Plus500 Share Discussion Threads

[cfro] 01/12/2017 15:34

I suppose the question we are trying to answer is - has PLUS taken a large hit on the Bitcoin surge these last few days?

As they definitely don't want a 'one-way' market where the majority of clients are positioned with it. As we know, PLUS prefer choppy and volatile the more so the better.

Typically speaking a one-way market 'without' any kind of hedging could equate to a heavy loss for PLUS.

[dennislevine] 01/12/2017 14:50

Also worth noting that if anyone wants to go long bitcoin on Plus the instrument does have an expiry date so to reopen a position continuously you have to effectively pay the spread to Plus each time.

[travellingtrader] 01/12/2017 14:42

Thanks all for the valuable discussions. Some very good points being made.
Yes most customers would have been margin called and lost their positions in the example I gave.
There will be customers who have positions who have never had a drawdown from their original purchase price. Those who bought on the breaks above 5000 in mid october and 8000 in mid november are 2 recent examples.
People buying around these points are almost certainly the ones which have caused PLUS to close up their crypto market.
It seems unlikely to me that bitcoin is going to retrace to 8000 to assist PLUS in having customers positions close out.
If PLUS aren't able to reopen the crypto market at competitive rates it will be a real shame as it is the fastest growing market around and has really driven down the AUAC.
PLUS are still a very attractive business regardless and will continue to generate lots of cash.
But they will be missing out on the fastest growing part of the market.
I'm bullish on PLUS regardless of crypto but if PLUS can get the crypto market opened again then PLUS is an even more attractive proposition.

[planelondon] 01/12/2017 14:06

To provide another example. On 20th July 2017, bitcoin had a low to high price move of 22.98%. The largest low to high price move this year. However, if you look at the daily P and L chart on page 21 of the 31/10 presentation around 20th July, you see no material loss to Plus500. Why? Because the customer could not collectively cover the charges applied that day, even though there was a 22.98% rise in bitcoin. Collectively, they opened/closed enough trades where the charges exceeded the collective trading gains.

[planelondon] 01/12/2017 13:51

Sj, I agree, you thinking correct.

[planelondon] 01/12/2017 13:44

Cfro, you are correct. 84% (FCA data) of customers loose money. They loose it bacause collectively, customers have paid money to Plus500 by way of charges. CDF trading is a zero sum game. It's wrong to say customers lost money to the market, they didnt, they lost it by paying charges to Plus500.

From information on the website, customer’s traded products with a notional value of USD 1042+ bn in 2016. The spread charged on that turnover generated 95% of 2016 revenues. An amount of USD USD 312m out of total revenues of USD 328m. USD1041bn divided by the revenue of USD 312m provides an idea of the average % spread across all products the customer pays, and Plus500 receive.

[sailing john] 01/12/2017 13:40

"TravellingTrader1 Dec '17 - 12:38 - 12095 of 12098 0 0
Bitcoin did reach a low of $5500 between the 1st Nov and now so assume they had enough equity to survive the dip."

Just a couple of points to add to the excellent debate
In the example from TT above a 100BTC position would be valued at $650,000 and would require an initial margin of $26000 and a maintenance margin of $13000
When BTC fell to $5500 the position would be valued at $550000 and would require additional margin funds of $87000 ($100k loss less $13k excess margin)
This is how leverage takes punters out since I doubt they could/would stump up an additional $87k to keep an original $26k position open so position would most likely have been closed out at that point.

Leverage OK if market moving one way consistently - but any volatility can give rise to liabilities far beyond that of an average retail punter. David vs Goliath when it comes to who blinks first.

Having said that there is little doubt that PLUS have taken a bit of a hit on Cryptos recently but have effectively closed the market for now. The quantum of any loss that they might have incurred is difficult to assess from the outside but given the typical cost of acquiring new customers I doubt it will be anywhere near as much as typical quarterly UAC and I assume the additional Crypto customers that PLUS has acquired are at little or no cost given all the free advertising in the media currently.
imo etc.

