with Three Part Advisors. Our next presenting company is StoneX. SNEX is the ticker. With us here from the company today, we have Sean O'Connor, the CEO, Bill Dunaway, the CFO, and Kevin Murphy, Group Treasurer. With that, I'll just turn it over to Sean.
All right. Thanks, everyone. Thanks for your interest. We appreciate it. We honestly don't do many of these, so I'll try and leave some time for questions. And, you know, if you guys want to interrupt, please feel free. I'd like it to be interactive. So a little bit about who we are. I started the business 22 years ago, with about $5 million. We're a financial services company. I'll tell you what we do later. In terms of our financial return, we, from day one, have sort of adopted Warren Buffett 101. We wanna compound our capital. We knew we didn't have a lot of capital to start with.
We knew if we could compound our capital at a decent rate, we'd become a big company, and if you owned a piece of that company, it would be worth a decent amount of money. We turned $5 million of equity into $1.6 billion over that period. Our revenue has grown from $0 to $3 billion. We have compounded every one of our financial metrics at about 30% compound for 22 years, so we have handily beaten Warren Buffett over a 22-year period. Pleased to say, although we were a really small company when we started. Our stock price from that first day when we took over the public shell is up 125X over 22 years. We currently trade at around an 11 PE, and we trade at about 1.6 times book value.
I think we've been one of the top-performing small caps. Certainly, that's what our investors tell us in their portfolios. But we have shown a pretty good rate of growth. Our last trailing twelve months, we're slightly north of 16% ROE, which is our major metric. That's kind of our compounding ratio, right? That's who we are. What we do is we are a financial services platform. We help our clients of many different types access the financial markets. If you want to trade foreign exchange, you wanna trade equities, you want a prime brokerage account, you want to trade derivatives, we can offer all of those products to you. We've taken the view that we don't just want to be a broker, we want to be an integral part of the financial infrastructure.
So we clear trades, we belong to all of the exchanges, all of the clearing houses. We're an accepted counterparty to every liquidity venue. We hold clients' assets, we hold their collateral, we hold their positions, and we clear all of those trades for them. So we are just like Goldman Sachs, we're just like Bank of America. We're like all of those bigger bulge bracket banks, offering pretty much the same services. We got a 20 year track record, which I've just mentioned, which we're very proud of. We have a very diverse business. We have diversified our business by product type. We are one of the few firms outside the bulge brackets that offers access to every asset class in the world.
You wanna trade foreign equities in over, you know, pretty much every country that has an equity market, we can do it for you. Trade fixed income, you can trade foreign exchange, you can trade derivatives, you can trade unlisted derivatives with us. Very diverse. We are also diverse geographically. The financial markets are global. People go to where the best price and the best source of liquidity is. We have offices in London, Dubai, Singapore, São Paulo, U.S., U.K. We are in every financial marketplace. We're regulated in all those markets. We belong to all of those liquidity venues and marketplaces. We have also diversified our business by client type. We deal with traditional institutional accounts, people like you guys, who invest people's money. We deal with traders. We also deal with companies.
We deal with 30,000 companies around the world who use the financial markets to hedge the risk that they have in their business. We deal with about 30,000 institutional accounts. Those are people like you who are using the markets to make money or invest capital, and we have about 400,000 retail people who trade with us, so we have a very diverse set of clients. The biggest thing that has allowed us to grow so fast is we believe there's some really interesting macro factors that are happening in our market, and you can see the evidence of that if you just look at our growth rate.
What's happened is, since the financial crisis, and there was a massive response by the regulators, which led to significantly more controls and infrastructure required to be in business, costs went up dramatically, and additionally, the regulators required a lot more capital to support the business. This obviously affected us, but we made the decision to invest in the markets. But the net result of that over the last fifteen years or so has been a massive consolidation at the lower end of the market. Just to give you one data point, we're here in Chicago. U.S. derivative clearing firms, 2007 , if I exclude all the tier-one bulge bracket banks, Goldman Sachs's, the B of A's of the world, there were 225 in the U.S. There are now six. We're the largest of those six.
