Night Watch 的 Roderick van Zuylen 谈 Marex $MRX

Roderick, how’s it going?

I’m good, Andrew. Thanks for having me. Like I said, I’m a big fan of your podcasts, and it’s nice to be on your podcast.

I was telling you before this that this is our first time on Zoom, but I’m a big fan. You and I have traded notes, mainly on fraudulent microcap Swiss companies before. Since 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 in a second, but first, a reminder that nothing on this podcast is investment advice. Consult a financial adviser. The full disclaimer is at the end of the podcast.

Roderick, the company we’re going to talk about today is Marex. The ticker 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 Marex, and why are they so interesting?

Marex would call themselves a futures commission merchant, which took me a little while to figure out what they’re actually doing. They’re the guys you call if you’re an airline or a hedge fund and you want to trade oil futures or other sorts of derivatives on exchange or off exchange. I think that’s the simplest way of putting it.

If you call them and you’re an airline that wants to trade some oil futures, they’ll talk you into hedging your FX risk or some interest-rate risk as well. That’s a simplified way of describing their business.

They only IPO’d 2 years ago. They’ve been a private-equity-sponsored roll-up, and private equity sold off after the IPO in 2 private placements as well. That’s put some pressure on the name. I think the market in general looks at this as a commoditized financial-services business, similar to BGC or TP ICAP.

Maybe 5 years ago, that would have been a fair characterization, when they were mainly commodity brokers—a very people-intensive business. But it’s grown into a much higher-quality financial-infrastructure business, operating in a very consolidated space.

They would point out that 20 years ago there were 100 FCMs, and nowadays there are 50. In reality, if you’re United Airlines, you call JPMorgan or Goldman Sachs. If you’re one step smaller, there’s StoneX, which has been a successful story as a public company. There’s Marex. There was R. J. O’Brien, but they just got acquired by StoneX. And there’s Archer Daniels Midland, which I think is for sale at the moment.

There are actually just 3 companies you can buy at the moment, so it’s a consolidating space. The demand for futures is growing—we’re just trading more futures every year—so it’s a good supply-and-demand backdrop.

That’s a fantastic overview. I’ll note that you and I are recording on March 23. The 2 reasons I mention that are, first, you mentioned trading oil volatility, and I know you didn’t say oil lightly, because if you imagine the past 3 weeks, with oil up and down, it shows the need for hedging. I’m sure there’s been a lot of trading. They mentioned a Goldilocks environment; we’ll talk later about how it’s not a Goldilocks environment.

The other reason I mention the date is that I think they have another investor day coming up on March 26, so we’ll get this posted around when their investor day is posted. If they have any groundbreaking news, I’m just mentioning the date for that.

You mentioned StoneX at the end. I was invested in StoneX about 5 years ago. For people with a long memory, they did the GCAP acquisition. They bought GCAP right before COVID, and GCAP basically minted the entire acquisition price during the volatility of COVID. I thought, “These are such cool businesses.” They benefit from volatility and all that sort of stuff.

StoneX is a competitor, but the reason I sold it was that I found it to be very black-box-ish. Every now and then, they’d have some write-off where they’d say, “We were trading, and we got stuck with a shipment of coal or something.” The financials were very difficult to interpret.

I would apply that here just a little bit. You’ve got a fast-growing financial company doing 25% ROE. I want to ask a bunch of different questions, but I’d just pause there. I understand that volatility benefits them, and I understand that this is a fast grower with great ROE, but how do you look at the financials? How do you pull them apart when there are lots of different pieces and moving parts?

That’s a good point. StoneX is the closest peer. Maybe just briefly, there are a couple of differences. The main one is that StoneX has a payments business that’s completely different, but they also have a physical-trade business.

So, losing money on the coal shipment is definitely a concern in the market. There’s always the potential, when there’s too much volatility, for credit risk. If you look at the history of FCMs—just looking at the biggest losses in history—there have been tons of times when an FCM lost $10 million to $30 million simply because they sit between the clearinghouse and their customers.

