Plus500 comes clean with the dirty truth #PLUS
I’ve come under fire for describing Plus500 as a “bucket shop”. It was said that I was being harsh on a top CFD broker.
And I’ve been corrected for claiming that Plus500 benefits from client losses. They only profit from the dealing spreads and overnight charges, or so I was told.
It turns out that this wasn’t exactly the whole truth. There was a lot more to the story than this.
According to the company’s preliminary results for 2018, published this week, the company enjoyed a “P&L gain” of some $172 million. That’s a rather large figure relative to EBITDA of $506 million (latest share price 923.5p, market cap £1,050 million). It also disclosed that it made a large P&L loss in 2017.
It’s all rather baffling, because the company and its financial PR have up until now strenuously denied that exposure to customer P&L is a significant issue for the company.
Let’s consider the treatment of Plus500’s 2017 results. We have the following data points:
1. The company’s description of its performance.
This is an excerpt from last year’s results statement:
In 2017, as in 2016 and 2015, overall there were no net gains from market P&L, thus Plus500 earned the vast majority of its revenues from trading spreads, and overnight charges rather than from client trading losses. This reflects the efficiency of its risk management systems…
2. The company’s investor presentation.
This is how the company visually described its 2017 revenues. The spreads and premium add up to 100%, and there is no mention of a large negative influence from customer P&L:
(Source: Plus500 FY 2017 Results Presentation.)
3. Statements by the company’s agents.
I was told by an agent of the company in July 2018 that Plus500 did not profit from customer P&L (based on results up to that date) and that its risk management strategies enabled it to avoid big losses (and implicitly avoid big gains, too).
The truth about 2017
The truth is that Plus500 made a huge net loss from customer P&L in 2017 of some $103 million, but it didn’t disclose this. Instead, it paraded the fact that it hadn’t made a net gain, and boasted about its supposedly brilliant risk management systems.
Would a transparent description of its 2017 results have included mention of the $103 million loss from customer P&L, so that investors could have understood the risky nature of the business? I think so.
2018: The truth hangs out
Plus500 is now main-market listed, and is even a constituent of the venerable FTSE-250 index. But one wonders for how long.
2018 results show just how huge the impact of customer P&L can be in any specific year, with a $172 million gain from client losses. It claims that on a 5-year view, customer P&L only accounts for 3% of revenues. But it hasn’t yet broken down the P&L performance on a year-by-year basis.
I had already formed the view, based on previous analysis, that Plus500 rarely used an external hedge and instead used alternative methods of managing its risk (including by blocking client trades). Since it didn’t hedge, I was happy to continue referring to it as a bucket shop.
Now we know that Plus500’s risk management techniques aren’t what we were led to believe, and that it is exposed to extreme volatility on an annual basis from customer P&L. We know that the company often profits directly when a customer loses money. We can say confidently that it is the world’s biggest bucket shop, having an adversarial relationship with its clients.
And we can contrast that with a reputable firm like IG Group (IGG) (in which I have long position), which discloses its market exposure as follows (the purple line):
(Source: IG Group FY 2018 Results Presentation.
Plus500 shares are “cheap”, on a forward P/E multiple of less than 6x. But I would agree with the stance taken by the company’s insiders, who have been aggressively selling down their positions.
At the time of publication, the author holds a long position in IGG.