Readers from outside the UK may not be aware of this but over the past couple of years, London headquartered broker Infinox has been embroiled in a scandal of sorts.
It all stems from an incident that took place in late 2019, when a group of clients lost a substantial amount of money trading with the firm. If you believe the papers then losses totalled somewhere in the region of £4m.
Put simply, a lot of moron influencers got people to sign up to the broker via Instagram, giving the impression that they’d get rich quick and, perhaps more importantly, that it was with an FCA-regulated firm. In reality clients appear to have been funnelled to an offshore entity in the Bahamas. Lots of reporters covered the story and the BBC even made a four part documentary about it.
At the centre of the scandal was one particular influencer named Gurvin Singh.
Gurvin, as you can infer from the image above, is your typical douchebag Instagram get rich quick guy, who posts pictures of himself shopping in Gucci and hanging out in a Lamborghini he rented for half a day. Like most FX influencers, trusting him with your money (or anything) would be kind of like getting a group of heroin addicts to look after a consignment of morphine for the day – it’s not going to end well.
The reason I’m writing about this so long after the incident is because I saw Gurvin pop up in a ‘suggested’ podcast on my phone recently. The guy is looking to do some damage control and tell ‘his side’ of the story.
The podcast is both very interesting and a total waste of time to listen to.
It’s interesting because you get to psychoanalyse a guy who is clearly full of shit but you can’t tell if he knows that or if he’s in so deep he can no longer distinguish his own lies from reality.
It’s a total waste of time for a similar reason, which is you can’t believe anything he says.
Reading up on the story and listening to old Gurvs, I think – and it is only what I think, I could be wrong – what may have happened is that:
- Infinox had a deal with an IB
- The IB hired affiliates to bring in clients (eg. Gurvin)
- The IB managed a joint client account
- The IB deliberately or otherwise lost everyone their money
- Everyone got mad at the people that had onboarded them (eg. Gurvin) following this
All of this is indicative of why introducing brokers suck. Not only do they cost you loads of money, you have little control over what they’re going to do or say. This is particularly true if you have a cascading system, where affiliates can onboard affiliates, who onboard affiliates and so on.
In this instance, the reputational damage was massive and it’s kind of amazing that nothing has happened to any of the people involved. Even Gurvin is now (can you believe it?) selling online courses for dropshipping.
It’s also probably a good example of that old aphorism – don’t shit where you eat. There is a reason that Exness, for example, doesn’t onboard any retail clients from Malaysia, even though its biggest office is there, or in Europe. If their partners mess up abroad it’s bad, but it’s not as bad as if it happens where their office is and regulators can do something.
Having said that, when I was discussing this incident with someone in the FX/CFD world recently and suggested it wasn’t exactly a great long-term strategy for doing business, he shrugged and pointed out that you can always find more rogue IBs to sucker in clients for you. And because the supply is endless, the strategy works long-term. There is some kind of twisted logic to that and Infinox seem to be making lots of money, so perhaps it’s true.
Will eToro SPAC?
Israeli broker eToro is supposed to be merging with a special purpose acquisition company (‘SPAC’) on June 30th. A couple of things suggest this isn’t going to happen.
- A report from February claims people at the company were selling shares to private investors at a $2.5bn valuation.
- More recent reports suggest the company is going to raise up to $1bn from private investors.
You don’t sell shares at a $2.5bn valuation if you’re about to go public at a valuation more than 3x that amount. You also aren’t likely to raise $1bn privately if you’re about to go public.
I feel bad for eToro (or at least their employees) because if they’d started the IPO process maybe 6 – 12 months earlier then they’d probably have managed to push it through and get the valuation they wanted.
I could be wrong of course but, assuming it doesn’t go through, a couple of interesting things may happen as a result.
One, which may have happened anyway, is that they could be forced to cut their marketing budget. In the year up to March 31st eToro spent a little under $524m on marketing, which is an insane amount and was 43.1% of total revenue. In a bull market with easy access to capital, you can keep doing that. In the current macro environment it seems like it will be harder to justify and eToro shareholders are more likely to want regular profitability today, rather than at some point in the future.
This is probably good news for brokers like Plus500 and IG (perhaps even Trading212, who are apparently coming back). When you make lots in profit, you are freer to spend on marketing. But if you have to compete with VC money being syphoned into online ad spend then it can be tricky. This is likely to change, at least for the foreseeable future. Even if the three mentioned above don’t necessarily compete for the same types of clients as eToro, the latter has been pumping so much into ad spend that it’s hard to see it not having spilled out into the areas that their ad spend targets too.
The other thing that’s worth thinking about is what will happen to eToro’s ability to pay its employees with stock options. Last year stock option compensation totalled $209m – 17.2% of total revenue – and it’s hard to imagine that being a one-off.
It’s plausible that staff will be able to sell to new investors on secondary markets or as part of the new investment that the company is receiving. But if not then it makes you wonder how appealing those options will be to employees. You accept stock options as a bonus or in lieu of a higher salary because you believe they’ll ultimately be worth more in the future. That’s predicated on going public and if that isn’t happening, there isn’t much point in them.
Tech companies often like to exclude stock-based compensation from their operating expenses because they don’t actually involve a cash payment. This is a nice accounting trick but if you don’t pay employees with options, you will have to pay them with cash. Maybe eToro employees will be happy to keep taking stock options. If not, then they may end up having to pay a lot more in cash for their salaries, which is likely to have substantial knock-on effects for the business.
Stuff that happened:
