Interactive Brokers Chairman and Founder Thomas Peterffy joins Yahoo Finance Live to examine the market outlook during the Fed's rate hike cycle, the environment for day trader investors, and the Interactive Brokers Group's latest earnings report.

Video Transcript

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SEANA SMITH: Thomas, it's great to see you. So I think we're all trying to make sense of the gains that we're seeing today and comparing that to the losses that we've seen, really, since the start of the year. The S&P still off just around 21% year-to-date. What's your assessment of where we stand today?

THOMAS PETERFFY: It's very hard to understand these gains because I think optimism is just too strong here because the Fed-- the Fed has to rein in inflation. And they are very far from having done that. So they still have a long way to go, and those higher interest rates are certainly going to hit earnings in the first, second, and third quarter of next year. And estimates will have to come down accordingly. And if you put a 15 multiple onto those adjusted earnings, I don't really see the market much above 3,000 on the S&P.

DAVID BRIGGS: So how much further do you think the markets have to fall, Thomas?

THOMAS PETERFFY: I think that it's going to get close to 3,000. So that's 10% to 20% lower from here.

SEANA SMITH: Thomas, what do you make of the moves that the Fed has made so far because there's lots of debate about how far the Fed has gone, if there is this risk that the Fed is going to overshoot. Do you think they've been too aggressive up to this point?

THOMAS PETERFFY: I don't think they have been too aggressive. Maybe they'll be aggressive in the future. But so far, look, the economy really hasn't slowed down much as a result of these rate increases. And they really want to dampen down retail consumer demand. And once they succeed in doing that, then inflation will slow down. And-- but that will show up in the sales figures for the big-tech companies and most consumer goods companies.

DAVID BRIGGS: So the Fed President Mary Daly, San Francisco, really rallied the markets. How dovish did you hear these comments-- "It's time to start talking about stepping down. The time is now to start planning for stepping down."

THOMAS PETERFFY: I think-- I think that is the wrong message. I think the Fed has to send the message that we are going to stamp out inflation, no matter what. And they are in a better position if they can scare the market into easing up on spending rather than having to force them to ease up on it. So this is-- I don't think the Fed is very happy right now.

SEANA SMITH: Yeah, and, Thomas, and with all of that in mind, the fact that you were saying that the S&P could fall to 3,000, I'm curious what you're seeing from your customers, from the retail investor perspective? What are they doing at a time when there's so much uncertainty in the market?

THOMAS PETERFFY: So our core customers, who are basically professional traders who work on the trading desks of many of the large investment banks around the world, and they hatched their portfolio early on this year. And as the market has been falling, they just recently started to cover those hedges very slowly. Unfortunately, the retail investors gotten really hurt, and they are on the sidelines.

Now as far as the market going from here, it's generally accepted by the professional traders that the market, as I said, has another 10% to 20% to go down, but it is impossible to keep a-- to pick a bottom-- bottom and if-- so they will have to pick a range of prices at which they gradually get back into the market using, like, Interactive Brokers has all kinds of algorithms that you can set up to buy, scale down in falling prices or sell, scale up in a range of prices-- rising prices. So, yeah, it's--

DAVID BRIGGS: So based on the volume of TD Ameritrade and Charles Schwab, "The Wall Street Journal" headline reads, "Time for day traders to go back to their day jobs." Overall, do you agree with that assessment? And when do you think they come back?

THOMAS PETERFFY: Well, I agree with this assessment. Day traders, yes. Day traders, I mean, look, day traders don't do better or worse in an upmarket versus in a down market. So day traders are just there to try to get the swing of things. And the ones that cannot make a living, of course, they have to go back to their day jobs.

But they-- much of this day trading has now migrated over to the options markets, where you can easily set up option spreads like buying one strike, selling another where your risk and profit is limited. But-- but you can take advantage of short-term moves without having to take too much of a risk. So I think that the conventional day trader has moved from the stock market to the option markets.

SEANA SMITH: And, Thomas, as I take a look at your most recent earnings report, obviously it beat there. The Street rewarded the stock. We saw some appetite for the stock as a result of those earnings. Just what's your assessment of your business at this point during the current quarter? And what does it look like as we look ahead to 2023?

THOMAS PETERFFY: So our business looks pretty good because we have more and more larger professional customers like hedge funds coming onto our platform, and that is very helpful. So we have spent several decades automating everything in the business so we can offer our services very, very inexpensively. And so we are finally getting the benefit of it because people are recognizing that IBKR is the platform to go to.