DAX and Index CFDs Hamper GAIN Capital and FXCM Q2 Earnings

Both GAIN Capital and FXCM cited problems in June from market making of index CFDs which erased strong operating results

Back in May, during GAIN Capital’s Q1 conference call, CEO Glenn Stevens was asked by analysts about the profitability of CFD versus forex products. Answering, he stated that overall CFD volumes are expected to be more profitable than forex, but singled out index CFDs, and specifically the DAX and FTSE as less positive due to being a more competitive market. That statement ended out being prophetic, as again on a conference call, Stevens was speaking about difficulties with the DAX.

With both GAIN Capital and FXCM issuing their Q2 financial reports last Thursday, today we take a closer look at some of the additional details provided in the analyst conference calls.

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GCAP Conference Call

DAX and other index CFDs cause $20 million hit – Within their Q2 financial statement last week, the figures were headlined by a $8.8 million loss due to “unusually adverse trading conditions across indices”. Following up in their conference call, CEO Glenn Stevens provided some more details about their Index CFDs as he stated the quarter wasn’t a good period for market making. He specifically cited the DAX as being the biggest culprit, but refrained from stating how much of the $20 million loss was due to the DAX.

GTX – With 360T acquired by Deutsche Borse, and Fastmatch close to being sold, Stevens used the call to speak about his company’s GTX institutional FX ECN. Stevens stated that “Our GTX institutional ECN is growing faster than our peers and people following along can see that there’s several recent transactions valuing very similar businesses at very strong EBITDA multiples of 15 times to 20 times. If you look at the sum of these parts, it creates an attractive value opportunity.”

Breakeven EBITDA of RPM in the low 70s – Elsewhere in the call, Stevens noted that the synergies with City Index as well as other cost reductions has decreased their breakeven level of EBITDA. While in the past GAIN had expected breakeven to occur in the mid-80s of revenue per million (RPM) dollars of retail volumes, they are forecasting the number to drop to the low-70s in the future.

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FXCM Conference Call

Index problems – Like GAIN Capital, FXCM had to explain its own RPM decline. During the quarter, retail revenue capture at FXCM plummeted to $54 from $60 in Q1 for their continued operations. CEO Drew Niv explained that CFDs were the culprit, and that prior to the losses in June, CFDs were providing $5-$6 million in revenues for April and May.

STP for CFDs – The problems FXCM faced with their CFDs was due to market making losses. Interestingly, Niv cited that the broker had been in the process of moving towards STP for its CFD business but that was delayed due to January’s SNB move and Swiss franc volatility. Overall, Niv believes that with the move to STP, CFDs could be a $100 million revenue business for FXCM.

FXCM Retail revenues per million dollars traded (source:FXCM)
FXCM Retail revenues per million dollars traded (source:FXCM)

Dealing desk to near 25% – While FXCM believes they could have avoided the type of problems they had with CFDs in June if they were operating an agency STP business for them, it is worth noting that in forex they are increasing their market making. The shift to market making was a response to negative balance losses from the Swiss franc that could have been partially mitigated with a dealing desk model. In this regard, FXCM stated that dealing desk order flow had reached to 10% of their June retail customer volumes. The shift to more dealing desk flow is an important one for FXCM, as Niv stated RPM is around $90 for these volumes. Dealing desk volumes are expected to grow in the future, but Niv stated that it won’t surpass 25% of overall retail trading.

Asset sales and Leucadia debt – Within the conference call, Niv stated that they had repaid Leucadia Financial $81 million and expected the figure to top $100 after the sale of their Hong Kong unit to Rakuten is finalized by regulators. Overall, Niv said that the entire loan is expected to be covered by the end of the year. Niv stopped short of citing what and when will be the next asset sale, but in their analysts presentation, the sale of their 35% stake in Fastmatch was described as “In Final Stages”, while Lucid was stated as “Process Underway.

One last note – With both GAIN Capital and FXCM citing problems with market making CFDs in June, it will be interesting to see how IG performed.  The broker recently reported their Annual Report.  However, figures were for the period ending May 2015, and excluded the difficult June month.


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