universities. It’s also easier to open and fund an account than ever before. All of this is helping younger folks learn their way into participating in the market, where more learning and education awaits them.
With the evolution of technology, market structure, and pricing I fully believe there has never been a better time to be an individual trader and/or investor.
What automation themes are you seeing, and what could drive more electronic trading?
At Schwab, we offer our Trader API, which allows developers to access market data and trade electronically without having to engage with the thinkorswim application every day. We love thinkorswim and feel it’s the best platform out there for traders, but we’re big supporters of choice. And we know it takes time to log in everyday, load a trade ticket, click send etc. Schwab’s Trader API allows clients to back-test strategies, set their own alerts, and execute trades based on the signals they identify as meaningful. We also offer a Schwab Developer Portal that anyone can sign up for.
Looking ahead to the future of electronic trading, the developments of your teams and how they look to enhance their skill sets. What work is being done to prepare the trading desk of the future from a sell-side perspective?
Our guiding principle is “through clients’ eyes,” which means we always frame our thinking around what the client needs, what will they need to grow their investments and how they can protect them. We are focused on adding capabilities to our apps without disrupting their current experience. We are looking to simplify processes, reduce the noise, and serve up information faster in a way that any investor or trader, from novice to expert, can consume. With the largest brokerage firm integration in history nearly behind us, we on the Trading Services side of the business are focused on innovating for clients in ways that reflect traders’ needs – which are far from one-dimensional. Traders are investors, too. They also engage in long-term investing with things like managed accounts and 401Ks. We want to serve the whole client, ALL their needs.
Is there anything else you would like to add?
In many ways, there’s never been a better time to be a retail trader. With the array of access, education, tools, ease, and low or eliminated barriers to entry that shape the trading experience now, we’ve come such a long way since I began my career two decades ago. Schwab was founded around the philosophy of creating greater access to investing and trading, so it’s exciting to see where we are today.
And you can expect Schwab to continue to be a leader in the trading space, especially coming out of the historic integration with Ameritrade and our ability to deliver the best features and functionality from both the Schwab and Ameritrade platforms to meet the needs of all kinds of traders, from very experienced and sophisticated to those just starting out.
