So it’s official – leading UK financial spread betting and CFD broker IG Group [LSE:IGG] is making a $1bn play for Tastytrade, the US online futures and options broker. IG Group is making a $1bn punt on the US online trading sector in what is likely to be the deal of the year in online broking.
IG is calling the deal a “landmark transaction that expands and diversifies IG’s growth drivers through entry into the world’s largest listed derivatives market.” The deal is going to significantly scale up IG’s international business and gives it a lucrative new beach head in North America’s retail derivatives marketplace.
2020 was a bumper year for online brokers
Last year was a bumper year for online brokers: while Robinhood’s venture in the UK market seems to have gone askew (and we still don’t have the complete story on why), many brokers have had a very profitable year. Trading volumes and new account openings soared. Stock in IG rival Plus 500 [LSE:PLUSP] went through the roof.
Taking just IG as example, its half year results showed net trading revenue up 67% to £416m for the six months ending November. Profit before tax increased 129% to £231m while active clients were up 5% to 238,600. If you were a broker and lost money last year, just what were you doing? IG made out big time.
A date for your diary
On the 21st of October, Stuart Fieldhouse will be joining Sarah Lowther and Mark Watson-Mitchell to discuss which small cap investments they like the look of and, perhaps, which ones they do not. It promises to be a lively and insightful discussion. If you are interested in investing in small cap stocks then this could be a profitable use of your time. We hope you can make it! Sign up now
One of the big obstacles for successful CFD brokers like IG and UK rival CMC Markets [LSE:CMCX] when it comes to tackling the North American market has been regulatory restrictions on the use of CFDs as a trading instrument. In a previous life, I worked on a project that kicked the tyres on the Canadian market and whether a major UK CFD broker could get this type of trading account signed off by Canadian regulators. It was not successful, and illustrated the scepticism of North American regulators when it comes to leveraged CFD trading.
Tastytrade is a sensible move into the US market
IG’s move to acquire Tastytrade looks sensible to us. It is an expensive move, but IG has the cash (supported with a big new share issue), and an established options broker like Tastytrade, which already has over 100,000 American traders as customers, seems like an obvious target. It gives IG the room to build on that and leverage its resources to expand Tastytrade further.
Short term investors have not been as enthusiastic as we are: IG shares dropped sharply in trading this morning, partly because of the dilution effect of the share issue. IG Group stock has been rising nicely from 751 at the start of November as the market woke up to just how lucrative some of these online brokers really are. The price reached 904 before the Tastytrade news came out, and has now slumped – at time of writing – to 804. We expect to see a resistance level at around 750, if not before.
Net selling of IG shares was high this morning, very high. Looking back over the past 12 months, we’ve not seen anything as high as this since the big IG stock sell off in July. But IG Group has proven that it can shrug off these short term tiffs with its investor base and push on to new highs. If you are waiting to get into IG Group more cheaply, keep and eye on the selling, as there looks to be a purchase level between 730 and 750 on this stock.