Shares of Plus500 (LON:PLUS) have tanked this week, currently trading lower by 67% after being suspended earlier today. There’s been a number of speculations as to what the reasons are for the share price dropping so dramatically.
After the initial decline following an official announcement made by the broker that it had suspended trading and withdrawals for its U.K. customers, a number of follow-up reports surfaced.
Not one, but two rather popular short sellers have voiced their opinions on the moves in Plus500 (LON:PLUS). The first was Gotham City Research LLC, which posted a series of messages on its Twitter account starting on Wednesday and culminated with an announcement an hour ago that the analytics firm is preparing to issue an “update”.
The company is owned by short seller vigilante Daniel Yu, who has correctly called the demise of some publicly listed companies. However his track record is not perfect. Gotham City Research became notoriously famous in the City only last April, when after the publication of a 74-page long report it prompted the shares of UK outsourcing company Quindell to tank 50% in 40 minutes.
The report cost shareholders close to £1.3 billion on that day. The firm rebuked the Gotham City Research’s report with an almost 13,000 words statement. Granted, the risks for the outsourcing company have been different from those of a publicly traded forex and CFDs broker, which is the case of Plus500 (LON:PLUS).
Company shares lost almost half of their value today to bottom out at 198 pence right in the aftermath of resumption of trading and a tweet by Gotham City Research that it will be issuing an update on Plus500 (LON:PLUS).
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Another research company betting on the short side of the market also published a report recently. San Francisco-based investment adviser, Cable Car Capital, issued a price target of 76 pence on the shares of Plus500.
The firm discloses that it is shorting the stock and the statements made by Plus500 (LON:PLUS) should be taken with a grain of salt. Proceeding forward with the statement made by the broker’s CEO Gal Haber to the Financial Times that Plus500 uses Interactive Brokers when it needs to hedge on the market, Cable Car Capital questions the hedging policies of Plus500.
That said, Plus500 has repeatedly stated that it needs to hedge its market exposure only on very rare occasions. Natural hedging is the way in which the broker announced how it would be handling its exposure to client traders. The term is another way of saying that there is usually enough traders on the other side of the market to cover the exposure the firm has to market risks.
The modern day reality for Plus500 is that a couple of small research companies with WordPress websites have just managed to cause a boatload of trouble for the publicly listed company. Such companies have numerously reported accurate findings, but their findings haven’t been correct on every occasion.
A couple of years ago, researcher Carson Block and his Hong Kong-based company, Muddy Waters, exposed a major publicly listed scheme under the name Sino-Forest. The firm which claimed to be one of the major commercial forest plantation operators in China later filed for bankruptcy and caused investors massive losses.
However, a couple of months later his call on Singapore listed company, Olam International, did not materialize into another bankruptcy. Ultimately, the business model of Plus500 is currently under scrutiny by the market and only the firm’s financial performance can keep short sellers away from the firm.
Shares of the company are currently trading at 250 pence, which is a third lower on the day and more than two thirds lower when compared to the start of the week.