If their customer can’t meet their margin requirements, they’re on the hook for that loss before the clearinghouse takes any losses. That’s where the real loss comes from. So, absent any fraud, there have been a couple of situations where an FCM has lost $10 million to $30 million in the past.

Then, of course, in 2020, ADM lost about $200 million, and Interactive Brokers lost $100 million-plus because oil prices went negative. I think that’s the real outlier. We’re talking about the worst of the worst—what could happen to this kind of business.

By contrast, Marex has $500 million in excess capital, which is the regulatory requirement. They would not aim to be close to that limit. They want to have an investment-grade rating, and if you don’t have that, it would impede growth for them.

That just goes to show that losing $10 million to $30 million—which they haven’t done since being public—would be a bad quarter.

The worst that has ever happened in this industry, absent fault, is losing $200 million; that would be a bad year. But it's less than a year of profitability, so they would retain earnings and keep their investment-grade rating. So, yeah, the worst of the worst, I would see that as a bad quarter, potentially—probably not even a bad year.

Perfect. Let's dive into that a little bit further. You mentioned FCM. This is a futures commission merchant—I think it's a Futures Commission Merchant, but I always mix it up. I even have it written down so I don't mix it up on the podcast. FCM.

I'm sure our listeners are familiar with the clearing house, right? The CBOE or whatever. When you and I trade, we can buy options with no credit or counterparty risk because, at the OCC, we actually buy and sell from them, and they settle and net it all out. The FCMs are the people who are actually trading and taking on the day-to-day risk. That's StoneX, Marex, or whoever we're talking about. Am I laying out that broad landscape correctly for the core business?

I think so. An even easier way to look at it is that if you and I want to trade stocks on the New York Stock Exchange, we don't trade on the New York Stock Exchange ourselves. There's an intermediary. It's StoneX Group. It's the same thing.

They are responsible for saying, “Hey, Andrew's margin is a little bit up. We're worried about it.” They're the ones who are actually going to liquidate my account, have me post margin, or manage that in some way. So, as you mentioned, if Marex goes bankrupt, the clearing house would ultimately be responsible, but they're putting the day-to-day risk management on Marex.

It does make total sense, right? Like if you think And again, I'm an outsider just like you. I I 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's 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 in arms. So, this is like mission critical stuff that isn't that that expensive. Now, let's not just 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 of 5% a year because you don't want to change like from BNY to Deloitte. You want to talk about settling every day hundreds of thousands of trades. Whoa, boy. So, yeah.

That's perfect. Here's what I want to ask you. Again, I mentioned at the front that Marex's own earnings earned, I think, a 27% ROE in 2027 and 25% in 2024, if I remember correctly. StoneX puts up great ROEs. Why, working as a futures FCM, does that give them the right to earn such high ROEs?

To me, I get that there's a big fixed-cost component—you have to have the seat—but it seems like 25% is pretty darn high for something where, as you mentioned, JPMorgan does it, all these big houses do it. It seems pretty high to get a 25% margin—or, sorry, return on equity.

Let's split this up, because the other big difference with StoneX is that, absent the last quarter, in which StoneX acquired Gain, StoneX was more like 15%, and Marex was actually at 30% in the last quarters. So it's a big difference for what's more or less the same business.

I had the same concern. My understanding is that the big difference between StoneX and Marex is that the StoneX CEO would tell you that he's got 110% of his wealth invested in that company. So it's conservatively run, with a different and more conservative leverage ratio. Marex is a private-equity-backed, slightly more aggressive roll-up. They've been slightly more aggressive in their bolt-on acquisitions, whereas StoneX has grown a bit more organically.

StoneX is investing in a CME warehouse for precious metals, which is a slightly lower-return-on-capital business. Marex 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 ED&F Man. But in general, these are companies that they acquired for low prices and where they managed to add a lot of value.

The most recent was a few months before the IPO, in December 2023, when they acquired TD Cowen's prime brokerage business.

