About last week
Since starting in March of this year, this newsletter has brought you several exclusive stories, a full explainer on the MetaQuotes-Apple ban and some in-depth valuation analyses on a few brokers.
But the biggest driver of new subscriptions ever in the short history of CFDs Weekly was….a poorly put together meme that took me 2 minutes to make on Microsoft Paint.
As the announcer at Oxford Circus likes to say about people wearing backpacks during rush hour…
You are all being judged, and judged harshly.
An interview with IG Index’s first employee
The great regret of my career to date is that I ended up missing out on the opportunity to interview IG Group founder Stuart Wheeler. I was all set to do so (thanks to one reader of this newsletter) but ended up leaving my role before the appointed date. Thus it never happened and now never will.
When digging through all those newspaper articles a few weeks ago, it reminded me of this and made me wonder if perhaps there was someone else that was at IG early on that I could speak to about the company’s formative years.
According to Wheeler’s autobiography, his first employee (bar a girlfriend who moonlighted as his secretary for two hours a day) was Robert Sheehan. So I looked Robert up and, not only did he not tell me to go away, he was kind enough to do this interview.
Can you talk about how you knew Stuart Wheeler and ended up working at IG?
I knew him through bridge. After I’d been through university for quite some time, twelve years, I was then working at a management consultancy company. And in 1972, I got into the British bridge team to play the Bridge Olympics but they wouldn’t give me time off to play in it, so I resigned then and there. And then for about four years, I scraped up a living playing bridge and backgammon.
And then in 1976, I happened to run into Stuart at the Clermont, a very famous gambling club in those days. I used to go and play backgammon and a bit of blackjack. They didn’t like people coming in that just played backgammon, as it was a casino as well.
This incident is not recorded [in Wheeler’s autobiography] as how I thought it happened. I happened to see him in the Clermont and we had a drink at the bar. He said, ‘do you know anyone that could run my business for two weeks while I go on holiday?’ In the book, he says that I was slightly at a loose end and asked him if he needed any help while he was away, so two different interpretations.
Anyway, the result of this conversation was that I said, ‘well, try me’ and I worked in his fledgling spread betting company for two weeks and got the hang of it. And then he did go on holiday for two weeks and I ran in it while he was away.
It was on the top floor of a house just off the Kings Road. I would say it was run in a room about the quarter of the size of this one and it was the spare room at the top of a house. He did have a secretary but I was his first…I suppose you could call it, dealing employee.
But to make one point very clear, some people seem to have formed the impression that I, jointly with Stuart, started the company. That’s not the case at all. It was entirely Stuart, I was just an employee.
When he asked you to do it, did you actually know what spread betting was?
No. But you know, he took the view that because I was a pretty good backgammon and bridge player, that I’d pick it up pretty quickly. It’s not a terribly complicated business, if all you’re doing is plain vanilla, what we called up and down bets.
It’s not too difficult, so if someone makes an up bet, you hedge it at slightly less than they’ve opened it. And if someone takes a down bet then you hedge it at a slightly better price than the one you offer them, which we could do through brokers.
Why did Stuart start the business? Most people assume it was because of restrictions on buying physical gold in the UK
That was it, in 1974 UK citizens were not allowed to trade in physical gold. So Stuart had the very good idea of letting them bet so many pounds per movement in the dollar movement in the futures gold price.
There were five bullion brokers that were allowed to deal in gold, one of which was Mocatta and Goldsmid, and they agreed to hedge us by betting in the opposite direction of the punters.
Then it became apparent that, because it was a bet, any profits that were made were not subject to any form of capital gains or income tax. That also meant losses couldn’t be offset against taxable gains.
The taxman had a very poor idea of how to tax it because they didn’t know what it was. So initially they started doing it as a percentage of the bet. So if you had a £1 bet in cocoa, which might’ve been £2,000 in size, you could have a 100 quid profit or less, they only took 20% of the £1 bet.
But that was because there was simply no structure to tax it. We didn’t rock the boat about that and stuck with it. But it was also possible that if they said, ‘we’ll tax you 5x as much’, we could’ve said, ‘alright, our new bet won’t be per pound movement, in the cocoa price, it’ll be in per 10p movement in the price’, so you’d have an apparently smaller bet but with exactly the same effect.
