Small Cap Value Report (Thur 5 July 2018) - PLUS, MWG, GLE, PURP, SDRY

Wednesday, Jul 04 2018 by

Plus500 (LON:PLUS) - Correction

In response to my article on Monday, Plus500's PR agent, and indeed readers in the comments section, corrected me that Plus does not make money directly from client losses. 

I am only human, and I get things wrong. So I am happy to accept correction on this point, and retract my statement that Plus500 directly profits from client losses.

My belief that it did was based on my understanding that the company rarely uses an external hedge to protect itself against the net position of clients.

How Plus500 manages risk

I still believe that the company rarely uses an external hedge.

According to the presentation forwarded to me by the company's PR agent, under Risk Management, the company says "hedging would be undertaken if market movement breach the Group's risk appetite limits".

In other words, Plus500 does have risk appetite when it comes to taking on client net positions. It would hedge if client net positions became too extreme.

Profit from client net positions is listed explicitly as a source of revenue by the company, though it claims to have generated no revenues from this source for the past three financial years.

The company presentation also refers to "monitoring of instrument level correlations and volatility".

What that says to me is that the company is willing to take on a net long position in one instrument, so long as it also has a net short position in a correlated instrument.

For any single instrument, ignoring its correlations with other instruments, the only way that Plus500 could have a zero exposure in the absence of an external hedge is if the client book perfectly balanced itself. Needless to say, this is unlikely.

At a normal CFD provider, the external hedge is how the broker protects itself from an imbalanced client book.

At Plus500, it is doing two things to balance its client book, whose importance I did not appreciate:

  • Using correlations of instruments to manage its overall exposure
  • Blocking client trades when the net position gets too large

Consequences of using these techniques

The first technique relies on correlations remaining within some kind of normal range in order for it to work.

The second technique risks creating unhappy clients. The company presentation says "when limits are reached, no further trades accepted."

This chimes with…

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All my own views. I am not regulated by the FSA. No advice.

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Plus500 Ltd is an Israel-based company that develops and operates an online trading platform for individual customers to trade contracts for difference (CFDs). Its online trading platform allows its customers to trade CFDs on over more than 2,200 different underlying global financial instruments comprising equities, indices, commodities, options, exchange-traded funds (ETFs), crypto currencies and foreign exchange. The Company enables individual customers to trade CFDs in more than 50 countries. The trading platform is accessible from various operating systems, such as Windows, iOS, Android, and Surface, as well as Web browsers. more »

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Modern Water plc is a United Kingdom-based holding company. The principal activities are to own, develop and supply technologies, products and services related to the provision of fresh water and treatment and disposal of waste water, specifically for the design, construction, testing, installation, commissioning and operation of desalination plants, water cooling systems and brine concentration plants; packaged seawater desalination systems; wastewater treatment systems, and water quality monitoring, environmental monitoring and soil testing. It operates through two segments: membranes and monitoring. The Membrane Division includes thermal desalination, membrane brine concentration, evaporative cooling systems, packaged seawater reverse osmosis (SWRO) desalination systems and wastewater treatment. Its Monitoring Division includes trace metal products, toxicity products and environmental products. more »

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MJ Gleeson plc, formerly MJ Gleeson Group plc, is a United Kingdom-based company, which is engaged in providing two businesses: house building on brownfield land in the North of England and strategic land trading, primarily in the South of England. The Company operates in two segments, which include Gleeson Homes and Gleeson Strategic Land. The Gleeson Homes segment is engaged in house generation and provides homes for sale to low income people in the areas of industrial decline, and social and economic deprivation in the North of England. The Company's Gleeson Strategic Land segment is engaged in land promotion business by securing residential planning consents for lands and focuses on helping landowners to pay for in the South of England. The Company has operations in various regions, such as Cleveland; County Durham; Derbyshire; Greater Manchester; Lancashire; Merseyside; North Yorkshire; Northumberland; Nottinghamshire; South Yorkshire; Tyne & Wear, and West Yorkshire. more »

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  Is LON:PLUS fundamentally strong or weak? Find out More »

32 Comments on this Article show/hide all

bwakem 5th Jul '18 13 of 32

What concerns me most about Plus500 (LON:PLUS) is that in all the discussions I've had with other investors / traders / spreadbetters both online and in real life, I've never come across anyone that actually uses them. I find this a bit odd for a such a big player in the market.

