Welcome to December. I would say, “Welcome to lower holiday activity,” but stranger things have happened in the forex industry during supposedly “quiet” months, like in December 2012 which was marked with M&As. So we’ll just roll with whatever the month brings.
FX Fines and Increased Costs of Doing Business – Perhaps the story of the month was the $3 billion in fines that was levied by the global financial regulators, including the UK FCA and US CFTC, against banks for their role in manipulating FX fix prices. The penalties marked a greater-than-one-year investigation into numerous banks and trading venues about collusion among traders and the lack of compliance staff to monitor their staff correctly, even following complaints from clients. In terms of the industry, the primary effect of the investigation and penalties isn’t the $3 billion firms will be paying out, but the increased scrutiny FX trading desks will be under by regulators and clients. In addition, further criminal charges and customer class action lawsuits could push the final payments banks will be paying well above the $3 billion mark.
Beyond the payments, where banks may really suffer is with the above-referenced regulatory scrutiny. As part of the settlements, firms will be required to enact compliance procedures for monitoring trader activity. These extra costs come at a time when margins on FX related trading among banks have been contracting due to increased competition created by electronic trading. Therefore, the trend of banks scaling back their proprietary FX dealing and accompanying risk taking should continue to take place with more incumbents slashing their market-making exposure and reselling liquidity from other sources. In terms of 2015, sources have indicated to Forex Magnates that this is one of the major trends unfolding within the institutional market, as primary dealing banks are being replaced by regional providers and non-bank market makers.
Volumes – November was marked by brokers and trading venues reporting their October volumes. On the whole, October activity was off around 5% compared to September’s year high of FX volumes. Nonetheless, compared to the first eight months of the year, October’s trading was robust with several venues hitting record trading days in the beginning of the month. Expectations are that, despite the lack of major events to trigger currency wide volatility like in September and October, November’s trading is believed to have stayed firm. As such, the back-to-back months may have been able to save the year for many brokers. A result of the volatility increase is already being seen in broker valuations, such as when FXCM stated during its Q3 financial results that it isn’t counting on M&As to bolster company earnings in the near term.
Filling the Gap Between Brokers, LPs, and ClientsGo to article >>
Funding for IPOs – Speaking about those valuations, while not a merger nor acquisition like October’s headline news story of City Index being purchased by GAIN Capital, during November we had an array of funding stories. Reportedly, new funding during the month was eToro which has been linked to Russian and Chinese investors. With the firm on the short list of brokers aiming to go public, the new funding may have been strategic and connected to expansion projects of eToro into China and Russia. In October, eToro launched ruble and yuan trading which was being directed at the firm’s growing client base in Russia and China.
Choosing to tap the capital markets was Saxo Bank, which sold €42.5 million in corporate bonds during November. The firm cited that the funds were raised to increase their capital ratios well above regulatory requirements. At a 9.75% yield, the bonds appear a bit pricey in the low interest environment we are currently in. As such, beyond just providing a cushion to their capital requirements, the bond sale may have been an opportunistic funding raise to increase their available funding as they seek to initiate several different growth activities with a possible IPO on the horizon.
Not on track for an IPO was news that a new trading related business, backed by Israeli investor Moshe Hogeg, had purchased Invest.com for $5 million. Details of the upcoming venture have yet to become public, but the domain sale reveals that investors continue to see opportunities in the online trading sector.
London Summit: During November, Forex Magnates presented its flagship London conference event. If you missed the many other stories covering the event, this is a quick recap. Over 1,000 industry professionals attended the forex conference with representatives from retail brokers to the largest banks in the world. The name of the game was networking. I like to think that new business gets done with people you want to have a beer with since you are comfortable with the other party on a relationship basis. Beyond the networking opportunity, the event was a microcosm for the industry featuring numerous trends and new products.
Other notable stories and products launched during November:
- Hello Markets gains CySEC regulation as it aims to provide a licensed platform for its binary options brokers partners.
- Magick signs with Atom8, marking its first broker partnership for its cloud-based automatic trading services.
- Among interesting fintech related headlines, Goldman Sachs led a $15 million round in Kensho, a machine learning investment platform competing with stock analysts.
- 24Option revamps 24FX forex broker offering with new technology provider as they partner with PandaTS.
- Software AG and Fluent Trade Technologies partner to roll out a new FX surveillance software and feed handler targeted to prime brokers and buy-side funds.
- Integral launched FX Yield risk management platform as they bolster tools for market-making, redistributing liquidity and monitoring client order flow.