We have bought many of those firms that have gone out of business. We've acquired their clients. There has been a lot of consolidation, and the same thing's happened with broker-dealers. The same metrics have happened internationally. So there's been a massive consolidation at the lower end. Additionally, there's been a big impact with the large banks. The large banks used to use the client execution business as an adjunct to their proprietary trading activities. Post the financial crisis, those proprietary trading activities were closed down, and they now had to start putting capital up against the client execution business, which is a much harder business. A lot of those businesses weren't nearly as profitable as the banks would like. They have constantly been shedding clients, pushing clients out to people like us.
If you're leaving one of the bulge bracket banks, you're used to having the kind of access and the infrastructure we have. There's no one in the second tier that has the capabilities we have. So we are a very desirable place for those clients that are being pushed out from the banks. Banks, which I call sort of tier one, by my estimation, pre-financial crisis, probably had about 80% market share in any product you care to name: fixed income, equities, derivatives. That market share is now around 60%, and I think it's going to 50%. And the reason is, the banks just cannot sustain the capital charges that this business is now requiring under Basel III. To give you a data point, you can go research it.
Currently, the latest Basel III regulations are gonna require U.S. banks to put up an additional $7 billion of capital just on their U.S. derivatives clearing businesses. Those businesses will not be profitable with that additional capital. Those banks are already shedding clients to us, and this has been going on for 15 years, and it's gonna continue going on. So there's a massive reordering of the sort of financial marketplace, and we are a net beneficiary of that. You don't grow compound at 30% because you're good at sales. You grow at that rate because something's happening, right? So that's what's happening in our industry. So this is what we do. We provide a tier-one, institutional-grade, global market access to all of our clients. As I mentioned, we don't just do the broking side and the execution side, but we provide a high-touch service.
We have deep expertise. We also do all the post-trade services. We hold your accounts, we hold your assets, we custody your trades, we prime broker you, and that is a fully integrated service. The reason we do that is we end up with very deep relationships with our clients. Our clients have a significant portion of their assets that sits with us, sits with StoneX. They regard us like they would regard their bank. They move money into us or request money from us almost daily, and the amount of money they have sitting with us is significant, millions and millions of dollars for individual client. So we have a very close relationship with these clients. Our client relationships go back 15, 20 years for the most part. How do we monetize our network? It's a little bit network, Metcalfe's Law, I guess.
What's the value of a network? The value of a network goes up exponentially as you add more access points. Because we trade all of these markets, all these liquidity venues, our network has become incredibly valuable. We charge people to use our network every time they do a trade. We charge a toll, we charge a commission, or we charge a spread. So that's the first way we make money, transactional revenue. What we want is more traffic coming over our network. We don't care if it's buying or it's selling. We just want activity. We're the toll takers. What does drive more revenue in the long term is obviously more clients. That's the number one mission for us, grow our client base. The second thing that drives volume over our network is market volatility.
When the markets start to get volatile, we see more volume coming over our business, so we are positively correlated to volatility. We like it when there is modest market volatility and disruption. That leads to more transactional revenue. The other part of our business and how we monetize it is we sit on a lot of client assets. We sit on over $10 billion of client cash. This is cash that clients leave with us as collateral for the positions they're running. We also sit on the clients' accounts. We sit on over $20 billion of securities that we sit on. We can monetize those securities, and we earn interest on those assets. So we are positively correlated to interest rates. We like interest rates to be at a modest level.
When interest rates were zero, that was a drag on our earnings 'cause we're a float business. We are just like a bank. We sit on a really big float. This is just sort of snapshot of key numbers. We belong to 40 derivative exchanges around the world. Every derivative exchange that matters, we are a member of. We trade over 18,000 unlisted derivative products. We trade every currency pair in the world, 140 of them. We have 54,000 institutional and commercial accounts, 400,000 retail accounts. We sit on $7 billion currently of cash. If you look at the notional value of everything we trade, we trade close to $30 trillion a year of assets for our clients, which is about the GDP of the U.S.
