Betting on 'an interesting opportunity' in Irish market

Chief executive of IG Index, Tim Howkins, is confident the financial spread trading specialist can carve out a decent share of the market

The promissory notes might be gone, but it still hardly looks like the right time to launch a retail investment business that depends almost entirely on clients with plenty of discretionary spending power.

That didn’t stop financial spread trading specialist, IG Index, announcing this week that it is setting up shop in the Republic. It has hired Declan Bourke, who previously headed CMC’s Irish business, to front the operation, and believes it can quickly carve out a decent share of the market here.

But is that market worth chasing? “We think there’s an interesting opportunity here,” IG’s chief executive, Tim Howkins, says.

He believes the company may already have between 10 and 20 per cent of the market, either through local brokers offering contracts for difference (CFDs) to private clients or people accessing its site from the Republic.

“There’s a good opportunity to grow that quite rapidly. There’s been quite a change in the local providers here and so we think that the time is right to have a presence.”

There has been a shake up. Worldspreads disappeared amid a scandal over lost client funds almost a year ago. It did not have a huge Irish customer base, but its founders and biggest shareholders were from here.

Apart from Worldspreads, CMC closed its Irish office and Delta was sold to a small UK operator.

In terms of substantial local operators, that leaves Marketspreads. IG thinks that there is room for another. It calculates that the market here is worth in the region of €20 million in revenue terms.

Howkins points out that IG has 44 per cent of the British market in the face of a lot of competition. With fewer rivals, he believes the Irish operation can get a “decent per cent of that” quite quickly.

Part of the shake up to which Howkins refers was due to the controversy that embroiled the spreadbetting industry here and in Britain last year.

In March, Worldspreads – an Irish-founded, London-based company – ceased trading after it emerged that it had a £13 million shortfall in client funds.

In April, the Central Bank suspended the licence of Marketspreads – which had been spun out of Worldspreads in 2009 by way of a local management buyout – for three weeks. There was no issue with its client funds, however the regulator had concerns over capital adequacy and audit. The actual problem was with transactions by long-departed directors.

Howkins describes the regulator’s actions as “fairly brutal” and “aggressive”, and points out that there was never a problem with client funds.

“I can understand why they felt the need to do it,” he says. “When MF Global [another industry player] went bust [in 2011], we saw quite heavy-handed reactions from regulators. For instance, in Singapore they turned up on everyone’s doorstep demanding to do a client funds audit.

“It is the role of the regulator to protect the individuals and sometimes the providers get bruised by it; it’s the cost of doing business in a highly regulated industry.”

Worldspreads

In terms of Worldspreads, he argues that “it was a small, badly run business”. He agrees that it’s not great for the industry’s image, but argues that it happens in lots of businesses.

Financial spread-trading involves betting on movements in markets, stocks, commodities or currencies.

“We make a two-way price,” Howkins says. “The FTSE we might quote at 6300-6301, you buy at 6301, you sell at 6300, so you buy if you think it’s going to go up and you sell if you think it’s going to go down.

You stake an amount to the point, you might bet €10 a point. If you are right, for every point it goes up, you make €10:, if it goes down, for every point it goes down, you lose €10.

“We make money from that spread, the difference between the 6301 that you buy at and the 6300 that you sell at.

“It’s a very low transaction charge, but in a busy day we’re taking several hundred thousand transactions. In a busy month, we will take three, four, five million transactions.”

The company’s model is very close to that of a broker, taking a commission on market transactions, without taking a view itself.

IG also offers contracts for difference (CFDs) which are similar in that they allow clients to bet on a price movement without actually owning it.

A CFD is a contract between a buyer and a seller where the seller agrees to pay the buyer the difference between today’s share price and the share price at some date in the future.

If the share price rises then the buyer receives the difference from the seller at the due date. However, if the share price falls, the buyer must pay the shortfall to the seller.

Risk

The volume of business that IG handles means there is generally large volumes of trades on both the buy and sell sides of any transaction. The company hedges any residual risk in the underlying market.

IG clients are traders rather than people who are making a straight bet that a price will go one way or the other. They are looking to make money by buying and selling, or going long or short, at prices at which they believe they can make a margin.

