SPB Exchange Is Going Public: Business-Model Analysis

Aug. 28, 2021 9:48 AM ET2 Comments
Gleb Krivosheev profile picture
Gleb Krivosheev


  • SPB Exchange, Russia's leading platform for trading stocks, is expected to have an IPO in the fall of 2021.
  • In this article, I review its business model and financial performance. Also, I compare it with Moscow Exchange and foreign peers.
  • SPB Exchange was the main beneficiary of the vigorous growth of retail investors in Russia, which lead to an enormous increase in trading volumes and income.

Moscow City - Moscow International Business Center at night, Rus
mikolajn/iStock via Getty Images

Investment Thesis

SPB Exchange is the main platform for trading international securities in Russia. The boom of retail investors in 2020 and their interest in Amazon, Alibaba and other foreign stocks led to a tenfold increase in trading volume. After growing successfully and seeing big opportunities for profitable growth in the future, the company has decided to go public on Nasdaq (source in the Russian language).

An increase in trading volume leads to a significant improvement in the financial performance of the company. Due to this, the company shows high profit growth rates, sustaining good profitability. A year after the retail investment boom, the number of active clients is still growing, as are earnings. Compared with peers, the company's performance seems solid. Currently, the exchange is small, but it has significant plans for development, including by introducing more traded instruments and extending its trading hours. It offers a unique, best-priced liquidity pool for clients to trade U.S. securities even when the U.S. markets are closed. The IPO of this company is definitely worth paying attention to, as we may see some updates and the price range disclosed in the near future.

Introduction To The SPB Exchange

SPB Exchange is a stock exchange, that primarily works with Russian brokerage firms. The exchange provides access to trading securities (e.g. stocks, ADRs, GDRs, bonds, ETFs). Securities are represented by foreign and Russian stocks and Eurobonds. Foreign stocks are the unique advantage of SPB Exchange, and it is the leading one in Russia in terms of the trading volume of foreign securities.

The international securities include such names as Moderna (MRNA), Tesla (TSLA) and Baidu (BIDU), which were among the most popular foreign stocks traded on SPB Exchange in July. Providing access to the largest volume of international securities in Russia is the unique advantage of SPB Exchange.

Founded in 1997, SPB Exchange first focused on the derivatives market. Subsequently, the exchange sold its business of organizing futures market trading, as a result of which the Moscow Exchange was founded (a detailed comparison of business models is presented below). After this, the focus of SPB Exchange shifted to the organization of trading in international securities. In 2014, it became possible to purchase 55 shares of the S&P 500 on the exchange. Since then, this number has been constantly increasing.

Today, the exchange has a large number of shares and depositary receipts of foreign companies and a few Russian companies, Eurobonds, ETFs, and shares of issuers from the CIS countries. At the moment, 1633 securities of foreign companies (which originally traded on NYSE, NASDAQ, LSE, DAS) are traded on the exchange (source in the Russian language), and this number is growing every month. Other instruments (such as Russian stocks, ETFs and bonds) are not so popular, so the exchange is gradually shifting its focus to foreign stocks.

At the moment, SPB Exchange is one of the largest in Eastern Europe. More than 12.2 million client accounts are registered on it, and the turnover on foreign securities for July 2021 amounted to $31.38 bn. For comparison, the turnover of securities on the Moscow Exchange (Russian and foreign shares, bonds, and ETFs) amounted to ±$50 bn (source in the Russian language).

The revenue structure of the exchange is quite simple. The main amount of income it receives is due to the provision of services related to the general common operations, and the commissions themselves. SPB Exchange has a subsidiary company that is engaged in depository brokerage activities (PJSC Best Efforts Bank). Other income includes information services, maintaining bank accounts, repository services, listing services, and others.

Source: created by the author using data from the company's reports

What is at the core of the business model

The modern history of SPB Exchange began in 2014 when it began trading international shares. In the Russian market, this was the first convenient, safe, fast and legal solution for investing in foreign companies – in stocks denominated in USD. In fact, making transactions on SPB Exchange is an alternative to opening accounts with foreign brokers for Russian investors.