We have $1.6 billion of equity capital, 4,300 staff, and we're represented in 21 countries. Little graphical picture of where all our clients are. We are truly a global business. At the bottom, you can see building this network, building this ecosystem is not easy. This is capital intensive, it's operationally intensive, and you can see all the regulators we have to comply with. This is a regulatory-intensive business. There are big barriers to entry to building what we've built. This would take decades to rebuild. Company timeline, we've been very acquisitive because of the market dynamics I mentioned to you. We've done over 30 M&A transactions. Sounds impossible? We pretty much have done it every time. In this business, there's been a lot of opportunity currently to make acquisitions cheap.
We are integral part of the financial services infrastructure. We are plugged in and plumbed in to every part of the financial services industry. This is a very complicated thing to rebuild, as I said, not something I would like to undertake right now. I won't spend much more time on that. Here's our segmental reporting. I'm not gonna bore you too much with all of it, but just to touch on it, you can see the vertical columns are really our client types, the institutional clients and the retail clients, the first two columns, which is about 50% of our business. These are clients that are looking to access the financial markets because they wanna make money, they wanna trade, they wanna invest. The right-hand side of this is our commercial clients and our payments clients.
These are clients that are using the financial markets to mitigate risk. Very different profile of client. We deal with them differently, and that's around half of our business. These are all the products we offer, one of the broadest product offerings in the second tier. Obviously, you could find all of these products at a Goldman Sachs or a B of A. But as I said, B of A and Goldman Sachs only wanna deal with the very biggest clients. They're kicking out all the smaller clients. Those are the clients that are coming to us. Here's our track record. You can see on the left-hand side, our stock performance versus the Russell and the Nasdaq. You can see we have compounded out at about 20% per annum versus about 7% for the index.
On the right-hand side, you can see our financial performance. You can see the columns are our shareholder equity. You can see the lines, the dark line is our revenue, and the light blue line is our market cap. And as I said, all of those numbers kind of narrowing in at around 30% CAGR over the last 22 years. Some more recent data just on our performance. I think we have had something like six or seven straight record years, in fact, probably even longer than that if you go back. It's been a good environment for us, certainly the last five or six years. The company, by almost every measure, is two or three times what it was versus 2019.
So we have managed to not only be profitable, but also grow pretty quickly over the last four, five-year period. All right, so that's basically where I'm gonna stop. I hope there's some questions. I flew through that because time is tight, and I'm always interested to see what you guys think. So anyone have a question? Yeah, at the back.
It's been a while, you know, since, you know, kinda like a global situation.
Mm-hmm.
I guess just what's your kind of view on your counterparty risk overall and kind of if someone blows up, you know, type of scenario?
Okay, good question. So one of the critical things in our industry is risk management. There is no free lunch. We don't make the kind of returns we're making without taking on some risk, and we basically have different categories of risk, right? The first risk we run is 70% of our client interactions happen with us acting as a principal to our clients. We make a price for something to our clients. We then go try and lay that risk off with someone else. The other 30%, we charge a commission, so that goes straight through to a clearinghouse. So the first risk is directional market risk. Are we taking views on the market? Now, express intent is not to take views on the market. We want to charge a toll.
We want to take that bid offer, clip it as fast as we can, get on to the next trade. You, as an investor, probably look at me and say, "That sounds great. How do I know you're doing that? How do I know you're not taking a massive amount of market risk?" If you go look at all our filings, we give you our daily mark-to-market revenues going back for 20 years, and I can't remember 20 years, but certainly in the last ten years, I think we've had one negative day. There is no ways you can have that profile of positive PNL if you're taking any modicum of market risk. So I would say to you, that's the empirical evidence of how we manage that risk. Every trade we do with a counterparty, we are taking the risk of the counterparty.
