Market Maker
For the last 18 years, CMC Markets and its GM Chris Smith have opened up global access to thousands of financial products, insights and tools for New Zealand traders. Over that time, we’ve seen market disruptions, recession, bull runs, cheap credit and expensive credit, but the markets keep on going. It seems like we are now in the middle of some historical economic and innovative moments, especially with AI that could shape the future of some industries.
Chris gives us his take on the lay of the land and what that might mean for the markets and the economy in general.
With new AI tools coming out almost daily now, does it feel like we are in the middle of this new era with implications across many different industries? Are you getting that sense of the market starting to react to this potential?
For sure. Everyone’s trying to work out how they can benefit from it. AI is a buzzword that a lot of people throw around without really understanding it. I’m no expert in AI at all, but you’re already seeing it with customer service divisions of companies being able to answer questions by robots and AI systems.
There’s going to be some incredibly beneficial uses for AI.
There’s obviously the bigger issue around data integrity and how these companies control these AI systems with robust oversight.
For a long time in the world of trading, there’s been this algorithmic aspect as well.
Yes, you can either trade manually or you can trade with a system that works on rules you set. I’ve never really seen any work successfully for a long period of time because the one thing about the markets, which is hard to teach a system, is emotion.
Emotion is a constant in the markets with extremes on both bull and bear markets. No matter if we look at ‘87 to every crash and boom and bust, there’s an emotion and fear/greed which computers do take advantage of.
I’ve never seen a system able to handle that emotion well but I’m sure it could be done. Greed and fear add reactions to the unpredictability of the market.
Russia invaded Ukraine about this time last year on February 21st. With those events, it’s very hard for systems to be built to handle and forecast outcomes and impact.
The more and more computer systems that are made, especially around technical analysis, self-fulfilling impact can occur and benefit the trader. One big benefit of a computer trading program that you could build is it actually takes the emotion out of it with strict rules, because that drives a lot of decision-making.
There’s so much psychology involved and that fear of loss is such a big driver for rash human decision making. With what you’re seeing coming through with the likes of ChatGPT, is there the potential for AI to factor in this sentiment and to almost lampoon human emotion and wider sentiment?
Yeah, I think so. There are already sentiment readings. The Fear & Greed Index has been around for a very long time, it creates a reading on the current fear and greed in the market based on five different inputs.
The Volatility Index is something our clients look at a lot. When there’s high uncertainty in the market, the Volatility Index spikes. Right now, the VIX is actually well below 20, showing the markets are actually a lot calmer and less volatile right now, which is not what we saw last year at all.
There are other sentiment readings, such as overbought or oversold signals. There’s the AAII survey, which has been followed for a very long time, where they interview people in America about whether they are bullish or bearish on the markets. That’s been a highly followed reading on what sentiment is looking like.
So yes, you could easily build something that factors in market sentiment. The top trading firms have probably built systems that are so robust that they’ve proven themselves for a very long time, but the average retail investor will struggle to build something. ChatGPT can write code and help you build trading systems but doesn’t have up to date real time data – it currently stops at 2021.
How would you describe the average CMC client?
We’ve been in New Zealand for 18 years now. The average client would be professional in terms of their work, in a corporate job or own their own business, between the ages of 30 to 60, and have an interest in stocks or foreign exchange or commodities. Some of them are very laser-focused on what they’re interested in; it could be gold, it could be silver, it could be the New Zealand dollar. Maybe they deal with the New Zealand dollar in their export-import business all the time, so they want to use it as a hedging tool or they want to speculate.
We also have some clients who only do crypto. They only want to trade Bitcoin or Ethereum. And we have other clients who only trade the Dow Jones or the German index or the FTSE in the UK.
It’s discretionary trading, it’s higher risk, it’s speculative unless you are hedging other holdings. We’re a niche in a bigger industry. We will be bringing in physical shares at some point, but that’s a business we do in Australia very well. We’ve just rolled that out in London and soon to be in Singapore.
We’ve always been a tech-led business, so it’s all online and we understand price and technology needs to lead.
There’s always something happening in the markets. We offer 15,000 products, so there’s always noise in one particular area, whether it’s gold, oil or stocks.
The economic outlook has shifted on a dime. Have you noticed a shift, like people moving from shares to commodities?
This time last year to now, the problems are the same in terms of the economy. We’re still dealing with the Ukraine war’s impact around inflation, energy costs and interest rates continuing to rise, which is making currencies a lot more attractive because people used to trade currencies against each other based on interest rate differences.
We went through 10 years where interest rates were near zero, so foreign exchange for us became a lot less interesting and less volatile. Clients focus shifted to US indices or European indices. We’re now seeing foreign exchange come back a lot more because of the volatility. The New Zealand dollar, for example, fell up to 20% last year against the US dollar at one point and had multiple swings, which is an enormous move.