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drvodkaquickstep 5th Jul '18 14 of 32

Morning Graham

2 recent bits of news from Modern Water (LON:MWG) who presented recently at Mello Derby might be worth covering:

This is a micro-cap tiddler and has been loss making since IPO back in 2007. They have some great technology, however, and finally now seem to be close to breakeven with sales improving in both their Monitoring and Membranes divisions. The new AMBC plant in India is their first full scale commercial plant and produces ZLD (zero liquid discharge) - ZLD is becoming driven by regulation now more and more and this showcase plant will not only attract further customers in India but also China etc.

On top of that they are close to being awarded the main contract works for a new Wastewater Treatment Plant at Europa Point in Gibraltar - their technology is being used as unusually 'the Rock' uses saline (sea) water for WC flushing and hence the treatment plant needs to be able to deal with saline wastewater. This £22m contract should deliver of circa £1.5 - £1.8m profits (by my estimates) for MWG but will be a one off.

The news today of Sunup (China) planning to take a 5% stake in the company and to JV with them re: a roll out of their membrane technology across China is very good news and also assists with their cash situation which was / is very fragile.  The equity raise at a premium (11p) is interesting and they are doing a 1 for 10 open offer to existing holders too.

I have been invested on and off since 2013 and like the management despite the poor track record of commercialising their technology (not helped by their previous Chairman) - new(ish) chairman is Alan Wilson from PRES.

SP up 20% this morning on the news.

Any reader comments also welcome!

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clouds 5th Jul '18 15 of 32

Hi Graham,

Genuine question, would you also view the other major spreadbet / CFD providers as "bucket shops" e.g. IG, CMC, etc. ? I would be very surprised if they fully hedged their clients positions.

Presumably when IG were offering binary bets, you'd have defined that as "bucket shop" activity? Note that Plus didn't offer such a product.

It seems to me that IG & Plus are not as different as some people would like to think.

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bgw1970 5th Jul '18 16 of 32

In reply to post #379944

you don't get it, either. You are only looking at one side. Their clients also win 50% of the time....

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ACounsell 5th Jul '18 17 of 32


I agree with your analysis of Plus500 (LON:PLUS). As a novice CFD investor (gambler?) I was caught out by some of the trading issues you highlight. In a previous comment relating to Roland Head’s SIF Portfolio review of Plus500 (LON:PLUS) I explained my own experience as follows:

“I think your comment (Roland’s) ‘Plus500 (LON:PLUS) business model does seem to be dependent on a constant supply of new customers each year. Presumably this is because many customers lose money and stop trading after an initial period of enthusiasm’ hits the nail on the head! From my personal experience Plus500 (LON:PLUS) is basically a CFD gambling site and I was caught out trying to hedge a 'smallish' long position in a metals ETF (clearly outside my area of expertise!) when the price spiked hugely and they halted trading in the instrument. When they restarted trading a few days later the price opened way above my stop-loss, the position closed and I lost considerably more than my stop-loss. 'Caveat Emptor' on my part but I suspect that Plus500 (LON:PLUS) are doing so well because c. 80% of customers lose money on their transactions. As a past holder of the stock making a decent profit with various sales in 2014/15, before selling the final tranche when the share bombed in 2Q 2015 (c. 50% fall - regulatory issues) I should have kept the shares and steered well clear of the product!

I think you are right to view this with trepidation - the financials look too good to be true, regulatory risk is high, the business HQ is in Israel and the Crypto bubble must surely burst. Good luck with this one in the SIF portfolio.”