[cfro] 01/12/2017 13:28

I think there is a lot of confusion here. We mustn't detract from the fact that spread-betting companies make their money from the fact that 80% of customers lose and only 20% win.

We mustn't forget that these are 'bets placed', not underlying securities bought and sold. Therefore if the client wins the spread-betting company pays out but if the client loses then they pay the company.

The business model is not much different to a bookie. Imagine if all the punters walked in with the luck of the Irish and everyone won, then the bookie would soon go broke.

My understanding with PLUS is that they have much lower trading limits than other spread-better like IG and don't take on the high-rollers. But if they have several thousand traders all on the long side of Bitcoin as it shoots ever higher then that is essentially the same as having a major player 'win' anyway.

If PLUS don't hedge this risk in some way or the other then it could ultimately lead to large losses imo.

[travellingtrader] 01/12/2017 13:18

a) yes I assumed it is held which is common among people buying crypto
b) the are plenty of examples in a straight line. I picked one that wasn't in purpose to show how they've still made a lot
c) I calculated the margin in the same way as you have. Using the formula stated on PLUS website.

So it's a valid scenario and there are probably quite a number of customers sitting and holding gains with no intention to sell out soon.
So Plus must be doing more then relying on customer PnL balancing the books otherwise they have huge market exposure to cryptos

[planelondon] 01/12/2017 13:04

Travelling Trade, your example is not mathimatically sound.

The reasons being:

a) you dont know how often the trade was turned over (open/closed) across the whole trading book. Unless you are assuming its opened and held. That might be the case for some trades but no across the trading book as a whole.

b)the rise in price you describe, didn't happen in a straight line.

c) if you deposited $1000 of money margin and leveraged 1:25 you would pay $125 per night in premium (0.5% on USD 25,000 nototional value). You deposited margin money would be spent by way of premium charges in less than 8 days.

[planelondon] 01/12/2017 12:51

Aakash30, you might not hold the position for 3+ years but across the trading book as whole this is what's happening and a premium charge is being made every night across a given amount of money. If you close you trade to avoid it, you will likely open another position and again a charge is applied to your margin money again.

Anyway, the beginning of the debate was do Plus500 make revenue and profits from form market P and L. In 2015 and 2016 they didnt. Maybe they do in 2017 because of cryptos but somehow I doubt it. They will continue to make their money the old fashioned way by charging their customers, as most commercial business do.

[travellingtrader] 01/12/2017 12:38

Here's an example using cryptos and the charges.

Cryptos have risen so quickly that charges do not make up anywhere near a large enough amount.
Here are my simple calculations assuming someone bought 100 bitcoin. Leverage was 25:1 or maybe even 30:1 then so the account didn't need to have a large amount of equity.
Bitcoin did reach a low of $5500 between the 1st Nov and now so assume they had enough equity to survive the dip.

Bitcoin price on 1 Nov: $6500
Bitcoin today: $10000
Difference: $3500
Profit without charges: $350000

Premium charge cost: Trade size x Opening Rate x Daily (Buy or Sell) Premium %
Premium originally: 0.19%
Premium now: 0.5% (I will use 0.5%)
Spread was 23 on 1st Nov
Spread now ~60
Spread average ~45 in total for complete trade

Total Spread cost: $4500
Premium daily at 0.5%: $3250
30 days premium: $97500

Current profit with charges: $350000 - $97500 - $4500 = $248000

Days for premium to eat profit assuming no price chage: 76

The calculations only look worse the further back you go so there's no reason they will start working going forward for crypto.

So they must be hedging or doing something other than relying on customer PnL balancing out and making money from the charges.

[aakash30] 01/12/2017 12:16

And I am never going to hold it for that long PL. for indices I would have to hold it for 3+ years before it takes away my deposit. I close out my market PnL (profit or loss) well before that.

Anyhow, my views on this debate are pretty much in line with TT except I don't think they hedge much. I have spoken to Liberum and competitors (and Plus annual reports) who say the same. They may be doing things differently or being forced to do things differently for cryptos.

