Three traders take the right option

Online brokerage firm optionsXpress has come a long way in the seven short years since the business was first hatched by three financial boffins. FST’s Julian Rogers speaks to David Kalt, co-founder and CEO, to discover the story behind the company’s phenomenal growth.

At the turn of the century the future direction of the internet looked far from certain, as investors ran for the hills amid the aftermath of the boom and bust dot-com goldrush; fingers had been burnt and a deep sense of trepidation hung in the air. But while fledgling start-ups were going to the wall as the house of cards came toppling down three men took the brave move of launching an online brokerage business – despite professional advice to contrary from certain quarters. However, David Kalt, James Gray and Ned Bennett strongly believed they had a product that could attract both novice and veteran investors with its innovative but easy to use software. Of course, their 30 years of combined experience in the options marketplace was a big help in getting the business launched.

Initially, Kalt, who had a great deal of personal options trading know how under his belt, approached Gray, who was president of G-Bar at the time, to voice his displeasure about the state of options brokerage. Coincidentally, Gray had earlier had a similar conversation with Bennett – a long-term brokerage industry expert – and the pair discussed how there was room for improvement within the market, and perhaps a gap that could be exploited. Kalt, the technology brain behind the start-up, casts his mind back to what triggered those initial discussion: “As an individual investor I saw how the overall options trading experience was skewed to the professional at the expense of the retail trader. Customer service was poor, there was little transparency into the market, execution was slow and prices were high. It was a pretty brutal environment to try to be successful in.”

The trio got their heads together and quickly identified ways in which the business could appeal to traders who were being ignored by the bigger firms. “We determined that with new technology, we could build a better mousetrap, and offer options investors great service, tools and execution.” So a gap in the market had been found; all they needed now was the small matter of financial backing to get the project off the ground.

Risky business
However, despite their unwavering enthusiasm for the business plan those with experience in this arena did their best to persuade the partners that it was a dicey venture with a bleak future. Undeterred, the three entrepreneurs managed to raise $3 million in funding, largely from other traders, to launch optionsXpress Holdings, Inc. with its first customer in January 2001. And in next to no time their bold visions were becoming a reality as investors logged on in their droves.

“We always knew there was demand for what optionsXpress was offering, but each month brought numbers that surpassed what we thought was an already aggressive business plan.” And in the six and a half years since then OptionsXpress has scooped numerous industry awards and delivered consistent profits for investors. It has over 225,000 customer accounts, up 31 percent year-over-year, and recorded revenues of $187 million in 2006. As well as specializing in equity options, optionsXpress is a one-stop shop for option, stock, futures, mutual fund and fixed-income investors. Its browser-based technology allows both US-based and international retail and profession traders to execute a whole host of investment strategies.

When Kalt is pressed on the secret of his company’s early success he is keen to stress how customer service was (and still is) key. “When you look at our growth over the past six years, and the awards we have won from the likes of Barron’s, SmartMoney and Kiplinger’s, I think it comes down to three key things: Customer service, low costs and innovation.” One key driver of growth has been the partners’ willingness to listen to the customers; by taking on board ideas that they wanted to see implemented on the site or things that hindered trading, optionsXpress was able to mould an online brokerage product that housed all the key attributes that investors were looking for. On the back of this, growth started to snowball.

However, after the initial euphoria of the numbers that optionsXpress was generating, the triumvirate knew that the business could not rest on it’s laurels – but forge ahead with new technologies and even higher levels of customer service and satisfaction. “Not to sound cocky, but our biggest challenge was keeping standards high during rapid growth,” Kalt notes. “It was never hard bringing on new customers – they were knocking down our doors to sign up. What we worked very hard to do, however, was keep service at an incredibly high level, continually introduce new tools and functionality, and push the options exchanges to improve execution and transparency for the benefit of our customers.”

New tricks
A key milestone for optionsXpress was when it went public in 2005 – listing on the NASDAQ (OXPS), while last year Xpress Trade LLC was acquired for $37 million. And with $72 million in profit last year, the future is sure looking rosy for investors in a market where the competition is ferocious. Kalt believes that technology is a distinguishing factor that separates his company from the competition. “Ultimately, technology will continue to be our primary tool to differentiate optionsXpress from the rest of the industry. While others compete over a dollar or two in commissions, we have functionality available today that can save our customers literally hundreds of dollars per trade, by improving prices. Just think what we could do tomorrow.”

Kalt suggests that technology will continue to improve customer experience on the site over the next 12 months. “We will use technology to help our customers get an even better brokerage experience, from improving the prices they receive on their trades, to more flexibility in how they can use our site.” Of course, it’s not just optionsXpress that has flourished on the back of the internet – the market is now awash with rival brokerage companies touting for business. E*Trade, Firstrade and Charles Schwabb are just a few of the firms jockeying for position an increasingly crowded market.

So after the soaring profits and customer numbers, as well as the industry awards, what gives Kalt the biggest buzz about his company’s success? “What I enjoy most is being around so many innovative people, and seeing how their work has helped make our customers better investors. A lot of people’s energy and persistence went into optionsXpress, and it’s reflected in the steady stream of emails and calls we receive from customers who are amazed at the service they receive. That’s awesome.”

Fast facts
Founders: David Kalt (CEO), James Gray (Chairman), Ned Bennet (Executive Vice Chairman)
Annual revenue: $187 million (2006)
Employees: 200