Trading options on the stock market brings with it incredible upside potential for investors who are right. But it also welcomes incredible financial risks for those who are wrong. These financial instruments have often been reserved for more savvy investors. By restricting options, investors miss out on tools that can help them achieve financial independence. However, there are also fees and other hurdles that exist when investors go to buy and sell options contracts. The end result is plenty of problems facing the options market that need correcting.

One company offering a solution to the issues in the options market is Gatsby. Through its simple, minimalist interface, the company gives its users the ability to easily trade options on the market. Gatsby, like Robinhood, provides commission-free trading for options. Unlike Robinhood, it does not offer trading for stocks or cryptocurrency. The platform does incorporate some social components to it. The biggest example is the ability to see what other users are buying and to leave feedback about another’s activity.

In addition to allowing others to trade on its platform, Gatsby has developed an API for developers and traders. This will allow them to incorporate the platform’s features on their own trading systems. Instead of charging users for this feature, the company gets the benefit of being able to monetize their order flow by selling it to other parties. This is only possible because Gatsby went through the expensive and time-consuming process (as much as $250,000 and six-to-nine months) to become a registered broker/dealer.

Since launching its service in December of 2019, Gatsby has seen over 7,000 accounts opened on its platform. These users have collectively traded over 100,000 options worth more than $30 million. Management claims growth of around 10% per week. Although the platform does not charge commissions on its trades, it does generate revenue through the sale of order flow. They estimated this figure is around $0.55 per contract. Given an average of 630 trades per user each year, the company’s gross revenue per client works out to around $346.66. Their lifetime value, meanwhile, is estimated to be $593.29. By comparison, the average customer acquisition cost is about $23.49. This cost grows when you consider getting customers to actually invest through the platform. The cost per funded account (with an average balance of nearly $1,100) is about $71.06.

In both 2018 and 2019, Gatsby generated nothing in the way of revenue. In 2018, the company lost $0.149 million, while in 2018 its loss was $1.09 million. Cash outflows in 2018 totaled $0.148 million, while in 2019 the firm’s net outflow totaled $0.94 million. Given the company’s existing user count, its annual run-rate revenue should be about $186,000. Management expects that its breakeven point should come in the second quarter of 2021 when it believes it will have 35,000 funded accounts. If this comes to fruition, annual run-rate revenue would be around $3.54 million. Investors should, however, very much take this with a grain of salt. Projections are simply that and they are often wrong.

Gatsby’s markt is straightforward. According to Nasdaq, the total number of options contracts traded on US markets every day comes out to about 23.22 million. Of those, 22.02 million (or 94.5%) are equity options. At $0.55 per contract, the total addressable market Gatsby fits in works out to about $3.22 billion per year. This is based on a total of 252 trading days per year, on average.

Expanding internationally can be a challenge for firms in the securities industry. However, this could provide additional opportunities for the business. If Gatsby can generate the same kind of revenue abroad that they can here, its prospects look much bigger. Total options traded globally in 2019 came out to 15.23 billion. This is up nicely from just 9.42 billion seen in 2013 for an annualized growth rate of 8.3%. At 15.23 billion, this implies a global market opportunity of $8.38 billion. Another area the business could expand to is the futures market. This space represents another 19.24 billion contracts per year. It is uncertain if pricing for order flow is similar for futures as it would be for options. But if so, then this could expand their global opportunity by another $10.58 billion.

For how early-stage Gatsby is, the company has a sizable, star-studded team running it. Let’s start with its Co-CEOs, Ryan Belanger-Saleh and Jeff Myers. Belanger-Saleh was the co-founder of Dealtable.com alongside Myers. In the past, Belanger-Saleh served as the CTO of BLUE Technologies. Myers’s prior experience also includes serving as a lead of the digital products operations at NBCUniversal. 

Another key member of Gatsby’s team is Davis Gaynes. He is presently the business’ President. Previously, he was employed as a Senior Executive at Instinet. He was also, at one point, a Board Member at Reuters America. Gatsby also has a CTO and a COO on its team. Its CTO is Jeffrey Kleis. Previously, he was the Lead Developer at RelaDev. Before that, he worked as a Team Lead at Apex Clearing. This makes him perfect for his position since Apex has served as the clearing broker for most of the major fintech apps in recent years. Gatsby’s COO, meanwhile, is Peter Quinn, the founder of Public.com, which is a well-known stock trading app.

Upon a careful evaluation of Gatsby and its prospects, KingsCrowd gas given it a Neutral rating. The company operates in an attractive market, and its traction so far is great. Add in a quality, experienced management team and it’s hard not to like the opportunity here. There are, however, some problems. For starters, the valuation — set at $25 million on a pre-money basis — is really high for how early-stage the business is. The fact that it has achieved broker/dealer registration helps to justify some premium as it removes some uncertainty for investors. However, it is still high nonetheless. Another issue is that while the options market is more niche than stocks, there are other competitors in this market. Robinhood is the big player, and its more than 10 million accounts makes it a difficult competitor to deal with. None of this should be construed to imply that Gatsby doesn’t stand a chance. But it does mean that the company has a lot of fighting it will have to do if it wants to succeed.