I haven’t changed my view since these comments and Graham is correct to point out some of the issues. Holders who have held the stock through the many ups and downs have done very well but I still feel it is an accident waiting to happen even though it still qualifies in Ed’s NAPs portfolio! Perhaps I should join the class action to recover my losses!!

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pka 5th Jul '18 18 of 32

This warning from Giambrone Law about using a 'bucket shop' to trade CFDs might be relevant to this discussion:

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Graham Neary 5th Jul '18 19 of 32

In reply to post #379984

Thanks jonno, I've put together a few thoughts on MJ Gleeson (LON:GLE). Would be pleased to hear your views on it, too. G

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LeoInvestorUK 5th Jul '18 20 of 32

In reply to post #379909


Seeing Machines (LON:SEE) is not a "Small Cap Value" share and while its announcement today doesn't mention revenue, as far as I can see it isn't material. Therefore I wouldn't normally discuss it here. However, it doesn't take much to get me started :)

The question in my mind is why they released such minor news as an RNS. I suspect the reason is remind the market that there is more to their business than (indirect) sales to car manufacturers (OEMs). While this is legitimate I then wonder whether this implies they are not expecting an imminent material announcement on the OEM side and don't want to go too quiet.

Whatever the reason, the share price is heavily dependent on newsflow and rumour, dropping back at the slightest lull. This makes makes them inherently risky to hold, especially over holiday periods when business decisions are less likely to be made. Versarien (LON:VRS) is a more extreme case of the same phenomenon.

It also makes SEE risky to not hold (or be short) as an apparently major announcement could cause a big price movement at almost any time. The fact that it has been possible to buy at a good price in reasonable quantity in the morning of previous big announcements may provide some reassurance here, but may also increase the speed of future spikes.

Notice that I have said nothing about fundamentals? That is because they currently provide no support. Certainly I can (and have) extrapolated a future scenario where the current valuation (and much more) is supported by fundamentals, but unless / until this firms up it is a highly speculative investment / punt and I would urge extreme caution.

Finally, there is some not entirely one-sided and not entirely banal discussion on the London South-East board, and especially in the absence of any material news I feel that is probably a better place to get a feel for the drivers of the share price than here.

Blog: LeoInvestorUK
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sharw 5th Jul '18 21 of 32

In reply to post #380029

The question in my mind is why they released such minor news as an RNS.

They didn't - they issued it as an RNS-Reach which is for non-regulatory information see:


The problem is that on most systems delivering RNS the difference is not obvious. On investegate it is indicated by a dark grey rather than black background to the white letters RNS and that may or may not be visible depending on your screen quality/size/contrast. Here on Stocko there is no indication at all. The only obvious place is LSE itself:


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Cockerhoop 5th Jul '18 22 of 32

Hi Graham,

Great research as always into PLUS (can someone please remind of the correct format to link epic)

I'm certainly unable to correlate 12% of professional investors producing 75% of European revenues with the massive fall off in revenue from long standing customers (who would presumably be more likely to be the professional ones) ie 47% of revenue comes from customers of 12 months or less.

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brucepackard 5th Jul '18 23 of 32

Thanks for the retraction on Plus500 (LON:PLUS) - great explanation of how the "largest bucket shop in the history of finance" makes money.

I think you are going to get more Financial PRs from other companies phoning you up now.

Keep up the good work.

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WLANE123 5th Jul '18 24 of 32

eventually they will blow up and we all know it and they know it too but why not milk it til it lasts. At that point you could always say " I told you".

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ezlifeme 5th Jul '18 25 of 32

Benjamin Graham on the "new" airline industry

It was clear in the early days that the industry would experience dramatic growth. Yet, it’s been absolutely terrible for investors.

and... Black Tulips, Tech Bubble , CFD Investing ?

