I was looking at AQX, Aquis Exchange, as a possibility of a 100 bagger, principally because AQX’s market cap is around 1/220th of the London Stock Exchange Group (LSEG). However it fails on a couple of Chris Mayer’s criteria, notably current valuation and director sales.
AQX has a p/e 202 and trailing twelve month (TTM) pe of 97.8 !! (but it has only just swung to profit).
I liked the way share-diluted turnover was diverging from direct and admin costs:
I am an ex-holder of LSEG and did look briefly at AQX when it floated the other year. The economics of (successful) stock exchanges are attractive due to the ‘network effect’ of market participants congregating on a single platform.
AQX’s ‘challenger’ business model appears based mostly on subscription pricing rather than the traditional commission-based-on-trade-size model:
The idea is to attract clients through a lower all-round cost. AQX refers to “message traffic”, which is a term I am not familiar with, but I think generally means ‘executed trades’ (Fee schedule → AQX fee schedule.pdf (62.6 KB)):
• Messages relating to posted (passive) liquidity and Market at Close (MaC) are not counted in the allowance. All other message types are counted as chargeable.
• Where an incoming order matches against a posted order that is already on the Aquis Exchange book, the incoming order is counted as aggressive and therefore chargeable.
Cost per month for unlimited trades is £80k or £960k a year. Presumably anybody paying more to the LSE or similar ought to switch to AQX and pay a fixed £960k. But whether AQX will ever enjoy LSE-type profitability with a cap on its fees is unclear to me.
The performance of both Aquis Exchange and Aquis Stock Exchange has progressed well. Exchange revenue increased by £1.2m (33%) from £3.7 million to £4.9 million and the number of Members grew from 31 to 39. In addition, a number of Aquis Exchange Members increased their trading volumes materially, with a 27% increase in the average monthly usage, in terms of chargeable orders (2Q 2021 vs 4Q 2020). This resulted in increased monthly subscriptions. There are now nine Members using the top three subscription pricing tiers and 25 in the other five tiers, with five liquidity providers.
The text suggests eight subscription tiers, which is more than shown within the image above. Assuming the top nine members pay £50k a month = £5.4m a year versus total exchange fees of £4.9m for the latest H1. So AQX is dependent on a handful of larger clients at present… but it is easy to imagine a few more larger clients could really propel revenue and explain the c£180m market cap.
All told, an interesting company, and one I shall cover for SharePad in due course. Thanks for reminding me about it.
AQX is indeed a very interesting company, and one of the more “difficult holds” in my portfolio at the moment given the high valuation vs current revenue / profits.
A few thoughts, in no particular order:
The fact that they’ve gotten to 6% trading share as a brand new entrant within 10 years of launch is stunning and is a testament to the team @ Aquis.
despite this - the one thing that’s been frustrating is the lack of “inflection point”. Originally, it was argued that when Aquis hit 3% market share, rest of the participants will have no choice but to join because of the “best execution” rules. However, this has not happened. It’s unclear if it ever will, or it will be a hard, linear slog to get to 90 partners. Theoretically, given the network effect dynamics and the strong value proposition, it should, but… we all know the Yogi Berra quote.
It’s clear that the subscription is severely underpriced. Right now, they are in “market penetration mode” but they’ve already raised prices and should continue to do so without any trouble. At the same time, as you’ve pointed out, it’s tough to know how many of the customers will hit the top tier.
The marginal cost of servicing additional customer at this point is close to 0, so the fall through to bottom line should be extremely strong, for the core subscription business. This business should hit above 50%+ EBITDA margin at scale.
The part where I’m having the most struggle with is how the business clearly has numerous highly valuable options, but yet it is almost impossible to value them. NEX, the consolidated tape data rev, software revenue, international expansion - there are all clearly multi-million pound revenue opportunities, at high incremental margins, but timing and true magnitude remain unknown.
Overall - it’s clear that Aquis has built out a rare, valuable and difficult to replicate infrastructure asset, and they have plenty of growth opportunities ahead. But obviously - given the valuation, look out below if they have significant missteps. At this point, I’m sort of just “along for the ride” and have put it in “close your eyes and HODL” part of my portfolio, at a weight which will make me happy if it works out, but won’t cost me sleep if it doesn’t.
I think ‘best execution’ is an important point to help underpin future growth. Management on the webinars has implied Brexit and the pandemic have perhaps pushed best-execution matters down the agenda for the regulator (and non-AQX members), but best execution is not going away and eventually the regulator (and customers of non-AQX members) should be asking questions on the subject.
Agree with all your other points. If they can ever get to, say, 10% market share despite pushing price increases through in the meantime then the plan would really be working and the shares could be off to the races.
Absolutely, re: “best execution”. The one slight hitch I see is that this might end up being one of those regulations that’s hard to enforce in practice, particularly because there are so many layers between the end client and the trading venue, and proving “best execution” is often very tricky.
On top of this, very few asset managers care enough about saving the extra 5-10bps in order to direct the trades , at the risk of missing out on liquidity.
To be sure , all of this is just in context of “will they hit an inflection point soon?” The original thinking was that this was dependent on Aquis hitting a threshold on market share, but it seems to be more dependent on regulatory action.
My notes from chat w/ Alasdair below… Echoes what you wrote.
problem we have - it’s more than pure maths. It’s much more about vested interest.
Best Execution is laughable in Europe today because it’s not. I joke and say it’s “Try My Best” execution.
Regulators - focused on COVID and Brexit. Not on MiFID. At some point regulators will come back to it. Esp in Europe.
What is really best execution and is it being achieved. Answer is no.
RTS27 - can look tat data across banks - where they are submitting orders.
You can see - when prices are the same, or even worse, they will still put orders into venues where they can get rebate.
If you are the client - this is disgraceful. Bank is getting paid your flow is being used and you are into benefiting from it.
As we can show and prove that, asset mgmt community is going to start telling the banks where they will place their orders.
Today - dealers - very few dealers tell banks what to do. Most will just give order and banks says - we have best SOR and look at this TCA that we produce ourselves.
This sort of behaviour that goes on in the marketplace.
When is it going to change? Dunno - but at some point, ppl waking up - Aquis is very serious, profitable - and we will continue to grow.
Seen it happen - at Chi-X - we hit 3% and grew very quickly and went to 20%.
Tougher in this market condition, but absolutely no doubt that we will blow through 10% without any problems and hopefully