Yet Another Value Podcast - Night Watch's Roderick van Zuylen on Marex $MRX

Episode Date: March 27, 2026

In this episode of Yet Another Value Podcast, host Andrew Walker is joined by Roderick van Zuylen of Nightwatch to analyze Marex (MRX), a futures commission merchant operating in a consolidated financial infrastructure space. Roderick explains how Marex facilitates derivatives trading for clients like airlines and hedge funds, while benefiting from rising trading volumes and industry consolidation. The discussion covers Marex’s strong returns on equity, acquisition-driven growth strategy, and competitive positioning versus peers like StoneX. They also address risks, including credit exposure, interest rate sensitivity, and a recent short report. The episode highlights why Marex may continue compounding earnings through both organic and inorganic growth.Roderick's twitter: roojoo3Night Watch's website: NightWatchIM.com______________________________________________[00:00:00] Podcast introduction and guest overview[00:03:56] What Marex actually does[00:05:05] Industry consolidation and competitors[00:07:43] Credit risk and downside scenarios[00:10:06] FCM role explained simply[00:11:49] Why ROEs are high[00:13:57] Acquisition-driven growth strategy[00:15:12] Market mispricing and valuation[00:17:24] Private equity overhang concerns[00:19:21] M&A execution and integration[00:22:28] Switching costs and customer stickiness[00:24:24] Why acquisitions are cheap[00:26:31] Industry structure and limited buyers[00:28:19] Volatility and revenue dynamics[00:29:46] Goldilocks volatility discussion[00:32:59] Buybacks and capital allocation[00:34:32] Short report overview[00:35:11] Key allegations addressed[00:38:29] Cash flow concerns explained[00:41:10] Company response to short report[00:42:28] Real-world business validation[00:43:41] Valuation and upside potential[00:45:43] Key risks and interest ratesLinks:Yet Another Value Blog - https://www.yetanothervalueblog.com See our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimerProduction and editing by The Podcast Consultant - https://thepodcastconsultant.com/

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Visit medcan.com slash moments to get started. You're about to listen to yet another value podcast with Joe. It was me, Andrew Walker. Look, it would mean a ton if you could rate, subscribe, review wherever you're watching or listening to this. You know, five stars make a difference. But neither here nor there. Today we've got Roderick from Nightwatch. And he actually, I completely forgot to botch this and mention it on the podcast.

He recently took over Ketam, Cuppie's Event Driven Monitor. It's not just Ketam, but he recently took over that quite popular among investors. But he is coming on to talk about Marix. The ticker there is MRX. And I think you're going to hear this. on the podcast, I'm really interested in Marks. Obviously, I'm interested in most of the stocks I have on the podcast. That's why I have them on.

But I'm interested here because it has all the hallmarks of companies that in the past I have looked at and thought, oh, dang, that's interesting. But for one reason, I don't want to invest. And then the stock is just like an absolutely killer. You know, the two, the one just like point vanilla, plain vanilla comp I would point to is Stone X about four years ago. But interactive brokers, it's got a lot of rhymes with that as well. And we'll dive all into the podcast.

I don't know why I'm rambling here when you can just go listen to the podcast in here at all. So we're going to get into that in one second, but first, word from our sponsors. Podcast is sponsored by Fiscal A.I. Fiscal.A.I is the complete stock research terminal for fundamental investors. With 20 years of standardized and as reported financial statements, as well as one of the largest company-specific segments and KPI databases in the world, fiscal. aI is one-stop shop for downloading and analyzing fundamental data.

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Anyway, I'm completely off the subject. Let's get back to fiscal. AI. Within seconds, you can chart, compare, and export decades of data for more than 50,000 global experts. Not sure where a particular data point came from. Like, want to see where that 147 million or so of prediction market's revenue is coming from? Click through and you can see exactly where the number came from and go to the exact page in the company's filing. If you want to try it out for yourself, use my link,

fiscal.a.ai slash yav. That's fiscal.a.m. slash yav as in yet another value, YAV. So get two weeks free with no credit card required, and you'll get 15% off of any of their paid plans if you choose to upgrade and sign up for it. Again, that's fiscal. That's fiscal.a.i slash YAV. And there'll be a link in the show notes as well. All right. Hello. And welcome to yet another value podcast. I'm your host, Andrew Walker. with today, I'm really excited to have one for the first time. Roger Van Zulin from Nightwatch. Rodgwick, how's it going?

I'm good, Andrew. Thanks for having me. Like I said, a big fan of your podcasts and nice to be on your podcast. No, look, I was telling you before, this is our first time on a Zoom, but I'm a big fan. You and I've traded notes on mainly fraudulent microcamps Swiss companies before. Because I said the F word, we won't mention specific companies, but I'm just a fan and excited to have you on. We're going to talk about the company we'll do in one second, but first, disclaimer, remind everyone, nothing on this podcast investing device, consult the financial advisor,

full disclaimer at the end of the podcast, all that sort of stuff. Roger, the company we're going to talk about today is Merrex. The ticker there is MRX. I find it to be a fascinating case study with a fascinating investment thesis. So I'll just pause there. I've got tons of questions, but what is Merrick? So why are they so interesting? They would call themselves a futures commission merchant, which took me a little while to figure out what they're actually doing. But they're the guys you call. If you're an airline or a hedge fund and you want to trade oil futures or other sort of derivatives, on exchange or off exchange. I think that's the simplest way of putting it.

