Assessing the True Value of GAIN’s Purchase of FXCM’s Client Base

What does GAIN Capital's purchase of FXCM's client base mean for the group moving forward?

What can be said about the FXCM fiasco has been said, however I must have my penny’s worth of input as it’s too big a story not to contribute to. The real fiasco started with the Swiss National Bank’s (SNB) move on the CHF back in January 2015 and the huge losses that FXCM suffered.

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Back then FXCM forgave approximately 90% of its clients who incurred negative balances in certain jurisdictions. In effect the writing was on the wall then but all fans of the FX industry and admirers of FXCM, of which I was one, hoped that it could pull through and regain its position as industry leader. The real hurt was from the letdown and being misled by FXCM – even I believed that they were running a clean STP model.

I did at times question how could they be making so much profit on an A book model when they would only be making profit on spread only. The big profits are made by the B Book operators like CMC Markets, IG Group, FXPro etc. My question about the profits was soon discounted and explained to me by my peers and industry experts as a poor question. I eventually submitted due to their superior knowledge and expertise and dropped the enquiry.

GAIN’s purchase

GAIN Capital has made a conditional purchase of FXCM’s client base at $500 per client payable as long as the client trades within a 173-day period. This is a great deal – GAIN has a very good market name and reputation and has proved over the years that it knows what it is doing.

CityIndex purchase

Recently, GAIN also bought the CityIndex brand in order to consolidate its position in the UK spread betting and CFD market. The price here was more than $118 million and GAIN Capital has not yet made CityIndex profitable. Given time, I feel that it will turn around CityIndex as it is looking to take on the big players like IG and CMC.

GAIN is also making serious inroads on the acquisition trail, with the patience and perseverance that is characteristic of the business model at GAIN, i.e. acquiring brand names to help grow its market share in a tighter regime.

FXCM clients: active and dormant 

With the conditional purchase of the FXCM database, GAIN had nothing to lose. There is no upfront payment and only once the client has become active does a payment become qualified. The real value here is not only in the active clients but also in the dormant clients.

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GAIN has the right team in place and has the ability to maximize the active and dormant clients. The cross selling opportunity is as significant as the CityIndex brand and  the GAIN brand can now offer all these databases a wide array of products .

How to approach the clients 

These clients will want to see a strong brand, stability, and security of funds as well as someone to contact. Clients who are going through a company change or poor experience will be even more cautious in translating business with a new firm. However, in this respect GAIN has the name and brand to secure these clients’ attention.

There are however risks that are possible, even in this situation, for GAIN. The chasing period and prospecting period that begins now is a test to its efficiency on sales and hitting the numbers daily.

Other firms 

All other players and firms are now chasing the clients that are known and the IBs that gave their business to FXCM. If those IBs for example are wooed by other firms then GAIN will have a challenge to convert the FXCM clients over. Most clients are loyal to their IBs as I have seen over the years .

That leaves the non-IB clients which also means other firms will be looking for them. The deal for GAIN is that it has a head start. If this head start is not capitalized on then the advantage will be lost very quickly.

GAIN could turn this exercise into a major dormant client success and have a big jump in its volumes if handled correctly. On the other hand, if not applied with the right focus, targets and enticements, the FXCM clients will walk.

All firms are looking for that new client. The global market place is very tight and firms are looking for new regions attract clients.

Overall, the market place is consolidating. FXCM has caused significant reputation damage to the FX and CFD marketplace and probably ranks high up there with the other names that have fallen due to mismanagement and fraud. The industry needs to be more caring about the image and awareness of client needs. Too many bad headlines and too many bad client experiences just make the job harder for the fair players.

This article was written by Meir Velenski, CEO of Velenski Financial Group.

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