Yep. Yep.

When they bought it, revenues were $80 million, and 2 years later they were at $250 million. So they 3×ed their revenue. This is a business where, apparently, prime brokerage has slightly more fixed costs than the remainder of their business, so margins also doubled.

Your ROE ends up being a reflection of what you paid for your acquisitions. I think that, in the case of Marex, there is slightly more leverage. There is also the supply-and-demand dynamic that we spoke about: it's a consolidated space where demand is growing rapidly. But the ROE is very much a function of just having been so successful in their M&A.

Yeah, that's great. Again, as I started researching this over the weekend, I thought, “Oh, this reminds me so much of StoneX.” I remember writing about StoneX when I bought it. I hate to keep bringing up my personal experience, but that's how I view everything.

I remember when I bought it, the CEO had compounded the business at about 20% since founding it in 2002 or something. I bought it a little below book value, sold it a little above book value, and I remember writing at the time, “I buy financials below book value, and I sell them above book value.” I thought I was a genius, except the stock is up 4× in the 5 years since I sold it.

Here you say, “Hey, I think tangible book is in the low teens,” and the stock's around $37. So you say, “Hey, it's quite a ways above book value.” But as you're saying, with 25%-plus ROEs, growing really quickly, and a long runway for inorganic growth that's very accretive, you could be talking about a long, long runway of accretive acquisitions here.

Let me poke at that one more way. This trades at, you know, $37, or 2.5× to 3× book, probably around a 10× P/E on a kind of discounted-earnings basis. What are you seeing that the market's missing here?

I think Marex trades at 7× to 8× P/E on what they're going to earn this year, versus StoneX, which is about 12× to 15× in that range. Given how rapidly StoneX has been compounding book value and earnings, I think 12× to 15× is 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 to 20× earnings, which I think it deserves, but there's a multiple uplift from 7× to 12× to 15×.

Let's just quickly get the technical reasons out of the way. Most importantly, there have been all the private placements we've seen in the last 2 years. There have been a lot of shares that the market has had to absorb in just 2 years. Most importantly, private equity still owns 17%.

They did their last private placement in April of last year. Everybody expected them to do another private placement around now. Actually, it happened 2 weeks ago; that's why the shares dipped a bit. There were rumors that they were looking to place a big block. Nobody wants to buy for a week before there's going to be a 17% placement. I think having that out of the way is going to help.

I think having a slightly longer track record of being publicly traded will help, too. Like I said, it's a black box. The market is trying to figure out how this operates during a tariff panic. 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.

Now we're in an extremely high-volatility environment, and they pointed out that this might be a little too much to actually earn good money. We don't want stress on our customers either. The market is trying to figure out when they're going to make money, and I think the answer will be that it's pretty much in any environment—some environments a bit more than others.

Can I pull on 2 things you just said there? The first thing I want to pull on is that you mentioned a private-equity overhang, right? There have been a lot of secondaries here, and they still own 17%.

On the one hand, I get it: private equity has to exit at some point. They built this, they've had a very successful run, and they need to exit. But on the other hand, you do this long enough and you see private equity exiting, and 6 months later the business collapses, or 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 private-equity-backed companies or you don't want to buy secondaries.” They really do paint a glossy picture of it as they're getting out, and then you're left holding the bag.

So why is private equity exiting, and why is that not a worry here?

Marex was founded in 2005, but the private-equity firm that's exiting is JRJ Group. They've been invested since 2009. I'm assuming, just given the time frame, that they tried to IPO this in 2022 already. That IPO failed. That's also maybe something to get into.

But there are exits from private-equity vehicles, right? It was one of the 2 concerns I had when I bought this around the IPO 2 years ago. One is that I don't want to buy when private equity is selling. The second is that I don't want to buy roll-ups in financial services, just because you know how it works: you buy people, and people are just loyal if you don't pay them enough.