Even if they trade with the CME here, the CME looks to us. They don't look to our client. They look to us. So we are prime brokering or guaranteeing our clients' obligations to the exchange. That's the role we play. If our clients fail to us, we have a counterparty risk, right? We have 55,000 institutional and commercial clients. We have clients that fail, and particularly when the market gets volatile, they get upside down, they don't have the liquidity, they can't make the margin call. Again, this is a huge enterprise for us to manage that risk. We assess all of our clients. We set limits around our clients. We say, "This is how much you can trade," and that is based on the client's ability to make a margin call... Right? Do we get it right every time? No.
So the empirical evidence of how we manage counterparty risk is very easy for you to look at. Go look at the bad debt line in our financials. That is the manifestation of our counterparty risk. And I would say to you, near any twelve-month, trailing twelve-month period, we'll have around $10 million of bad debts. That's sort of how we've calibrated our risk. If it's less than that, it's probably temporary. If it's more than that, it's probably temporary. I think that number is highly correlated to volatility. So if I go back to recent events, during COVID, when the markets exploded with volatility, we actually had about $20 million of bad debts in that twelve-month period, but we made so much more money out of the volatility on the other side, that there was a net benefit to the shareholders.
But that's the empirical evidence I can offer you of how we manage our counterparty risk. But it's a very important thing in our business. You have to get this right, and part of it is you have to calibrate your business and the size of your clients with the size of your firm. If you take on clients that are bigger than you, more aggressive risk-wise than you want to be, that never ends badly. So we often refuse clients access to us. Some clients get too big, which is a shame. We've grown with them. We have great relationship with them. Sometimes they get too big, we say, "Listen, you've got to go to Goldman Sachs, Bank of America. You're too big for us now." Those are tough decisions, but those are decisions we have to take. Yes.
Why do the individuals trade with you? What do you give them access to things they don't have, or better pricing?
We acquired a business. We weren't in the retail business until five years ago. We acquired a business called Gain Capital. It was public. Gain Capital has an international business that trades derivatives, listed derivatives. There's a different regulatory regime in the U.S. Dealing first with international, on our platform, you can trade equities, you can trade indices, you can trade foreign exchange, and you can trade commodities. All of these look like CME derivatives, but they're much smaller. They're sized differently for retail investors. Retail investors trade 'cause we give them the best price and the best access to those markets. That's why they trade. We have a property called City Index, and we have another one called Forex.com. In the U.S., they only do foreign exchange for... at the moment.
We are the number one provider of foreign exchange trading for retail and small institutional investors. We're now expanding that to offer futures. We can't do OTC futures to individuals. There are rules here in the U.S., they don't allow that, and we also have an equity trading platform, so we're merging all of that. Once we do that, which will happen soon, we'll look a lot like Interactive Brokers. So we are sizing, our digital offering is going to be exactly like Interactive Brokers, but with a better service. We hope.
Thank you.
Okay. Any other questions? Quiet lot, huh? Yes.
Just curious, BGC is launching FMX. Is that-
Sorry?
BGC Group is launching the FMX exchange. Do you guys deal with anything like that?
No, but, you know, if that exchange becomes an interesting liquidity source that our clients want to access, we'll join the exchange. I mean, you know, we are always looking to expand our ecosystem. I mean, we've joined the Nordic exchanges in Scandinavia, offering you know environmental products. We're always looking to expand the network, so... Yeah.
Another question. And uses of cash. Sounds like you're cash generative, but you also need a lot of cash, so you buy back stock, you 11 times PE.
Yeah, it's sort of an interesting business because if you look at our balance sheet, it's all cash. I mean, we have. The only sort of long-term assets we have are sort of our offices, right? All of our entire balance sheet turns to cash every two days, so we are the ultimate liquid business. But having said that, we are required by the regulators to support the activities of our clients with our own regulatory capital. So we have a pretty linear relationship of capital to revenue. As our revenue and our client activity grows, we need capital to support that. My view is, if you wanna run a business for the long term and be a franchise, and I think we can be a major financial franchise in future, I think it's right that capital be funded through equity.