And then, of course, if you call them to, if you're an airline and you want to trade some oil futures, they'll talk you into hedging your FX risk or some interest rate risk as well. So that is in a simplified way their business. And look, I only IPO two years ago. It's been a PE-sponsored roll-up. You've had private equity sell-off after the IPO and two private placements as well. So let's just put some pleasure on the name.

And I think the market in general looks at this as a commoditized financial services business, I guess similar to BGC or TPP, which maybe five years ago would have been a fair characterization, where they were mainly commodity brokers, a very people-intensive business. And it's just grown out to be a much higher quality financial infrastructure business, where they operate in a very consolidated space, they would point out, that 20 years ago there were 100 FCMs and nowadays there's 50. But in reality, if you're not United Airlines,

if you're United Airlines, you call J.P. Morgan or Goldman Sachs. If you are one step smaller, there's Stone X, which has been a successful story as a public company. There's Mairex. There was R.J. O'Brien, but they just got acquired by Stone X. And there's Archer Daniel Mitchland, which I think is for sale at the moment. So there's actually just three companies you can buy at the moment. So it's a consolidating space.

And the demand for, we're just trading more futures every year. So it's a good supply demand back to all. That's a fantastic overview. I'm going to note that you and I are recording March 23rd. So the two reasons I note that are, A, you mentioned, you know, if you're trading oil volatility, I know you didn't say oil lightly because, you know, you imagine the past three weeks with all the oil up and down. It kind of shows the need for hedging.

and I'm sure there's been a lot of trading, though. We'll talk. They mentioned the Goldilocks environment. We'll talk, how it's not a Goldilocks environment. We'll talk that later. The other reason I mentioned the date is I think they have another Investor Day coming up on March 26. So we'll get it posted kind of right around when their Investor Day posts. But if they have any groundbreaking news.

But so just mentioning the date for that. You mentioned Stone X at the end. You know, I was invested in Stone X about five years ago when they did for people who got a long memory. They did the Gcap acquisition. They bought Gcap. right before COVID, G-CAP basically minted the entire acquisition price during the volatility of COVID. And I was like, oh, these are such cool businesses.

You know, they benefit from volatility, all this sort of stuff. It's no next to get better. But the reason I sold it was I found it to be very black boxish, right? Every now and then, they'd have some write-off where they said, hey, you know, we were trading and we got stuck with like a shipment of coal or something. And the financials were very difficult to interpret. it. And I would kind of apply that here just a little bit where, you know, you've got a fast growing financial that's doing 25% ROE. And I want to ask a bunch of different questions, but I would

just kind of pause with that. Like, I get volatility benefits them. I get this is a fast square with great RE. But how do you kind of look at the financials? Like, pull them apart. There's lots of different pieces and lots of different moving parts here. That is a good point. So Stonix is the closest spear. And maybe, maybe. Maybe just briefly, like there's a couple of differences where the main one is Stoenax as, well, one of payment business. That's completely different, but they also have physical trade business. So losing money on the call shipment is specific for the physical trade business. There's definitely a concern in the market that there's always the potential when there's too much volatility that there's credit risk.

And I think if you look at the history of FCMs, just look. looking at what are the biggest losses in history. And there's tons of time when FCM lost 10 to 30 million just because they sit in between the clearinghouse and their customers. So if their customer can't meet their margin requirements, they are on the hook for that loss before the clearinghouse takes any losses. That's where the real loss comes from. So there's absent any fraud, a couple of situations where an FCM has lost 10 to 30 million in the past.

And then, of course, in 2020, I think ABN, Namro lost about 200 million and Interactive brokers lost 100 million plus because oil prices went negative and I think that's a real outlier. And then we're talking about a worst of the worst, what could happen to this kind of business. Just to put it in contrast, Maix has 500 million in excess capital, which is the regulatory requirements. They would not aim to be close to that limit. They want to have an investment grade rating.

If they don't have that, that would indeed growth for them. But that just goes to show that losing 10 to 30 million, which they haven't in the last, well, since being public, that would be a bad quarter. The works that has ever happened in this industry absent fraud, losing 200 million, that would be a bad year. But it's less than a year of profitability, so they would retain earnings, keep their investment grade trading. So, yeah, like the worst of the worst, I would see that as a bad quarter potentially. not even a bad year. Perfect. Let's side into that a little bit further.

So you mentioned FCM. This is a futures clearing manager, I think, is the... Futures Commission merchant, but I always mix it up. I even got it written down so I don't mix it up in the podcast. FCM. I haven't written my notes, but I wasn't... So basically what this is, is, you know, I'm sure our listeners are familiar with the clearinghouse, right? The CBOE or whatever.

These are the people, when you trade, you and I, we can go buy options with no credit, with no counterparty risk because the CBOE, we actually buy and sell from them and they kind of settle and net it all out. The FCMs are the people who actually are trading and kind of taking on the day-to-day risk. That's what the Stoneax or the Merricks or whoever we're talking about. Am I kind of laying that out correctly, laying that broad landscape out correctly for the core business? I think so. And an even easier way to look at it is if you and I want to trade stocks in New York Stock Exchange, we don't trade at the New York Stock Exchange ourselves. There's an intermediary. It's the same thing.