That concern has been unfounded. They've grown their earnings 7× in the last 5 years, and that included the last 2 years after the IPO. 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—but that's the same question. I do have another question. When they're buying, they've done a lot of accretive growth, and you mentioned that I think the old model was, when you go buy something, you really worry, “Hey, the people leave. People are disloyal, and you lose that.”

I think this has changed a little bit, and they've done a really nice job of buying businesses. Look, they bought TD Cowen's prime business. TD Cowen doesn't exactly lack for resources, but within 2 years, they turned it from $87 million of revenue to, I believe they said on the most recent call, $250 million of revenue. How can they accretively grow these businesses like this?

The prime brokerage business is sort of a new business, so it's an outlier. Let's start with the core business. A lot of the acquisitions that they've done are in clearing.

About 10 years ago, they were guys trading metals on the LME. 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, you tell your guy in Bloomberg what you want to trade that day. If you're a hedge fund, you're going to trade with the guy who took you out to a fancy restaurant yesterday or took you to the strip club.

If the broker leaves, you might just shift your trades to another firm. There's always a lot of competition for brokers between BGC and TP ICAP. That just makes things inefficient because brokers go on garden leave for a year. It's not a business you want to be in.

What really improved the quality of the business was when they moved into clearing, which is a lot more tech-enabled. They say it takes them 1 or 1.5 years to onboard their business on the CME or ICE, and it takes their clients half a year to onboard on their system. A lot of that is compliance, and there's a lot of technology. I'm too much of an outsider to know exactly what the technology looks like. I just know it's more complicated, and that's one of the reasons the business is consolidating.

If I can continue on that M&A playbook—

Please. I'm so sorry I cut you off. I apologize.

There are, I think, 3 transformational acquisitions: TD Cowen and its prime brokerage business, and Rosenthal Collins Group. I think it was 2018 or 2019. That got them started in the clearing business and made them an FCM registered with the CFTC in the United States.

Generally, the M&A playbook is that they've got the clearing business with a lot of scale. Then they go to the Middle East and buy a brokerage business over there, which effectively means they buy client relationships and, in some cases, capabilities to trade on another exchange where they haven't onboarded yet. Generally, you buy client relationships.

One of their recent acquisitions had a 50% profit uplift on day 1 because they have lower clearing fees at the CME and ICE. They have scale. Those aren't difficult synergies that you need to try to achieve over the next couple of years. On day 1, 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 client and try to sell them not just oil futures, but interest-rate futures. That's sort of been the playbook. The value add is high, and the multiples that they're paying are really low.

There's a different category: they've done some acquisitions now in market making where they're paying 3 or 4 times earnings, and then there's growth after that. If you're paying those sorts of multiples, it's not hard to see why 25% ROE or better remains possible.

Can I pause you on the multiples? The 3- or 4-times multiples—I definitely hear you. But the synergies you talked about, the day-1 uplift, are very reminiscent to me of the TV cable networks of old, right?

You had USA merge with NBC, and then they would go to Comcast and say, "Hey, Comcast, you used to pay 5 cents per subscriber for USA. If you block USA out now, you're going to have to block NBC out, too." What was 5 cents becomes 10 cents. So, day-1 acquisition, I totally get that.

But the counter to that is, "Hey, NBC and Fox would both have that same synergy, so they should compete to drive the price up and price that synergy out." Here, you've got Marex, and you do have other buyers. Why are people selling for 3 or 4 times? Why isn't it just getting bid up? Marex says, "Oh my God, we do have synergies." StoneX says, "Oh my God, we do have synergies." Three other firms say, "Oh my God." They just bid the price up to counteract that synergy, if that makes sense.

To answer that is to answer the question of why the space is consolidating. Why did the number of registered FCMs in the United States get cut in half in the last 20 years?

On the one side, you have banks, which are regulated under Basel III or Basel IV, and they have high capital requirements, so they've been exiting. The nonbank FCMs don't have the same capital requirement. Marex would point out, "Hey, we still like to be investing again, and we still keep capital on the side." But anyway, banks are exiting this space.

