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Q3 2013 Results Earnings Call

November 07, 2013, 08:15 AM ET


Jaclyn Klein - Head, Corporate Communications and Investor Relations

Drew Niv - Chief Executive Officer

Robert Lande - Chief Financial Officer


Ken Worthington - JPMorgan

William Katz –Citi

Patrick O’Shaughnessy - Raymond James

Michael Adams – Sandler O’Neill

Howard Chen - Credit Suisse

Lee Jagoda - CJS Securities


Good day, ladies and gentlemen. And welcome to the FXCM, Inc., Third Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder this call maybe recorded. I’ll now introduce your host for today's conference, Jaclyn Klein, Head of Investor Relations. You may begin.

Jaclyn Klein

Good morning. And thank you everyone for joining us this morning for the FXCM third quarter 2013 earnings conference call.

Joining me today are Drew Niv, FXCM’s Chief Executive Officer; and Robert Lande, our Chief Financial Officer.

A live audio webcast, a copy of FXCM’s earnings release, which was sent earlier this morning and presentation slides used during the conference call are all available at under the Investor Relations tab. A replay of this conference call will also be available later today on our website.

Before I turn the call over to Drew I would like to remind everyone that in today’s remarks, we will refer to certain non-GAAP financial measures, including adjusted pro forma EBITDA, adjusted pro forma net income and adjusted pro forma net income per share.

These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings release on the Investor Relations portion of our website.

As usual, this call is intended for investors and analysts, and may not be reproduced in the media in whole or in part without the expressed written consent of FXCM.

Before we begin we would like to remind everyone that the remarks and responses to your questions that we provide today may contain forward-looking statements. These statements do not guarantee future performance and undue reliance should not be placed on them.

These statements are based on current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated in any forward-looking statements, including those identified in the risk factor section of our annual report, Form 10-K filed with the SEC and available on our website. Such factors may be updated from time to time in our SEC filings and FXCM assumes no obligation to update any forward-looking statements.

And with that I would like to turn the call over to our CEO, Drew Niv.

Drew Niv

Thank you Jaclyn and good morning everybody.

Let me take you through our earnings presentation on slide three, to give you the highlight of the quarter. Revenues were a $113 million, which was slightly lower than the same quarter in 2012. Pro forma EBITDA of $33 million was down 11% and pro forma EPS was $0.13 per fully diluted share, down 24% from the same quarter last year and our GAAP EPS showed a loss of $0.15 a share. This figure includes a $15 million reserve established for a long standing regulatory matter in the United Kingdom relating to certification processes prior to 2010.

Our revenue and EBITDA results reflects the reduce trading volume we saw in the quarter. Revenue per million remains steady at $89 per million which is consistent with our recent performance. Despite the muted trading environment the company continues to generate significant cash. We generated 45 million in a quarter and our nine months figure of a $140 million is more than double what we did for the same nine months of last year and is already 33% higher than the cash we generated in all of 2012.

When you combined our continued ability to generate cash from operations, cash we have on our balance sheet and cash available to us via our ongoing credit facility we have $577 million in liquidity. This gives us significant flexibility to pursue acquisitions as well as to continue our practice of returning cash to our shareholders.

Turning to slide four, we see two measures for the trading environment for FX over the last five years. Both charts clearly show a five year decline and volatility conditions hit historic lows like last year before rebounding in the first half of this year. In July volatility plunged and continue to slow in August and September, September was worse than August going back to levels we saw at the end of last years.

You can see on the right hand side key pairs such as euro dollar hit multiyear lows and volatility in the right hand chart show the daily highs and lows which most of our clients use for most of our clients trading today. In the same chart you’ll be able to see, we don’t display here obviously for yen and euro and yen are the two top pairs that our clients trade in, that the market's overall trade.

Market conditions go up and down as both of those grabs clearly show and we’ve never had any control over them. We have however increased with scale and diversification made our business less sensitive to these markets flows. We have consistently generated strong cash flow across periods of rising and falling volatility. When trading conditions are favorable we can deliver strong organic growth. If conditions drop we look for opportunity to expand our platform through acquisitions.

