Flow Traders has been telling the press their IPO is planned this year “before the summer” and at Euronext Amsterdam. The Telegraaf has been reporting this last weekend (blendle – nl).

It was also the only relevant piece of information, because the journalists have a very hard time understanding what the Flow Traders is actually doing. Not all their fault, as Flow has been posing as a true high frequency trading gem – and they are not. Comparing the business with a racing team (“the car is the IT and connections, the driver is the trader”) seems to be coming straight from Flow’s marketing department (or IPO underwriting investment bank).

Virtu valued at $2.6 bln

The journalists seem to believe the takeover of Nyenburgh by Virtu back in 2012 is a clear sign of increased competition in the ETF industry. Anyway, Virtu is about to raise as much as $314 million with their IPO this month. The stock will trade on Nasdaq with code VIRT – and the whole company would be valued as $2.6 bln.

That’s a bigger fish than Flow Traders. Flow is dreaming of a 1 billion valuation. Not a lot of people believe in such a valuation for Flow Traders. Also for Virtu such a price/earnings multiple of 13 is raising eyebrows. In 13 years most of Virtu’s assets will be worthless. Mechanical Markets estimates a lifetime of algo’s at five years (a good read anyway on the risk of investing in this kind of firms).

Back to Flow Traders. I think Flow is a great company with very skilled and reliable employees. The results in the past have been good as well. Yet I doubt I would sign up for their IPO. There are a few issues.

Flow Traders is earning profits in niche market

Lacking raw speed, the company is mainly making money in niche markets. Speed isn’t the only thing that matters, when you have alpha in the slower transactions. Flow has got alpha. An example of a strategy where speed is less relevant is the trading of ETF’s based on markets in other time zones. Trading the Greece ETF (GREK) in the USA while Greece is closed. Or a Hong Kong ETF in Amsterdam. There’s no underlying market open to hedge your risk.

A risky cash cow.

Flow Traders is a one trick pony

Citadel, KCG (Getco) and Virtu have a lot of strategies in a lot of asset classes. Zerohedge notes most of Virtu’s income these days comes from forex (“global currencies”). Flow Traders on the other hand is a one trick pony. Dangerous position as the competition is fierce. If you lose your edge on your only trick, you’re ready for the abattoir.

Founders cashing out

Virtu raises money for trading capital and eventually buying other firms in a time of consolidation. Flow Traders isn’t raising money to expand their line of business. The founders are selling their shares. No money from the IPO will end up in the balance sheet of Flow.

Flow isn’t HFT

Flow Traders isn’t active as a high frequency trader. There’s no official definition of HFT, but in the business nobody is seeing Flow as a HFT shop. Not necessarily a bad thing – but why try to sell the firm as such? Sure, they will be having fast lines. But they are too slow for competing in the most liquid US ETF’s. Flow has lost the speed race ages ago.

Valuation seems stretched at 1 bln

Without the results over 2014 it’s hard to discuss the valuation. As the firm is looking more vulnerable than many of their peers, a discount in price earnings multiple compared with Virtu and KCG is reasonable. Say a p/e ratio of 11. Would expect a net profit of 90 million over 2014 for such a valuation. Not impossible – we’ll see.

Disclaimer: This post is for discussion purposes only and nothing in this post constitutes advice to buy, sell, not buy, or not sell a security or any financial instrument.

Jack
Jack