Will Old Rivals GAIN Capital and FXCM Bid for CitiFX Pro?

CitiFX Pro’s anticipated exit from the retail market, published exclusively by Finance Magnates, is both an indication and a factor in the aftershock of the SNB flash crash the market is still enduring. In this analysis, we will explore the options for a deal and attempt to assess what the possibilities are for Citigroup’s retail unit going forward.

Ever since major banks have attempted to make their way into the retail foreign exchange business, their efforts have been somewhat wanting.

Anyone looking to acquire PoP entities will need a significant capital base – Andrew Ralich, CEO of OneZero

Deutsche Bank ventured into this space in 2006 with dbFX, operating as an FXCM white label, but after five years the bank decided to shut down the unit and sell its client base. The taker was not, as one might have expected, business partner FXCM, which provided Deutsche with a trading platform, but rather rival broker GAIN Capital.

Barclays had also partnered with FXCM back in 2012, to launch Barclays Margin FX – an enterprise that closed in early 2014, and clients were given the option to migrate their accounts to FXCM.

Now, with the impending exit of Citigroup, considerably the most stable player in the prime of prime space, the two NYSE-listed firms emerge again as likely bidders.

Saxo Bank could also be a good fit for the asset, being CitiFX Pro’s white label and eyeing high net worth accounts such as the ones Citigroup’s retail arm holds. However, given various market estimations according to which as much as 70% of CitiFX Pro’s clientele come from the U.S., it would face a regulatory hurdle.

Therefore, while European clients could opt for a local player, most notably Saxo Bank themselves, it seems that the US affiliation keeps only a handful of companies in the race.

Defying Black Swan Black Swan A Black Swan event is most commonly associated with an unforeseen calamity or event. In its most basic form, this event results in disastrous consequences for multiple parties, markets, or individuals and are characterized as extraordinarily rare in frequency, yet are seemingly predictable in retrospect. In the foreign exchange space, the most noteworthy of these events in recent memory was the Swiss National Bank (SNB) crisis which roiled currency markets back on January 15, 2015.During this in A Black Swan event is most commonly associated with an unforeseen calamity or event. In its most basic form, this event results in disastrous consequences for multiple parties, markets, or individuals and are characterized as extraordinarily rare in frequency, yet are seemingly predictable in retrospect. In the foreign exchange space, the most noteworthy of these events in recent memory was the Swiss National Bank (SNB) crisis which roiled currency markets back on January 15, 2015.During this in Read this Term impact?

If it wasn’t for the 15th of January’s black swan clearing the acquisition power of FXCM, the global broker would have easily come to mind. In fact, even now some industry insiders believe that the company may turn out to be the taker of CitiFX Pro’s book, attempting to demonstrate strength.

While the possibility remains remote, it should be noted that the companies are already tied together into a clearing arrangement. Provided that Citigroup is flexible enough, a deal based on future earnings may still be in the works with FXCM.

However, FXCM’s inclination to only buy brokers with MT4 accounts, stated by FXCM’s CEO, Drew Niv in the past, should be taken into account. CitiFX Pro’s MT4 volumes are estimated by Finance Magnates at 20-25% of their total volumes, so FXCM may not be as interested since it would mean they couldn’t easily transfer the accounts to their dealing servers – and would need to operate a new one to handle CitiFX Pro.

Whoever buys Citi’s book will have client attrition issues - Paul Towne, BBFX

Boosting UK asset list

Under current market conditions, the strongest candidate seems to be GAIN Capital. Despite the recent acquisition of City Index last October for $118 million, the company can well add another solid asset to its UK shopping list. In fact, reporting GAIN Capital’s last quarterly earnings call, CEO Glenn Stevens stressed that the firm could pursue more acquisitions, provided that the conditions are right and early valued deals could be found. From what Finance Magnates understand, one such deal is about to take place or be announced soon.

All of this coincide with Gain’s strong standings after the SNB flash crash. While the market turmoil hit the whole industry hard , it actually made a profit. The company seems to be robust, and its share price jumped 20% since January.

For an acquisition to involve GAIN Capital, the company will be committed to get a good price for CitiFX Pro. This will will largely hinge on just how low Citigroup is willing to go to get rid of a unit which has proven to be on the risky side of the company’s balance sheet.

GAIN Capital and FXCM have dedicated institutional arms to accommodate CitiFX Pro’s clients

While not being the first bank to offload retail forex business, Citi’s assumed sale takes place in a new, post-SNB reality. The crisis has led to a “staggering shift in terms of Prime Brokers appetite for credit risk,” according to Andrew Ralich, CEO of OneZero, technology provider for the forex market.

“Many Prime of Prime Brokers will either need to raise capital in order to maintain their existing costs and credit conditions or look for strategic options,” he added. “Anyone looking to acquire Prime of Prime entities will need a significant capital base to cover the new requirements (from Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term providers).”

IB's Respective

While no formal announcement has been made, CitiFX Pro's partners are weighing in the situation. "Whoever buys Citi’s book of business will have major issues with client attrition," said Paul Towne, President of the US-based Introducing Broker BBFX whose clients trade with the bank's retail unit.

"The clients at Citibank have had access to a suite of trading conditions that other US-based RFED’s are not able to, or are not willing to offer. We have an existing book of business at Citi comprised of clients that are there for specific reasons."

As for his own approach to a sale scenario, he added: "after Citi sells their book these clients may not like the other options available in the market. We have a few solutions that we are working on to help our Citi clients find their next best option, but are also playing the waiting game much like the rest of the industry."

Other contenders?

What about other companies in the U.S. who are looking for acquisitions? OANDA comes to mind, as they stated to be the lookout for new business after the SNB event. However, the company has not been notorious for making direct client acquisitions and rather prefers organic growth.

In addition to CitiFX Pro being focused mainly on big retail traders and small institutional clients, the customer profiles might not be the most appealing to the company.

In contrast, GAIN Capital and FXCM have dedicated institutional arms which could comfortably accommodate CitiFX Pro’s client base. Can the old rivalry between GAIN Capital and FXCM return only for a single deal and in such contrasting market conditions?