In 2017, two of the largest retail brokerages in the country, TD Ameritrade Holding Corp. (NASDAQ: AMTD) and E*Trade Financial Corp (NASDAQ: ETFC), found that millennials, not their older Gen-X and Baby Boomer counterparts, were the most active options traders on their platforms.
This may have been surprising to some, but it shouldn’t have been. Even the youngest millennials, the cohort born between 1981-1996, have reached adulthood. And while this generation is still largely hampered by unfavorable macro forces like rising student loan debt and stagnant wage growth, this is a demographic with an increasing amount of disposable income.
Take that income, throw in a long time horizon and a healthy mix of new platforms that make investing easier and cheaper than their predecessors, and it’s not hard to see why millennials are becoming more attracted to derivatives, options specifically.
Think about it. The rise of roboadvisors over the last decade has helped many otherwise non-investors get exposure to the markets in a passive way. Now, they want to build on that foundation.
Look around the retail brokerage space. Robinhood has more than 6 million users and a $5.6 billion valuation. TD Ameritrade lets its clients trade directly from their social media accounts. Clearly, the market is there.
Increasing Access While Protecting The Novices
And yet, with all the advances in retail brokerage offerings over the past few years, we felt like something was missing. Options are an amazing tool that can both increase buying power and allow speculative trades for, or against, stocks and ETFs while limiting risk.
But the barriers to entry are still too high. The jargon too complex. Matrices too hard to follow. The commissions too expensive.
We started working on Gatsby in 2018 to fix this very problem. The idea was, if we can design an intuitive user interface, ax the commissions, and remove some of the unnecessary jargon, that would make it easier for newer investors to access this instrument—a net positive for everybody.
Still, we recognize the need to protect new options traders. The last thing anybody wants is to unwittingly get in over their head by entering a trade without knowing all the risks. This is why for now we’ve limited functionality to just buying options, therefore capping investor risk.
If millennials have taught the financial services industry one thing, it’s that they are not as financially illiterate as the cliche would have you believe. They simply want to be treated better.
The way we see it, the difference between the two main revenue drivers of a retail broker— commissions and payment for order flow—is that one of those things actively discourages trading. So why do we need it?
We don’t. The stock market can be a wonderful place that allows for generational wealth building, and options allow investors to take a more active short-term role. Let’s make it so more people can participate.
Jeff Myers is the co-founder and co-CEO of Gatsby, a commission-free options trading platform.
Photo by Austin Distel on Unsplash
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