Playtech’s Tradetech gamble hits the buffers with slower growth

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FTSE 250 listed Playtech announced what amounted to a “profits warning” on Friday saying that its full-year earnings will not meet analysts’ expectations, what’s more, it laid the blame for the downturn at the door of its CFD trading financial division, Tradetech, saying it had “underperformed”.

Playtech itself has come under increasing pressure from activist investors lead by Jason Ader, who has a history of reshaping the gaming sector and has an investment of US$100 million in Playtech.

Mr Ader spoke at a hedge fund conference last week calling on Playtech to sell off assets including the Tradetech forex brokerage businesses.

Alongside the profits warning on Friday, Playtech’s management admitted that all options were on the table for its financial division.

It’s not surprising really as with GVC’s InterTrader brand, sophisticated speculators are probably getting fed with high-risk trading being so closely linked with gambling. Online gaming companies are fairly adept at onboarding new clients with bonus incentives. But, as these are now banned brokers must focus on developing long term relationships with clients, rather than the bookie’s approach of churn and burn.

Readers may recall that another major player in the margin trading and CFD brokerage reported last week, in the shape of CMC Markets. Their numbers showed significant recovery after a very difficult 2018 so what has gone wrong for Tradetech?

Tradetech is largely involved in the wholesale or B2B end of online margin trading. Providing Prime brokerage and clearing services to intermediaries through its CFH brand and non-bank liquidity and risk management services through its Alpha division. In effect, the group provides its customers with the services and technology needed to trade in FX and CFDs on a wholesale basis.

Those customers are likely to be to smaller to medium-sized institutions who would not be able to secure those services directly from a tier-one bank.

Consolidating buying power and acting as a conduit for smaller clients is nothing new to the FX world, which has always operated within a hierarchical structure.

However, since the infamous Swiss franc event of January 2015, the tier one banks have become ever more discriminating about the businesses and clients they take on

The next tier down in the prime brokerage and liquidity provision spaces has become ever more competitive and as we know intense competition tends to drive down prices.

Unlike CMC Markets and IG Group, Tradtech’s operations are largely focused on the wholesale end of margin trading, in spot FX and CFDs.

A while ago we highlighted how easy it was to set up a forex broker, using a white label provider.

An area of the business whose profit margins are counted in basis points (that is 1/100th of a percentage point) and which relies on high volumes to drive growth

Profitability in FX and CFD trading can often depend on market volatility and that has been in short supply in 2019. Research from Bloomberg and Deutsche Bank suggests that price ranges within the G10 currencies are currently at multi-decade lows with the pound sterling and Brexit providing the only significant price swings.

While it’s true that overall FX volumes are higher now than they were three years ago much of that growth has happened away from the spot FX market in products such as swaps.

Playtech operates a considerable amount of gambling white label brands but have yet to move into niche gaming areas such as betting exchanges or sports spread betting.

If Tradetech were to come up for sale who might be interested in the business?

A buyer could come from several areas: Firstly, from one of the larger listed FX and CFD brokers who would like to diversify into the wholesale institutional space. Or perhaps a Market Maker, High-Frequency Trader or Hedge Fund keen to expose themselves to the wholesale flow of Tradetech’s B2B customers. Finally, I wonder if the Tradetech business might also have an appeal to US Futures and Options exchanges who are looking to expand their FX footprints into the OTC markets?

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