And then they are responsible for, you know, they say, hey, Andrew, his margins is a little bit up. We're worried about they're the one who are actually going to liquidate my account or have me post margin or kind of manage that. So the clearinghouse, as you mentioned, like if Merricks goes bankrupt, the clearinghouse would ultimately be responsible, but they're putting kind of the day-to-day risk management on the Merrick. So that's perfect.

Here's what I want to ask you. Again, I mentioned at the front. Merrick's is earning, they earned, I think, 27% ROE in 2027, 25% 2024, if I remember correctly, Stone X puts up great ROEs. I mean, why working as a futures, why working as an FCM, why does that give them the right to earn such high ROEs? Because to me, I get, there is a big fixed cost component. You have to have the seat, but it seems like 25% is pretty darn high for something. As you mentioned, JP Morgan does it, all these big houses, like, seems pretty high to get a 25% margin. Or sorry, return in equity.

Let's split this up because the other big difference with StoneX is that Absin the last quarter in which Stonix acquired RG O'Brien, Stonix was more like 15, and Maurex is actually at 30 in the last quarters. So it's a big difference for more or less the same business, and I had the same concern. And in my understanding, the big difference there between Stonix and Marix and the CEO, the CEO would tell you that he's got 110% of his wealth invested in that company. So it's conservatively run. There's different leverage ratio, more conservative.

And Maax is a private equity backed, a slightly more aggressive roller. That's been slightly more aggressive in their bold on acquisitions, whereas Stonix has grown a bit more organically. They're investing in an ACME warehouse for precious metals, which is a slightly lower return on capital business. Maurex has had an extremely successful M&A. Playbook. They've had a couple of super successful acquisitions, some of which they bought below book value. That's EDNF men. But in general, companies that are they acquired

for low prices and where they managed to add a lot of value. The most recent is a few months before the IPO, December 2023, they acquired Tidic Cohen, the prime brokerage of them. And in that period, they, like when they bought it, revenues, were 80 million and in the last like two years later they were at 250 million. So they three X'd the revenue. And this is a business. Apparently prime broker has slightly more fixed costs than the remainder of their business. So margins also sort of doubled.

Your ROE ends up being a reflection of what you paid at your acquisitions. And I think in the case of my ex, there is slightly more leverage. There is the supply demand dynamic that we spoke about. it's a consolidated space where demand is growing rapidly. But the ROWE is very much a function of just having been so successful in the MNA. That's great. Again, the reason, as I started researching this over the weekend, I was like, oh, this reminds me so much of Stone X. And I remember writing Stone X at the time when I bought it.

I hate to keep bringing my personal, but that's how I view everything. I remember when I bought it, I bought it a little under book value. And I saw everything you did, right? The CEO had compounded the business at like 20%. since found Eden in 2002 or something. I bought a little below book value. I sold it a little above book value. And I remember writing at the time,

like, I buy financials below book value and I sell them above book value. And I thought it was genius, except the stock is up like 4X in five years since I sold it. And here you say, hey, I think tangible books in the low teams and the stock's around 37. So you say, hey, it's quite always above book value. But as you're saying, 25% plus ROEs growing really quickly, long runway for inorganic growth that's very you're creative, like you could be talking about a long, long runway of accretive acquisitions here. So let me kind of poke on that one more way. What are you seeing?

Like, look, this trades at, you know, 37 from 2.5 to 3 times book, probably around a 10x P, like on a kind of discounted year basis. What are you seeing that the market's missing here? So I think my X rates at 7 to 8 times. on what they're going to earn this year versus Stone X that is as about 12 to 15 times in that range. And then I think just given how rapidly Stone X has been compounding book value and earnings, I think 12 and 15 times are a bit low. But there's always a black box nature to it.

The market is never going to be fully comfortable with the credit risk and is never going to fully understand when they're going to make a lot of money. So maybe they'll never get the 20 times earnings that I think it deserves. but there's multiple uplift seven times to the 12 to 15 times. Some fundamental reasons, some technical reasons. Let's just quickly get the technical reasons out of the way. Most importantly, are all the private placements that we've seen in the last two years. There's been a lot of shares that the market has had to absorb in just two years. With, most importantly, they're still 17% owned by private equity.

they did their last private placement in April of last year. Everybody expects them to do a private placement around now. Actually, two weeks ago, that's why the shares dipped a bit. There were rumors that they were looking to place a big block. Nobody wanted to buy a week before there's going to be a 17% placement. So I think having that out of the way, that's going to help. I think having a slightly longer track record of being publicly traded, like I said, it's a black box.

Mark is trying to figure out how does this operate during, during a tariff, then it turns out we're trading more, so they benefit from the volatility. But Q3 of last year was a slightly lower volatility period. Do they still manage to grow earnings? The answer is yes. Like now, we're in an extremely high volatility environment, and they pointed out,

this might be a little bit too much to actually earn good money, like we don't want stress on our customers either. So the market is trying to figure out, when are they going to make money? And I think the answer to that will be pretty much in any environment, some environments a bit more than others. So I think that will help over time. Can I pull on two things you just said there? The first I want to pull on.

