One of the points I made here a couple of weeks ago was that if you’re a broker launching in Europe or the UK and want to do something new, there is a good chance you’ll end up hiring someone who was at IG to do it.
As if to prove that point, Webull is very likely planning to expand in Europe and the UK, with ex-Trading 212 CEO Nick Saunders on board as well.
For those not familiar with the firm, Webull is a company that’s similar to Robinhood in the US. They offer users access to crypto, stocks, and options trading. The company’s main market is the US but the company itself was founded in China by Wang Anquan, an ex-Alibaba employee.
Until now the firm’s activities have mainly been confined to Hong Kong, Singapore, and the US. However, they have registered companies in the UK, Ireland, and the Netherlands. This would indicate a planned launch in both the UK and EU.
Saunders was registered as a director of the company’s Dutch entity last month. He was previously head of CFDs at IG, as well as CEO of Trading 212 until March of last year.
Assuming all of this is the case, it will mean a major new competitor for brokers operating in the region. Webull seems to have a lot of money behind it and will probably, in terms of its branding and target audience, be competing with eToro and Naga-type firms, although there’s clearly going to be some overlap with other players too.
I have not seen this reported anywhere else. Does this count as an exclusive?
eToro buys an options broker
Aside from hiring ex-IG employees, another strategy you can employ as a broker is to copy whatever IG is doing. For example, if IG buys a company in the US then you can, like Plus500, do that a few months later as well.
Now eToro is getting in on the act, with the announcement a week or so ago that they’re buying an options trading platform in the US called Gatsby. A press release from eToro indicates they paid $50m for the firm.
Ok so it’s a bit unfair to say that they copied IG when doing this. Options trading in the US seems to have become a ‘thing’ as a result of Robinhood’s success over the past few years, as well as the fact that companies with the capital to do so are looking to expand beyond a standard CFD offering.
What’s interesting is that you now have three major companies that have historically been active in the CFD market expanding into the US exchange-traded derivatives market – namely IG, Plus500, and eToro.
Beyond watching on to see how they compete with one another in the world’s largest economy, there are a few interesting things that are worth looking out for here.
One is how profitable this business line actually is. If you go through IG’s accounts, there is, at least as far as I can tell, no detail as to what tastytrade’s financials are like. Top line revenue numbers are reported but you can’t work out what their margins are based on the figures presented. Not ideal if you paid $1bn for the business.
The next point is how viable it is to offer these products outside of the US. For example, IG appears to be planning to expand into Canada and Australia with tastytrade. But tastytrade in the US makes its money from payment for order flow, a practice which isn’t permitted in either of those two countries. IG CEO June Felix has said they have other revenue levers that they can use to make money, which will presumably be some form of commission. Alternatively they could just funnel trades to IG US and still receive payment for order flow that way, assuming it’s permissible from a regulatory point of view.
Beyond this, there may be some issues over uptake. Most retail clients in Europe, for example, are not accustomed to options trading. And assuming CFDs are more profitable, which they may not be, would you want to replace them with options? Or in other words, can you convince people outside the US to YOLO call options and, if so, is it more profitable to do so than have them trade CFDs?
The final point is that there seems like there may be a bifurcation in the traditional CFD market, mainly because exchanged-traded derivatives are much harder to offer. As with stock trading, if you have a bog standard MetaTrader offering, I don’t even think you could offer options – and that’s leaving aside any regulatory hurdles you’d have to go through to do so.
If you look at eToro, for example, they now have physical crypto, cash equities, options, CFDs, social trading, some payments card thing, and their own trading platform. There is still some overlap but clearly this is very different from a company with a standard FX/CFD package available to trade via a MetaTrader white label.
As a result, it seems plausible that we could end up in a scenario where you have a small number of players offering this broad suite of products and then a group of mainly offshore brokers continuing with the standard MetaTrader CFD offering, with some players sitting somewhere in the middle.
FTX BS
A few weeks ago I wrote about how Revolut uses BS statistics to try and inflate its customer growth figures, probably with the goal of building hype in the media to try and increase its valuation.
You will be unlikely to find a better example of this working out for a company than an article which was published in CNBC covering FTX last week (incidentally, I am off on holiday so I am writing this earlier in the week than I usually do, meaning it’s plausible the article will have been edited by then.)
Assuming it hasn’t, the piece – which you can read here – purports to describe some leaked financials from FTX.
Let’s start with the timing of this ‘leak’. It happened to come out a day after FTX US had been given a cease and desist letter from the Federal Deposit Insurance Corporation (FDIC) for misleading investors about how their funds were protected. Interesting! It’s always possible this was coincidental but it was very nice timing and meant that reports on the FDIC story were pushed down in Google news.
Next we have this wonderful line from the author…
“[FTX’s] profitability, like many start-ups, depends on how you measure it.”
To the contrary, you have generally accepted accounting principles (GAAP), or some equivalent of them, for a reason. The idea is to make it easy to see what the financial state of a company is. A ‘start-up’ is a company like any other and its profitability is measured in exactly the same way – even if the company in question does try to include ‘non-GAAP’ metrics or ‘adjusted’ income statements to flatter themselves.
Not long after this claim we learn that…
“Operating income was $272 million, up from $14 million a year earlier. FTX saw net income of $388 million last year, up from just $17 million a year earlier.”
No discussion or explanation is made of how the company’s operating income is lower than its net income. This is possible but it is typically the result of exceptional income (eg. a sale of a subsidiary), interest, or tax credits (ie. something you typically get if you are loss-making).
My understanding is that FTX did not dispose of any entities in 2021 and they appear to be profitable. I am not suggesting they’ve done something wrong but it would be good to understand why there is such a huge disparity between those two figures, especially as the claim made by CNBC is that they have seen the company’s audited accounts. Sadly for us no reason is provided. Any accountant readers are welcome to send in suggestions.
After this, we have the following line…
“FTX had roughly $2.5 billion in cash at the end of last year and 27% profit margins, according to the documents. Margins were closer to 50% if advertising and “related party” expenses are stripped out.”
Remember that time when you were putting your accounts together and you decided to just leave out your marketing costs – you know those things that can end up being one of your biggest expenses?
The only way this point can make sense is if FTX has plans to cut back its marketing budget. Given it’s trying to expand this seems very unlikely to happen. As a result, why was this point included beyond trying to make the company look good?
Lastly, of course, we have the valuation. FTX is apparently worth $32bn, with revenue of $1.02bn and (a debatable) net income of $388m.
By comparison, Coinbase made $7.4bn in revenue last year and made $3.6bn in profit. Its market cap is a little over $16bn at the time of writing.
IG made just over $1.1bn in revenue for its 2022 financial year, with net income of $466.8m. Its market cap is $4.2bn at the time of writing.
Plus500 made $718m in its 2021 financial year with net income of $310m. Its market cap is $2bn at the time of writing.
Does a $32bn valuation for FTX make sense in light of these figures, as well as the massive crash in both growth stock valuations and the crypto market over the past year? Not really.
I could be totally wrong but I would not be surprised at all if FTX gave its financials to the reporter, partly to get rid of the FDIC story but mainly just to build hype – a PR person can’t hope for a much better headline than ‘FTX grew revenue 1,000% during the crypto craze’.
The question is why these figures were reported so breathlessly and without any questioning of substance by the journalist. It would be easy to ascribe it to some sort of conspiracy but, as with most schemes the tin foil hat brigade believe in, it’s likely to just be ineptitude. Sadly reports like this will continue to come out, as valuation headlines get lots of clicks and likes, and journalists rarely dig into the numbers behind them.
As a great man once said, “it’s all so tiresome”.
Have a good week everyone.
