With a little less than three months after the Swiss National Bank sent the foreign exchange industry into turmoil, there is a duo of publicly listed companies doing better than the rest. At least, if we look at their stock market performance.
GAIN Capital and Plus500 lead the pack when it comes to foreign exchange brokers that are publicly traded. With IG Group remaining more or less unchanged, the big loser of market value as we all know is FXCM Inc.
Focusing on the winners, we have to point out that the market- making capabilities of both GAIN Capital and Plus500 have remained intact from the CHF induced panic which swept through brokers operating on an agency model, like FXCM.
The event uncovered some unforeseen risks on the market for agency brokers who do not take a position against their clients, but instead transfer the open orders onto their liquidity providers.
While clients of these brokers are satisfied that their trades are passed onto the market, agency brokers essentially have become the risk takers with liquidity disappearing from the market after the SNB decision.
GAIN Capital tops the list of major publicly listed brokers whose main focus is foreign exchange. The firm’s value has increased by about 20 percent for the past three months. As a recent announcement by the company highlighted, after the acquisition of Citi Index, the brokerage had over $1.1 billion of client funds deposited as collateral for trading.
With 2014 behind us, we are not focusing on those results as market moving. What matters for share prices is the future outlook, and according to the latest CFTC data sets about client collateral deposits, GAIN Capital was pretty much the only company that gained market share in the U.S. in February.
In addition, recent trading volumes numbers suggested that aside from holding collateral with the broker, its clients are actively trading.
London listed brokerage Plus500 is the second one to add almost a fifth to its stock market value throughout the period. While the company has not reported any details related to the extraordinary CHF rally, the firm did report record profits for the second half of 2014.
Being a market maker, the company has not been impacted by the CHF rally, in fact, it could have profited, just as GAIN Capital disclosed on January 16th.
There’s been a lot of speculation about how rising acquisition costs for Plus500 might impact the profitability of the firm as it started to target wealthier customers, however for now, the company’s “marketing machine” is working rather well. The million dollar question for knowing how Plus500 will perform is for how long the company can continue acquiring new clients.
Contrary to its critics, since the firm was established and listed on the London Stock Exchange’s Alternative Investments Market, it has been growing steadily. Despite some hiccups related to a possible investigation by the U.K. Financial Conduct Authority (FCA) reported last year by The Times newspaper, its shares continued on an upward trajectory.
IG Group has been a solid performer for the past couple of years, rising materially from a year ago, but halting its rally after the £30 million write down it reported following the CHF debacle. The company’s reputation has been somewhat damaged as it chose not to forgive negative balances of its customers, causing a lot of negative press.
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That said, the company has never promised to cover negative balances of its clients. The unfortunate hundreds of customers, who suddenly became on the hook for millions of losses in negative balances, actively engaged in complaining about the way their orders got filled.
With profitability in Europe declining materially in recent quarters, future growth of the firm hinges on its ability to gather new clients from new markets.
Sources shared with Finance Magnates’ reporters that the EUR/CHF fills have been as low as 0.9250 at IG. A few lucky clients got out around 1.1900, whilst others managed to close their positions at 1.1900. The company has not issued any official announcements related to the CHF issue and its clients continue complaining about the way the broker has treated them.
That said, the company highlighted in its trading update for the period until the 18th of February that it expected to provide for the majority of client debts it was owed, totaling £18.4 million ($27.2 million). With about half of the debtor accounts already settled, the firm highlighted that the majority of the remaining debtors were not likely to be in a position to settle their obligations.
It seems that the brokerage has decided to treat the credit obligations on the customers’ accounts on a case-by-case basis.
The company has also begun rolling out its stockbroking platform in countries outside of the U.K. and Ireland. The Netherlands is going to be the first continental European market where clients will be able to take advantage of the multi-asset trading offering, which IG aims to push in other countries by the end of the year.
In its earnings call, the IG Group revealed that its new offering has been well accepted in the U.K. and Ireland. With profitability in Europe declining materially in recent quarters, future growth of the firm hinges on its ability to gather new clients from new markets. Revenues from the firm’s Australian arm gained 11 percent in the quarter ending on the 28th of February.
Turning to FXCM, the story has already been widely covered. The company’s shares have lost over 80 percent during the past three months and traded below $1.30 in the aftermath of the announcement about a $225 million loss which was the initial estimate.
The direct result from the SNB turmoil prompted FXCM Inc to turn to Leucadia National for a bailout. Taking in $310 million including charges, the firm has now about two years to repay the loan with draconian interest rates reaching up to 20.5 percent attached to the deal.
The terms of the loan the company got were deemed unfavorable and painted a gloomy picture for shareholders of the brokerage. In order to repay Leucadia, FXCM Inc has started selling its assets. The first major deal announced was the broker’s Japanese unit.
After managing to sell FXCM Japan for about $62 million to Rakuten Securities, with $22 million already part of its capital buffer, FXCM has made its first big repayment to Leucadia. Rumors about the sale of the firm’s Hong Kong unit and the institutional arms, Lucid and Fastmatch, are already circulating across the industry.
Investors in the company’s shares will continue to worry that it won’t be able to raise enough funds to survive. Under the terms of the agreement with Leucadia National, the shareholders of FXCM will get little to nothing from a sale of the company.
This might be one of the main questions closely tracked by industry insiders in 2015. Will FXCM be able to survive this, and how?