You mentioned PE overhang, right? And there have been a lot of secondaries here and they still own 17%. And on the one hand, I get it. Peas got a, you know, they built this. They've had a very successful run and they need to exit at some point. But on the other hand, you know, you do this long enough and you see PE exiting and you do it long enough and you see PE exiting and, you know, six months later, the business collapse a year later. And you start to say, hey, maybe there is something to all these people who say, you don't want to buy, you know, P back companies or you don't want to do secondaries. Like they really do put everything, paint a glossy light on it as they're getting out and then you're kind of left holding the bag.

So why is P. exiting and why is that kind of not a worry here? So this started, I think it was founded in 2005, but the PE firm is exiting. It's a JRJ or RJR. Brogo. They've been invested since 2009. I'm assuming, just given the time frame, they try to IPO this in 2022 already. That IPO failed. That's also maybe something to get into.

But there's exits on PE vehicles, right? It was one of the, I had two concerns when I bought this around the IPO two years ago. One is, I don't want to buy when PE is selling. And the second one is I don't want to buy roll-ups in financial services just because it's, you know how it works. You buy people and people are disloyal if you don't pay them or not. This concern has been unfounded. Like they, they've seven-xed their earnings in the last five years.

and that included in the last two years after the IPO date, they just continue with 30% plus growth rates each year. They continue to execute, which in the end is what matters. Completely. The second question I had on this. I forgot the second question, but I do have another quote. When they're buying, like, they've done a lot of accretive growth. And you mentioned, you know, I think the old model was when you go buy something,

you really worry about, hey, the people leave, people are disloyal and you lose that. I think that's changed a little bit and they've done a really nice job of buying stuff. I mean, look, they buy TD Cowan's prime business. And TD Cowan doesn't exactly lack for resources. But within two years, they turned it from 87 million of revenue to, I believe they said at the most recent call, 250 million of revenue. How can they accretively grow these businesses like this?

So the plan-brokeless business is sort of a new business. So it's an outlier. So let's start with the core business. A lot of the acquisitions that they've done in clearing. And they've moved like 10 years ago, there were guys that were trading metals on the LME. And they moved into brokerage in energy, a lot of which is OTC.

And it's a very competitive business. It's not a good business to be in. Because as you know, they call it voice trading, but effectively it's you tell your guy in Bloomberg work what you want to trade that day. And if you're a hedge fund, you're going to trade with the guy that took you out to a fancy restaurant yesterday or took you to the strip club. If the guy leaves, if the broker leaves, you might just ship your trades to another

firm. So you see that between BGC and TPI cap, there's always a lot of competition for brokers. And that just makes things inefficient because they go on garden leave for a year. It's not the business you want to be in. And what they really, what improved the. The quality of the business is when they moved into clearing, which is a lot more tech-enabled. They'd say it takes them one or one and a half years to onboard their business on the CME or ICE, and it takes their clients half a year to onboard on their system.

And a lot of that is compliance, and there's a lot of tech. And I'm too much of an outsider to know exactly what the tech looks like. I just know it's more complicated. And that's one of the reasons the business is consolidating. It does make total sense, right? Like, if you think, and again, I'm an outsider just like you. I'm not running a huge hedge fund with thousands of millions of trades a day. But if you're, if you join them and they're doing all your clearing and there is, like,

that's your day in books. And if you're switching to someone else, I mean, if you're, if you switch on day one and your trades don't settle that day, cool. You saved a little money and you blew the entire firm up, right? You no longer know what your risk management is. You're probably getting, you know, red flags from auditors, red flags from the SEC. Your clients are up and arm. So this is like mission critical stuff that isn't that expensive.

Now, that's not to say it's the strongest lock in in history, but it's quite strong. And I'm sure they have, you know, you think an auditor has good pricing power up 5% a year because you don't want to change like from E&Y to Deloitte. You want to talk about settling every day, hundreds of thousand streets. Whoa, boy. So, yeah. Definitely on the prime brokerage business, I believe if you have a prime brokerate and you're on a hedge fund, you included in your fund documents, and it's extremely expensive to change the fund documents. So you're locked in.

There's high switching costs. If I can continue on that M&A playbook. Please, I'm so sorry. I cut you off. So there's, I think, three transformational acquisitions. The TDCO and it's prime brokerage and Rosenfeld Collins. I think it was 2018, 2019. seen. That's what got them started in the clearing business that made them an FCM that was

registered with the CFTC in the US. Generally, the MNA playbook that they do is they've got a clearing business with a lot of skill, then they go to the Middle East and they buy a brokerage business over there, which effectively means they buy flying relations. And in some cases, capabilities to trade on another exchange where they haven't on boarded yet. But generally, you buy client relations. On day one, one of their recent acquisitions, I think, on day one had a 50% profit uplift because they have lower clearing fees at CME and ICE. They have skill.

That's not difficult synergies that you need to try and get over the next couple of years. Day one, they managed to grow profitability by 50%. Then when you have those customers, you try to do more business with them. Like I said, you have the airline and you try to sell it, not just oil futures, but in the interest late futures. So that's sort of been the playbook. And the value add is high and the multiples that they're paying is pretty low.