The market’s generally move six to nine months ahead of the economy going into a potential recession. The market anticipates the big slowdown in earnings and the economic GDP.
It all comes back to the risk-free rate on your money, which is so much higher now. Interest rates at 5% on your term deposit are risk-free. If you are comparing another investment against that, it has to beat that hurdle rate of 5%. The stock market now has to do much better than 5% to get more money coming in.
The market is anticipating that inflation is coming down. Central banks are closer to the end than the start. The employment market is much stronger than the Fed. We saw enormous jobs reported in the US on Friday. Unemployment is at its lowest since 1969 in the US, New Zealand unemployment is at 3.4%.
So, the backdrop of interest rates is going to have an enormous pain on the economy. I think in this post-pandemic world, the data is just so mixed. We saw a really strong GDP in New Zealand in September, 2% growth in New Zealand. Most economists forecast we might do half a percent.
The RBNZ believes we’re going to have four quarters of negative growth from June onwards. But maybe the economy is a lot more resilient than we think. We’re seeing that with the issue with employment – people are struggling to hire staff.
Some would argue that we’re in a recession at the moment, but it’s nice to think that the markets indicate some light at the end of the tunnel.
Traditionally, a market reacts before interest rates start being cut. The market is irrational and overextends on the upside and the downside.
Clearly Zoom was not worth as much as ExxonMobil, but everyone in the pandemic was using Zoom as we are now. It was like, this is going to be the biggest company in the world, and then the pandemic ended and obviously the valuation and the growth rate stopped. People aren’t signing up as much as they were. The market overshot on the upside and the downside.
This year, inflation is the number one thing investors are following and hoping we see a continued down trend – currently sitting around 7% down from 9.1%. Companies can’t continue to pay wage rises every year for employees, especially post-pandemic where they’re still trying to recover from Covid.
The Reserve Bank of New Zealand has forecast two to three more rate hikes. But again, I wouldn’t read too much into forecasts by any central bank because I’m a little bit cynical after how long I’ve been in the markets. These are the same central banks that put interest rates to zero.
I think they are playing the game of ensuring they stay with a hawkish tone to the market, that they will continue tightening on financial conditions, hoping things don’t break and hoping that they can engineer a soft landing on the economy.
It seems like such a rough hangover after years of that sugar rush. Could it have been a slightly softer landing?
A hundred percent. In hindsight, they loosened the financial conditions and didn’t react fast enough to bring them back up again to normalised levels.
Election year is interesting because it’ll obviously be policies to entice people to vote for the different parties and it should create some optimism, I hope, around the economy. I believe the country can get its mojo back a bit and elections are good to change sentiment.
It does feel a little bit like we’ve lost some of that celebration of entrepreneurial pursuit and the power of business to create opportunity. You can see that within CMC as well, the entrepreneurial story behind it.
CMC was founded by an entrepreneur, Lord Peter Cruddas. He dropped out of school and started the company early into his career in the markets. He is a proud British entrepreneur and continues to lead the company.
We need more entrepreneurs in this country. We need more innovation, we need businesses to feel like they can set up a business, give it a go; that’s the environment we want. Whether the government incentivises that more, whatever government is elected in October, that’d be great for the economy. The feeling that you could leave your normal job and start something, and you’ve got the support of the country.
Speaking of innovation and development, can you talk about Alpha?
Alpha’s our service for our more active traders. We class a client who’s more active in the markets as an Alpha client for CMC. We look after those clients a bit more with a private premium account manager. We don’t give advice as a business, but we are there as a support for our Alpha clients; whether it’s market news, networking opportunities, events, market research, support on their trading strategies.
It’s needed in New Zealand. We want to look after our clients really well and have a service that looks after those clients like a private banking customer would have as well. Alpha clients receive rebates on their trading activity. We’re a small country, we want to look after our clients really well and continue to invest in the business here.
When you look at people’s LinkedIn profiles these days, there’s a couple of years here, six months there. You’ve been with CMC for a long haul. What do you think is behind that in you?
I’ve really enjoyed working at CMC. It’s constantly changing as a business and trying to deliver the best technology and products for the customer.. I’ve been here 18 years and I’ve enjoyed my work to date. I believe there’s a lot of opportunity to keep growing the business in New Zealand into other product categories we know investors want. I’m really passionate about living and working in New Zealand.
What’s a particular area that you are most passionate about?
I’m most passionate about the US share market, the US stocks, where the global brands exist, the biggest brands in the world. It fascinates me that you can invest in Apple, Amazon and Microsoft. If Microsoft has bought part of ChatGPT and you own shares in Microsoft, you are potentially part of that success story. That’s really fascinating.
I’ve always been focused on the US market. I look at currencies, I look at gold, I look at all different asset classes, but I don’t spend too much time really going into the price movements of them.