The well-known securities offered on SPB Exchange are the same ones you find listed on foreign exchanges. Thus, they give investors similar rights, including receiving dividends. Retail investors make up the bulk of the volume of transactions on the exchange.

SBP Exchange organizes trading for almost 19 hours a day. The exchange starts working at 7:00 a.m. And end closes at 1:50 a.m. Moscow time. From 7:00 a.m. to 2:30 p.m. (or 3:30 p.m., when the United States switches to winter time), the exchange operates due to internal liquidity. From 2:30 p.m. (pre-market time in the USA) to 1:50 a.m. (end of post-market in the USA), due to internal liquidity and the liquidity of US exchanges.

SPB Exchange offers smart order routing – a type of built-in best execution service, which tracks both its internal liquidity pool and an external one that is available when international markets are open. This mechanism allows SPB Exchange to offer its clients the best-priced liquidity pool automatically. This system also provides opportunities associated with investing in premarket and postmarket.

The IT platform is at the core of the SPB Exchange business. It limits high-frequency trading to liquidity providers. The market players’ main focus shifts to providing the best prices by competing with each other. Market-makers, at the same time, are not required to place orders with large spreads to prevent spreads in a short period of time due to HFT activity. Consequently, market players are competing on price rather than on speed.

Maintaining a deep internal liquidity pool is good for revenue. If there is enough liquidity, both the seller and the buyers pay the commission, but when liquidity is provided from the external markets the commission is paid either by the seller or by the buyer. In the first 6 months of 2021, more than 77% of all transactions were completed using SPB Exchange’s own liquidity.

Future development prospects

Since most of the exchange's income is payments for services related to securities purchase/sale transactions, it is extremely important for SPB Exchange to increase the volume of these transactions. The income of the exchange was strongly affected by the influx of retail investors, and it counts on the continuation of this trend in the future.

Judging by the current monthly increase in the number of retail investors, the trend may have seasonal slowdowns, but it definitely won't stop. The population of Russia is huge, but the move towards investing in the markets is new. At the moment, about 7.6% of the adult population has a brokerage account. And only 1.6% actively use this account. This figure is significantly lower than countries such as the United States, China, and many European countries. Therefore, the near-term development prospect is the continuation of the trend of income growth due to the influx of new Russian retail investors.

SPB Exchange has an easily scalable platform. This allows it to maintain high rates of turnover growth and unusual volume spikes. The exchange wants to continue extending the trading day, with the prospect of covering the entire 24 hours.

The exchange considers the possibility of entering foreign markets as a long-term development prospect. First of all, these are the CIS countries, which have large populations and rising levels of financial literacy. New digital brokerage platforms are also developing in these countries, the same as in Russia, making investing simpler for individuals. Further, the company sees the prospect of expanding into the markets of Eurasia, including Central Asia and India. As its unique trading offer, SPB Exchange plans to offer foreign brokers the opportunity to trade shares around the clock.

Financial Analysis

The year 2020 was the decisive moment for SPB Exchange, in which the strong flow of retail investors, who want to make money on a wide range of instruments and investment ideas for any type of market (rising, falling, flat) was solidified. Since then, trading volumes and the number of clients have been growing relentlessly nearly every month, with the exception of some seasonal troughs.

Until 2020 the company wasn't making any profit. Therefore, SPB Exchange showed an enormous growth rate of EBT and net profit.

Indicators 2020 2019
Revenue 360.4% 13.7%
Operational Profit 545.3% 23.0%
EBT 163581.3% -96.4%
Net Profit 21278.5% -84.4%
FCF 1319.0% -165.4%

Source: created by the author using data from the company's reports

Profitability changed positively too. Right now SPB Exchange shows high profitability ratios, that are in some cases are even better than peers' (the comparison is presented below).

Ratio 2020 2019 2018
ROA 6.9% -0.1% -0.7%
ROE 37.0% -0.5% -3.0%
Operational Margin 70.7% 50.4% 46.6%
Net Margin 38.5% -0.8% -6.1%

Source: created by the author using data from the company's reports

Years prior to 2019 do not show any picture of the company's performance. In my opinion, it literally "existed". The company was increasing sales year to year, but still losing money. It was an essential change that the company gained new client accounts in 2020.