They've done some acquisitions now in market making where they're paying like three or four times earnings. And then there's growth after that. If you're paying that sort of multiples, it's not hard to see why 25% ROI or better remains possible. Can I pause you on the multiples? The three or four X multiples, I definitely hear you.

But this was, like, the synergies you talked about the day one uplift is very reminiscent to me of the TV, the cable networks of old, right? You had TNT merge with USA, and then they would go and say, hey, sorry, it wouldn't be TNT, USA, you have USA merged with NBC. And then they go and say, hey, you know, Comcast, you used to pay five cents per sum for USA. You black USA out now. You're going to have to black NBC out.

And it goes, you know, what was five cents becomes 10 cents. So day one acquisition. I totally get that. But to counter to that is, hey, NBC and Fox would both have that same synergy, so they should compete to drive the price up to kind of price that synergy out. Here, you've got Marx, and you do have other buyers here. So why are people selling for kind of three or four X? Why isn't it just getting, you know, Marx says, oh, my God, we'd have synergies.

Stonet says, oh, my God, we'd have synergies. Three other firms say, oh, my God. And they kind of just bid the price up to kind of counteract that synergy, if that makes sense. So to answer that is to answer the question why is the space conference. consolidating. Why did the number of registered FCMs in the US get cut in half in the last 20 years? And on the one side, you have banks which are Basel 3 or Basel 4 regulated, and they have high capital requirements. So they've been exiting. The non-bank FCMs don't have that capital requirement. Marix would point out like, hey, we still like to be investment grade and

we still keep capital on the side. But anyway, banks are exiting this space. On the lower end, Because it's becoming more tech-enabled, the compliance costs go up, the tech investment requirements go up. So when you're saying somebody else can outbid you, I mentioned them earlier, there's Tonex, there's Maarex, and there's Archidennial Metterland, and everybody knows that ADM is for sale. I wouldn't know who the buyer is. There might be private equity if the valuations become attractive enough, but they don't have those synergies. So it's just not as competitive to bid for those companies. Let me ask you this different. If this business is so good, right?

And you see it in the Tonex results, right? Mid-to-high-high-teens ROEs. Mar-X is a little bit more levered, but 25% plus REs? Why is ADM for sale and why are people not jumping at the bit to grab that if you've kind of got this consolidating business where you've got this really interesting dynamic where the largest players are actually regulatory priced out of this? and the smallest players are getting OpX price out of this. So why wouldn't that just kind of be the nirvana for a variety of buyers?

So specifically ADM, I wouldn't know them well enough to comment on their specific situation. RJ O'Brien just got acquired by Stonex. And I've asked both of the companies, like, did you bid for it or didn't you? And you get completely different answers, where Stonex would say that it wasn't a competitive bit. They just had the relation with RJ O'Brien, which was a family-owned business, if I'm not mistaken. So they were the own, like, R.G. O'Brien wasn't interested in getting acquired by Maurex, according to Stone X. And Maurex would point out that Stone X is paying like six to nine times earnings to your post synergies, because they're not buying a small broker in the Middle East.

They're buying one of the last remaining big firms. And they're like, why would they pay six or nine times for one of those bigger platforms if you can buy three smaller ones for three or four times? it's a different mindset there. And they point out also something we'll probably get to, that Mairex already felt like they had enough interest-state risk in their portfolio. RJ or Brian comes with additional interest-state risk. So both companies could have acquired it, but only one was really interested,

or the acquiree was only interested in getting acquired by one, if that helps, if that answers your question. No, no, no, it. You know, it also strikes me that if you, the industry has truly gone kind of from four viable, scaled players to three. The, you know, yes, Stonex buys RJ and gets the benefits of the synergies there, but everybody else kind of gets the benefit of a more rational, more oligal-gopolistic.

Let me, I said I was going to ask a question earlier, and I want to turn back to it. You know, Goldilocks environment. Again, I just remember Stoenax. They buy G-Cap, and I think they strike the deal at the end of February of 2000, and then March 2000. 2020 and the March 2020 happens, and I'm sure everybody remembers what happened March 2020, and G-CAP, because they benefited from volatility, actually earned their entire market cap in the month of March 2020.

I remember that very well. Marks comes, you know, their Q4 earnings call, which happened a couple weeks ago, I would have guessed, you know, given everything that's happening in Iran with, you know, oil going from 60 to 100, 100, 120, whatever you call it, you know, multiple up down, up 10, down 10 days and everything. I would have guessed they were absolutely minting money in this environment. But they kind of came on the call and said, hey, there's a Goldilocks level of volatility, not too volatile where our customers are kind of like blowing their brains out. But, you know, we want some movement in stock.

And they said, we're way past the Goldilocks level. That kind of surprised me. So I want to just ask, like, why is it this high volatility isn't just complete nirvana for them? And how do you kind of think about that? It surprised everyone, right? That's why the share price is down. They did say it's not golden locks, but we're still growing in line with our usual growth algorithm. So it's not goldilocks, but we're still growing at least 10 to 20%, is what they were effectively saying.

