Aside from learning that company CEO June Felix may be an automaton programmed to intermittently repeat the phrase ‘high quality clients’ when speaking in public, one of the interesting things gleaned from IG’s annual results presentation was the progress the business is making with Spectrum.
This may sound like an evil organisation from one of the recent James Bond films but it’s actually an exchange-like facility (or a ‘multilateral trading facility’ to use the regulatory lingo) that IG launched in Frankfurt in the second half of 2019.
Like Nadex, the US-based binary options exchange IG sold to crypto.com earlier this year, Spectrum is a venue for exchange-traded derivatives. In this instance, the ETDs in question are turbo warrants. These are a bit like CFDs, with the main differences being they’re exchange traded, rather than OTC, and they have a built in knock out price.
IG’s setup is quite smart. They own the exchange which the turbos trade on, they own the company that issues the derivatives, their Cypriot entity BrightPool is the market maker on the exchange, and they can funnel clients to trade in them via their main IG brand.
Much has been made, including in this publication, of IG’s efforts to expand in the US and Japan. That’s understandable given the prospects for growth those markets offer. However, Spectrum is arguably just as interesting and also offers a meaningful route for growth in Europe, outside of the region’s heavily saturated CFD market.
The exchange has gone from generating nothing to £9.3m in less than three years. That’s with around 7,000 active clients, so each one produced about £1,300 in revenue for the firm.
There are also signs the company is going to grow the number of products available, with the annual report presentation indicating two issuers will join the exchange in the near future.
Turbos aren’t new and have been popular in parts of Western Europe for some time. When Saxo Bank acquired BinckBank in 2019, for example, it meant that it could start offering them to clients. Swissquote also allows its customers to trade a range of turbos and similar products.
But both companies have structured their offerings differently to IG. BinckBank issues the turbos that Saxo customers can trade. But it is not the market maker for them (UBS is) and their customers access them through BS Cats, which is owned by Boerse Stuttgart. Swissquote is set up similarly, with clients trading turbos directly with the companies issuing them.
This is not necessarily bad and it’s also probable that both companies could white label the products in some way so that other brokers can offer them. It does seem very likely though, that their ability to do so, as well as the revenue they generate from the products, will be limited compared to IG.
For example, if you imagine a broker wanting to access turbos via Swissquote or Saxo, they will be one step down the ladder from the venue where those products are traded. By comparison, it seems plausible that IG could connect them to Spectrum directly.
Similarly, if a new issuer or market maker lists on Spectrum they are doing so on a venue that IG owns and one would imagine that the company will make money from them in one way or another.
In short, IG looks like it can make more money from turbos by owning the whole structure needed to trade them. It can make money from traders or brokers that want to access them, as well as issuers and market makers that want to deal in them. And because it has the capacity to be both the issuer and market maker for its own customers then it makes more money than other brokers which only offer access to the products on an agency basis.
Some questions do remain as to how effective this will be long-term. For instance, if more regulatory clampdowns occur on CFDs in Europe, will new restrictions also be applied to similar products like turbos or could they act as a shield against them?
The other thing that is hard to work out is whether these products attract new customers, direct existing ones away from other products, or encourage them to trade more. Obviously bringing in new customers or getting existing clients to trade more are positives. But turbos are, at least for now, substantially less profitable than OTC derivatives. Average revenue per client for IG’s ETDs last year was £1,142, compared to £4,063 for OTC products. If clients are trading the former instead of the latter then that is probably a negative for the company.
Is anyone better than IG?
The other thing that strikes you looking through the Q&A with June Felix is how developed IG is a business relative to its competitors.
Some other brokers purportedly make similar amounts of money but…
1) They’re private, so we don’t know that for sure and…
2) They also tend to earn that money through some less scrupulous, and thus sustainable, behaviour. I am unaware, for example, of IG using a tiered introducing broker system in random frontier markets to onboard clients, nor is this a great way to earn money long-term.
Aside from these reputational points, IG now offers a broader range of products than many, if not most, of its peers. It is also making lots of money in the US, Japan, and the UK, which are probably the best markets for a business like IG to be in. If you then factor in the growth potential it has, particularly via TastyTrades, this all looks impressive.
Again, the only companies that really seem to be on the same level as IG on a product and reputational basis are Swissquote and Saxo, but neither company makes anywhere near as much in revenue, nor do they look likely to expand substantially in the years ahead.
Plus500 may soon be in a somewhat similar position, having acquired a US futures broker and a business in Japan, although it’s unlikely they’ll be able to offer turbos in the same way any time soon. However, the Japan and US acquisitions happened suspiciously soon after IG had done both, as did their efforts at expanding into Singapore, making you wonder if they weren’t just copying what one of their main competitors was doing.
Speaking to that point, several years ago I remember speaking to one IG executive, who had since moved to another company, who claimed that many CFD providers would literally have a meeting where they sat down, looked at whatever IG was doing, and then sought to imitate it. That should probably be taken with a grain of salt given how much IG employees enjoy believing they’re superior to their peers, but there is likely to be a grain of truth to it.
Indeed, if you actually look around the industry, many brokers are led by people who spent a long time with IG. eToro’s UK CEO started there, Capital.com appears to have started life as an IG side project and has hired two ex-executives to be its CEO, and OvalX’s (ETX) CEO also spent time at the broker. Even Plus500 once brought a former IG CEO to its offices in Israel, presumably not just to hang out and chat about the weather.
In short, IG does seem to still be the preeminent firm in the CFD / retail trading / whatever you want to call it sector and there don’t appear to be many other firms that look capable of knocking it off its perch.
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