By Neil Halligan
Global leaders in online trading, IG Group’s interim CEO Peter Hetherington explains why it has taken the $4bn listed company so long to establish an office in Dubai, which will give UAE investors access to over 10,000 financial markets, with the capability to trade 24 hours a day.
For a company that has built its foundations on financial spread betting, establishing an office in Dubai is hardly the most obvious destination.
Peter Hetherington, IG Group’s newly installed interim CEO, disagrees, however.
IG Group started out in 1974 offering spread betting — a type of speculation that involves taking a bet on the price movement of a security — and it was the only product it offered up until 1998, when the company branched into contracts for difference.
“Spread betting is a quirk of the UK and Ireland tax legislation,” says Hetherington, insisting that the company has no plans to operate it outside those two jurisdictions.
“It’s now about a third of our business globally, by value. By number of trades it’s less than a third. Contracts for difference is the second biggest.”
Listed on London Stock Exchange, with a market cap of just over $4.1bn, IG Group will offer everything that it ordinarily offers elsewehere, such as trading in stock indices, commodities, bonds, metals and foreign exchange (FX), from its new Dubai office at Dubai International Financial Centre (DIFC).
“If you look at IG globally, you can trade over 10,000 products. On a busy day we do 800,000 trades a day,” he says.
Half of the company’s business by value is trading stock indices — FTSE, Dow, DAX; 20 percent is FX pairs; 20 percent is equities (trading single stocks on margin, or share trading; and the last 10 percent is all commodities.
Taking over from outgoing CEO Tim Howkins earlier this summer, it has been a busy first month or two for Hetherington, but he’s in ebullient mood as he sits down to discuss the company’s new office in Dubai. “You have to say ‘why have we not been in Dubai until now’ or why have we not been in the Middle East at all until now?” he says.
“Clearly if you look at the region, the wealth, the geography, the infrastructure, if you look at the whole area, and see where IG has offices around the world, it should have been in Dubai before now.”
Hetherington says the delay comes down to IG’s core principle when they set up offices to do business — having an operation that complies with local licensing and regulations.
“The reason we haven’t been is really simple: we don’t operate anywhere where we can’t get a proper local licence to do what we do well. We’ve been working with the DFSA [Dubai's financial regulator] somewhere between 18 and 24 months about getting a licence which allows us to do what we want properly. They have now issued us with the licence; we’re the first people to get a licence of this type,” Hetherington says.
“If you look at where we’ve got offices, and you would say it’s odd that we’ve got nothing in China. I’d love to have something in China — lots of people are doing so much business there, but I can’t do it properly, therefore I’m not doing it at all. Ditto Brazil,” he adds.
The category 3A licence from the DFSA allows IG Group to deal on a matched principal basis.
“It’s a subsidiary business so it’s locally capitalised. All the clients that are papered to this business contract with IG Limited which is registered at this office. Unlike other businesses who are sometimes sending them away overseas, all the legal risk is with this entity and therefore we have capitalised it to deal with that and deal from here,” Hetherington says.
“There are any number of companies who are not licensed to operate in Dubai at all who are selling into Dubai. Quite a lot of FX. Then there are a couple of companies who are licensed in Dubai, but nobody has a retail endorsement from the DFSA to offer the products that we do,” he adds.
The company actually got its licence from the DFSA a couple of months ago, but held off launching it due to Ramadan.
In that time, Hetherington says they’ve opened 70 accounts and has noticed some interesting patterns that he wasn’t expecting.
“Those accounts are odd in that they are heavily towards individual stock trading, individual names, which we weren’t really expecting. My expectation pre-launch would be that we’d be FX heavy and we’d be commodity heavy and that would mirror where we are in Singapore, and places like that. Slightly to my surprise, it’s all indices and shares,” he says.
“My expectation is that in time it will be indices, FX and I think oil has got to play a part. It’s interesting here. You look at CNBC or Bloomberg, they talk about the oil price almost incessantly here. It’s not a petro-economy but oil is still very important and I think people are going to want to trade that.”
Hetherington also believes that contracts for differences (CFDs) will, in time, become a strong part of its business in Dubai.
“We are undeniably the biggest company in our space [globally] by a country mile. I don’t think any of our competitors would dispute that. We’ve also got a good reputation for doing things right. We’ve never been censured by any regulator in any jurisdiction we’ve ever operated in. Try finding a bank who can say that,” he says.
CFDs are derivatives that enable people to take advantage of changes in an asset’s price, without owning the asset itself. CFDs are a leveraged product, which means you only have to put down a small deposit for a much larger market exposure. The leverage comes with significant benefits and risks: your investment capital can go further, but you can also lose more than your initial deposit.
“Let’s say you’re in Dubai and you’ve got someone on oil trading, something like $45 per barrel of 9x crude. You want to trade on that and you believe that oil is going to go higher. You would buy an amount per point — and the per point is two digits on — so 45.00 — and you’re on the .00 and say make or lose $10 if it goes up or down one tick. So if oil goes to $46, you’re making 100 points or a $1,000. If it goes down to $44, you’re losing $1,000. You’re making or losing every point that oil moves at that rate which you set. You deal in contracts and we’ll define a contract — we might say $1 a point, or $10 a point,” he explains.
