Chris Lapointe, CFO of Sofi Technologies, said on the company's most recent earnings call that the company would soon roll out options trading, which will give investors the right to buy or sell a stock. There are lots of financial products at SoFi, including loans, cash management accounts, personal budgeting tools, and more. It might not seem like it, but this feature within the SoFi Invest brokerage could be a big deal. Let me explain.
An option is a bet on a stock hitting a certain price by a certain date. If you think a stock will hit $50 or more by July, you can buy call options on that stock. If the stock hits $50 a share, you are set to make some nice gains because it involves multiple shares.
The risk with options is that if the stock doesn't hit $50 a share by the set time, you lose all the money you paid for the options, whereas if you were just to buy the shares, your money would still be intact.
SoFi members can buy and sell stocks and cryptocurrencies with no commission. It isn't a market maker, meaning it doesn't execute those trades. Rather, it helps source those trades to the digital custody and clearing company, which then connects with market makers to facilitate the trades. Payment for order flow is the fee SoFi earns for driving these trade orders.
When it comes to options trading, these orders tend to be more profitable than regular equity orders. In the fourth quarter of the year, options trading made up over half of the total transaction revenue at Robinhood Markets. The largest revenue source is transaction revenue.
Market makers make money the same way normal traders do. They buy a bunch of stock orders at a single price and hope to sell them at a higher price in order to make money. Market makers pay higher fees for options trading because they carry larger spreads.
If you have followed SoFi, you know that it uses a strategy called a "flywheel" in which it hopes to sell multiple financial products and services. The company only has to invest in acquiring that customer once if it sells multiple products.
To succeed with its strategy, SoFi needs to bring people onto the flywheel and into the SoFi community. The SoFi Money cash management product, the SoFi Relay budgeting tool, and the SoFi Invest online brokerage account are the three products that most of SoFi's members come to first.
New members tend to use the company's more profitable credit card and lending products when they join.
More people are likely to sign up for a SoFi Invest account if they have a better investing platform with options trading. In the fourth quarter of 2020, SoFi had more people using its Money and Relay products. At the end of the fourth quarter, SoFi Invest had more accounts than Money and Relay.
One reason that could explain this is that SoFi has grown the number of cryptocurrencies that can be bought and sold through the broker to 30.
The more capabilities the Invest product has, the more effective it will be at pulling in members. Although a huge part of the flywheel strategy, this has been a drag on the company's financials, as SoFi houses its Invest, Money, and Relay products in its financial services division. Each of the last three years, the division has reported a significant contribution loss.
The Invest product is more attractive to prospective members because of options trading, so it could be a big deal for SoFi. It could improve revenue in the Financial Services division. We don't know what kind of fees SoFi would get for options from Apex, and options trading can draw more scrutiny from regulators, but the addedFunctionality certainly looks like it would be a plus for the company.
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