is a small, yet growing, online broker that's making a name for itself by providing a niche offering for the increasingly sophisticated retail investor.
The firm specializes in options and futures contracts, and it typically flies under the radar screen when compared to larger rivals,
David Fisher, CEO of OptionsXpress, spoke with
just hours before the May 6 market crash, saying rather ironically that the markets need a healthy balance of volatility. But ultimately the long-term success of OptionsXpress and other brokers will depend on the health of the economy and investor confidence. Oh and rising interest rates won't hurt either. Here is an edited transcript of the interview:
OptionsXpress Thrives on Market Volatility
TheStreet: Explain the services that OptionsXpress provides and what service gap the brokerage firm is trying to fill?
OptionsXpress is an online broker. It's been around for about 10 years. The portion of the market we really want to fill is retail investors who want to use derivatives products, options and futures as part of their portfolio. What we found is some of the larger brokers out there don't service those products as well as they could. At OptionsXpress it's really been our focus. So providing the right education, customer service for the product and really focusing on these products to provide a better experience for customers who want to use them.
TheStreet: A huge topic in the industry these days is the debate over the level of financial reform needed in the industry. What are your thoughts on how much reform is needed, and if derivatives trading does get more scrutiny, how would that affect your business?
When you look back at the financial crisis clearly something needs to be done. We don't want to go through that again. There were probably some portions of the market that were not regulated enough, but when you look at those portions where they were is really the area of business we operate in. So exchange-listed products, where everything is very transparent and you can see what the products are. These are listed products where you can get liquidity very easily, can see the bid-ask spreads, they're easy to price. If look at those markets, the exchanges and the clearing houses that serve them, they all performed very, very well without any hiccups during the financial crisis. I think that's why when you look at financial regulation not much is focused on those areas and I think they could actually really be a big beneficiary of financial reform as more volume is pushed to the listed products.
TheStreet: Another big topic is market volatility. What's been going on in the markets and how does that affect your business? Does it scare off investors?
Volatility is something that you want some of, but not too much of and if you look back to the financial crisis and the fall of 2008, volatility was at extremely high levels. The VIX, which is a measure of volatility - some people call it the fear factor or the fear gauge - hit an all time high of above 80. Those levels of volatility scare a lot of people out of the market, especially retail investors. Retail investors in general are looking to execute positions and strategies that they know about and are comfortable with, and with volatility that high it's very difficult to do and so they tend to run away from the market. At extreme low levels of volatility, there's not a lot of premium in the option contracts. There are not a lot of stories in the markets. There's not a lot to talk about and so investors sit on their hands.
TheStreet: Last week, rival TD Ameritrade Chairman Joe Moglia told CNBC that the day that the SEC case came out against Goldman Sachs (GS) - Get Report, they experienced 600,000 trades that day, which is pretty much unheard of. How does that play into your business, especially as you were talking about earlier about specific events that drive trading?
I think that's a great example. Throughout the financial crisis the focus has been on the entire market or the economy, Europe, Greece, and not so much on individual companies and the stocks and what's happening with them. Retail investors, that's not really their focus. What's going on in Europe is not as much a focus as what's going on in the individual stocks in their portfolio.
So if you think back to the day when there was the news on Goldman that's a great opportunity for retail investors to rethink a stock that maybe they hadn't thought about before. So maybe you haven't thought about Goldman in years, but you see the news and one investor could say 'Hey, you know the stock's down a lot; this is a great opportunity to get into a good high-quality stock. I'm going to buy.' While another investor could say 'You know this is going to be a long slippery slope for Goldman. I don't feel comfortable with the stock. I want to get out. I want to go short the stock.' But either way they're making a decision, they're thinking about a stock well maybe they haven't thought about it before so that does lead to much higher volatility. And we saw some of the same things that our competitors saw.
TheStreet:What is the biggest factor that could affect your company?
Long term, the health of the economy and really the optimism of the retail investor. That's who our customers are. If they're feeling good about their jobs, if they're going to still have them, if they're getting raises or bonuses, they're going to be willing to put more money in the stock market and take additional risks with their portfolio. And I think we're starting to see that. We haven't necessarily turned the corner yet, but we're getting there. People are feeling more optimistic and we're starting to see that in trading volumes, the new accounts we're generating, all of which improved over the last couple of months and we see that continuing as the health of the economy continues to improve.
The other factor that really affects our business is interest rates, that's just a pure economic factor. If rates go up we'll make more money on our customer assets. Our customer assets are at an all time high. Our customers are now holding almost $8 billion of assets with us and as rates rise we're going to have a higher spread on those assets and that will happen over time.
TheStreet: It's clear that investors in general are getting more sophisticated and asking for more products and services to optimize their portfolio. What is the future of the online trading industry and how does OptionsXpress grow and how do you remain relevant to your customers?
Retail investors are a lot more sophisticated than people give them credit for, especially in this modern day and age where the technology is available to us and firms like OptionsXpress can give them the education and the tools and the service to really put them on an even playing field with professional investors. We're going to use that to our advantage and that's how we've seen great growth in our derivatives products in the last 10 years. Ten years ago there was almost no retail participation in these markets. Now about 10% to 15% of the retail investors uses these products -- about 50% of the options market. So there's been great growth, but only 10% to 15% of retail investors is utilizing them. There's a long way to go and certainly our mission is to continue to show people how to use these products and really benefit their portfolio.
--Written by Laurie Kulikowski in New York.