At the lower end, because it's becoming more tech-enabled, the compliance costs go up and the technology investment requirements go up. When you're saying somebody else can outbid you, I mentioned them earlier: there's StoneX, there's Marex, and there's Archer Daniels Midland. 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.

If this business is so good, right—and you see it in StoneX's results, with mid- to high-teens ROEs, and Marex is a little bit more levered but has 25%-plus ROEs—why is ADM for sale? Why are people not jumping at the bit to grab that if you've got this consolidating business, where the largest players are actually regulated out of it and the smallest players are getting OpEx-priced out of it?

Why wouldn't that just be the nirvana for a variety of buyers?

Specifically on ADM, I wouldn't know them well enough to comment on their specific situation. R.J. O'Brien just got acquired by StoneX.

Yep.

I've asked both companies, "Did you bid for it or didn't you?" You get completely different answers.

StoneX would say that it wasn't a competitive bid. They just had the relationship with R.J. O'Brien, which was a family-owned business, if I'm not mistaken. R.J. O'Brien wasn't interested in being acquired by Marex, according to StoneX.

Marex would point out that StoneX is paying 6 to 9 times earnings post-synergies because they're not buying a small brokerage in the Middle East. They're buying one of the last remaining big firms. They're asking, "Why would they pay 6 or 9 times for one of those bigger platforms if you can buy 3 smaller ones for 3 or 4 times?" It's a different mindset.

They also point out something we'll probably get to: Marex already felt like it had enough interest-rate risk in its portfolio. R.J. O'Brien comes with additional interest-rate risk. So, both companies could have acquired it, but only one was really interested—or the target was only interested in being acquired by one. If that helps, if that answers your question.

It also strikes me that if the industry has truly gone from 4 viable, scaled players to 3, yes, StoneX buys R.J. O'Brien and gets the benefits of the synergies there, but everybody else gets the benefit of a more rational, more oligopolistic environment.

I said I was going to ask a question earlier, and I want to turn back to it: Is this a Goldilocks environment? I just remember StoneX. They bought GAIN Capital, and I think they struck the deal at the end of February 2020. Then March 2020 happened, and I'm sure everybody remembers what happened in March 2020.

GAIN Capital, because it benefited from volatility, actually earned its entire market cap in the month of March 2020. I remember that very well.

Marex, in its Q4 earnings call, which happened a couple of weeks ago...

I would have guessed, given everything that's happening in Iran, with oil going from 60 to 100, 120—whatever you call it—multiple up-and-down days, up 10, down 10, and everything, that they were absolutely minting money in this environment. But they came on the call and said, “Hey, there’s a Goldilocks level of volatility. Not too volatile that our customers are blowing their brains out, but we want some movement in stocks.” And they said, “We’re way past the Goldilocks level.”

That kind of surprised me. So I wanted to ask: why is this high volatility not just complete nirvana for them? How do you think about that?

It surprised everyone, right? That’s why the share price is down. They did say it’s not Goldilocks, 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%. That’s what they were effectively saying.

The market, including me, is still trying to figure out what the right level of volatility is. There are arguments for why this amount of volatility would be too high. Margin requirements for customers go up, and instead of just posting more margin, maybe they de-risk their book, which means closing some trades and taking it a bit easier. Plus, if you’re an airline and you were waiting to hedge oil, maybe you’re not going to hedge it for the next 2 years. Maybe you’ll take a very short contract just because you don’t want to pay up.

That was the explanation. To me, that sounds a bit like deferred income. If he’s choosing to hedge only for the next couple of months, he’s going to come back in 2 or 3 months and hedge more. The way I would look at it, the last 5 years, in which they grew their net income 7×, have been pretty volatile in the market, and that’s benefited them.

The best way to look at that is that, prior to COVID, the amount of futures being traded globally used to grow about 5% a year. That has grown in the double digits in the last 5 years. It went from 5% to 12%, and I think that’s a function of the higher volatility we’ve seen with Ukraine, with COVID, and with everything that’s happened. Maybe they’re also doing a better job of cross-selling us into other structured products.