[planelondon] 01/12/2017 12:06

TravellingTrade, you are most likely correct in reference to crypto currency and the recent one way market. However, we shouldn't underestimate the impact of charges and how frequently these charges are applied to the customers account. The volocity of customer transactions (charges) within the same pool of moneny will be extremely high during these volitile crypto moves. As SJ explained in his demo account example, its very hard to trade more profitably that the charges your are incurring, even when its appears the market is moving in your favour. In essence, with leverage trading you can't out run the charges over any reasonable period of time.

[planelondon] 01/12/2017 11:51

ARPU is another way to describe Average Charge Per User. They are two different sides of the same coin.

As far as your example of holding a long equity index or currency position is concerned. You just haven’t held it long enough for the premium charge to exceed your deposited margin money. You can calculate how much you have been charged so far and at what point in the future the premium charge will exceed you deposited margin money. That point might not have happened yet but it will happen, it’s a mathematical certainty if you continue to hold the position.

[travellingtrader] 01/12/2017 11:34

"Any market P and L is mostly between customers and nobody else"
Cryptos have shown why this doesn't work and why it's unlikely this could be what happens.

Crypto customers are almost all long positions and with the huge rises over multiple days PLUS were forced to effectively close their crypto books by the new measures they introduced.
PLUS would have been raking revenue in over the past few days had they not been forced to cut off their crypto books.
The longer it takes PLUS to begin to offer cryptos on similar terms as prior to the big rises (Larger contract sizes predominantly) the more concerned I become.

PLUS must have realised their strategy doesn't work on heavily trending markets with the books weighted to one side and are currently working on a better hedging strategy. I believe the recent pullback has been a lucky escape from what could have been some massive losses.

I do have the view that PLUS do hedge so it's not clear to me why the accounts don't appear to reflect this. Whatever hedging they were doing has been insufficient for the crypto market.

Hopefully they will have things back on track soon to retain the customers that have been added over the past few months and continue to attract new customers.

[planelondon] 01/12/2017 11:34

The daily movement in trading P and L are earnings and cash flow movements, it is not revenue or profit. The earnings and cash flow movements may look very similar to revenue and profit, in terms of amounts and timing but they are different. The revenue and any profit are generated at the point of transaction (the opening of the first leg of the trade).

The way Plus500 manage risk is a key differentiator from its competitors. Plus500 minimises market risk by not allowing themselves to be exposed to it in the first place. When it does happen, it’s so small it’s immaterial and doesn’t impact the company’s financial accounts.

Whereas for most of the competitors, they find themselves in a position where they are exposed to market risk they don’t want and then hedge it externally to remove it. The competitors pay a financial cost to remove this market risk, Plus500 don’t.

[aakash30] 01/12/2017 11:25

Thanks for your detailed explanations PL. I find it very hard to rationalize that most let alone all of the market PnL offsets across customers. I know that's what their reports and presentations say but IMO I can't see that to be true. The market PnL offsetting would work only if they had a matched book but taking cryptos as an example they are far from matched.

As ~80% of clients lose money, and ~20% make money you need the difference to be funded by bid offer spreads costs and overnight premiums and I don't think they are that significant to say they are the sole contributor.

For example when I trade on Plus, I hold my long equity index or currency positions for a while, weeks sometimes. I am not trading in and out and certainly not exhausting my margin through bid offer spread or overnight premium.

[planelondon] 01/12/2017 09:31

Yes the trading book will not be perfectly hedged naturally and the uncovered exposure will sit with Plus500. The cash movements behaviour accordingly. This is only temporary. If it falls within risk limits set at customer, instrument and asset class levels no action is required.

However, for the average customer, the collective charge for all their trades combined will eventually exceed any movement the in the customer’s market P and L, which the customer faces predominately with other customers. Therefore, technically, Plus500 make 95% of their revenues by this charge and not market P and L. As explained above, the point the customer is charged (and revenue generated for Plus500), is when the position is opened and not when it closes. Everything else is settlement and cash flow movements.

