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LSE- London stock exchange


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Anyone know what is up with this one? DOes not look that cheap, but has seen quick growth and is currently highest rated idea on VIC. Im reading the AR's, but struggling to really understand what they do.

 

seems like this business is a broker of brokers? So basicly I buy UK stock with interactive brokers, and this company arranges the transaction between interactive brokers and possibly another broker that might have people willing to sell?

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So they are merging with the US russell exchange, and there will be a rights offering this month. Apparantly there would be major synergies or something. I guess that is why this idea is so highly rated on VIC.

 

I'm not sure if their business is any different ultimately than that of the NYSE and other exchanges which have gone public over the last decade.  I initially assumed these would be great businesses because of their network effects which come with being a market place.  This has not turned out to be the case as they seem to have lots of competition from other smaller startups and large banks that trade among themselves.  The real moats are in the derivative exchanges like the cme whose products are not fungible.  A product purchased on the cme needs to be sold there creating a closed loop and pushing out competitors.  That is why you see the nyse buying up European derivative businesses and generally moving away from the traditional exchange business where the price they can charge for trades has been in steady decline.

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Not sure if you are joking but the Russell group is not an exchange, they're an index provider and asset management firm. Probably some synergies there because the LSE group already owns the FTSE indices group. Buy a range of popular indices -> offer derivatives on these indices on your exchanges -> earn money while locking people into your trading platforms. Also you can provide services to asset managers tracking your indices, for example automatic rebalancing through your trading platforms or stuff like that. And the more indices you own the easier it will be for asset managers (for everybody in general) to stick to your company. For example, if you already have a US equity fund tracking the Russell 1000 and you want to start an additional EM fund it might make sense to track some FTSE EM index because you already have the infrastructure for the LSE indices group in place. I think it makes sense to own a diversified portfolio of indices covering a wide range of assets. The Russell group is mostly US-focused afaik so it could be a nice complement to the EU-focused FTSE stuff. That's my take on the acquisition.

 

With regards to the exchange business itself, as deadspace pointed out the derivatives business is very nice because you lock people in. Your counterparty is the exchange - as opposed to another trader so you can't easily switch exchanges, as you can with stocks. There has been a bit of a war the last couple of years between all major exchanges trying to gobble up derivatives exchanges (for example ICE and DB fighting for NYSE, ICE wins the war, keeps the derivatives business and spins off the 'bad' equity trading). I think people expect that the traditional equities exchanges themselves have a troubled future ahead of them due to fragmentation of the market place (dark pools, Chi-X, BATS etc.). Maybe they can counteract this by focussing on additional services (for example facilitating IPO's, making it easier for companies to disseminate information, offering structured products tailored for retail customers, offering market access for smaller companies with less stringent rules, etc.).

 

A clearing house is basically a heavily regulated monopoly business responsible for post-trade services. So basically making sure that you pay / receive money and get / deliver shares, bonds or commodities. The LSE group owns an Italian clearing house and LCH Clearnet: an overview of what they do if you're interested: http://en.wikipedia.org/wiki/LCH.Clearnet .

 

Just my ramblings about the business. Never analysed the stock though. By the way, I see you opening a topic for every VIC idea with a high rating. Your eagerness is appreciated but what's the point if you have done no analysis yourself - and are clueless about the business in the first place?

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  • 3 months later...

This seem pretty cheap. they have been under short sellers pressure since it became public last year...

 

The numbers seem to good to be true... but it is growing like mad at 50%+, 60% EBITDA margins and they payout 50% earnings as dividends.  it currently trades for 5x-7x FCF, no debt. Comps like FXCM trade for 15x or 10x EV/EBITDA...

 

I attach a presentation supporting the long case

 

any thoughts?

Plus500_Presentation_Buckley_Capital.pdf

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My impression is that the people trading CFDs in the UK are like retail investors trading Forex here in the States. Ultimately a losing game for the customer, although profitable for the broker. What do you think has driven the large growth in business? Is it that these guys are the low-cost operator, or has the industry in general been booming for some reason? The low-cost model is obviously powerful, my concerns are that the industry they are in always seemed sketchy to me, but I would love to be proven wrong by a more knowledgeable poster.

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yeah with plus500 im kind of scared revenue could just fall of a cliff. I also don't really understand why they should have an edge. I would buy at lower PE levels, but  not here. Especially with some sort of crisis just around the corner, seems like companies like Plus500 will be hit first.

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  • 2 months later...

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