On slide five for the retail FX business we see our key quarterly metrics. Our retail average daily volumes dropped 16% in Q3 from record results we saw in Q2, but even with volatility figures back to 2012 lows our Q3 results exceed all but the first quarter of last year, an indication in benefit to scale and diversification our retail dollar per million remained steady. Our DART’s and total volumes similar to our ADV figures came down from the highs we saw in Q2.

Moving on slide six we see results for our institutional business. We have made steady progress over the last five quarters building our institutional business that continued in the third quarter despite decreased trading overall. Results from our listed subsidiaries were more consistent with the overall drop in trading volume. A short survey of comparable trading venues like ICAP which is the UBS platform CME and Reuters saw similar sequential decline. Lucid tends to outperform in periods of high volatility and under perform in periods of low volatility.

Turning now to slide seven, October was pretty much an extension of the trends of the third quarter. Although I'll mentioned that we did outperforms some of the processes by quite a bit CME and UBS who already reported for October had volumes down 22% or 17% respectively in October, relative to September. Retail trading volume of $315 billion was 11% higher in September and 3% lower than the Q3 of last year, sorry Q3 of ’13.

Retail ADV of $13.7 billion was 1.1% higher than September, but 7% lower than Q3. We added 1,913 active accounts, so 1% from last month and year-to-date active accounts are now up 8%. Retail DARTs were 1% lower than September and 9% lower than Q3 average.

On the institutional side our $176 billion of volume was 3% lower than September and 8% lower than Q3 average and we did $7.7 billion a day of institutional volume in October, 10% lower than September and 11% lower than Q3 ’13.

November has picked up a little bit. Last few days of October and November have seen a pickup in the pace. It’s a little bit too early to say if that's sustainable is that going to continue or move upwards.

On slide eight, I like to give you an update on our M&A activity. We did three transactions in the third quarter. We purchased a controlling interest in Faros Trading. Faros is a leader in market intelligence coverage and execution services for institutional foreign exchange firms and continues our investment in larger institutional platform. Faros particularly covers a lot of the institutional buy side customers that we have not serviced.

As most of you know we previously talked about our institutional business we mostly service the low touch electronic only customer Faros services. The other side of the scale where there is more of the high touch, either voice or electronic trading execution but sort of the higher touch higher commission, lower volume but much higher per million and that we saw as a good fit, not only because we don't have it, as a good thing to bring up our dollar per million in our institutional business.

We also took over the U.S. accounts from Alpari, another broker leaving the U.S. market and that gave us about 2600 extra tradable accounts for the month of September. Although that does not show up in the October results, October result organic.

And finally with the principles of Lucid we acquired a note in Infinium Capital Markets. Infinium is an electronic market maker in commodities and foreign exchange. Lucid and FXCM are exploring the possibly of expanding into markets adjacent to the FX market that Lucid currently operates in.

In addition to these small transactions we continue to review a range of potential transactions including significantly larger deals. We have demonstrated over the years a practice of identifying accretive transactions, closing them and successfully integrating into our platform.

As I mentioned before, one upside to lower volatility has historically been increased M&A activity with the significant liquidity we have available to us and the advantages of having publicly trading stock. We believe we are in a position to continue our track record of expanding our platform through acquisitions.

And I would like to sort of emphasize that although we have had in Q3 one retail acquisition of accounts and two institutional acquisitions, our pipeline currently is only retail. And so that’s the deal people should be expecting going forward.

With that I would like to now turn it over to Robert who will take you through the detailed financials.

Robert Lande

Thank you Drew. Turning to slide nine I thought I would take a few minutes to talk a bit about the positive cost story at FXCM before going through results in detail. The table on this slide shows our key operating cost at FXCM for the past four quarters and you can see we have done a good job at keeping a lid on cost.

Looking at just the differences sequentially in Q3 versus Q2 of this year our operating cost declined $3.5 million or 6% from the $62.8 million last quarter to $59.4 million this quarter. Comp and benefits declined 5% or $1.3 million from $24.5 million last quarter to $23.2 million. Advertising and marketing was $148,000 or 2% higher this quarter than last quarter but you can see how we brought advertising from the $7.4 million, $7.5 million per quarter levels of last year and earlier this year.

Communication and technology was up $346,000 or 4% from last quarter to this quarter but note that this quarter had an $800,000 one-time item in communication and technology and without that it would have been $9.3 million or 5% lower sequentially for the quarter.

