Plus500: past performance is no guide to the future

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Pop quiz: what would you expect the share price chart to look like for a company whose industry will soon face tough regulatory reforms, where a temporary rush of business is ebbing, and whose founders have sold large amounts of stock?

Wrong!

It looks like this:

Quill Cloud

In the last year Plus500, the contract-for-difference group, has reached a value of £1.9bn, to become one of the largest companies on AIM, London's junior market favoured by soon-to-be-bankrupt miners, disappearing Chinese entities and tech-focused gobbledygook merchants.

The business is best understood as a bucket shop. It operates a closed system that allows customers to place bets on currencies, stocks, financial markets and the price of crypto-tokens, using large amounts of leverage to magnify the gains and losses.

Plus500, which declined to comment, always maintains it is a market-maker. It says its profits come from a spread - the difference between the price at which customers can buy and sell contracts - and interest charged on positions held overnight, rather than customer losses.

Its argument rests on semantics. The reality is that leverage magnifies the cost of the spread, eating away at the limited capital of small-time traders. High levels of churn in the customer base, with new punters found online to replace the old, point to a longstanding pattern: traders join, lose money, then stop trading.

It isn't just Plus500. Regulators across Europe have repeatedly found that more than three-quarters of CfD traders lose money, with 89 per cent on the losing side in a French study. Which is why the European Securities and Markets Authority has ordered a crackdown, including restrictions on the amount of leverage and the way CfDs are marketed to the stupid, vulnerable and inexperienced.

For instance, the permissible leverage on currency pairs will be 30:1. Plus500 currently offers 300:1.

Such limits should impact the revenues and profits of CfD providers, and the evidence is that they do. After Japan introduced leverage limits in 2011, IG Group's sales in the country halved. IG has also said that it expects ESMA's changes to hit group revenues by around 10 per cent, in the year starting June 1st.

The leverage limits only apply to retail traders, not those classed as experienced professionals, but note what IG said in a recent update (with our emphasis):

“The Group has received around 15,000 applications since November 2017 from clients to elect to be categorised as professional, and 3,800 clients are now categorised as professional. The Group's process for assessing these applications is appropriately rigorous and over three-quarters of the applicants to date have been rejected. Clients categorised as professional contributed over 35% of UK and EU OTC leveraged revenue in the last three months, and the Group continues to expect this proportion to rise to 50% when the ESMA measures come into effect. 

Since Plus500 experienced a regulatory intervention by the UK's Financial Conduct Authority in 2015, it has tightened up its act on compliance. Penny Judd, a compliance expert, is non-executive chairman, so we'll assume the company is going to play by the new rules.

Yet it offered guidance in May that there will not be a material impact to full-year numbers from the new ESMA rules. Analysts' forecasts are for sales and earnings growth in the years after.

Considering Plus500 mainly caters to retail customers, such an outlook is hard to square with a regulatory approach designed to reduce the customer losses that provide as the bottom line for CfD houses.

At the same time, Plus500 has just experienced a record quarter thanks to the crypto boom. It was one of the few places punters could bet on bitcoin, with leverage, which had two positive but temporary effects.

One was the company had to pay far less in marketing fees to find customers. User acquisition costs almost halved, compared with the first quarter of 2017. Second was the crash in crypto prices at the start of the year, which we suspect wiped out large numbers of the new traders. Plus500 reported revenues had almost tripled, and fully 80 per cent of those revenues were captured as ebitda, a phenomenal margin no business can expect to maintain.

Just matching these numbers next year will be tough, even without the imposition of leverage limits.

So what should shareholders think? The company has said it intends to apply for admission to the main market, which would bring new investors and attention. Yet in March the founders of the business, who we assume understand its potential better than anyone, sold £80m of stock, almost two-fifths of their collective holdings. The sensible strategy would be to leverage that insight, and follow suit.

