Interactive Q&A: Ned Bennett, Co-Founder and EVC of optionsXpress

This is the latest in the Seeking Alpha series of interviews with leading financial firms of interest to our readers. These, however, are interviews with a twist: the executive has agreed to answer questions and respond to comments not from a single interviewer, but rather from our community of readers and contributors.

This interactive Q&A is with Ned Bennett, the co-founder and executive vice chairman of optionsXpress Holdings, Inc. (Nasdaq: OXPS), which offers a suite of brokerage services for option, stock, futures, mutual fund and fixed-income investors. optionsXpress has sponsored this interview, which works like this:

• Ned briefly introduces himself and the issues he's focused on below.
• Readers and contributors can immediately start to post questions and remarks using the comment box below (Note: you need to sign up for free registration and be logged in to do so).
• Seeking Alpha editors will not filter or edit the questions and comments from readers, except to delete profane or inappropriate language.
• Ned has agreed to respond to the questions and remarks by beginning to post answers to readers' questions on Tuesday, April 24th. Readers can track his answers and respond to them during that period, with the resulting dialogue remaining on the site.
• Readers can respond to his responses during that time.

Yahoo Finance readers may join the Q&A by following this link.

Over to Ned:

Hello, my name is Ned Bennett, and I am the co-founder and executive vice chairman of optionsXpress Holdings, Inc. (Nasdaq: OXPS)

At optionsXpress, we see ourselves as the customer’s advocate. This means that we work with exchanges to create faster, more transparent markets; with market-makers to find new price improvement opportunities; and with technology to build what we believe is the best online broker platform.

Note that I haven’t even mentioned options yet. But yes, as our name suggests, and as readers may know, we are specialists in equity options.

optionsXpress was founded in 2000 by myself and two partners, our chairman, Jim Gray, and our CEO, David Kalt. Since then, optionsXpress has leveraged our deep understanding of equity options to help over 220,000 retail investors generate income, protect their portfolios and enhance returns.

In addition to options, we recently acquired XpressTrade, a highly respected online futures broker with a spirit very similar to ours.

I’m happy to discuss any market-related topics – options, futures, stocks, bonds, mutual funds or otherwise.

I look forward to hearing from you.

~ Ned

Comments

[David Jackson]

Thanks for doing this Q&A, Ned.

There's been speculation recently that the recent results from the online brokerages might lead to consolidation. See for example this view from Barron's.

What's your view of the potential for consolidation in the online brokerage sector? Who would it make most sense for?

[Ned Bennett, optionsXpress]

I think consolidation is inevitable. It has been in all industries. The Wall Street analysts see E*TRADE and Ameritrade as candidates. I think you may see banks and other traditional brokers get in the mix, too. Ned

[SA Editor Eli Hoffmann]

Hi Ned,

It's great of you to come here and answer questions.

For a trader thinking of 'getting his feet wet' in options trading (correct me if I'm wrong), it seems that charging a $14.95 minimum fee forces him either to trade multiple contracts in order to take advantage of discount pricing, or to pay a hefty per-trade premium. Are there options for someone looking to trade as little as 1 contract at a time without paying through the nose?

[Ned Bennett, optionsXpress]

Thanks for your comment. I have traded options for more that 30 years, and I must say, other than a covered call and a one to one index put, I have never seen any one make money with fewer than 5 lots. In fact, most programs show the optimum is 8 contracts or more.

We have priced to make money. We are a great value for the 8 contracts + traders. I have a problem pricing to encourage a one lot trader, as I don’t believe they have much of a chance.

We have a great virtual site to practice, at no charge.

BTW, active traders pay $12.95. Ned

[Philip Davis]

This is a great idea for a forum, thanks for doing this!

What is your position on the new margin requirements and how do you forsee it rolling down to the retail traders (if at all)?

Do you see this as a plus for your company or a dangerous way to leverage up accounts?

======================...

Eli's issue is one that is common with my readers - although I often recommend your service I can't argue the fee issue to small traders. While I recognize it's difficult for you to affix lower fees I think something like $99 for 20 small transaction paid up front would be a good way to introduce your service to newer investors. We've been running a $10K Portfolio for the past month and 51 trades in 30 days eats up $800 out of $2,300 made - not a good percentage. Also, the fees make it prohibative to get out with a small loss (as you compound it) which makes it even worse for small investors trying to make good decisions.

[Ned Bennett, optionsXpress]

The new portfolio margining will be a “step up” for the industry. We are very excited about it. The big question is the size of the account that will benefit.

We believe all accounts with spreads or complicated positions will benefit. We are ready for the retail roll out. Ned

[Ned Bennett, optionsXpress]

Email me account number. You should recieve an active rate.

That is a good suggestion, we will look at it. Ned

[Ned Bennett, optionsXpress]

My email is nbennett [at] optionsXpress [.com]

[njholm]

Hi Ned,

Thanks for the opportunity!

Is there a chance you'll offer the ability to roll with a single fee? Just asking, as a competitor recently made this available.

Thanks,
N

[Ned Bennett, optionsXpress]

I am not sure I understand, multi leg at one price? Ned

[Philip Davis]

Sorry, just read your last comment.

