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Welcome back to another issue of the C-Suite, a once a month interview where we speak to senior executives from the retail trading industry.
This time we’re talking to Tom Salmon, Managing Director at Spreadex. Tom has been at Spreadex for almost two decades and we talk through the company’s client base, future plans, and how Spreadex has managed to continue performing well in an ultra competitive market.
DK: One of the things I always like to do is get some background on people and how they ended up in this industry. So how did that happen?
Absolutely, so I joined Spreadex at the start of 2007. I’m from up north and did a maths degree at Manchester. I wasn’t one of those people that was really into picking stocks at aged 10 or whatever. But I did a course on options pricing at university and I liked the mathematical side of it.
So I wasn’t really sure what to do after university but saw an ad for Spreadex, came down for the interview, got the job, and started a few weeks later. That was a really different time for the spread betting industry. Spreadex didn’t even have an online platform when I joined. It only launched about six months afterwards. So when I started it was all on the phones.
And pre-financial crisis, there was basically a decent group of clients that traded in large sizes with us and that was how we made our money. Then about a year after I joined you had the financial crisis and that really changed the company because a lot of those big clients just dropped off after that.
DK: What were they trading out of interest?
So you had a lot sitting in equities who got hit when markets fell. But then you had others trying to do some kind of mean reversion trade in indices or commodities. I remember a lot of them getting picked off really badly in the Dow and trading in oil, which went from about 60 to 150.
The result of that really was that we had to do a lot rebuilding. Partly that was not being so reliant on a small group of clients. It was also about putting in more controls about building up large position sizes. Then you also had a lot of senior people leave as well.
So it was really a wholesale change and that took a couple of years. You probably won’t remember but 2009 and 2010 were pretty dry markets, so it was a difficult time but we managed to do it.
DK: I always wondered if Spreadex plan on going public? You’ve been around for a while.
The owners have no plans to do that as far as I know.
DK: How is business in general? You know, I saw IG’s results just came out and they spoke about ‘soft’ trading conditions. Is that impacting you?
I doubt anyone in the industry is immune from lower volatility. We are in a good position because we have a large subset of clients who sit in equities and so we can just earn the commission on financing, which can be significant. So we have done a good job in building up a niche in that area, which helps a lot at times like this. But the amount we make on the spread has come down.
CFD firms have proven to be very resilient despite a competitive industry so I am always reluctant to predict too much but we’ve seen some firms shut and some bearish news in the last 18 months or so. The pandemic would have revitalised some of those players for a bit but now you have this dry period again, so I imagine some will be finding it tough.
DK: One of the things that’s interesting about Spreadex is that you have managed to maintain your sports book arm. Obviously all of the other companies now like to pretend they never had those but that was a big thing back in the day for a few companies, like City Index and IG. You manage the financials side. Is that annoying at all? There is no split in the brand.
It’s certainly not annoying. That part of the business is strong and it’s also much more predictable. Just inherently, you know that the darts is going to be at this point in the year, the euros will be on in the summer and so on.
It’s a completely different business because they’re obviously pricing their own markets, they’re not basing it on underlying exchanges like we do in the financial room. The risks are very different. But their revenues are spread across the company and that also allows us to improve our product in various ways as well.
So I think the better way to describe it is as a dilemma, where we have to ask, how much does the Spreadex sports book put off people that came to trade on the financials side?
That’s something we’ve looked but never got to the bottom of. So probably there are people that come from a comparison site, see the sports book, and don’t want to trade with us. On the other hand, advertising from the sports side brings clients over to the trading side.
Ironically, our biggest clients are the ones that are most understanding about this because they understand the background of the industry and product, but also see that it helps make the business more sustainable. We are the most diversified CFD firm out there because of that because we are not reliant on financial market volatility.
DK: What is the revenue split like between the two sides of the business?
We don’t disclose that but it has been slightly larger on the sports side for a few years. Obviously that fluctuates though because when there is more volatility, the financials side makes more money.
DK: We’ve spoken before so I have some sense of this but what does the average Spreadex client look like today?
