FXCM is the largest retail Forex brokerage in the world. FXCM does have an institutional business, however what has made it not only the largest but also the most well known Forex brokerage in the world, was its retail business. However, it hasn't been an easy path for the company, as it has encountered many hurdles in a brand new industry.
FXCM's association with defunct fraudulent broker Refco, lawsuits, and even a RICO case have given FXCM a bad reputation. Yet even considering this, FXCM was still able to launch a successful IPO and continue to move forward, now holding the title of the largest retail Forex brokerage.
FXCM is a publicly traded Forex broker capable of capturing the global Forex market better than any other (there aren't too many). The only other publicly traded company that is a pure Forex broker is Gain Capital (NYSE:GCAP). Companies such as E Trade (NASDAQ:ETFC) and Interactive Brokers (NASDAQ:IBKR) do offer Forex, but it is not their primary offering. But Gain Capital has its own set of problems as reflected by the stock price that's trending down.
In our opinion, FXCM is the company best poised on a business level to capitalize on the growth of the retail Forex business on a global level. It has a scalable infrastructure capable of handling new business coming from markets like China. FXCM's knowledge and experience will give it an edge over local competitors.
Some of the bigger opportunities in retail Forex as an industry, are likely to come from emerging markets such as BRICs. The US market has been saturated but even there, FXCM has an edge over other players. Let's discuss first what's going on in the retail Forex industry.
Volume Drying Up
A few unusual things are happening in the Forex market. First, volume is drying up, according to multiple sources. At the same time, a potential Currency War is brewing, including the new government of Shinzo Abe, not to exclude Ben Bernanke, who has led the Fed to increase their assets to record levels.
One might think that Forex volume decreasing means less business for brokers. This is absolutely true. But what it also means is that larger players will be able to assert a larger degree of influence in the small pond.
The foreign-exchange industry will see many brokerages close or be bought out as they struggle to cope with a decline in business, according to Brendan Callan, chief executive officer for Europe at FXCM Inc. (FXCM)
"Small firms won't survive" as low volatility levels cut volume and revenue, Callan said at a briefing in London today. FXCM, an online currency broker, expects to be "very aggressive" in acquisitions, he said.
FXCM is not new to acquisitions. It has acquired many firms either strategically or in some cases, bought the assets of defunct firms.
Most notably, when FXCM acquired ODL group they became officially the world's largest Forex broker.
They've even setup a Venture Capital unit poised to exploit opportunities in Forex specific ventures.
Another factor causing a problem for smaller firms is increased regulation. Many of the newer firms in retail Forex are new to Forex. They may have come from the Futures market or the Stock market, so they are familiar with financial business. However, Forex is completely different than Futures and Stocks from all layers; regulatory, technically, and mathematically.
New regulations impact the Forex market more than others; established well funded firms like FXCM are in a better situation to deal with them. It's a global issue, although regulatory focus has been in the US, European leaders just approved a controversial transactions tax on financial transactions, which will be a big blow for brokers.
Non-Forex regulations also can impact the retail Forex market, such as new banking regulations that will ensue due to the Libor rigging scandal.
FXCM Business Model
FXCM continues to offer traders more products and platforms.
FXCM is set to launch a multi-asset trading platform with cross-asset margining capabilities in March, as it continues to expand its product set.
Company officials say the platform will be offered globally, excluding the US market, and enables cross margining between exchange-traded products, single-share contracts-for-differences (CFDs) and foreign exchange.
"FXCM will offer Phoenix initially to our current customer base of on-exchange traders, yet our primary purpose is to deliver this solution to our institutional partners and prospects that demand this product for their customer base," Brandon Mulvhill, head of sales for FXCM Europe in London tells FXRetail.
This combined with its expansion into emerging markets is a powerful combination. FXCM is already big in China, but that growth is expected to continue.
"We're gearing up for some major growth in China," said Brendan Callan, chief executive of FXCM Europe. "The industry there is starting to change and they seem to be more open to letting outsiders into [the] mainland, which would be huge for us."
FXCM has a horrible reputation problem. There are those that would sell their children into slavery before opening an account with them. They've burned many clients, traders, and partners. That's a hard reputation to over come, as traders maintain the philosophy "Fool me once... "
The liability from the slippage cases and RICO cases still lingers but seems to have been dealt with. Of course there's always the possibility of another big lawsuit, but the consensus is that they've dealt with it, now they can focus on growth.
The stock has been up recently, so if one was considering this trade they may want to wait for it to settle down again.
This trade would be for those who want exposure to the Forex market, and to invest in a leading player. The upside potential considering their financials and other metrics is probably not huge; at least to compare it to recent gains of other stocks we've been covering such as Medical Marijuana (OTCPK:MJNA) that's been up 40% in a month. In other words, don't expect FXCM to double anytime soon. But it looks like a lot more upside than downside.
For traders who like the idea but don't want to tie up their capital or face risks of decline, Call options above 12.50 are quite cheap, priced the same as options above 25 (about .20). Buying a call at 12.50 or 13 would give you upside exposure with limited risk (the cost of the option).