I don't see 8 contracts as being optimum, I see $800 as being about the minimum, almost the same thing but sometimes that is one contract.

The virtual site would be great if you could buy and sell at the next actual trade rather than always buy at the ask and sell at the bid as this shaves off a lot of money for no reason and makes it hard to get an accurate view of how your strategy is working. Of course there are quantity issues but I think the good outweighs the bad if we stick to the actual trading price, or at least allow it to be an option.

[Ned Bennett, optionsXpress]

The site does fill you in between. There needs to be a trade, just in the real life. It will do "price improvement" if there is a trade. Ned

[Options Today]

Hi Ned,

Great to have you! Regarding portfolio margin requirements, it seems that OXPS restricts the offering to traders with 3 years experience and $100,000 equity. Can you tell us why such restrictions exist? Is there a correlation you see between trading competence and portfolio size? I see a lot of people coming through courses with small capital amounts and tremendous sophistication and some really wealthy individuals who know very little so I would appreciate your comments.

Thanks!

[Ned Bennett, optionsXpress]

The regulators wanted a place to start. We will lower as it evoles. Ned

[Options Today]

Hi Ned,

It seems education is a critical part of trading and that you are pioneering in that field with partnerships. I have learned from one of the companies you are partnered with and believe that some of the instructors are outstanding while others are so-so. Have you considered plucking the talent and having them create an educational product for you? If you are interested in more comments offline I would be happy to offer them. My email is ILOVEOPTIONSXPRESS@GMA...

Thanks!

[Ned Bennett, optionsXpress]

No, I will let the world see my answer. I love your email address.

We will continue, for the most part, to partner, while building "our" education. We believe that general education can be done in house and specific types need to be out side.

We like to hear feed back about the instructors as we can help getting the best. Ned

[nglhansen]

What factors (first derivatives) and hedge ratios do investment banks subscribe to nowadays when hedging some of these custom long-term calls and puts they're writing? Just trying to get a feel for what hedge strategies and expected returns ex fees are reasonable presently outside of a few-month durations.

[Ned Bennett, optionsXpress]

As a retail trader I have no clue as to what the banks are doing. However, I put it out to our institutional traders. So...if I get an answer I will relay. Ned

[nglhansen]

Thx Ned

[User 39448]

Hi Ned,
This is a great forum -- thanks for participating.

We've all read about etrade's plans to introduce a global trading platform: https://us.etrade.com/...

How does this new product/service introduction affect the online brokerage business in general and your business in particular?

[SeekingAlpha Editors]

My pleasure.

We are already in EU, Singapore and Australia, Members of the Australian Stock Exchange, and have just added futures, so…my feeling is “Global Platform” not far behind for us, too.

The new products are sometimes challenging due to education. The on line platform is “self directed”. So as new products and new venues come about we need to help ensure that our customers are up to speed. As globalization comes everything will need to be valued in multiple currencies. Ned

[Options Today]

Ned I have found Fasi Filiaga and Gareth Feighery to be the best two instructors out there for what it's worth to you

[Ned Bennett, optionsXpress]

Thanks, Ned

[SeekingAlpha Editors]

Hi Ned,

Thanks for doing this.

The other online brokerages have tried to reduce their reliance on transaction-based fees, so that in the event of a stock market downturn they'll be less exposed to a fall-off in trading. E*Trade, for example, highlights its banking revenues and asset related income in its conf calls, and says that it's become much less reliant on trading commissions.

Can you talk about optionsXpress' strategy? What percentage of your revenue is from transaction commissions, and what % from non-transaction based sources? And what's your strategy to diversify, if any?

BTW, it would be very helpful to have your conference call transcript on Seeking Alpha. Not sure why they don't publish it.

Cheers,
Spencer

[Ned Bennett, optionsXpress]

Thanks. While we do not give “guidance” on % of income derived from any source, let me say that we are not a bank, we are a broker, and in the retail self directed space, we are transactional. That said, we have a second brand, brokersXpress, which is an RIA and caters to independent brokers, money managers, small hedge funds and family offices world wide.

We are comfortable with our model. Remember, options traders’ trade both sides of the market unlike stock trades do. So we participate in down markets as well as up markets. In fact, our best market is a side ways volatile market. Ned

[SeekingAlpha Editors]

How much of a threat is to to your business that the larger online brokerages are improving their options trading? They have much larger marketing budgets.

Thank you.

[Ned Bennett, optionsXpress]

I have been a broker for more than 40 years and the one thing I can guarantee you is there will never be just “one” broker. Customers identify with their broker and they stay with them due to the personality.

When we started optionsXpress no broker, on line or traditional were treating options seriously. We changed that and due to the other brokers joining the fray the whole market is growing. We are delighted that the “big” guys have started advertising. “When the circus comes to town ALL BALOON VENTORS do well”.

The greatest thing for us and the options industry would be if the “big” guys really got serious on options and made them the number one asset class. But, alas, I dream.

I will say this; we have an options franchise that will bring 90% of the options traders to at least visit us. And to be honest, we are still light years ahead of the “big” guys. That doesn’t mean “everyone will love or even like us”. It just means they all know who we are.

