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Followers of the TradeInformer WhatsApp Channel may remember a few months ago when we posted about Rwanda introducing regulations governing the FX/CFD industry. Nominal GDP per capita in the country is less than a thousand bucks and the population is under 14m.
The fact that the Rwandan regulator decided to introduce those regulations suggests companies have been going there. But if you are targeting Rwanda, it’s probably because you are struggling to get clients or grow your market share elsewhere. Otherwise it makes little sense to target a country which has a relatively small population and low per capita income.
And that leads to another question, which is basically, are we done? Is there no growth left for this industry? If brokers are being pushed to these sorts of regions, is there just nowhere else to go?
ATFX is on a hiring spree – read about it here
You could argue that investors think that’s the case.
If you look at valuations for the London-listed firms and Swissquote, then they have been consistently low. The five year average P/E ratio (not the ‘perfect’ ratio I appreciate) are as follows.
| Company | 5yr Average P/E (as at 14/07/24) |
| IG Group | 9.8 |
| CMC Markets | 10.5 |
| Plus500 | 6.8 |
| Swissquote | 13.8 |
There are other reasons we’ve looked at before as to why valuations tend to be low. For example, the market just cannot deal with the fact that, even though earnings may grow long-term, they do so with huge swings that typically stem from higher/lower volatility.
Nonetheless, I spoke with one value-oriented investment manager a couple of months ago. He actually held one of the names above but did so because he thought it would rerate, not because it would deliver growth. And indeed, he argued that there basically isn’t much viable growth left for the big players today.
If you look at the wider industry, there are several firms which have tried to go public – Oanda for example – and it seems like the owners are struggling to get the valuation they want. That has to be, in part, because investors don’t believe the price tags on them reflect their true value.
What’s another sign growth is done? Acquisitions and new products. If you look at IG’s activity over the last five years, it has basically been adding ETDs in Europe and acquiring tastytrade in the US.
You could make a good argument that there were regulatory reasons to do this as well – basically CFDs risk being banned or having more restrictions placed on them – but the main reason was probably that IG is now predominant in the UK and a few other markets. It can’t really eke out much growth in them, so they bought tasty and added ETDs.
Finally, you just have to look at what is going on in the industry in general. Pretty much no one today is focused on expanding in Europe. Everyone is targeting countries in emerging markets, whether it be in MENA, Africa, LATAM, or Asia.
The thing is, and as the Rwanda example illustrates, a lot of these markets are already very saturated! For example, if you check the web traffic of the big players like XM, they will invariably have large numbers of people in places like Thailand and the other ASEAN countries, Nigeria, or a few of the big LATAM countries.
To top this off, a lot of these places are gray market. For example, we wrote a bit about India last week, which is clearly a huge market for a few players now. Except you can’t do business there easily at all because it’s a gray market at best.
The result is that most of the prospective growth areas for the industry can’t really be fully targeted because they don’t have the regulatory framework in place that would allow that to happen.
Lastly, a lot of the way this industry works is like a bidding process. Essentially, if you can pay your affiliates / partners more, you get more clients. Things are more complicated than this but that’s kind of how it works in simple terms.
The more time progresses, the more companies with deep pockets are able to pay more to partners. In theory, this creates a slow grind where the big get bigger and the small get pushed out. If you look at the UK market today, this has basically happened. It is hard to see how a smaller player could compete unless they had serious financial backing.
But then maybe I am way off. Perhaps there is still growth on the table.
First off, if you look at the UK market over the last few years, you have Trading 212 and Capital.com both seeing huge growth in a relatively short period of time. Trading 212 effectively did that by being the first to introduce a new product and also building good technology around it.
Importantly, I would say companies like Trading 212 or eToro brought new people into the market, meaning they didn’t necessarily capture someone who would have otherwise gone to a firm like IG or CMC.
Today I am also aware of two new prospective entrants to the UK market. We then have Revolut who just launched CFDs in Europe and will presumably do so in basically every market it has the ability to do so. Again, this could be another new major player in the sector.
Then you have a few props who have managed to deliver huge growth in the last 3 – 5 years. FTMO is in the process of starting a broker that will be targeting the EU market at a minimum. Funding Pips appears to be getting a license and Alpha Capital Group already has one. E8 Markets looks like it’s doing something similar.
Firstly, these guys arguably added a whole new sub industry with prop trading and then also appear to be adding clients that wouldn’t otherwise have been there – ie. they grew the size of the industry.
At the same time, the CFD business model is such that you can recoup investment in a very short period of time. This means that there can nearly always be a new market entrant because if you find an edge then you can start making money very quickly.
If I look at the last few months, I’ve seen at least three people start a new broker. For example, last week Daniel Takieddine, who was BDSwiss MENA CEO, announced that he’d started a new firm.
A lot of these guys operate using the IB model. Again, from the IBs side there is always room for competition because someone can come in and – potentially – offer you a better deal. Consequently there is always a level of competition in the markets where IBs are still predominant.
What’s the right answer? I don’t know. One of the paradoxes of today is that you speak to people in the industry and they are all pessimistic about what’s happening. But then the sector has never been bigger. More people are interested in markets than ever before in real number terms and it’s incredibly easy for them to access trading services because of improvements in technology, primarily the smartphone. And then you have a whole new wave of growth with props, which is in the midst of something like a gold rush.
So is it all over? Or is it just beginning?