Typically, they are “self-directed” investors, people with income to save who will have put some of their spare cash in more conventional savings and investment products, but keep a small percentage for the higher risks/rewards offered by spread betting.

IG Index did not invent spread trading, but it can claim to be something of a pioneer. Stuart Wheeler founded the company in 1974, when it was called Investors’ Gold.

The idea was to allow people to trade on the price of gold, without having to buy the commodity itself. It evolved from that point, adding indices and then individual shares in the 1980s, and CFDs in 1999.

Wheeler himself has a colourful reputation. He became treasurer of the UK Independence Party (UKIP) in 2011 and his politics are at the nether end of the eurosceptic range. During Britain’s 2001 general election, he gave £5 million to the Conservatives, but later fell out with them over their position on Europe and began courting UKIP.

He sold the last tranche of his IG shares shares in 2003. Its current chief executive says he remains in touch with the business.

Howkins studied maths and computer science in Reading University. Unsure of what to do when he finished, he opted to train as a chartered accountant believing it was a natural enough extension of what he had done in university.

He joined Arthur Young, and worked in a group which serviced high-growth, entrepreneurial start-ups.

“When the merger with Ernst Whinney (to become Ernst Young) happened, they weren’t nearly as interested in that sort of thing,” he says. In 1990, he was one of a group of partners and staff who left to form their own firm, Rees Pollock, where he was a partner for seven years.

Half way through that period he picked up IG Index as an audit client. Not surprisingly, given his maths and computer science background, it was the one that caught his imagination.

“It was always my most interesting client, I was always fascinated by the business,” he says. So when they were looking for a new finance director in 1999, he put his hand up. The fascination must have been mutual: IG hired him.

It turned out to be a pivotal time in the company’s history. IG floated on the stock market the following year. In 2003, its management, backed by CVC Capital Partners, took the group private again. The move was driven by Wheeler’s desire to sell his shares in the business.

In a move that was not unusual at the time, the business returned to the market once more in 2005, listing as IG Group Holdings plc. Howkins notes that he is one of very few finance directors to have IPO-ed the same company twice. The company denied him an opportunity to do it for the third time by appointing him chief executive the following year.

“At that point, we were £60 million of revenue, of which £57 million was UK and £3 million was Australia,” he says. “We had no other overseas operations. We are now in 14 countries. Revenue last year was £368 million, so a bit over six-times in six years,” he says. “It’s a very different business.”

Regulatory trends both before and after he took the helm have helped the company’s expansion in no small way.

Authorities in Europe and elsewhere began to talk about “relaxation” and “modernisation”. Midway through the last decade, the EU introduced the Markets in Financial Instruments Directive – Mifid – specifically designed to open up markets for investment products, including those aimed at individual retail customers.

These trends allowed people to invest in the type of products that IG offers, including contracts for difference. “Regulatory change has been the thing that has shaped our international expansion,” he acknowledges. “We were literally the first overseas applicant under the new licensing regime in Australia in 2002. The same sort of thing happened in Singapore, Mifid allowed us to roll out across Europe.”

All that has changed. Words like “relaxation” and “modernisation” are no longer in favour in financial regulation. There is less opportunity to enter new markets. However, Howkins points out that IG is now at a relatively early stage of development in a group of countries. The logical thing to do in the current climate is to consolidate and grow those businesses.

For example, he says the company now does £20 million in revenues in Germany but that there is a lot more headroom left. “If you take somewhere like Germany, there’s no reason to think that that can’t be as big as the UK in 10, 15 years’ time,” he says.

Given that the UK generates half the company’s £368 million revenues, and that many of the newer markets in which it now operates are potentially as big, it’s easy to see where the next stage of growth is for the company.

It’s equally easy to understand why neither Howkins nor the company is particularly perturbed by the fact that the chances to move into new territories are limited, for the moment at least.

CV Tim Howkins

Name: Tim Howkins

Job: Chief executive, IG Index

Family: Married with two teenage children, one in university, the other heading for art college

Career: Got a degree in maths and computer science at Reading University and worked as an accountant with Ernst Young and then Rees Pollock before joining IG Index in 1999

Something you might expect:Is a member of the Institute of Chartered Accountants and the the Chartered Institute of Taxation.

Something that might surprise:He has an observatory in his back garden, allowing him to combine his twin interests, astronomy and gardening