So in those early days, were you having to do everything? If I think of IG today, it’s a huge operation with lots of people in specialised roles. If there were only two of you, then that probably wasn’t the case?
Well someone would ring up and say, ‘what’s September cocoa?’ We had direct lines to a couple of brokers, so we’d ring them up and get the price.
I can’t remember what cocoa was in those days…let’s say 1,000 a ton. That was the mid-price. So you’d go back to the client and quote them 1,003 because we could then deal with the broker at 1,002.
Was it difficult to get brokers to let you hedge with them? I mean, it can be difficult to do that today but at that point I would imagine they wouldn’t even know what spread betting was.
I wasn’t involved on that side of things but Stuart managed to do it.
You have to remember though, one of the advantages of dealing with IG Index for the small man was that they didn’t have to deal in whole lots. If you imagine one lot of cocoa is ten tons, the chap betting £1 on the price movement in it is only betting on one ton, which he certainly couldn’t do by going directly through a broker.
So what we would do in the early days, we’d keep a running book of our exposure and if it went over one lot, then we’d hedge by going long or short according to what the punters had been doing.
It was all done in a very pencil and paper sort of way. There was a manila folder for each of the assets we dealt in. So we’d write down the name of each person and the position they’d taken and so on. Then in the right hand column was our running position so if someone closed their position we’d have to update that. It wasn’t computerised at all.
I remember in Stuart’s autobiography, he talks about a time, I believe in the late 70s, when you had a large unhedged position in silver. So were there times when you didn’t hedge in the underlying market?
There was difficulty trading in silver at the time, it was when Nelson Bunker Hunt was trying to corner the silver market. But to my recollection, we always hedged when we had a position that was more than one lot either way.
By the way, the reason it took off in 1976, the fact that it was free of tax meant the shrewd boys in the city would much rather deal with us and pay us slightly more, to buy cocoa for example, because when they closed it out – usually at a profit because they knew what was going on – they had a winning bet, so they didn’t have to pay any tax.
That’s actually something else I wanted to ask. Today, you look at companies in the spread betting industry, they have a huge number of clients. But at that point in time, it seems like it was a very specialised product that only a few people knew about. Was that the case?
Well we’d put advertisements in Investors Chronicle or the Financial Times, Stuart handled all that side of it. So we got people sending in coupons and we’d chase them up. That was an aspect of it that I was not at all good at and I didn’t like doing. So in 1983 I was essentially sacked for not putting enough effort into that sort of thing.
What do you mean?
I wasn’t doing my share of the cold calling, which was a very unpleasant aspect of the job for me. Our cold calling was not the sort of vicious scammers that you have now. We never said to them, ‘look, this is the best way to make money’, we just said, ‘if you want to take a small position in commodities, this is what you can do’ and explained that, without saying it was the holy grail to making money.
How would you actually get people’s details though? I assume you weren’t calling people from the phone book
You’d put adverts in things like Investors Chronicle or Financial Times with a coupon. So people would cut out the coupon, fill in their details and send it to us. At that point, because they’ve cut out the coupon and sent it to you, it does give you justification to ring them up.
I might add, I can’t say enough about what an honest, decent person Stuart Wheeler was. When I joined up with him, I had some deal, for not being paid very much, I got 2% of the equity for each two years worked. So by 1983, when he sacked me, I hadn’t quite worked off the last 2%. So he didn’t have to give me that last 2% but he did. I got 6% over the 5½ years, which for years didn’t appear to be worth anything. I remained a director because I remained on good terms with Stuart and he wanted an outside director that understood what was going on. We did have a couple of directors that didn’t have much experience in the city.
Now this is another thing I’d say about Stuart, when he thought something had to be done, he’d do it immediately. For example, if he thought someone had to be sacked, there was no question of getting one of his minions to sack them, Stuart would do it himself.
When you started working at IG, I believe there was one other company called Coral Index, were you aware of them?
Both Coral Index and Ladbrokes Index had a bit of spread betting. But they were run by betting shop personnel and, quite honestly, didn’t have quite the intellectual clout to run them. IG Index bought both Coral Index and Ladbrokes Index eventually. We did take on a chap from one of them as well, this was when we expanded into sports betting. But for Coral and Ladbrokes, it was quite a small part of what they did. As I recall, we didn’t do much more than buy their brand names and client contacts.