Hetherington says the contract is relatively simple — you know how much you’re in for per point. “You have to put up a margin before you trade, something like 5 percent of the contract value to protect you. That means that if the contract starts running away from you, and it carries on falling, then we’ll close out your position,” he says.
The mechanism to close the position is relatively new, put in place post 2008 after a high-profile case in Ireland where the country’s richest man — Sean Quinn — lost a $5bn personal fortune through CFDs.
Hetherington says there were fundamental issues in the way the CFDs were used in that case, which ultimately gave the derivative a bad name.
“People were not being closed out when they ran out of money — that’s what we built after 2008 as a direct reaction. It’s now entirely automated. If you open a position with IG and the position starts running away from you, once you have half the margin you’re supposed to have, the position is closed. There’s no call, no debate, but you do get warning emails. It’s our job to get you out with no debt liens. It doesn’t always work, but it does in almost all cases,” Hetherington says.
The other problem in Ireland was that bank stocks were being pledged as collateral for CFDs in the self-same banks.
“There was a support mechanism done by some people where what they were doing was trying to support the price of the bank shares,” says Hetherington. “So they owned a lot of bank shares, you sell those shares to turn them into a CFD, which then releases the spare margin to allow you to buy loads more to try and support the price. But when the price continues to fall, you’re now in a whole world of hurt and that’s exactly what happened. Holding collateral against the same name that you want to trade. That it is a disaster and we just do not allow it. We have never allowed it. We’ve been as clean as you like on whole thing.”
He insists that CFDs are not for stake building. “If you want to physically own the shares, go own them,” he says.
While the licence in Dubai allows IG to offer foreign currency denominated products, trading in 10,000 global markets, it won’t offer any local products.
“That is something we’ve got to make this business work in its own right, then we need to look at how do we grow it out into the GCC and how do we start putting some local products in to allow people to start trading them. The problem is the products that we tend to trade off the back of are generally futures contracts or stocks where you can borrow and go short. Both of those subjects are in quite short supply when you come to local indices, so we’re struggling,” he says.
Hetherington says, however, they’re also not keen on trading in currencies that are pegged. “The problem is that a pegged currency isn’t very exciting to trade by nature of the peg, and you need quite a lot of margin so that if the peg ever goes, you’re protected,” he says.
When Swiss authorities removed the de facto peg of the franc to the euro in January this year, which sent the value of the franc soaring, IG’s clients who had been backing a weaker franc were painfully exposed. One student who had a $340 investment on the euro against the Swiss franc turn into a debt of €7,000 in less than an hour. IG offered some clients varying discounts on debts incurred, and several months later, there are still 80 clients out of 341 still having debts outstanding or are in dispute with IG, according to recent media reports.
Hetherington says it provided IG with a painful lesson and made them rethink their strategy.
“You had belief that a peg would hold, which was very well established. We’d looked at it and said it’s a pegged currency so therefore we’re going to charge significantly more margin. But the quantum of the move was so enormous — for a G10 currency to move 30 percent in 20 seconds was completely out of any normal range — therefore it has made us rethink a bit, whether or not we’re charging enough margin,” says Hetherington.
“Good companies learn from things that go wrong. We were definitely hit by the Swiss franc — not to the extent that companies went bust or had to be recapitalised, but it definitely served as a wake-up call and it made us realise the danger of things which are pegged, manipulated, held in the wrong place, any variation of a theme of where a market is not able to auto correct and self-adjust.”
The IG business in Dubai will pitch at the “more serious end”, targeting “proper established people who are relatively wealthy, experienced and crucially who are self-directed,” he says.
Hetherington says IG — in keeping with its business model — will never advise clients on where to invest.
“IG as a business will never advise on anything in any way, shape or form. We also won’t work our way towards advising and then say ‘but it’s your decision really’. Lots of firms will advise you, some will implicitly advise you. We’ll do neither. We will help you to trade well, support and give information about products.”
With 130,000 active clients trading globally with IG on a monthly basis, Hetherington says the target in two years’ time is to be in a position where 1 percent of the company’s trading is coming from Dubai-based clients.
Making a projection of where the Dubai office would be in five years’ time, he says the size of the business is hoped to be similar to its business in Italy or Spain, doing about $15m to $23m. Hetherington, however, hopes to see it grow like its Singapore office.
“We have had an office in Singapore for ten years. There are five million people in Singapore and those people actually trade so much more. Their accounts are valuable and their propensity to trade is very high. Whenever a market goes volatile, they trade loads more and there’s something about their free-spirited entrepreneurial culture. It ends up that Singapore is more valuable to us than Germany with 80 million people in it. It’s extraordinary. As soon as the market gets volatile, the German thought is to pull back, wait for it to settle down before going back into the market,” he says.
“Dubai to me could be Singapore. That’s the upside and it puts you significantly above an Italy or Spain in terms of revenue, but frankly we don’t know.”