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Last week retail broker Plus500 announced that it will acquire Mehta Equities for $20m.
Mehta is an Indian wealth manager and broker. Its most recent full year financials show it made $6.4m in revenues and approximately $1.2m in net income in the 12 months to the end of March last year.
Given Plus500’s most recent accounts show it had cash balances of $890m, the company is not breaking the bank to complete this deal.
The rationale for the purchase seems quite similar to the one that Plus500 undertook in the US back in 2021, when it acquired Cunningham Commodities.
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That deal totalled $30m and seemed less about buying the company for its money making potential. Instead it was about acquiring a firm that had the back office capabilities and licensing that Plus500 wanted to enter the US market.
Since then the company has built its own trading platform and branded product for the US futures and options sector.
The decision to acquire Mehta looks very similar.
Like Cunningham, Mehta’s website and product looks dated.
However, it has a lot of licences, regulatory permissions, and exchange memberships. If you are a retail trader in India, Mehta has the ability to provide you with pretty much any service you are likely to need.
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That being the case, the odds are that Plus500 will come in, take all of Mehta’s licensing and regulatory permissions, but then launch its own branded website and product. Mehta provides the licensing and back office, Plus500 does the product, technology, and marketing.
A more interesting question is why Plus500 decided to enter the Indian market.
The Indian options boom
We looked not too long ago at one broker’s activity in India, which has become one of the largest markets in the world for CFD trading.
When a different firm had its funds confiscated by police last year, they totalled close to $100m – a sum the police said was derived from only 9 months of business activity.
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The point being that there is clearly money to be made in India, albeit for a product that requires reverse solicitation.
Options are going to be less profitable but they are regulated in and the Indian market is booming.
Long-term followers of the little known but highly vaunted TradeInformer WhatsApp Channel may remember a chart we posted many eons ago about the almost unbelievable rise of Indian options trading.
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In 2023, Indians traded 85.3bn options contracts. This was almost 80% of all options contracts traded globally, although the notional value of US trading volumes was still higher.
Last month the Futures Industry Association, an industry body for exchanged-traded derivatives, gave a presentation which showed options trading continued to grow into 2024.
The chart also shows just how insane the growth in the Indian market has been over the last five years.
Last week we looked at the power of marketing in the crypto space, where basically crypto people can do the exact same stuff as CFD / other finance people, but because they are crypto bros no one cares.
There is something similar at play with options and futures. These are often seen as ‘high brow’ compared to CFDs.
But, much like the US, if you look at Indian YouTube, options brokers have the exact same playbook of how CFDs are marketed in other countries, with random influencers, educators, and other people showing you how to become rich fast or running random strategies based on technical analysis.
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The boom has also been very profitable for brokers and market makers. According to the Securities and Exchange Board of India, the average loss for Indian options traders in the 12 months to the end of March 2022 was $1,468.
This is a crazy number when you consider that India’s per capita GDP in 2023 was $2,481. It’s not far off what the (boring/killjoy) Spanish regulator reported as the average loss for CFD trading clients ($1,784), despite Spain’s per capita income being 13.5x higher.
The overall point I’m trying to make is that it’s not really that hard to understand why Plus500 entered the Indian market.
They would probably love to do the sort of reverse solicitation business for CFDs that others are doing but, because they are listed, doing so would be hard and they would not want to risk the potential regulatory headache.
Consequently, the next best thing is to enter the local market properly and try to capture some of the market share for ETDs.
This also fits with their stated wider goal of diversifying revenues away from CFDs. As we reported in February, ~10% of Plus500 revenues last year came from its US futures business and the company’s CFO, Elad Even-Chen, said the broker expects revenues from non-CFD products to hit 30% – 35% of total revenues in the next three to five years.
Is the Indian options boom over?
One interesting question is whether Plus500 is actually too late to the party.
If you look again at the chart from the FIA report, you can see a big dip in volumes in the final two months of last year.
That has continued into the new year. In fact, a recent report by Bloomberg shows that options contracts volumes among retail have fallen off a cliff, something you can see below.
The reason for this is simple – regulation.
“When the regulators crunched the numbers they saw that more than 90% of retail traders in [options trading] were losing money,” said Will Acworth, Global Head of Market Intelligence at the FIA, in the presentation. “So it just didn’t make a lot of sense for this kind of speculative frenzy to continue.”
Those regulations were primarily aimed at indices trading and I think there were four key points here.
1 – The regulator forced there to be a minimum contract size of INR 1.5m (~$17,500) or 3x its previous level
2 – No margin trading on options premiums
This is potentially the biggest killer. Until the regulatory changes, Indian brokers could let traders set a stop loss and then only put down the amount they stood to lose when buying an options contract.
So if the premium is $100, you put down $10 and set a $90 stop loss. Obviously the leverage potential here is huge. Now it’s gone
3 – only one weekly expiry
The number of index options expiring on a weekly basis is now limited to one per exchange. As we’ve seen elsewhere, people like trading on options on expiry day. Now the number of times you can actually do this is much lower.
4 – No cross margin
The final key change was that there is no longer the ability to offer cross margining. Previously, if a client had offsetting trades in the futures markets, brokers could reduce their margin requirements accordingly. Alas, no more.
Despite the huge drop in volumes, India is still the largest – in terms of contracts traded – options market in the world.
However, it’s early days and it’s plausible we’re yet to see the full impact of those regulatory restrictions, which only went into force completely last month.
For Plus500 the acquisition is thus a bit like an option. It cost them very little to buy Mehta and there is a lot of potential upside if the market keeps growing. If it doesn’t then they lost – but it wasn’t that much anyway.