TradeInformer will be making merry next week and enjoying the Christmas season so no newsletter. It’s been a great year so thanks everyone for reading, happy Christmas and see you all in 2024.
To finish off the year, we have an interview with OptionsDesk Managing Director James Proudlock.
Since starting TradeInformer, one of the things I’ve said is a ‘thing’ is more uptake of options trading among retail investors. That has certainly been a phenomenon in the US but OptionsDesk is one of only a few companies offering retail traders access to exchange-traded derivatives in the UK.
The other interesting thing about the company is that they only do voice broking. I assume I’m not alone in hating the increasingly abysmal customer service plaguing society, as companies do everything they can to push you to speak to a (useless) chat bot. So this made me wonder if, contrary to what you’d expect in an ever more digital world, offering a phone service may actually be more attractive than one that’s easy to access online. Read on to find out.
When I first saw OptionsDesk it coincided with a period where I had become increasingly annoyed with my bank and energy supplier because they made it nearly impossible for me to ever speak to a human being. And so even though we are in a period where everyone talks about digitization, I actually wondered if, counterintuitively, voice broking has been a good selling point for the company?
It really has. The first thing is, when you look at me, you can realise that I’m from a generation that used to know the name of my bank manager, used to know the name of my stockbroker, and so on. And in those days, I probably paid £30 or £40 a lot in order to talk to somebody.
If I now trade on Interactive Brokers, it just drives me bonkers. You know, you haven’t paid your margin in. So now you are getting closed out and losing 20 grand because nobody bothered to ring you up and discuss what you could do to prevent that from happening.
So it’s such a false economy in my opinion, trading on these platforms that are ostensibly free, with spreads you can drive a London bus through, and not being able to speak to anybody. And if you look at the consequences of that as well, from a business perspective, these guys have to churn through so many people to stay afloat and that never ends, they are always having to bring in new clients.
I would rather sign up five or six people a month, provide them a really, really good service and keep them forever. Then over time you incrementally keep adding clients and then adding voice brokers as and when you need to fill that function.
So it’s going well?
Yes, we have had a nice, steady growth trajectory. It’s a very accretive business model because clients don’t flare up, they are going in and either taking advantage of short-term trading opportunities or hedging their risk.
And one of the things we’re now doing is an equity product. What we found was quite a lot of clients were doing all their equities trading on one platform and then using us to trade options, almost as an overlay to that.
So we said well, why not just bring over your portfolio to us and then we can start working out where it might be advantageous to grant some covered calls and so on.
But to answer your prior question as well, you know we had a lot of pick up since launching a couple of years ago and I think a lot of it is to do with people realising, ok you can trade on a platform but you are really on your own and customer service does matter. I think during covid when a lot of people were left in the dark at some points that became a sticking point.
And then, particularly for options trading, do you want to do that alone or do you want to be able to speak to someone who is literally doing it all day long particularly if you are someone who trades infrequently?
Another component there is also trust. So I think for younger people, say people that have traded crypto, there is something appealing about exchange-traded instruments like options, where you have more regulation, more transparency, more understanding of who your counterparty is.
On that point, what are your clients like? I mean, is it wealthier, more sophisticated clients or is there a mix?
There’s a few things that we have as points of principle. The first is that an awful lot of voice brokerages operate on what I call an ‘eat what you kill’ basis. So in other words, I’m going to get 20 cents for every ticket I stamp or every lot I trade or whatever it is.
That for me is just the worst boiler room type environment you could ever possibly work in as an employee and, as a client, it’s definitely the worst because all the people that are meant to be servicing you and telling you how to manage your risk are so busy fighting each other for who takes credit for your business, there is no incentive for them to act collectively as a team to give you the best service. So we don’t operate like that.
The second point is that we purposefully don’t give advice to clients. Advice is a technical thing that requires a certain type of work, which we do not want to do. But what we do have is the material and information needed for you to make informed decisions. So if you go on our website, we have a strategy builder which you can use without giving away any details.
You can say, ‘ok, I think that markets are going to be more volatile’ or ‘I’m bullish on equities’ – whatever it may be. And the strategy builder basically goes, ok, based on those answers, you may want to look at a put spread or sell a strangle, or whatever it is.
So to come to your question, that’s how we operate, but in terms of clients, one of the pillars of the Consumer Duty regulation that is now in play is your target market. And that’s really critical. So if you are a pay day lender, you are going to have quite a different target market to an equity release company.
For us, the target market is people with an existing store of wealth that want to use options for protection, generating an income, or tactical trading. So that can encompass a broad group of people but it does tend to mean wealthier individuals.
What we have is a rigorous onboarding system, so that if you are putting in that you make X amount of money or have not traded much before, it will be a red flag for us and we will have to understand what you are trying to achieve.
At the same time, consumer duty does not prevent you from onboarding customers, you just have to be damn sure that you know what their vulnerabilities are, that you are monitoring them, and that they have a good outcome, not withstanding that vulnerability.
But even taking that into account, we don’t want someone who has traded £10 of crypto and thinks they are going to be a millionaire next week. That’s not to say we only take millionaires. But we want someone that can develop into a good client, by which I mean someone that loves us and wants to keep doing business with us because they are also happy with the service and outcomes they get from doing business with us.
Ok, so part of the reason I ask that is anecdotally I saw quite a few people who, firstly, did not want to trade in spread bets or CFDs but did want leverage. Then they looked at Robinhood and similar platforms in the US that have made options trading simpler and easier to do. You potentially fill that gap, so I’m curious if you have seen people move over as a result of that?
So there is definitely a cohort of people who either work or used to work in the City. A lot of them are retired. And they just like trading the financial markets. So that’s one group.
Another factor is obviously the leverage and there are people that come to us for that. So for example, we had one client that wanted to open a large position in a bank’s shares during Covid. And with our help he could gain a lot of exposure, without putting down much himself. So there are people that are attracted to options on that basis as well.
And then we have a lot clients that are either using options to hedge out the risk in their portfolio or to generate income. So the latter is something that people that come to us often haven’t considered before or thought about. But when they understand the opportunities there, it’s something that they seek to take advantage of.
But in terms of disaffected traders from other platforms, I wouldn’t say that’s a big demographic for OptionsDesk. What I would say is that there are some people that like to leverage up on specific stocks and that there are also a lot of younger people who often like the mathematics or mechanics behind options and how to trade them. So that is a cohort you see as well – basically very smart, mathematically minded people, who believe they can gain an edge by trading options in one way or another.
On that point, one of the things that I would say is a strength of something like a spread bet or a CFD, is that it’s quite an intuitive, point and click product. Options can seem a lot more complicated and difficult for the average person to understand. Do you think that is part of the reason they haven’t taken off so much in the UK?
I don’t think that’s the case, I think the problem here has been that it’s been a huge headache offering options to retail investors from a broker’s point of view.
Why is that? Well, it’s almost like a free option. If you do well, great, you are going to say things are fantastic and how wonderful we are. If things go wrong then you will find people suddenly turn around saying they had no idea what they were doing, the product was too complicated, and so on.
So if you look prior to the financial crisis, a lot of brokers here did offer options but the headache for them just became too much. The revenues did not justify doing it. So that’s the biggest issue in my opinion.
That has meant for us, it has been almost four years of blood, sweat, and tears, of building all the technology needed to make sure we have the right onboarding process, that we have all our books and records streamlined, all our logs, and so on. It has basically required a monumental amount of investment so that you can do something as simple as pick up the phone and call us to trade.
And when people do trade, is it individual equities or indices? Something else?
The US on the equities front dwarfs the UK. That’s not to say people don’t trade UK stocks but the US is much more popular. You know, I think a lot of people look at Warren Buffet or whoever and think ‘I’ll do the same but juice it up with options.’
Then you do also have a lot of people that trade on indices. A lot of the time those are people trying to protect themselves from what is happening in markets but there are also people that think markets are going to rise or they want to trade around economic data as well.
What I would also say is that you have more people trading equities but the people trading indices tend to do it in much larger volumes.
2023 has been tough for lots of the financial services industry and I think brokers fit in that mould. Has that had a slowing effect on your business and what do you think we can expect moving forward?
You know I’d say since the Greenspan put in the 90s and the bailing out of Long-Term Capital, way before the financial crisis and the era of low rates, risk has been seriously mispriced. And we’ve had this environment where so many markets have just been a bottom left to top right graph.
When you are in that kind of environment it’s easy to get lulled into a false sense of security, of complacency, because it’s almost as though anything you buy is going up.
And so what I think people are seeing now is that, with rates higher for longer, you cannot just approach things as simply as you might have previously. So that might mean using leverage in some areas of your portfolio or using options to provide some downside protection.
At the moment, we’re seeing more people buy volatility. Because it’s not staying like this for much longer.