Whether there’s more trading activity exactly today or not, it’s not the kind of company that needs to make all of its earnings in 1 or 2 weeks of the year, like you would see with Flow Traders or something like that. We can still see in the data that, in January and February, the amount of futures on CME and ICE was up 12% year over year. It’s trending well, and energy and metals are way higher than that.

No, it is surprising, but you mentioned metals, and that’s a great call because they said, “Hey, the volatility in January”—and you completely forget that’s when silver was doubling inside of a couple of weeks. Since then, you’ve had the multiple pullbacks. Oil is the headliner right now because it’s 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.

One last thing: buybacks. That’s been a popular topic with this company for the past few years, I would say. The question is, “What do you think about buying back stock?” I think they’ve largely resisted it. And look, when you’re running a business with 25% ROEs, it’s probably right not to buy back stock when it’s trading at 2.5×, because the market is anticipating continued organic growth, and every dollar of growth you can produce creates a ton of value.

What do you think about buybacks and capital allocation here?

They haven’t spoken about this publicly, I think. But when they’re a foreign entity listed in the US and reporting under IFRS, they would need shareholder approval to do buybacks.

They’re British, right? Why are they British? Is that a function of mergers or just a function of history?

It’s a natural British company. They would talk to you with a 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 2 reasons it failed was because—who wants to buy British stocks, right? Nobody wants to trade in the UK.

So now they’re listed in the US, but they still need shareholder approval for buybacks. Their previous private-equity owners didn’t want to give that. I don’t know why. Their previous private-equity owners are no longer in charge. They gave up their board seats. They would have sold out by then. I’m very confident. I could be wrong, but I’m quite confident that they will ask for buyback authorization at the next AGM, probably in May, at least to have it.

There was a short-seller report last year—

That was my next question.

—which was mostly unfounded. They would have liked to have a buyback in place. The only thing they could do at the time was go around, and 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 it after May.

Let’s talk about the short-seller report. That came out in early October 2025. It was Ninky Research? I’m not 100% sure that’s how you pronounce it. I’ve never heard of them. Ninky Research came out in October, and we can talk about the company’s response and everything, but the piece is pretty scary, right?

It says, “Hey, unconsolidated entities, lots of related-party dealings that aren’t getting tracked.” It mentioned a reduced scope from the auditor as 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 about 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 this: I worry about a black box, right? When you have a black box, rightly or wrongly, it is very exposed to a short-seller report. Hopefully it’s a good one, but black boxes and short-seller reports are a match made in heaven.

It took me more than a day to actually figure it out—it was about 40 pages, which pointed out various inconsistencies. Some of them surprised me. Someone must have dug pretty well into the company to find those.

Yeah.

Out of those 2 inconsistencies, I would say there were 2 arguments that, if they had been correct, I’d be worried. The most important was that it would point to 2 unconsolidated entities: Luxembourg SICAVs, which are like a VIE here, but it’s a fund structure through which they can do their market making. Maybe one of them was used for the issuance of structured products.

It would point out, “Hey, the auditor resigned. There were entities—the 2022 financials weren’t audited until the middle of 2023.” Those are inconsistencies that shouldn’t exist. But I think the main allegation was that they were unconsolidated, that Marex was trading with them, and Marex was booking fake profits with its own entities. If that were true, that would be pretty bad.

Management addressed it during their call, and the first thing they said was, “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 an entity.

But then, if you learn the background of those entities, it’s a roll-up. 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. Some of them take time to get rid of and consolidate. They aren’t actually using the entity.

We’re talking about 2 funds with $2 million in US equity that they’re not using. They told me they’re just trying to get the confusion gone about that, so I’m not sure whether they still exist or not. Bottom line is, they were fully consolidated, so there are no fake profits being booked. That’s the only thing that matters here.

