Plus500 is an unusual member of the retail foreign exchange trading world. The London-listed group offers contracts for difference on currencies, as well as stocks, indices, exchange traded funds, and commodities, but it is unusual in the way it is structured, the way it operates and, above all, the way it is spectacularly profitable.

More on all that below, but to begin let’s focus on the recent move in the Swiss Franc versus the Euro. The decision by the Swiss central bank to remove the cap on the value of the franc prompted very large moves for the currency, blowing up some currency trading platforms and prompting unexpected losses throughout the financial system.

Plus500, however, suffered “no material impact on the Company’s financial and trading position”, an incredible result.

To understand why this is hard to believe, consider Plus500′s business model. Customers buy and sell CFDs on its trading platform using high levels of leverage, up to 200 times the initial stake for currencies. These are directional bets and at, say, 100 times leverage a one per cent price move would wipe out all capital. The initial move for the Swiss Franc against the Euro on Thursday was around 20 per cent, so five times leverage or more meant you were toast.

There are a few different ways a company such as Plus500 could manage trading risk on its platform. It could run a balanced book, meaning that buy orders equally match sell orders. The trading platform then merely collects the spread, the difference between the price at which it buys and sells each CFD.

An alternative is for the trading platform to wear the risk, effectively taking the other side of customer bets — what would be considered proprietary trading in the world of investment banks. Plus500 would have had a great day if customers were almost all on the wrong side of the trade. Discussion of trading strategies on FX message boards suggests many were .

The problem is the risk of a big market swing, leaving the company exposed to a lot of highly leveraged trades. At the end of June Plus500 reported $115m of cash and equivalents on its balance sheet, a comparatively small amount of capital if the company were taking big proprietary bets.

Indeed, Plus500 says it takes the balanced course, explaining it manages the risk of such market moves at the group level, that it utilises “market position limits for operational efficiency and does not take proprietary positions based on an expectation of market movements.” This risk management appears to have been successful, with the group reporting 297 profitable trading days (on closed positions), in 2013.

It does not always hedge, so may have some exposure, but chief executive Gal Haber told FT Alphaville that “we need to hedge very rarely”. When Plus500 does need hedging or liquidity, it uses Interactive Brokers, the deep discount electronic broker.

So, what about the day the swiss franc ceiling evaporated? Mr Haber explained how his company made money while others blew up.

Very simple, they allow their clients to go into a negative balance. We just don’t let customers go into a negative balance.

Most of the CFD positions the company offers are “naturally hedged”, he said. “Some were long, we made the spread”.

Discussing the big price change on Thursday, he said:

If you have that change, and other people are winners, we track that exposure in real time, and hedge out.

The problem is this explanation seems insufficient.

When a company runs a balanced trading book there is a potential mis-match, because customers can only lose what is in their accounts. When a major currency moves by a fifth, the winners will be owed far more than the losers’ capital, the deposits in their accounts, leaving the trading platform to make up the difference. Stop-loss positions designed to automatically close trades are useless when a market “gaps” — jumps straight from one price to another, leaving no time to trade or to hedge.

Such a mismatch is what caused problems for FXCM, which found it was suddenly “owed” $225m by clients, and is a problem inherent in offering leveraged trades.

We put this to Mr Haber. He said, “before it happened we didn’t have that many trades.” He said that most trades were small, with the maximum margin for any customer limited to $200k, and “there wasn’t that much trading in the Swiss franc before the move. Most of it came in after the move”.

Given the amounts traded on Plus500′s platform, this appears to be a stroke of luck.

Mr Haber was not able to tell us the level of notional trading conducted on his company’s platform. He said it was not an important number that he tracked.

He said the company mainly makes money from the spread, the difference between the price at which it buys and sells CFDs on different instruments, with about 80 per cent of revenues in the first 9 months being spread income (about $130m). The balance, he said, is mainly interest income on overnight positions. He could not tell us the average spread Plus500 makes on a trade, but the group typically makes about 20 basis points per trade in equities, and much less than that for currencies, he said.

We calculate for the 15 instruments that Plus500 described as its most actively traded in October, the average spread was 7 basis points. To make $130m from a seven basis point spread requires trading about $185bn of notional positions in the first nine months of 2014, or about $1bn each trading day.

Mr Haber, though, said that Plus500 typically makes about $2m in spread income a day, which on our 7 basis point assumption would be closer to $3bn of notional trading.

In the context of such trading volumes, it is striking how lucky Plus500 was to make money given the move in the swiss-franc versus the euro on January 15 and the volatility elsewhere as the effects rippled through markets.

Trading success is not the only unusual aspect to Plus500, however. Another is its structure.

