Like the geeks and wallflowers of grade school who are left alone to play with their ham radios, only to later eventually blossom into the brilliant, beautiful and wealthy adults who are envied by all, option traders seem to be finally coming of age. After years of being ignored, overlooked or being treated as fifth wheels on their double dates with stock and mutual fund investors, those in the options set are being invited to dance with the biggest and most popular names in brokerage.
2005 study of the options investor released this April helps explain why brokerage firms have turned more aggressive in their courtship of option traders. The study, which was conducted by Harris Interactive, is consistent with existing perceptions of the personality profiles of option traders: Option traders view themselves as financially savvy, with "above average investment knowledge, consider investing as "an important part of their life" and feel comfortable "taking high levels of risk." They are also more likely to try new products, and by a wide margin say they trade for short-term speculative gain. Nonoption users say they are decidedly long-term investors. More compelling are the statistics showing that option traders indeed have more money and are more active than nonoption users. Over 41% of option users have net income above $100,000 per year, compared with just 28% for nonusers. More than 32% of options users have a net worth in excess of $500,000, compared with just 17% of nonusers who sport that level of liquid assets. More than 45% of option users have made 51 or more stock trades over the past year, compared with just 12% of nonoption users. For online firms that measure success and growth on per-transaction basis, having an active customer base is crucial to their bottom line. Many studies have shown that of the some 20 million online stock accounts, only about 10% can be considered ones that are held by active traders. Yet this small group accounts for something like 75% of retail trading volume. If you are trying to lure active traders, the option waters are an obvious place to throw your line. They are teeming with some of the most hyperactive investors. All of this comes against the backdrop that overall option volume surged some 31% in 2004 and is on pace for 20% to 25% growth in 2005.
There are only so many of these prized trading accounts to go around, and the need to keep growing revenue per account is certainly one of the driving forces behind consolidation and recent merger talk in the online brokerage business. Aside from supposed synergies and economies of scale, E*Trade's ( ET - Get Report) unsolicited and so far unsuccessful bid for Ameritrade ( AMTD - Get Report) was no doubt partly a move to grab the latter's more active, though less affluent, customer base and boost its daily average revenue trades (DART), a common yardstick of brokerage firms to measure bottom-line growth. So far, Ameritrade's transaction-based model does not seem to be a good fit with E*Trade's one-stop financial firm, which includes banking and lending services.
"The new tools and option offerings from the big brokers will always be just a small part of their business," says David Kalt, the president and CEO of OptionsXpress. To that end, he doubts these "bolt-on" products and services will be able to match the tools and execution offered by his or other option-centric firms. He goes so far as to say "we would actually welcome more consolidation in that we have historically picked up market share that results from a certain level of alienation and displacement that comes with change in platform." Kalt notes that most option traders typically separate accounts broadly divided between banking and long-term savings, and their active trading. Upheaval gives OptionsXpress a chance to show they have a superior service and platform, "land new lucrative accounts and hopefully retain the whole account for both new and existing customers." His confidence that OXPS service can win customers over has no doubt been bolstered by the fact the firm has been named Barron's best online broker for a record two years running.