It's regulatory capital, it's supporting your client assets, it should be permanent capital. I think borrowing that capital is a very risky way to run that business. So we always want, because we've been growing so fast, we always want to retain our regulatory capital. So it's a little bit of a conundrum. It's all sitting in cash, but yet it's required by the regulators to sit there in cash. So, so we don't pay a dividend, and we are very opportunistic in buying back our stock because we're growing, so we're gonna need that capital to support our growth.
Similarly, the growth. At zero, I'm assuming you didn't make much money on-
Correct, correct.
What do you make on the growth today?
So the great thing with us, I mean, you've all heard about how the banks got themselves upside down during COVID. They all had these deposits coming in, and they all went out and bought mortgages at 2%, and now those deposits, they're paying 5%, and they're earning 2% on the mortgages, right? We don't do that. So we take our client funds, and we invest it in T-bills, three-month T-bills. So we take no risk on the asset side of that. We charge those clients a spread for the most part. So we would take out, you know, maybe 150 basis points of those clients. So as long as the interest rates don't go below 150 basis points, I think we'll still be able to maintain our spread.
But when rates were zero, you can't take a spread out of zero.... That's the problem, right? So, but certainly, interest rates going up over the last few years have been very helpful for us.
Your clients basically get 3.5%-4% right now?
Roughly, yeah. Yeah. It's a little bit all over the place, but as a general average, that's correct, yeah.
Is that what happened in 2021?
What happened in 20-
I saw on the financial slides, your revenues kept going up year.
2021. Yeah, I'm not sure it was really that. I mean, I think in 2020 and 2021, interest rates were zero 'cause it was COVID, if you remember. So we weren't making much on the float. That definitely hurt us. But on the flip side, volatility was sort of off the charts. So I think we were doing very well on the volatility side. So I'm not sure that blip you see there is directly related to interest rates. I think there was somewhat of an offset. Bill, do you have an-
Yeah, you actually wanna look at the bottom right-hand adjusted. The blip you see there is actually 2020 at the acquisition of Gain Capital, and we realized about $80 million gain on buying that business.
Okay.
So the bottom graph is we're trying to-
Yeah
... Be honest with you all. So here's your true earnings, right? Take that out. So actually, it'll continue to ramp up. That was just that annual blip there.
Yeah, but what we really want in our business is moderate volatility and a moderate level of interest rates. That's kind of the Goldilocks scenario for us, and we want an environment where we can keep growing our client base. And that's very constructive right now with the banks pulling back and with consolidation. I mean, just to report, I think last quarter was our highest onboarding in terms of number of clients we've ever had in our history, in terms of the number of clients we onboarded. So, you know, it's not—we like to think we're good at sales, but we're not that good. There's something else going on. Yes?
You mentioned some of the old brands, why their customer and whatnot is a regulatory burden. Why does it make sense for them to get us as customers for you guys to make it work?
'Cause we're not a bank, so we are not regulated like a bank. So the regulations that are hurting the banks are the Basel III bank regulations, which are not designed for the trading business. They're designed for loan portfolios, but an unintended consequence of that is it hits the trading business very hard. So the kind of clients the banks are gonna wanna keep, in my opinion, they're gonna wanna keep the very big clients, where they have lots of other touch points. They lend money, they do capital markets activity. The clients want to do their trading with them, they'll do that as an added service. So those clients will stay there, right?
The other client trading clients that the big banks want are the very active, very large, high-frequency trading kind of firms because they get a lot of transactional revenue, but they're not holding the assets for long periods of time. So the clients they don't want are the kind of clients we deal with, which are hedgers. People who hedging a position, they put a trade on, not a lot of activity happens for two, three, four months, and then they take the trade off. For a bank, that's a losing client. But for us, we take a 2% spread out of that client, we charge a commission when they trade. Those clients work well for us. I mean, yes?
Who is the competition thus far?