The company is listed on Aim, the junior part of the London Stock Exchange. This status is mentioned on the homepages of Plus500′s various websites (.com, .co.uk, .pl, .it, etc).

Plus500 is the listed entity, however. It isn’t licenced by regulators and is based in Haifa, Israel, where almost all of the 80 staff are found, along with the senior management and the company’s auditors, the local branch of PWC International.

Customers deal with three 100 per cent subsidiaries of the listed vehicle; Plus500Uk Ltd, regulated by the Financial Conduct Authority; Plus500CY Ltd, regulated by the Cyprus Securities and Exchange Commission; and Plus500AU Pty Ltd, regulated by the Australian Securities and Investments Commission.

Plus500 does one thing, offer CFD trading, and all customer money is held in segregated client accounts in the UK managed by Barclays, according to Mr Haber. Customers from the UK going to Plus500.co.uk sign a user agreement with the UK subsidiary, regulated by the FCA.

In October, however, Plus500CY also registered with CySec in Nicosia. Clients from outside the UK sign a user agreement with the Cypriot entity, although their money goes to those client accounts in the UK.

The Cypriot registration might be considered surprising, given that the company has one product sold online and Plus500UK was already allowed to operate in Cyprus under European regulations (MIFID) which “passport” the UK licence into other jurisdictions. The FCA said obtaining another European license is within the rules, without commenting on Plus500 specifically.

Before the group had gained a UK licence, CySec issued a 2009 warning to investors that Plus500 had never been granted a licence to operate in the Republic of Cyprus.

Mr Haber said the additional licence is an asset. “It saves us some costs. In the UK transaction reporting is very expensive, with the Cypriot entity its actually free”.

(In late 2012 Plus500 paid a £205,000 fine levied by the FSA related to breaches of rules involving the timely and accurate reporting of transactions.)

Mr Haber also said that it wasn’t an issue for clients to sign an agreement in one jurisdiction, Cyprus, and to have their money held in another, the UK. “It doesn’t really matter where the money is held.”

The FCA, which again declined to comment on Plus500 specifically, said in theory such an arrangement should be fine.

On the subject of the UK, we would mention that the London address of Plus500UK, described by the FCA as the firm’s “principal place of business” is one floor of managed space at 44 Moorfields shared with eight other companies.

The registered address is an accounting firm’s office, while the address to which most of Plus500′s various domain names are registered, 33 Throgmorton Street, is now a building site. The registrant for most of the Plus500 domain names registered from 2008 onwards was Dror Sordo, chief executive of Plus500UK who resigned in October 2013.

The UK company’s auditors, Baker Tilly UK Audit LLP, also resigned a year later, in October 2014. No reason was stated, although the letter giving notice of the resignation as of March 31, reports there are no circumstances connected with it which should be brought to the attention of creditors.

In our first post on Plus500 we considered the sustainability of a business model that is heroically profitable — it keeps 69 cents of every dollar of sales as pre-tax profit — even as it sees huge churn in the customer base.

One way to make large profits for a short while in the retail FX market is to churn through a steady stream of money-losing punters, eating the sheep (collecting their losses) rather than shearing them (just making a spread).

A combination of leverage and stop-losses will do a lot of the work with minimal volatility, steadily eroding away a customers capital. There will still be winners, however, and the question of how these are dealt with is one of the central questions for retail FX shops such as Plus500.

Any casino can close its door to a persistent winner: sorry, we’d rather not have your business. Online complaints about Plus500 fall largely into three categories: arbitrary application of scalping rules to stop loss abuse that allow Plus500 to cancel trades, problems with the technology resulting in trading losses (I couldn’t trade, I didn’t get the price I expected), and difficulties withdrawing money from the system.

It is very hard for an outside observer to assess the validity of these claims, which often feature email correspondence from Plus500 customer representatives (Vanessa, Miguel, George…). Unlike, say, computerised gambling machines found in casinos and bookies, there is no third party monitoring the software to make sure it is set up fairly.

Plus500 has an aggressive approach to anti money laundering rules, requiring verification to withdraw money, not to deposit it and start trading.

Such an approach is legal, but is one an aggressive operator could in theory use to avoid paying out in some circumstances, assuming the amounts involved and legal complexity would make customer legal action rare.

Yet, as Mr Haber said, any large payment company gets lots of complaints, and they haven’t been sued. Given that most retail punters lose money, it is a customer base ready made for complaints. Plus500 says it is so profitable because it is a nimble technology company running its own clever software.

So, one final point to ponder. Plus500 has a market capitalisation of £700m ($1bn). It is on course to report more than $200m of revenues for 2014. Yet this technology upstart reported capital expenditure in 2013 of just $92,000. In the first half of 2014 it invested $83,000. Generating so much money with so little investment, now that is magic.

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