Plus500 and Cable Car – Analyzing the Aftermath

Plus500 is now trading at its 52-week low due to short positions by hedge funds that are revealing their rationale

Two weeks ago, there were talks about two of the largest brokers being bought out by Playtech, a UK listed company. I always like looking at how publicly traded companies are valued and saw that both Playtech and Plus500 were at, or, rather trading at their 52-week highs. Conversely, Plus500 is now trading at its 52-week low due to short positions by hedge funds that are also revealing to the public their rationale on the situation.

This past Sunday, I read the thoughts of Cable Car Capital, and wanted to provide some feedback on their comments. I have no idea what is really occurring with Plus500 and have no relationship with them – my argument is in defense of this industry.

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As the concerns addressed by this hedge fund reflect the impressions and jealousy of the industry in general. This happens when a company used to be a $100 million company then shoots to a market value of $1 billion in a short time – regular financial companies can’t do this.

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Unlike its peers, Plus500 has its own technology and controls everything tightly. Everything is automated and they only have email to correspond to traders. This says to me their focus is on trading technology. Everyone is treated equally, you either like it or you don’t. It is the only business model of this type in the industry. Normally, a technology provider sells itself as a white label to other brokers and doesn’t take any risk upon itself.

The stated goal by Capital Car is: “To document the unanswered questions that have motivated my positioning.” There are 10 parts to this blog, but only the section on customer lifetime value is valid. Ultimately, as judged from the blog, he has not studied nor contacted other brokers and how they operate. His knowledge is from Google searches and public records, not from an understanding of the industry nor the customer base. But I guess that is sufficient to short the stock and create fear and uncertainty. I highlight 4 quotes that I feel are relevant and more simple to understand than some of the other sections in the blog post:

  1. Let’s start with this statement: “Plus500 advertisements contain a somewhat cheeky disclaimer reminding prospective customers that “Your Capital is at Risk.” So is nicotine and yet people smoke. I’m sure many in the hedge fund world are chain smokers. Like in every industry, you inform clients about the potential risks and dangers. Have you gone to Cable Car’s website? Its disclaimer is quite long itself.
  2. Another great quote and use of adjectives is: “Plus500 is a ‘bucket shop’ that offers customers derivative interests without transacting on an exchange. Shockingly, that’s not illegal in Europe. This post is intended as background to explain how the model works.” Cable Car is located in the US and is applying US principles to a foreign operation that doesn’t solicit US business. What I find shocking is the legalization of casinos and drugs throughout the US and the repeal of the Glass Steagall act of 1933. Does that make me want to short Las Vegas Sands? And sell short JP Morgan (who is involved in forex fraud might I add)? Bucket shop or not, the trader/speculator is using skill to profit from market prices, not help local and state meet budget shortfalls. This is acceptable in Europe and even sports teams are sponsored by forex brokers.
  3. The most illiterate comment is this statement where he reinforces the bucket shop mentality: “In its 2014 annual report, Plus500 claimed to be profitable on 349 trading days, up from 297 in 2013. This is startling not only because of its consistency. It is also remarkable because a typical trading year has only 252 trading days, depending on the timing of holidays and weekends. If Sunday nights are included (when interbank forex markets are open) there are still only 304 trading days. Evidently, Plus500 is also profitable on Saturdays when underlying securities markets are not even open! This is only possible because Plus500 trades against its customers without executing offsetting transactions on an exchange.” Has this writer opened an account with them? No broker is opened when markets are closed. Traders are too smart for this. He makes it seem that Plus500 screw people when they are off with their families, come on!
  4. Assuming a 15-month lifespan, future revenue would drop to $124.7 million. This is one-time, non-recurring turnover that should not be capitalized. Future growth depends on attracting new customers to the platform.” Yet Plus500 maintains a certain customer base. The idea behind online marketing is that it’s a statistics game, which Plus500 appears to do a good job at.

For those who read the 10 part blog, Cable Car does dig deep and impart statistics and other things that are time consuming to read, but the 4 items I mention here shed some light on the bias of the writer so the other comments made about its auditor, to its location, and past history may not be as controversial. It’s not a company’s job to make it easier for the competition to understand how it operates, which I am sure the writer knows.

In conclusion, what happens when brokers start to listen to hedge funds? They become FXCM and process transactions on the CHF and lose a serious part of shareholder equity when those same funds swoop in to “save them.”

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