And how many people were actually betting with IG when you joined?
I mean…a pathetic number – 20 or 30. Admittedly, it had been started in 1974 and then restructured. So it was a question of starting and getting clients in, with a lot of city people being very scornful and saying it will never work.
One company, which was notorious for ripping off old ladies, they were badmouthing us around the city. Luckily they went bust.
And were those customers mainly people working in the City? Today, I would imagine IG has a huge variety of customers, so you might have someone working in the City but also just a random punter.
Yea, well that was also the mix we had as we got established. As I say, particularly with cocoa and coffee, we had a lot of the people working at brokers in those commodities, who bet quite a lot with us. Usually we used to hedge straight back with them. They seemed to make money, so I assume they knew more about those markets than the market itself expressed. In other words, the market price was not the correct price.
Were you involved at all when the market crashed in 1987?
I was still involved because I was a director. In 1987 I happened to be in Jamaica in the bridge world championships. So I didn’t follow it very much, there were quite a lot of Americans there crying about being wiped out.
One of the problems with small clients was that if you had to make a margin call, they’d send you a cheque which might take a few days to clear, whereas the brokers immediately wanted collateral. So there was quite a nasty cash flow problem there. But there was a man who knew Stuart from Eton – there was quite a lot of ‘knowing people from Eton’ going on – apparently rang up and said to Stuart, ‘I’ve got a couple of hundred thousand sitting around’, so that helped to bail IG Index out.*
That would’ve been a time when there were more bad debts than there had been as a general principal. There hadn’t been many bad debts but that type of incident was likely to produce bad debts.
Was there anyone that refused to pay?
It wasn’t that they refused to pay, they’d say they couldn’t. We used to take out bank references on people, although those now are a thing of the past. And they varied in their strength.
Some would say, ‘we don’t see large amounts going through his account but we think he’d be good for the money’ or variations of wordings like that.
But the best one we ever had, which was on a duke, was one word – “undoubted”.
I believe at that point in time you could take on customers from the US, which today would be totally forbidden. Was that the case?
Yes, certainly there was a slight worry, Stuart and I both used to go to the United States, that we might be jumped on for taking Americans. I don’t know what it’s like today.
I suspect you might be jumped on if you tried it today. Do you know why they’d bother using a UK spread betting company?
I suppose for the capital gains and income tax advantage.
In those early days, did you have any inkling that IG could become the size it is today. I think IG is worth more than £3bn now.
No, I didn’t have any inkling of that. You see, I think this was one of the reasons Stuart didn’t think I was committed enough to it. Actually at the time, my initial deal, which Stuart offered me, was this deal of 2% per two years. But that was on the basis of me working three days a week. He asked me to work five days a week, or in other words I would’ve got 10% of the company. But at the time there was a very good backgammon game going on in London, in which I did make six figure sums for two or three years. So I wanted to have time to play backgammon, which is why I turned down the chance of owning 10% of IG Index.
Is it true that IG was only able to stay in business because of Stuart winning money playing bridge?
He was a member of the Portland Club and in those days, in the 1970s, there were a number of extremely weak players playing there. So Stuart certainly made quite a reasonable amount of money out of it each year. That was about the only thing that kept him going in the early days of IG Index.
Well this was all very interesting, thanks for doing it
One thing, I’ve made a few notes of things I want you to convey.
First of all, Stuart was a scrupulously honest person. I never saw him cut any corners.
Secondly to stress that I was not a partner or founder. I was just an employee.
Thirdly, Stuart was very good at taking decisions and acting quickly on them. Those are the points really.
*A note on this point. Although it’s true IG was bailed out by one of Stuart Wheeler’s friends, this was more down to the cash flow problem Robert describes than clients failing to pay. Just prior to the 1987 crash, spread betting debts had become legally enforceable, meaning anyone that went into negative balance was legally obligated to pay their debts. But as it could take some time for them to do so and hedging brokers would want cash immediately, this could lead to a funding gap. After the Black Monday Crash, this was the position IG found itself in, so Wheeler was bailed out by a friend but he also paid the money back within 6 months of that happening, as most clients ultimately repaid their debts.