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atali1 5th Jul '18 26 of 32

Another attack on PLUS.
I'm not quite sure why Graham is so against PLUS while holding IGG when IGG operate in exactly the same way as PLUS. Quote from IG "IG takes market risk for the purpose of facilitating instant execution of client trades. The business manages this market risk by internalising client flow (allowing clients’ trades to offset each other) and hedging when the residual exposures reach defined limits. The Group’s real-time market position-monitoring system allows it to monitor its market exposure against its market risk limits continuously. If exposures exceed pre-determined limits, hedging is undertaken to bring the exposure back to the limit."
IGG aslo often block trading in instruments and while I don't know how they compare on this I doubt the difference is much. The only time I took notice was the massive run in crypto near the end of last year. PLUS never completely closed their markets (instead taking the proactive measures of lowering available sizes and increasing spreads) while IGG closed their crypto markets for weeks.
Aside from the crypto example we also know from the past history that when the Swiss franc lost its peg PLUS didn't suffer but IGG had a large hit.
Anyway everyone should DYOR and come to your own conclusions. But taking Graham's word that PLUS are the worst of the worst while IGG are fine is something that is rather misleading.

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sharw 5th Jul '18 27 of 32

Whether Plus500 or conventional brokers most of us have cash and shareholdings held on our behalf, indeed it is compulsory for ISAs.

Like many on these boards I have read of the problems at Beaufort and the little-known rule 135 which allows administrators to help themselves to "ring fenced" money and investments.

There is now a petition - it has passed 1,000 signatures but needs 10,000 for a reply.

You can sign here:

More details here:

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Edward John Canham 5th Jul '18 28 of 32

Whenever the subject of PLUS500 comes up and is analysed by a city insider it suffers - its a bucket shop, it doesn't hedge ....... Most also compare to IG Group as the pinnacle of what it should aspire to.

I keep on going back to the Swiss Franc debacle. PLUS500's customers lost their deposits, IG's customers lost their houses in certain cases.

No doubt someone will put me right on this.

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wildshot 5th Jul '18 29 of 32

Great analysis of Plus500 (LON:PLUS) Graham, if ever I felt inclined to short a share it is certainly now based on this. The lock out of trading for periods just brings flashbacks to the time of WorldSpreads. I was caught out by that one even after Robbie Burns openly talked of his trading issues with that site and I believe MF Global (?) also another one to hit the wall.

Whilst I was hit with WorldSpreads it was a small amount and I was fully compensated (like with the Icelandic bank IceSave) due to the government compensation scheme. With Plus500 being registered abroad I'm not sure on their licence and if people who use their service have the same compensation rights as I had with WorldSpreads and IceSave?

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GN100 5th Jul '18 30 of 32

In reply to post #380069

As a holder of Plus500 (LON:PLUS) I appreciate all the comments and research. I have done very well out of Plus500 (LON:PLUS) so far and pay close attention to my stop. The biggest risk then is the gap down if it all goes pear shaped.

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john652 5th Jul '18 31 of 32

Plus, IG,CMC and all the rest, these are great businesses for making money from the market and clients.

How can that be?

Relatively easy if your algorithms constantly see all the buys, all the sells, all the stops, and the underlying prices and move your bid /offer/settlement arround accordingly, add in actually halting trading....easy.

I Know this space well, 15 years in derivatives exchanges working with matching algorithm logic. The spreadbetters effectively trade their own book, it’s a form of front running, if you are a client of an exchange its illegal.

Someday I am sure this will come out, when they get into the actual detail of the matching engine, or maybe not, Flash Boys anyone?

Graham, either way I am with you on this. 

That said I have owned them in the past and might again, afterall you gotta be dumb not to profit when you can front run your customer orders. 

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pka 6th Jul '18 32 of 32

In reply to post #380154

'That said I have owned them in the past and might again, after all you gotta be dumb not to profit when you can front run your customer orders.'

Not dumb but immoral...

I would not want to be a part-owner of any company that behaves this way with its customers, even if that is just an allegation.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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