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Long time readers may remember that when we started this newsletter, it was often more like small anecdotes, rather than some long form screed. Today we try and revive that format by looking at a bunch of ETD stuff – dawaj.
Plus500 keeps the focus
One of the main reasons the whole TradeInformer website started was because I used to have a stock screen which would filter for, among other traits, no debt, low valuation, and high operating margins. Plus500 would show up every time.
When we recently reviewed their founder’s book, one of the points that came through was his strong focus on what’s functional, rather than what’s nice or what feels good. This goes a long way in explaining why they are a cash generating machine.
Last week Plus500 put out results showing that their US futures business did around $54m in revenue in the first half of the year. This is in line with prior statements that the company made, where they said revenues for the division will exceed $100m this year.
Given margins for that entity are around 35%, this means they could make $35m from that business line. They paid $30m for the whole business in 2021.
For some more context, IG Group paid $1bn to buy tastytrade in the same year and, assuming they do similar levels of revenue in the second half of the year, they’ll probably make around double what Plus500’s US business will.
Or to put that another way, IG Group paid 33x more than Plus500 did for a business that generates 2x as much in revenue.
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Can you replicate that in India?
The next market that Plus500 will try and do this in is India. They bought a local broker – Mehta Equities – for $20m earlier this year.
India is now, in terms of contracts traded, the biggest market in the world for options trading.
However, I wonder if this will change.
The main reason for that are a number of big changes the local regulator has introduced over the last 12 months. The key ones are…
- Option premiums have to be paid for up front and in full – you cannot get leverage on them, as you could in the past
- Removal of cross-margining benefits for calendar spreads trading
- 3x increase in minimum notional size of positions that retail traders can open
- Forcing people to register with local regulator if they are acting as ‘finfluencers’ (probably won’t happen)
- Exchanges only allowed to offer weekly expiries on one index
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Plus500 will add event contracts – so will everyone
Last week Robinhood Founder and CEO Vlad Tenev gave an interview where he talked about his different business lines. Although he was actually talking about crypto, one of the interesting points was that he described ‘event contracts’ as being a new business line.
Event contracts are obviously a lot of fun and a great product. I can guarantee you this as well – IG will add them, eToro will add them, and Plus500 will add them. In fact, anyone who has a license in the US will add them.
The potential ‘problem’ with event contracts is actually monetising them. Interactive Brokers has got around this by setting up its own exchange and acts as market maker on that exchange.
For brokers, the only way I can see of doing anything beyond earning an execution fee on the contract is taking payment for order flow.
Otherwise you are limited to taking something like a $0.01 per contract dealing fee. This is not ‘bad’ – imagine charging a minimum 1% fee on stock trading – but it’s also not a massive amount.
Offshore event contracts
Another interesting question here is whether we could see some kind of event contract offshore industry emerge.
Right now these products might be considered binaries by some places. I guess they also have to be exchange-traded in the US? But do they in somewhere like Mauritius or the Seychelles?
A better example of this is Polymarket, which is apparently registered in the US but doesn’t take clients from the country. The firm is also set to raise $200m, with backers including Peter Thiel and ethereum founder Vitalik Buterin.
Polymarket only takes crypto deposits and it is very easy to sign up to the platform. These are things that I know many of you like!
Also weird is that, from what I can see, Polymarket is registered in Delaware but has no license. So right now Polymarket is just an unregulated US company that is taking clients on its platform from all over the world. Again, this sounds like a set up that would be amenable to many of you.
Anyway, the basic question would be ‘are these binaries or not?’ If they’re not, it makes life easier.
But even if they are, you can still just call them event contracts and pretend they’re something else. A number of firms, like Olymp Trade, already do this for binaries, which they call ‘quicklers’. Presumably you could just do the same for event contracts.
The US isn’t so bad?
Given that Thiel is investing in event contracts and Robinhood is touting them as a new product line, we can assume they will be pushed forward and the regulator is going to allow them, even if they don’t like them.
A lot of CFD people see the US as a no go zone, which is understandable, given how weirdly hostile they are to the product.
However, today things are not so bad in the US. You can offer CFDs on FX. In theory, I don’t see why you could not do it on bitcoin, given that bitcoin is not considered to be a security by the regulator there.
Then you have perpetuals, which look likely to get regulatory approval this year. To top that off, you have record retail volumes in options and futures, which are getting more and more accessible as exchanges reduce contract sizes.
Prop is also allowed and lots of firms are already targeting the market. Indeed, the first prop – TopStep – is a US firm that’s still doing lots of business there.
Finally you have a growing binary opt…I mean event contracts market, which is another speculative financial product.
Obviously the high capital requirements for FX suck. But otherwise, the US is not a bad place to be doing business in if you’re a retail broker today.