It's very fragmented, so the competition is the banks, but when the banks get rid of the clients, and they have to come to the second tier, I think the choices are really a firm like us, which offers broad market access. We're public, or a whole bunch of monoline, non-public firms that maybe just do one thing. So just trade equities, just do FX, just do derivatives. But if you want access to doing lots of different things, which I think people, all things being equal, prefer, would prefer a broader platform than a narrower one, there's not many options, to be honest with you. I mean, Marex is one that just went public. They're drafting us. The CEO, I know well, totally copies our strategy. He admits it. They've done a great job, but they're drafting us.
They've figured out that we're onto something, and they're trying to copy us. And they do a good job. They're very good. And there's more than enough room for two of us, so we're not concerned. Just to give you some sort of stats about sort of our market presence, which I think might be interesting, is on the agricultural side here in the Midwest, we touch about 40% of the row crops in the U.S. 40% of every bushel of corn, every bushel of soybeans, we touch in some shape or form. We probably touch one in five cups of coffee drunk in the U.S. We hedge, through our clients, probably 20% of the natural gas usage in the U.S. We touch 40% of the agricultural production in Brazil, which now exceeds that of the U.S.
So we have pretty big footprints in some of these markets, where we're very well known. Yes?
How does revenue split between-
Sorry.
How does revenue split between commodities and equities?
We do provide that in our earnings deck. We actually give a product breakdown. I don't have it on this presentation. What I do have is that breakdown. If you look at the commercial column there, the commercial column here, that is basically all our operating businesses that are using us to hedge their risk. The bulk of that, not all, but the bulk of that is commodities. That also includes people managing their interest rate risk on their revolvers and things like that, but I would say 85% of that is commodities. Any other questions from anyone? Yes, sir.
You mentioned in the past that you've done a fair number of acquisitions. I was kinda, 'cause how do you think about that going forward? Like, how-
...Yeah, it's interesting. I mean, you know, for us, as I said, we're very disciplined around acquisitions. We have the luxury of being disciplined around acquisition 'cause our organic growth rate is so high at the moment. We have so much opportunity organically just to grow our business 'cause of the dynamics I mentioned to you. So when we look at an acquisition, we're always looking at it versus if we just put our heads down and did the organic expansion, which would be better? I mean, acquisitions bring disruption, it's work, it's risk, it's a whole bunch of things. But our screens generally for acquisitions are: it has to bring us a new product capability we don't have, that would be generally applicable to our broad client base, or it has to bring us a client base where we think we could sell more products to.
It's got to do one of those two things. The next screen is we have to add value to that acquisition. Buying a business for 100 that stays worth 100 doesn't do anything for our shareholders. We net zero at that point, right? So we have to see how we're going to make that business better. Generally speaking, if those first two things are right, we know we can add value with that business. We can take their products, we can sell them to all our clients. We can sell our products to their clients. Also, oftentimes, we can take out all the operational and infrastructure cost in the acquisitions 'cause we already have all of that. We have accountants, we have compliance people, we have risk people. That's another way we can add value. And then finally, there's culture and fit and all of those things.
Finally, it's what do you pay for that? What do you pay for that business? Some people are just irrational in terms of how they think about that. You know, if someone says to me, "I want a 15 PE for my business," and maybe I'm wrong. I mean, you guys are all equity analysts. My view is, so you're really asking me to work for 15 years before I see a dollar of return on that business. Why the hell would I do that? That makes no sense. We want to have that business pay for itself inside 36 months. That's what we want to have happen. Now, we can do that 'cause we're pulling out costs, we're adding revenue synergies, and you also got to be careful not to talk yourself into all these synergies. But typically, we want acquisitions to pay back very quickly.
We're in a fast-moving market. The world changes quickly. I don't have the luxury of taking a fifteen-year view on a payback for a company. And we've done 30 acquisitions. There's plenty of opportunities that fit that screen. Anyone else? Going once, going twice. Well, thanks so much for your attention. We appreciate it. I like all the questions. That was great. We're around. I'm not sure if we got any open slots, but if any of you want to catch up with us, we'd be delighted to chat. If you can't chat now, call us. We'll talk to anyone. So if you want to chat and learn more about our business, we love our business. We like telling people about it, so call us. We'll happily take your call. Thanks very much!