We have looked at this before and it does tend to be older than our peers, so mid to late 50s. You know, if you look at some of the reports from Investment Trends then I’d say we skew older than a lot of our competitors.
So I like to think we’re in our own niche, with a smaller client base but one that’s more in the high net worth, more sophisticated category. A lot of our clients have joined via word of mouth, so we’ve grown a bit like an IFA would.
We’ve never been hugely successful at onboarding thousands and thousands of people every month. What I would say though is that the clients we do get tend to have a much better life time value. So if someone joins and deposits a couple of grand, there is a high likelihood that they will churn through their account and then be worth nothing to you.
What we have been good at is getting clients who join and then stay with us for a long time, and who increase in value over that time as well. So they are still with us five years down the line and are a better client in revenue terms than in year one.
DK: You’ve been doing this for a while now. Let’s assume we have the same sort of 18 months ahead that we’ve had over the last 18 months. What happens?
Like I said, I would never rule people out because companies in this industry do seem to have this sticking power. What I would expect is more of a retreat. So less competitive on the affiliates and introducing side. Cutting costs, we’re already seeing that happening, by reducing headcount and stopping marketing campaigns.
What you don’t tend to see is consolidation because companies don’t want to buy other businesses. You know, most companies will just want the client book and, in a lot of cases, they’ll just go, ‘well, ultimately we’ll get those people anyway, so why bother paying for it?’
DK: Spreadex has bought a few client books over the years. And if I look at the period since you joined, the industry has really boomed and become ultra competitive. So how did you guys not fall by the wayside over the years?
Partly it’s strength of balance sheet. That is something you’ll hear a lot but what I mean is that it really does allow you to undertake business that others can’t. So if you look at equities as an example, that is a very capital intensive part of this industry, which is why a lot of companies don’t like doing it or aren’t able to do it.
Like I said, it’s also a part of the business that generates more steady revenues for us, so we are less reliant on volatility spiking than peers. Then I’d say the sports room as well. That basically helps smooth out revenues for the company as a whole.
I’d also say we’re just careful about costs. I mean if you compare our revenue to headcount, the ratio is high on the revenue side.
DK: One thing I think a lot of, in relative terms, newer players have been good at is basically taking a product and then going global with it. Spreadex is still only in the UK. Would you start offering services abroad?
I think it is a natural next step for us as a business and we are looking at different regions. We were actually planning on doing it a few years ago but ESMA’s rules came into play and then there was the pandemic, so it meant we put those plans on ice.
What I would say though is that we’re mindful of the fact that we have built a specific niche in the UK. So what we are looking for abroad are markets where we can maintain that same sort of niche.
Partly that’s just about being able to stand out. I mean, if you look at the UAE at the moment, there is just a mountain of firms there. So how do you stand out from that when ultimately a lot of brokers have similar offerings?
DK: Would you go to the UAE?
It definitely fits with our model because you have a similar regulatory regime and you also have a lot of people working in finance, who fit the same sort of higher net worth profile that we deal with here. So it’s a region we’re looking at yes.
DK: To finish off, do you see any interesting trends at the moment? Or perhaps any new initiatives you’re undertaking at Spreadex?
One of the things we’ve been looking at is expanding our products offering. We’re seeing options trading becoming more and more popular. They’re obviously very popular in the States.
And, like most things in life, what is popular in America becomes popular everywhere else about two or three years later. So we’re working on our offering there. We’ve expanded our index options offering but the ultimate goal is to have single stock options on the Spreadex platform.
DK: The actual option or a derivative on them?
A spread bet or CFD on the option premium is what we’re aiming for.
We do have a kind of natural shift to non-leverage products, so similar to what some other providers are doing. We have some clients who will have an HL account and may want to bring things over.
We’re flirting with that but, to be honest, we are not convinced that the revenues are there. It requires a lot more back office time and investment and we aren’t convinced the numbers add up. It’s also fundamentally an assets under administration game. You have to spend a long time building that up. So we are flirting with it but, like I say, we are not convinced yet.