And it's always the markets, including me, is still trying to figure out, like, what is the right level of volatility. There are arguments why this amount of volatility would be too high. is a liquidity requirements or customers go up and instead of just posting more margin, maybe they just de-risk their book, which means some closing trades and taking a bit easier.

Plus if you're an airline and you were waiting to hedge you know, well, maybe you're not going to hatch it for the next two years. Maybe you'll take a very short contract just because you don't want to pay up. That was their explanation. To me, that sounds a bit like deferred income.

Like, if he's choosing to only hedge for the next couple of months, he's going to come back in two or three months and hedge more. The way I would look at it, the last five years in which they seven-xed their net income, I think pretty volatile in the market, and that's benefited them. And the best way to look at that is prior to COVID, the amount of futures being traded globally.

used to go about 5% a year. And that has grown in the double digits in the last five years. So that they went from 5% to 12%. And I think that's a function of the higher volatility we've seen with Ukraine, with COVID, with everything that's happened. And maybe because they're doing a better job at cross-selling us into other structured products. So whether there's more trading activity, exactly today.

Like, it's not the kind of company that needs to make all of their earnings in one or two weeks of a year, like you would see with flow traders or something like that. We can still see in the data. January and February, the amount of futures on CME and I's were plus 12% year on year. It's trending well. And energy and metals are way higher than that. No, I just, it is surprised. But you mentioned metals, and that's a great call because they said, hey, they've also

in January and you completely forget that's when, you know, silver is like double. inside of a couple weeks, and then you've got, since then, you've got the multiple pullback. So oil is kind of the headliner right now because it's kind of just top of mind with the war, but there was plenty of volatility in every other metal and commodity for the most part in the first few months of the year. Let me go. One last thing. Buybacks.

Popular topic for the past few years, I would say, with this company. Now, hey, when do you think about buying back stock? I think they pretty much largely resisted it. And look, when you're running a business with 25% ROEs, probably right not to buyback stock when it's trading it two and a half times. Because every drop of organ, your market cap is anticipating continued organic growth. And every drop you can do creates a ton of value. But what do you think about just like buybacks and capital allocation here?

So they haven't spoken about this publicly, I think. But when they, there are a foreign entity listed in the US. the reporting on the IFRS or the foreign entity, they would need Cheryl's approval to do buybacks. They're British, right? Yeah. Why are they British? Is that a function of mergers or just function of history? Because it seems like this should be...

It's an actual British company. They would talk to you with the posh British accent. Their biggest office is in London somewhere. It's a British company. They tried to IPO in 2022 in the UK. And one of the two reasons it failed was because who wants to buy British stocks, right? Nobody wants to train in the UK. So now that is in the US, but they still have required, like they need shareholder approval for buybacks.

Their previous PE owners didn't want to give that. I don't know what. Their previous PE owners are no longer in charge. They gave up their board seats. They will have sold out by then. I'm very confident. I could be wrong. I'm quite confident that they will ask for buyback authorization at the next AGM, probably may, to at least have it.

there was a short salary report last year. That was my next question. Arguments very much unfounded. They would have liked to have buyback in place. The only thing they could do at that time was everybody in the company had to chip in $1 million to buy back some shares. They would have liked to do buybacks. But they didn't have the authorization, and I think they will have after May.

Let's talk about the short-slaw report. So that comes out in early October, 2025. It is Ninky? Ninky research. I think that's how you pronounce it. I've never heard of them. Niki research, they come out in October, and we can talk about the company's response and everything,

but the piece is pretty scared, right? It says, hey, unconsolidated entities, lots of related party dealings that are getting tracked. It mentions reduced scope from the auditor is one of the things, if I remember correctly. It's got a lot of stuff. Let's just talk about the short report up front, and we can also talk to the company's response. Yeah, sure.

Like you said, it's a difficult business, so it's quite easy to make a report that looks scary and scares people out of their position. My first question was, I worry about Blackbox, right? And when you have a Black Box, rightly or wrongly, it is very exposed to a short-seller report. Now, hopefully it's a good one, but, you know, Black Box's short-seller reports match me in heaven. It took me more than a day to actually figure out. It was like 40 pages, which pointed out various inconsistencies. Some of them, I was surprised, like someone must have dug pretty well into a company to find those. Yeah.

Out of those two inconsistencies, I would say there were two arguments that if they had been correct, I'd be worried. Yeah. The most important there was it would point at two unconsolidated entities, Luxembourg, seek-ups, But it's like here you would have a VIE, but it's like a fund structure through which they can do their market making. Maybe one of them was used for the issuance of structured products. And it would point out like, hey, the auditor resigned. There were entities. And the 2022 financials weren't audited until the middle of 2023, like inconsistencies that shouldn't exist.

But I think the main allegation there was they would claim that they were unconsolidated, that Marix was trading with them, and that Marix was booking fake profits with their own entities. And that was true. That would be pretty bad. Management address during their call, and the first thing they said is, we consolidate those entities. If you consolidate them, the entire argument is off the table. It doesn't exist.

