One on One with FXCM’s Drew Niv: Death Stars, Rise of the US and M&A

It’s become a quarterly post at Forex Magnates to review highlights of FXCM’s earnings reports and accompanying conference call for details on the direction of the broker and overall industry themes. Yesterday, we also had the chance to chat to FXCM CEO Drew Niv directly where he answered our questions about his company and the industry. While the earnings presentation and analyst call tends to focus on hard numbers and shareholder growth, the one on one with Niv provided an additional opportunity to focus on details that are important for the industry.

Below is a compilation of our interview along with highlights of yesterday’s earnings presentation and conference call. So far, the earnings have had a positive affect on shares of FXCM as they have rallied 8% to a recent $17.72, after hitting an all-time high today of $18.66.

US Volumes Soaring – One area that stuck out among FXCM’s figures was the rise in US volumes. From an average of $93.5 billion per quarter in 2012, during 2013 we have seen Q1 and Q2 volumes at $138 and $148 billion respectively (the Q2 data calculates to roughly $2.2million in monthly volumes per account). This has occurred even as accounts have stayed around the 22,000 level in the country, and FXCM themselves conceded last year that the US wasn’t seen a region of growth for the broker. Niv explained to us, that it has to do with account size, as in the US, Japan, and Western Europe, the average account size has risen 200% in the past two years. Therefore, with such large accounts in place, it provides a base to drive volumes higher quickly when volatility in the market returns.

Profitability – Talking about large account sizes. In the past, Niv had stated in FXCM presentations that they are seeing a correlation between account size and profitability, with their largest segment of customers, showing gains. In relation to cross-referencing Niv’s comments with other brokers, representatives of FXCM competitors have told us that they haven’t seen meaningful increases in profitability based on account size. Providing more details, Niv explained that accounts above the $25-50,000 were considerably profitable. He pinned the performance on the account holders trading in lower leverage jurisdictions, as well as viewing forex as an income producing opportunity, and not a short term ‘gambling’ like product.

M&A, and how to get yourself bought – In FXCM’s earnings slide-deck (see below) there was a bullet point that “M&A pipeline remains robust”. Asked about this in the conference call, Niv answered that “I can clearly tell you, it’s not GAIN specifically, but we are looking at a scale acquisition… in comparable size to GAIN.” He added that “we are talking to a number of parties and we think we are relatively close to a deal with at least one.” He went on to explain that the larger the transaction, the less likely it is to close. However, he added that due to regulatory changes in Europe that will increase capital requirements and compliance expenses, it could be a catalyst to “shake the tree even more.”

Speaking on the subject with Forex Magnates, Niv also raised the regulatory issues, saying that it “will flush out a lot of brokers”, as “there will be lots of margin calls hitting the industry.” In that regard, firms will be looking for exits, whether of their own choice or not. Niv added that FXCM themselves has done due diligence on around 50 brokers the past couple of years and that brokers in lightly regulated jurisdictions like Cyprus or Mauritius, brokers are hiding a lot, and presenting a “mirage to the market.” Giving advice on the best way to get bought, he stated that “put your clients on a generic platform like MT4, don’t bring clients from ‘dodgy’ countries that I can’t accept”. Niv added that the “field is limited to G7 countries”. When asked specifically about OANDA, as their name has come up in pretty much every M&A or IPO discussion, he didn’t believe it would be a good fit, as their customers come to them for OANDA specific features, and wouldn’t scale well with a buyer.

Reading between the lines, it is apparent that FXCM is in discussions with at least a few larger brokers with a considerable MT4 franchise. Creating a short list, Alpari with its known brand and MT4 business makes the cut. Forex Club is another possibility since the two firms have a previous relationship with US clients, provides an established foothold in Russia, as well as Forex Club MT4 its default platform. Other options include the fast growing MT4 Australian brokers like Pepperstone or IC Markets who bring exposure to the hot APAC markets. Other choices could be lesser known but large Hong Kong brokers with active Chinese businesses.

FastMatch and Death Stars – Moving to the institutional side, we wanted to know where FastMatch stood. In previous calls, Drew Niv had been very optimistic about the platform. For those unfamiliar, FastMatch is an institutional forex trading engine that utilizes technology initially created for equities. The main feature is its flexibility as it features both quote and order based books, as well as separate trading rooms for different types of order flow. For 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, the trading rooms provide greater transparency in understanding who is trading, and price accordingly.

In terms of uptake of the platform, Niv told us that usage has been driven by interest from high frequency traders and hedge funds, as well as brokers, of which FXCM Pro prices to around 70 retail firms. In the conference call, it was stated that FXCM still expects several more quarters before FastMatch to breakeven as they have hired more personnel to increase its penetration. With regard to raw spreads, Niv explained that “HFT spreads are substantially higher than what is seen for retail (order flow).”

This answer led to a question about his opinion on ‘randomized’ order executions that were being initiated at EBS and ParFX. He compared these types of products to the Death Star in Star Wars which could blow away the rest of the competition. Niv explained that firms are always trying to create these perfect platforms, which like the Death Star will destroy the completion. However, Niv added that these types of ‘killer’ products are extremely rare in the fragmented trading industry due to players having many different needs, with MetaTrader’s success being unique. In terms of randomized orders, Niv believed that it “has a nitch, and will work well for some but not others.” As one can imagine, he’s a fan of the multiple features that FastMatch provides, but conceded in the conference call that “the institutional business is a tough business, extraordinarily competitive.”

White Labels – White labels are an area that has gotten attention for FXCM as the broker has partnered with the likes of ETrade, Barclays, and Charles Schwab. However, in previous calls, Niv has stated that they are long term relationships and aren’t immediate delivers of profits. About their current partnerships, Niv explained to Forex Magnates that large financial firms view retail forex as an auxiliary product that they can promote in specific periods, such as when stocks are falling or for investors interested in higher yields. He stated that “the tricky part of white labels is that it’s not their core products. So you need to get your priorities, onto their to-do lists.” In terms of the future, Niv pointed out that with Charles Schwab’s OptionsXpress, which was launched two weeks ago, forex is being offering as an integrated solution within the OptionXpress platform. Therefore, traders only require transferring funds between their multi-asset account. He added that a similar integrated setup is being planned to be launched with ETrade Pro in Q1 2014.

FXCM Markets – Launched in April, FXCM Markets is the broker’s new unregulated division. Viewers of FXCM’s Spanish site will notice that it is no longer under the UK entity, but onboarding is through FXCM Markets. Niv explained that they are currently moving their emerging markets customers to the unregulated unit. The changes are based on upcoming UK regulations that will place restrictions on IBs and MAMM operators from receiving trading rebates. One complaint about the system though is that existing IBs have agreements with the regulated entities and are being excluded from being compensated when their clients are referred to the unregulated unit. Niv answered that “we are allowing and encouraging IBs from emerging market countries to sign up with FXCM Markets."

FXCM Second Quarter 2013 Earnings