As for advertising and growth; we have plenty of resources to compete. And our growth is and has been deliberate and measured and will continue to be. You can really make customers mad if your growth out paces your service. Ned

[SeekingAlpha Editors]

Ned, following up from Spencer's question above: how sensitive to market conditions are options trading volumes compared to stock trading volumes? What kind of decline in your trading commissions should we expect in the event of a 6 month correction in the markets?

Thanks for answering our questions here.

[Ned Bennett, optionsXpress]

As I said, options traders trade both sides of the market. Remember, we started the firm in an ugly bear market, 2000. Our customers were overall very successful. The pundits like to say retail customers are “sheep”. Well if that’s the case, our customers have proven that it was because they had a “broker” who was the herder. Ned

[SeekingAlpha Editors]

Thanks for this opportunity Ned.

How big is the futures opportunity for you? What % of your customers are or could be interested in futures? Have you talked about what kind of revenue growth that could generate for you over the next year or so?

[SeekingAlpha Editors]

Futures are just another arrow in our quiver. We think there is a big opportunity to do for the futures trader what we are doing for the options traders. The market is not as large but neither is the field of competitors.

It is also a step towards the small hedge funds and the overseas market. I believe that’s a great opportunity for us. Ned

[holly]

Hi Ned,

Thanks for this great forum! Now that ISE's forex options have been trading for a week, I was wondering what kind of retail response you've received since the launch. Are your customers showing increased interest in forex options trading with the new product out of the gate? Are there any advantages to ISE's fx options over similar products offered by the Philadelphia Stock Exchange? Thanks again, looking forward to hearing your thoughts. Holly

[SeekingAlpha Editors]

Good response to the launch, our customers are still learning the product. It is quoted in the dollar, so it is a little different. We think it will have great retail appeal. Ned

[SeekingAlpha Editors]

Ned, thanks for answering questions.

What positive aspects of your business are not sufficiently appreciated by Wall Street, as reflected by your stock price?

[SeekingAlpha Editors]

That’s a tough question. We do not give any specific guidance on the various segments of our business, as a corporate policy. So it is hard to determine what the street knows, understands and values. I think that overall they do a good job. They seem to not understand the seasonal nature of our business. They seem to think every year repeats itself, like retailing.

I must say that the licensing in foreign countries is big going forward. It is not as easy as it sounds. Ned

[SeekingAlpha Editors]

Ned, thanks for doing this.

You mentioned earlier that you thought the banks and full service brokerages would make a move to acquire the online brokerages. My questions are as follows:

-- None of the full service brokerages have made a move so far. In fact, they even sold their online divisions. For example, Morgan Stanley sold Discover Direct. What makes things different for them now?

-- If you had to guess, which banks do you think will make a move into the online brokerage sector in the next two years?

[Ned Bennett, optionsXpress]

In my opinion, the major traditional firms are having an internal struggle, producers versus “self directed”. I think they are trying to transition to the fee based model. Once that is done they can offer the transaction model online as self directed. In a nut shell, they are afraid that their producers will get upset and leave if they “compete” for self directed.

I think they will discover that every one with a computer has an online account. And as the online firms began to compete for “assets” and be successful it will wake up the “sleeping giants”. They will decide to participate. Charles Schwab is doing a good job of gathering assets. Just look at the offerings of the big traditional firms, they were second rate at best. They will figure it out. We are not that smart.

Banks and brokers have always been like oil and water. As groups, we look at everything differently. And so each foray has been painful. But the banks are learning…a branch on every desk, and brokerage is a part of what can be offered. They will learn that price, even zero, means nothing when you can’t comfortably make the trade.

But as online banking grows they will learn. Which ones… I am not in that line of work, but I think it won’t take too much to pick the aggressive ones. I think the successful one will buy not build so that they get the management to lead.

Ned

[SeekingAlpha Editors]

Ned, in answer to my questions above you wrote:

<blockquote>They seem to not understand the seasonal nature of our business. They seem to think every year repeats itself, like retailing.

I must say that the licensing in foreign countries is big going forward. It is not as easy as it sounds.</blockquote...

Can you expand on these points and explain in more detail please?

Thank you,
Frank

[SeekingAlpha Editors]

I will try.

In brokerage, given 4 calendar quarters, over my career there is always one spectacular quarter, two normal and one very slow. The analysts seem to think they will be the same as last year when modeling. And when the quarter does not shape up in the way they expect they do not adjust. It is not a science and a prediction is a “best guess”.

I think there will be big growth in the foreign markets and in foreign participation in our market through on line delivery. I think “being there” and able to book business will be a huge advantage. The foreign regulators are not going to let their business go to unregulated firms. Our regulators are willing to help enforce the foreign regulations because our regulators want reciprocity.

Hope this helps. Ned

[SeekingAlpha Editors]

That's helpful. Thanks again for your answers -- this has been great.
Frank

[SeekingAlpha Editors]

That closes this interactive Q&amp;A. A big "thank you" to Ned Bennett of optionsXpress for his participation, and to Seeking Alpha's community for your great questions.

The full list of links to Seeking Alpha's interactive Q&amp;As is here.