You'd still prefer that they didn't take 18 months to audit the next. entity, but then if you learn the background of those entities, it's a roller. Like, they've done a lot of acquisitions. And what happens if you do a lot of acquisitions, you end up with, I don't know, hundreds of legal entities. And some of them take time to get rid of, to consolidate. They aren't actually using the entity. We're talking about two funds with $2 million US dollar in equity that they're not using.

they told me they're just to get the confusion gun they are in the process of shutting down and I haven't heard about that so I'm not sure whether they still exist or not bottom line is they were fully consolidated so there's no fake profits being booked that's the only thing that matters here I think the other one was there there were claims like hey there's not even any not any real free cash flow I'd encourage anybody to just open financial statements yourself look at the free cash cash flow statement. They only report that twice a year because it's a British company, another US company. Maybe they should give that free cash flow statement every quarter.

But there definitely is free cash flow. We're talking about a financial with a complicated balance sheet. So sometimes there are hedges working as a tailwind, sometimes as a headwind. In the two years, prior to that short report, it had been a till rent for free cash flow. But hey, in the last six months, it's a headwind and there's still plenty of earnings. If I remember correctly, another thing that was scary on the free cash flow, I'm trying to find the specific table with. They said, hey, they're booking financing. You know, on your free cash flow statement, anyone who's familiar with one, you have CFO, cash flow from operations, cash flow from investing, cash flow from financing. They were saying, hey, they're booking cash flow from financing as a cash flow from operations.

And that kind of breaks the thing. And I think the company came out pretty strongly and said, hey, because we are a finance firm, this is typical. And by the way, if you read like footnote number one, it is very clearly broken. out. So you can make your own assumptions. It's not like we're trying to sweep this under the rug. There were a few other scary ones there. And there was a British entity that they acquired where the short sellers said, hey, they didn't report a looming fine from the regulator. And I believe you can correct me if I'm wrong, or you can tell the story if you remember it. But I believe the company said, yeah, we didn't report it because we structured it as an asset acquisition so that we

didn't buy that legal entity so that we didn't. Like, we knew there was the fine. The seller knew there was the fine. We left that liability with the seller. So there was that there was like a scope question. They said, hey, Deloitte's pulling back their scope. And the company came and said, yeah, that's because E&Y is taking over the scope. So there were some other scary things that the company, I think, addressed well. I'll pause there. Were there anything else? Was there anything else in the short report or anything that you wanted to mention? Oh, you answered your own question on at first point. I think in general, what I liked about response. I think this is the kind of company similar to interactive brokers that has benefited

from being public. The amount of recognition and transparency that gives them in the market as a prime broker has helped them in the last two years. And they point out like, well, we benefit from being public. And clearly there's also some negatives because you get short reports like this that you have to do. But in the end, everybody's allowed to say what they want to say. Now, I personally, as a financial market participant, I feel like everybody's allowed to say what I want to say, but if you want to make such complicated arguments, why don't you do it after hours and not five minutes after the market opens? And I don't know this person. I'm not sure that it even happened, but I just see it so much nowadays. Before, I've had time to read and understand the report.

I think most of the time they've already covered part of their position. that's a personal frustration I'm beginning with. But at the end of the day, let them say what they want to say, and it keeps us sharp. I learn a couple of new things about the company, and the company needed to communicate a bit better on certain things. No, look, on the short seller trading, I mean, I don't think you're the only one to point out the timing and everything.

But on the company response, I mean, I just, when I was tried for this podcast, I was like, oh, no, Blackback Financial with a short report, this could be scary. But the thing I really liked was, I like, I like to tell the company responded, right? Because the short report gets published a couple days before earning. So the company is a blackout period. They just publish a thing that says, hey, we think this is misleading.

We'll talk about it. Then they do the earnings call. On the earnings call, they say, look, we respect short sellers. We're just going to rebut the two kind of scariest points as you started talking. And then the next day, you know, all the top brass kind of buy shares on the open markets. Would you like to see more? Sure. But, you know, everybody buys shares.

So I just, I thought it was an ideal response. They didn't yell and cry about. short sellers. They kind of just address the most pressing things. Look, as a financing firm, this question gets asked, right? The reason financial firms are so scary when they get short is, A, they're black box. But B, customers say, yeah, like we have our prime and our docs, but if there's a 1% chance our prime is going under, we're just going to move because we're not going to get zeroed out here. So, you know, you worry about the customer risk. They came out and said, look, we had open conversations with the customers. And for what it's worth, if I remember,

you say, we've got a global hedge fund who's decided to move more business to us. I'll pause there if there's anything else. I think we discussed it. They handled it well. There's zero relevance of the short report going forward. It's just business as usual and growing earnings. And what you want to do with complicated blackbots financials, you want to sort of verify in real life that the business really exists

and that they're really growing the way they are growing. Funnily, I started. started my hedge fund about two and a half years ago when I moved to the US and in Maex, T.D. Cohen, which was only just been acquired by Maddox a month earlier, they were the first one to reach out to me. Like, hey, have you already picked a prime broker? A lot of firms moved out, like started reaching out when it was already too late. Like, nobody's going to pick a prime broker five months after launching a front. Now, I, I, you can see in real life if you're in the financial market. I know some people who are moving their prime brokers business to

Maax. They really like the swap lines that they offer. I see people moving their business there. So you can sort of verify in real life. Business exists. They're gloring it. They have a very well, very motivated sales force that is reaching out to a lot of people. I saw that. I saw that example in your in your notes that you sent me to prep, but I didn't want to bring out an anecdote. But I thought that was a really cool anecdote. And sometimes it's that little personal insight that makes things. Let me add with this. We've talked, I've said a few times.

