Undisclosed Market Making Loss Hits Plus500 Investor Confidence

The company disclosed a loss of $103 million during the crypto boom in the final quarter of 2017

The confidence of Plus500 investors appears to have been shattered significantly. A week after the company reported a downgrade to its outlook for 2019, the company’s stock continues to slide. The main reason is a previously undisclosed market making loss, that doesn’t affect top or bottom line results.

While the financial results of the company for 2018 have been all but solid, it was the fine print that caused investors to sell their holdings. In the following lines, we are briefly exposing what really happened. The information has been verified by sources with knowledge of the matter within the company.

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Plus500 chart
Chart of Plus500’s stock since it peaked out above 2000 pence per share in August 2018

After a report by The Times, last Friday focused onto a drafting error in the firm’s annual report for 2017, shares of the company continued a 30% slide with another leg lower to lose 57% since the close on February 11th, just before the firm’s earnings report was published.

Crypto Boom Market Making

While no changes have been reported to the bottom line of Plus500, the firm didn’t disclose a loss in market making activities in Q4 of 2017. At the time many brokers in the industry have suffered heavy losses from trading cryptocurrencies. The traditional adagio that retail investors always lose didn’t play out well during the crypto boom.

Investors who got into trading Bitcoin early enough posted significant gains on their accounts. That said, in all likelihood, those have merely been paper profits. As the prices of cryptocurrencies dropped lower in the first quarter of 2018, Plus500 reported a record-breaking quarter.

The company reported a market-making loss of $103 million, most of which occurred during the crypto boom. Over 2018, the P & L was offset, netting a gain of $172 million. During both 2017 and 2018, revenues and profits of Plus500 have not been misrepresented in any way.

While the bottom line hasn’t been affected, investors are worried that the company didn’t adequately disclose its crypto market making losses to investors in Q4 2017. Other companies such as Playtech, which cashed out on its Plus500 holdings in September 2018 reported similar misfortunes in crypto market making.

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Crypto Trading Challenge

While Plus500 did manage to onboard a slew of crypto traders, aside from a few exceptions its peers in the industry, traditional forex and CFDs brokers largely underperformed. Taking on all the risk has not been particularly appealing to most companies with significant experience in the market.

Until December 2017, when the futures contract got introduced, there were no known hedge mechanisms to protect brokers from the market exposure of its clients. At the time IG Group was revealed as one of the major holders of Bitcoin futures contracts, protecting the company from exposure to client gains.

The market eventually turned, and Plus500 made those losses back and then some. The broker reported a record-breaking quarter in Q1 2018, which was primarily driven by those same crypto investors who didn’t take their winnings and by new accounts which bought into the digital asset boom at the top.

Thinking about Short Sellers

The massive crypto losses of the company which didn’t get disclosed ultimately didn’t matter to the firm or its long-term investors. But it did a lot of damage to short sellers. At the end of the fourth quarter, the brokerage’s shares were trading above current levels, circa 900 pence per share and hit an all-time high of 2000 pence per share in August.

At present, Plus500’s premium over other publicly-traded retail brokers has all but evaporated as the market comes to terms with the missing details in its Q4 2017 reports. The crypto market-making position on which Plus500 was down significantly, turned for the best possible outcome due to the sharp fall of Bitcoin throughout 2018.

One of the big shareholders of the Haifa-headquartered brokerage, however, does not appear to be deterred by the latest events. Crispin Odey’s fund Odey Asset Management just ramped up its stake in Plus500 to above 16%. While attractive at current valuations, legal challenges could still be ahead for the firm.

For the time being, Plus500’s stock is the worst performing stock on the FTSE 250 index this year. The company got accepted into the elite list of constituents in one of the largest UK indices only last year.

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