"This time last year there was genuine fear in the marketplace and customers weren't thinking about executing their strategies or their next trade," David Fisher, CEO of online broker optionsXpress (Nasdaq: OXPS ) , told me as we sat in the Buffett conference room at Fool HQ. "They were wondering whether the markets were going to be there the next day."
But as optionsXpress enters 2010, its chief executive says the overall mood and attitude is "significantly better." One of his goals for 2010 is to rebuild the excitement and joy of trading options that's been lost in the crisis.
2009 was a rough year for the online brokerage industry, as individual investors pulled back on the number of trades they executed. optionsXpress, which provides electronic trading platforms and education for individual investors to trade options, felt that pain. (Ninety-five percent of its business stems from individual investors, while 5% comes from institutional investors.)
As the market environment has stabilized, Fisher says, the economy is probably somewhere near the beginning of the way up, which means optionsXpress is near the beginning of the way back up.
"Trading activities have rebounded a little, [but] they still have a ways to go," he said. "I think that's going to be indicative of the economy, because the economy has rebounded a little but still has a ways to go. Interest rates haven't risen yet, but they're closer to rising than they were a year ago and I think those are all positive things [for optionsXpress]."
The moving parts?
Fisher says the first quarter was "tough," but the company remained profitable and is seeing signs of life. The company doesn't report first-quarter results until April 27, but Fisher gave this preview:
People were just not very active during the quarter, and I think it's a reflection that we're still in the middle of a pretty tough recession ... it's going to take people time to re-engage. There's been very little volatility in the market so there's been very little short-term trading. But we keep building assets, and we keep adding customers.
While spikes in overall market volatility scare off investors, Fisher says individual-name volatility is beneficial for his business because it increases the company's daily average revenue trades (DARTs), a key metric. Fisher is confident individual-name volatility will rebound. "As the economy comes back, companies will be more aggressive in their approaches," he said. "They'll make some good decisions and do some really exciting things, and do some bad things that hurt their businesses. But that'll cause individual names to move more and that'll get people more focused."
Macroeconomic factors will have the biggest impact on optionsXpress’ business this year, Fisher said. Low interest rates, for example, mean the company will earn lower interest revenue on customer deposits.
"Our business will start making more money when people trade more and when rates go up, but the good news is we never lost those customers," he said. "Our market share is actually up a little bit from a year ago." Client assets zoomed to over $7 billion as of Dec. 31, 2009, an increase of 43% over last year, which could be a catalyst for profits when interest rates begin to rise.
International expansion plans on tap for 2010
With the macroeconomic issues beginning to pass optionsXpress by, the company is positioning to grow through acquisitions in Europe -- specifically the U.K., Germany, and the Netherlands. Although it has expanded its business internationally over the past four or five years, its international customers trade primarily in U.S. markets and primarily in English.
Now, the company plans to roll out options trading platforms in local markets that trade localized products. "Acquiring a foreign broker we think is the best way into those markets," said Fisher. "Where you buy some of that expertise and you buy some of that infrastructure, instead of having to build it all from scratch."
Looking to the long term
The biggest challenge Fisher sees facing the company is staying relevant and differentiated in competition with the large online brokers -- E*TRADE Financial (Nasdaq: ETFC ) , TD AMERITRADE (Nasdaq: AMTD ) , and Charles Schwab (NYSE: SCHW ) . "Now thankfully they always have a fear that if their site's too option focused it's going to scare away the 90% of their customers who don't use options."
Challenges aside, Fisher says optionsXpress is in the very early stages of growth. Using a baseball analogy, he says the company is in the third inning. Right now, 10% of the brokerage industry's retail customers are trading options. Fisher says he doesn't see why 50% to 70% of investors won't be trading options in years to come.
"A couple generations ago people didn't really trade at all, and then a generation ago they mostly traded mutual funds," he said. Then people started trading more stocks through their 401(k)s and IRAs, and now they're moving onto options and futures. This is a product that retail customers just started adapting to eight years ago. So I think we have a long, long way to go."