In 2021, the company's growth did not slow down. The growth of turnover on the stock exchange led to an increase in income, even with a slight slowdown in the growth of investors. In 2021, SPB Exchange should show even better results than in the previous year, despite a sharp surge. This situation suggests that the majority of retail investors who come to the exchange remain there and continue to invest, creating income for brokers and the exchange.

Indicator 6M 2021
Operational Margin 56.2%
Net Margin 39.4%
Change YoY
Revenue 458.6%
Operational Profit 757.3%
EBT 757.8%
Net Profit 288.9%
FCF 165.1%

Source: created by the author using data from the company's reports

Peers Analysis

SPB Exchange currently has the only real competitor, Moscow Exchange (also called MOEX). Until recently, the competition between these companies was low, since there was a division of markets between them. But now, MOEX is developing foreign stock trading. At the moment, 204 foreign stocks are available on this exchange. A distinctive feature is that transactions with shares are made in Russian rubles and the prices are indicated in the same currency.

Both changes share the market of financial instruments in Russia. Thus, SPB Exchange specializes in foreign securities, and the Moscow Exchange specializes in Russian securities, futures, and foreign exchange markets. Due to the futures and forex markets, MOEX's turnover and revenue are significantly higher. But the growth rates of these segments are not as high as those of SPB Exchange

Taking into consideration only the stock market, SPB Exchange is the obvious leader. Since 2020, international stocks have become much more popular than local equities for various reasons. One of them is the quantity: the U.S. market offers much more diversity than the Russian market. Also, investing in international securities gives some protection from the weak national currency, as all investments are made in USD or EUR. 2020 and 2021 also were more successful for SPB Exchange in terms of the number of active clients.

Stock Market SPB Exchange Moscow Exchange
Trading volume 2020 $167.29 bn $323 bn
Change 999,94% 91.11%
July volume $31.38 bn $27.08 bn
Daily average July volume $1.43 bn $1.23 bn
Change 111.81% 31.10%

Source: created by the author using data from the company's reports

Overall, the financial indicators of Russian leading exchanges look quite the same. Some of the profitability indicators are better for SPB Exchange. But 2020 was the first year the company showed profits, while MOEX is a stable company that pays a decent dividend yield.

Indicator SPB Exchange Moscow Exchange
Market Cap n/a $5.5B
Dividend n/a 5.22%
ROA 6.92% 0.05%
ROE 36.98% 20.06%
Operational Margin 70.70% 64.78%
Net Margin 38.51% 51.27%
P/E n/a 15.65
P/S n/a 8.05

Source: created by the author using data company's report and data from Investing.com

The emergence of new competitors for the SPB Exchange in the Russian market is unlikely. The OTC market is very poorly developed and inaccessible to the vast majority of retail investors. SPB Exchange has a platform that is extremely difficult to replicate. Foreign stock exchanges are also inaccessible for a retail investor since of the difficulty of registration of foreign brokerage account and various regulations.

Foreign exchanges

Despite the fact that foreign exchanges are not competitors of SPB Exchange, their comparison by key financial indicators is extremely useful for analyzing the company. The comparison will be made with several public exchanges. First of all, these are exchanges whose shares are represented on the US market: CME Group (CME), Intercontinental Exchange (ICE), Nasdaq (NDAQ), Cboe Global Markets (CBOE). Also, I compared it with two European exchanges: London Stock Exchange Group (OTCPK:LDNXF) (OTCPK:LNSTY) and Euronext (OTCPK:EUXTF) (OTCPK:ERNXY).