Look, hey, it trades at two and a half to three times. Well, 25% already. You say, I think this should trade for 20 times EPS and it's kind of trading at 7. How do you value this company? How do you think about the value? Because the other answer is, like, they say we can do 10% organic plus 10% inorganic. If you can do that for a long time, like forget 20xie by. Right now it should be valued like the next Berkshire Hathaway.

So how do you think about the kind of fair value here? I mean, just because I think it's worth 20 times fee, doesn't mean I'm ever going to get it. I've accepted that. I do think, like it's got higher. They do 30% ROE, Stonex does now 20%.

Maybe with slightly more leverage. Does it deserve at least a Stonix multiple? I think so. I think it will end up trading somewhere between 12 and 15 times, maybe not the next couple of months. But I'm not in it for the multiple expansion. That's a nice bonus.

If they do continue to to grow earnings at anywhere close to the rates they've been growing. Like, yeah, they're guiding for 10 to 20%, but they've been doing 30% plus. If anybody grows earnings at that rate, you'll make a good return without a multiple expansion. And if at some point you go from seven times to 14 times, that push your IRA quite a bit, but it's the earnings curve that matters more. It is nice when you've got that earnings growth tailwind, right? Because you can always just say, hey, every year 20% more, 20% more.

Let me ask you one last question. This is, if I put aside the black box kind of risk here, right, which obviously is scary. But if I put that aside, what would keep you up the most at night about this business? Interest rates. They would point to a very low sensitivity. like if the fat funds rate drops by 1% of its point, they would lose about 5% of their earnings. And the reason that that's quite low is,

so customers post-margin, and they earn a fat funds rate on that effectively. But they share that. If you're similar to insight at broker, that just takes 50 basis points, for 60% of the clients, they take like 150 basis points on average, depending on the size of the client.

and 40% of the customer, they take all of it themselves. So with that 60% of the customer, it doesn't matter if the fat fund rate drops by 1% until we go below 1.5%. They will point out, like, we're not worried because we've got that hedge. They've got interest rate hedges, rolling two and a half years basis. But in a situation where the fat funds rate goes to 0%, and the hedges roll off two and a half years later. That's a decent chunk out of earnings.

The reason that even though that's my main concern and I'm still invested is Dave managed to grow those balances at a pretty high rate. Two years ago, I think they had like 13, 12, 13, 14 billion of client balances. They're now at 20. So like 50% growth. They continue that growth that offsets quite a bit.

The other thing is it's a consolidated market that we've spoken about. When interest rates went up, customers approached them and said, like, hey, you're making so much money on our balances, maybe you should share a little. Both Stonex and Madex are saying that they're quite confident that if the Fed Funds rate drops below 1.5%, they can actually go back to the client and say, like, hey, we gave you more money on the way up. Now we're going down. How about you start paying a slightly higher.

spread on the swap that we're selling you. So they can probably compensate quite a bit through commissions. And the client broker's business, you've got the same interest rate dynamic with a lot of the retail brokers, but there the argument is always, if interest rates drop, we start trading more. I think that same argument goes a little bit for the prone broker's business, less so for the clearing. So we'll make it up on volume and on pricing, but fat funds rate under one and a half percent

would be negative. Well, I have good news for you. A month ago, you might have had some worry about Fed funds rate. But, you know, I don't think, again, we are recording this on March 23rd, but the Fed funds outlook has changed pretty materially in the past couple weeks. So I have good news for you on that risk. No, and look, I think the younger me would have kind of said the Fed funds risk and been like, well, look, people are going to look through this.

People are going to normalize. But, you know, the older me says it's not lost to me that interactive. brokers in StoneX, there were a lot of other things, but they really start taking off in kind of mid to late 2022 when how long did IBKR rail against the system to say, hey, interest rates are zero. We're making nothing on these huge margin things. As soon as interest rates start taking up, I mean, IBKR is like a 4X over three or four years since then. I might be a little bit high on that. But IBKR works, StoneX works. It's not loss on me. Interest rates going higher. Just a huge talent for all these things. And like, that's when the market really starts rewarding them.

I think we've also got kind of a proof point in the market, if that makes sense. Yeah. This has been great. Anything else you want to talk about, whether it's Marx or Swedish small? No, we're not going to talk about Swedish small cap frauds. I have to keep reminding myself, but anything else you should be chatting about? I think we covered this company quite well. That's what I like to hear.

Well, look, I really enjoyed having you on. And, again, I've just through our Twitter DMs and stuff, I've had a lot of respect for all the work and everything you've done. So appreciate you. coming on and we'll have to have you back on sometime soon. Thanks. Thanks for having me. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

Getting ready for a game means being ready for anything. Like packing a spare stick. I like to be prepared. That's why I remember 988 Canada's suicide crisis helpline. It's good to know just in case. Anyone can call or text for free confidential support from a train responder anytime. 988 suicide crisis helpline is funded by the government in Canada. Thanks.