I think the other one was claims like, “Hey, there’s not even any real free cash flow.” I’d encourage anybody to just open the financial statements themselves. Look at the cash flow statement. They only report that twice a year because it’s a British company, not a US company. Maybe they should give that cash flow statement every quarter, but there definitely is free cash flow.

We’re talking about a financial company with a complicated balance sheet. Sometimes hedges are working as a tailwind, and sometimes as a headwind. In the 2 years prior to that short report, it had been a tailwind for free cash flow. But in the last 6 months, it’s been a headwind, and there’s still plenty of earnings.

If I remember correctly, another thing that was scary in the free cash flow—I’m trying to find the specific table where they said, “Hey, they’re booking financing, you know, on your cash flow statement.” Anyone who’s familiar with one knows you have CFO, cash flow from operations; cash flow from investing; and cash flow from financing. They were saying, “Hey, they’re booking cash flow from financing as cash flow from operations.” And that kind of breaks the thing.

And I think the company came out pretty strongly and said, “Because we are a finance firm, this is typical. And by the way, if you read footnote 1, 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. There was the British entity that they acquired, where the short-sellers said, “Hey, they didn’t report a looming fine from the regulator.” I believe—you can correct me if I’m wrong, or tell the story if you remember it—that the company said, “Yeah, we didn’t report it because we structured it as an asset acquisition. We didn’t buy that legal entity, so we knew there was a fine, the seller knew there was a fine, and we left that liability with the seller.” So there was that.

There was a scope question. They said, “Hey, Deloitte’s pulling back their scope.” The company came and said, “Yeah, that’s because EY is taking over the scope.” There were some other scary things that I think the company addressed well. I’ll pause there. Was there anything else in the short report, or anything that you wanted to mention?

You answered your own question on the first point. In general, what I liked about Marex—and I think this is the kind of company, similar to Interactive Brokers, that has benefited from being public—is that the amount of name recognition and transparency it gives them in the market as a prime broker has helped them in the last 2 years. They point out, “Well, we benefit from being public, and clearly there are also some negatives, because you get short reports like this that you have to deal with. But in the end, everybody is allowed to say what they want to say.”

Now, personally, as a financial market participant, I feel like everybody is allowed to say what they want to say, but if you want to make such complicated arguments, why don’t you do it after hours and not 5 minutes after the market opens? I don’t know this person, and 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 dealing with. But at the end of the day, let them say what they want to say. It keeps us sharp. I learned 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 don’t think you’re the only one to point out the timing and everything. But on the company response, when I was prepping for this podcast, I was like, “Oh no, black-box financials with a short report. This could be scary.” The thing I really liked was how the company responded, right? The short report gets published a couple of days before earnings, so the company is in 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 2 scariest points,” as you started talking about.

Then the next day, all the top brass kind of buy shares on the open market. Would you like to see more? Sure, but everybody buys shares. I just thought it was an ideal response. They didn’t yell and cry about short-sellers; they just addressed the most pressing things.

And look, as a financing firm, this question gets asked, right? The reason financial firms are so scary when they get shorted is, A, they’re black boxes, but B, customers say, “Yeah, we have our prime in our box, 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 worry about the customer risk. They came out and said, “Look, we had open conversations with our customers and, for what it’s worth”—if I remember correctly, they said—“we’ve got a global hedge fund that’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. With complicated, black-box financials, what you want to do is verify in real life that the business really exists and that they’re really growing the way they are growing.

Finally, I started my hedge fund about 2.5 years ago, when I moved to the U.S., and Marex’s TD Cowen, which had only just been acquired by Marex a month earlier, were the first ones to reach out to me, like, “Hey, have you already picked a prime broker?” A lot of firms started reaching out when it was already too late. Nobody’s going to pick a prime broker 5 months after mentioning a fund.

Now, you can see in real life, if you’re in the financial market—I know some people who are moving their prime broker’s business to Marex. 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 that the business exists. They have a very motivated sales force that is reaching out to a lot of people.

I saw that example 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. Sometimes it’s that little personal insight that makes things.