Indicator SPB Exchange CME Group Intercontinental Exchange Nasdaq Cboe Global Markets LSE Group Euronext
Market Cap n/a 71.70B 66.63B 31.40B 13.82B 55.76B 12.32B
Dividend n/a 1.81% 1.13% 1.14% 1.29% 0.95% 1.26%
ROA 6.92% 1.30% 2.20% 6.50% 6.60% 0.07% 14.82%
ROE 36.98% 7.20% 14.10% 17.70% 13.00% 3.97% 0.46%
Operational Margin 70.70% 52.90% 49.60% 24.70% 19.40% 22.10% 45.89%
Net Margin 38.51% 41.60% 32.20% 19.00% 12.70% 14.55% 32.21%
P/E n/a 37.06 23.43 27.93 31.87 67.17 24.98
P/S n/a 15.55 7.64 5.29 4.01 10.36 10.44

Source: created by the author using data from Finviz.com and Investing.com

SPB Exchange (same as Moscow Exchange) has decent profitability ratios comparing to foreign peers. Right now it's not obvious for how long the company will be able to sustain high profitability. The exchange plans various development scenarios and all of them will require investments.

IPO Details

The news that SPB Exchange is going public appeared last year when it received a new life due to the influx of private investors. The popularity of IPOs and the good financial performance of the company pushed the shareholders to bring the possible IPO closer. The IPO itself was laid down in the company's development strategy for 2021-2023.

According to publicly available information (source in Russian), the IPO is expected in the fall of 2021. Goldman Sachs (GS) is expected to be an underwriter, and the company will be listed on Nasdaq. The expected cost of SPB Exchange is $1.8-2.5 bn according to publicly available sources.

SPB Exchange doesn't have direct participation of the Russian government in its capital. The main shareholders are Russian financial companies, as well as other organizations and members of the board of Directors. The participation of Russian capital in the company is indirect and does not have a direct impact on the company. This is a positive fact since it reduces any potential political risks. In addition to this, the number of news items that led to an increase in the Russia discount due to geopolitical concerns has recently decreased.

The Bottom Line

After the boom of retail investors in Russia, the IPO of SPB Exchange was one of the most highly anticipated listings. The increase in financial literacy among the population of Russia and the appearance of popular digital brokerage platforms lead to high interest in investing and trading. The weakness of the Russian rouble created a demand for investment options in foreign currency. SPB Exchange, which was the only platform to trade international stocks, has become the main beneficiary of this growth.

The boom of retail investment wasn't a consequence of the Covid pandemic. It was driven by the evolution of people's consciousness about finance and the growth of digital apps that make investing easy. This leads to a consistent increase in the number of active clients, therefore boosting SPB Exchange's earnings.

Despite the fact that SPB Exchange is 24 years old, it is a young technological company. It has the attributes of a fast-growing company. It showed first profits in 2020, and 2021 is going to be even better (according to the results of the first half of the year). Even though there is no such bull run as in the middle of 2020, earnings are still growing fast. Another positive is that SPB Exchange operates in a niche with low competition and has a solid strategy for future development.

Indeed, there are some risks in investing in a Russian company. Usually, currency risk is an important one. However, SPB Exchange earns a big part of its revenue in USD since the stocks are nominated in USD. Nonetheless, investors should consider political risks (even though the company doesn't have any government structure as a shareholder). Also, demographic risks are important: a high degree of social stratification, a poorer population can lead to a decrease in income in the very long term.

In my opinion, the IPO of SPB Exchange deserves attention. It is a unique story of rapid growth in the fast-growing financial services sector of a developing market. As retail investors become a more powerful force in the stock market, stock exchanges that target this group will benefit.

This article was written by

Gleb Krivosheev profile picture
"Courage taught me no matter how bad a crisis gets ... any sound investment will eventually pay off." — Carlos Slim said. Even though this statement may be true (history shows that in most cases it is so), I am focusing on investments, that will pay off soon. Therefore, most of my articles are about companies that can unlock great potential in the near future.I started investing while I was studying at the university. Since then I was interested in stocks' fundamental analysis and valuation. Having 4 years of experience in the stock market, I decided to share my unbiased view on the market. My area of interest is global companies with decent growth potential and good financial health. Also, I cover some Russian companies, that I personally find good for both domestic and foreign investors. Feel free to contact me via email: gleb.krvshv@gmail.com

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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