Related Links:
The trading magicians of Plus500 - FT Alphaville

  1. WeWrite-down
  2. No deal Brexit is not a hedge fund conspiracy
  3. Europe’s digital infrastructure issue
  4. Let’s give a helping hand to Andrew Yang
  5. Anatomy of a malware scam
  6. ARK Invest’s Tesla model gathers dust
  7. A delirious defence of Uber
  8. WeLiquid: Adam Neumann pockets $700m
  9. Yesterday, in efficient markets
  10. The warm fuzzy feeling of indirectly owning Tencent
  11. The best of Morgan Stanley's Adam Jonas
  12. Apple/Tesla: M&A and heartbreak
  13. Did Beyonce make $300m from Uber's IPO?
  14. Bitcoin is the 10-year Treasury of our time
  15. High resolution music is a solution looking for a problem
  16. Amazon is furious about this negative review
  17. Missing: $500bn of American savings
  18. Blockchain for Brexit: a wonderfully terrible idea
  19. The Bank of Hodlers [sic] (sigh)
  20. Behind the curtain at China Ding Yi Feng
  21. An answer to Mark Cuban's question
  22. Crumbs! It's CRYPTO: the movie!
  23. National Beverage Corp loses its fizz, and its mind
  24. Amazon won't spin-off Amazon Web Services
  25. Mensch! Dan McCrum is innocent, ok?
  26. Europe's $1 trillion tax gap
  27. Why online propaganda mobs are an investment red flag
  28. Davos has produced an amazing new guide on precisely how not to think about risk
  29. When the public relations industry does PR for itself
  30. Who wants to be crippled by student debt?
  31. The bitcoin price is wrong
  32. The warm fuzzy feeling of Goldman debt
  33. “Cryptoassets” are crashing again. Is it time to start calling them cryptoliabilities instead?
  34. Puff the tragic cryptowagon smokes out the Mumsnet demographic
  35. Don't write off the public sector
  36. Initiative Q: an elementary pyramid scheme with grandiose ideas [Update]
  37. Moral investments aren't outperforming
  38. No one is killing it in crypto (not even Woz)
  39. Too smooth: the red flag at Patisserie Valerie which was missed
  40. No, the housing crisis will not be solved by building more homes
  41. Sorry Civil, 'crypto-economics' and 'constitutions' won't save journalism
  42. 'Short-termism' isn't a thing, say Fed economists
  43. Coinbase wants to be “too big to fail”, lol
  44. Regulation and innovation don't have to be enemies
  45. Retailers get so lonely around the holidays
  46. Folli Follie: $1bn of fake sales, and what to learn from the debacle
  47. The new green evangelism
  48. Tilray, how low can it go?
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  87. Oh, the digital humanity
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  89. Spot the difference, Steinhoff edition
  90. Larry Robbins, a cautionary tale
  91. The node to serfdom
  92. Carney is down with the crypto kids
  93. Samsonite: inventory, excess baggage, and unresolved questions
  94. It might be a long wait for “the equivalent alternative to ICOs”
  95. Don't blame it on the sunshine
  96. In corporate America, brands develop you
  97. One in ten dollars of US housing were anonymous
  98. Should AT&T worry more about its debt?
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  101. Tokens all the way down
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  128. The magic of adjustments: ebitla-dee-da
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  130. A complex analysis reaches same conclusion as simple one: hedge funds suck
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  132. These hedge fund numbers can't be right
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  134. Lies, damn lies, and charticles
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  136. No, Facebook should not become a nonprofit
  137. Sell all crypto and abandon all blockchain
  138. Immutable ledgers meet European data protection
  139. Amazon is not a bubble
  140. Japan's economic miracle
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  146. No one needs to buy Tesla
  147. How to win a debate in the cult of meritocracy
  148. Steinhoff International and the case of Pepkor Global Sourcing
  149. Sorry Jack, Bitcoin will not become the global currency
  150. The “academic’s cryptocurrency” is an elegant waste of time
  151. Cigarettes are the vice America needs
  152. Well that’s one reason to buy yen…
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  160. No Bloomberg, the world's richest people did not lose $114bn...
  161. Someone is wrong on the internet, government employee pensions and passive investing edition
  162. Someone is wrong on the internet, possibly fragile
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  164. Someone is wrong on the internet: tontine tokens [Update]
  165. Someone is wrong on the internet, road economics edition
  166. Someone is wrong on the internet, wages and the stock market edition
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