Let me end with this. I’ve said a few times, “Look, hey, it trades at 2.5 to 3 times book, 25% ROE.” You say, “I think this should trade for 20 times EPS,” and it’s kind of trading at 7 or 8. 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, forget 20 times EBITDA. Right now, it should be valued like the next Berkshire Hathaway. So how do you think about the fair value here?

Just because I think it’s worth 20 times P/E, it doesn’t mean I’m ever going to get it. I’ve accepted that. I do think Marex has a higher ROE: it does 30%, while StoneX is now at 20%. Maybe with slightly more leverage, does it deserve at least a StoneX multiple? I think so. I think it will end up trading somewhere between 12 and 15 times. Maybe not in 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 grow earnings at anywhere close to the rates they’ve been growing, 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 multiple expansion. And if at some point you go from 7 times to 14 times, that boosts your IRR quite a bit, but it’s the earnings growth 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.”

Yes, one last question. If I put aside the black-box kind of risk here, 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. If the Fed funds rate drops by 1 percentage point, they would lose about 5% of their earnings. The reason that’s quite low is that customers post margin, and they earn the Fed funds rate on that, effectively. But they share that, similar to Interactive Brokers, which just takes 50 basis points. For 60% of the clients, they take about 150 basis points on average, depending on the size of the client. And for 40% of the customers, they take all of it themselves.

So, for the 60% of customers, it doesn’t matter if the Fed funds rate drops by 1% until we go below 1.5%. They would point out, “We’re not worried because we’ve got that hedge.” They’ve got interest-rate hedges rolling in 2.5-year periods. But in a situation where the Fed funds rate goes to 0% and the hedges roll off 2.5 years later, that’s a decent chunk out of earnings.

The reason that, even though that’s my main concern, I’m still invested is that they’ve managed to grow those balances at a pretty high rate. 2 years ago, they had about 12–14 billion of client balances. They’re now at 20, so that’s 50% growth. If they continue that growth, it offsets quite a bit.

The other thing is that it’s a consolidated market that we’ve spoken about. When interest rates went up, customers approached them and said, “Hey, you’re making so much money on our balances. Maybe you should certainly share a little.” Both StoneX and Marex 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, “Hey, we gave you more money on the way up. Now we’re going down. How about you start paying slightly higher spreads on the swap that we’re selling you?”

So they can partly compensate quite a bit through commissions. And the prime 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 the same argument goes a little bit for the prime broker’s business, less so for the clearing. So they make it up on volume and on pricing, but Fed funds rates under 1.5% would be negative.

Well, I have good news for you. A month ago, you might have had some worry about the Fed funds rate, but I don't think—again, we are recording this on March 23rd—the Fed funds outlook has changed pretty materially in the past couple of weeks. So, I've got good news for you on that risk.

No, and look, I think the younger me would have said, “The Fed funds risk?” and been like, “Well, look, people are going to look through this. People are going to normalize.” But the older me says it's not lost on me that with Interactive Brokers and StoneX, there were a lot of other things, but they really started taking off in mid- to late 2022. How long did IBKR rail against the system and say, “Hey, interest rates are zero. We're making nothing on these huge margin things?”

As soon as interest rates start kicking up, I mean, IBKR is like a 4× over 3 or 4 years since then. I might be a little bit high on that, but IBKR works. StoneX works. It's not lost on me that interest rates going higher are just a huge tailwind for all these things, and that's when the market really starts rewarding them. So, I think we've also got kind of a proof point in the market, if that makes sense.

Yeah. All righty, this has been great. Anything else you want to talk about, whether it's Marex or Swedish small-cap frauds?

No, we're not going to talk about Swedish small-cap frauds. I have to keep reminding myself.

But anything else we should be chatting about?

I think we've covered this company quite well.

That's what I like to hear. Well, look, I really enjoyed having you on. Again, just through our Twitter DMs and everything, I've had a lot of respect for all the work you've done. I appreciate you coming on, and we'll have to have you back on sometime soon.

Thanks for having me.

A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.