Think about what is going on in practical terms. The customer is tapping at a piece of plastic all day long. Tapping it the best way they see fit. The piece of plastic just happens to be a smartphone. Over in the real money world what has happened is the customer has transferred margin money to the CFD provider’s segregated customer bank account. A charge is then applied every time the customers taps a transaction on the piece of plastic. At that point part of the customer’s money moves from the segregated customer bank account to the provider’s bank account. The money now belongs to the CFD provider.

This is how the legal and book keeping arrangements operate.

Any market P and L is mostly between customers and nobody else. In simple terms, all Plus500 do is charge the customer a small amount each time they trade amongst themselves. In the meantime, the money goes back and forth between the customers, who are the ones to experience market risk and the market p and l with each other.

If Plus500 were hedging market risk with a counterparty (if this is being proposed as an explanation to what happens to market p and l), significant amounts of money would be leaving the company. Such transactions would be evident in the report and accounts as they are at IGG and CMCX.

[dennislevine] 01/12/2017 08:14

planelondon: some interesting points on spreads and market P&L. In one of the examples above you mention a case where customer A and B have opposing positions - hence the market moves are simply allocated or transferred between clients. For Plus overall to have no market P&l would they not have to be running a balanced book all the time to get the natural hedge from aggregation (seems rather unlikely). If the opposing trades are unbalanced is it not the case that the residual exposure must flow to Plus (either positive or negative) and is this not part of market P&L rather than spread revenue?

[planelondon] 30/11/2017 18:16

With a CFD the charge (spread) to the customer is booked to the CFD provider’s accounts as revenue at the point the customer executes the first leg of a trade. It’s simultaneously booked to the customer’s account as a charge by way of a higher/lower exit price for the second leg of the trade.

Who has to pay who after the trade closes is a different matter. The spread (the charge) has been book to both parties account at the point the transaction was executed. All the other movements are cash flow because it’s a money business.

Aakash30, I don’t know if customers trade too often. I do know based on the example I gave about that for an average customer their money only buys them a certain number of trades (33 in the example) before it is depleted by way of spread which in turn generates 95% of Plus500 revenues.

If customers are really losing money through market p and l, where is this money going, who has it?

The accounts and reports states there is no market p and l. It’s because there is any.

[planelondon] 30/11/2017 16:54

'The best days being on bitcoin down days'because it generates immediate cash flow from stop losses and increases the frequency customer trade and pay charges (spread). It’s cash flow, not profit.

[aakash30] 30/11/2017 16:25

PL isn't your scenario just one of many? How do you explain their best days being on Bitcoin down days? It's due to customers getting stopped out of their positions due to market moves not due to excessive trading by clients to exhaust their margin.

[planelondon] 30/11/2017 15:56

Charges (spreads and premiums) make up 100% of customer losses. Client losses equal 100% of Plus500 revenue. The annual accounts and page nine of 30/09 presentation confirm it. In previous years when market P and L was generated, the amount was stated. For 2015 and 2016 it was as nil.

If customer A has $1000 margin and customer B also has $1000 margin and they take opposing positions to each of and the product has a 0.3% spread at 10 leverage, after 33 trades, they will both have exhausted their margin. The margin now sits with the product provider. The customer losses are a result of spreads (charges) and not because of market P and L. Market P and L moved the money between customer A and B and the spread creates the loss.

The customers aren’t so much buying a trading platform, they are buying a user experience

[aakash30] 30/11/2017 12:43

@alan, I have the same concerns/thoughts as you. Technically I don't think all their PnL is just from spreads and overnight PnL. A lot of it must be coming from customers getting stopped out/margin called and this they call spread PnL. I remeber that really good chart someone had posted about their best days being when bitcoin was down a lot. I find this a grey area but they could argue we are not actively taking a prop position, we are just accepting customer flow , providing liquidity and then what happens happens.