Trading costs on brokerage fees and clearance fees declined in the quarter due to lower level of activity and G&A declined just under $500,000 sequentially or 4% from last quarter.

So with that as backdrop let's turn now to slide 10, with our income statement for the three and nine months. Starting with the three months on the left hand side, retail trading revenues were up 2% versus the same time last year to $87 million. Volume in Q3 ’13 was up 14% to $980 billion versus the same time last year. But revenue per million of $89 per million was down 10% from the $99 per million of Q3 ’12. Q3 ’12 of last year did not have all the yen trading that we still have and which has driven our revenue per million to the high 80’s which we have been seeing this year.

And Q3 ’12 was also particularly strong quarter in our CFT business which together with the less yen trading put revenue per million at $99 per million. Institutional trading revenues were down $3 million or 12% from the same time last year to $22.9 million. FXCM Pro our in-house institutional platform recorded $5.3 million in revenues, up $1.6 million or 44% from the same quarter last year and reflects the steady progress we've been making in the institutional business.

However this was offset by Lucid revenues seeing down $4.6 million or 21% to $17.6 million. As Drew discussed earlier, Q3 was a tough quarter for all the main venues that Lucid trades on, UBS, Reuters, CME et cetera. However it is good to see that even so they generated $12.7 million in EBITDA or 72% EBITDA margin in the third quarter as Lucid always keeps a tight lid on cost.

Net interest income was down 49% to $474,000 reflecting the tough interest rate environment. Other operating income was up 1% to $2.9 million and that leaves us with net revenues of $113.2 million versus a $114.9 million, down $1.7 million or 1%.

Referring broker fees were $2 million or 11% higher Q3 ’13 versus Q3 ’12. Referring broker fees this quarter were 23.8% of retail trading revenues, pretty much in line with the 46% of indirect volumes we recorded for the quarter. Last year referring broker fees were only 21.9% as that was a good quarter for the mix of referring broker volumes in that quarter.

Turning now to expenses you can see that in total we had $59. 551 million Q3 ’13 versus $59.048 million Q3 ’12 an increase of $503,000. Higher comps and benefit in communication and technology was pretty much offset by lower advertising, trading cost by brokerage and clearing fees and G&A which leaves us with EBITDA down $4.2 million or 11% where $2 million of that $4.2 million is from higher referring broker fees, $1.7 million from lower revenues and $500,000 from higher operating cost.

Depreciation and amortization was up $1.1 million or 10% to $12.9 million due to our higher level of fixed assets. In Q3 ’12 we now have a full quarter of the convertible bonds interest at $2.9 million which we did not have last year. Income taxes were $5.1 million or a 29.7% effective tax rate versus 30.4% the same time last year. I had mentioned on a previous call that you would see a step down in our effective tax rate. And minority interest was down 44% to $2.5 million due to lower income from Lucid.

Average shares outstanding was 2% higher to 76.4 million shares. Drew had mentioned on the last call that at a minimum we were going to buy enough shares to keep the share count flat accounting for stock option exercises and I think you will see us pick up the pace of share repurchases this quarter to achieve that goal.

With the lower EBITDA mostly from higher referring broker fees, higher interest expense due to the convertible and higher average shares outstanding EPS for the quarter was $0.13 per fully diluted share versus $0.17 for same quarter last year.

Turning now to the nine months, I do not propose going through all the details but I think most of you are pretty familiar with the results of the first half of this year but I guess it's worth pointing out some of the highlights, that even with this relatively weak quarter when you look at the nine months of this year net revenues are still up 25% to $311.8 million, EBITDA is up 58% to $131.3 million our net EBITDA margin of 42.1% which was pretty much our objective that we set last year and EPS is $0.60 per share $0.66 per share, up 47%.

So it's been a solid year so far and I think you’ve all been able to see in Q2 of this year in particular with the relatively fixed cost structure how higher incremental margins are and how this [current thinking] can generate a very high level of profitability if trading conditions are half decent.

And that’s without even getting into the impact of improved interest rate which most of you know as well, should that happen at some point.

With that let me turn to the balance sheet on slide 11. I do not propose going through everything here but some highlights. First the obvious is our cash and cash equivalents are up a $49.6 million this year and it's been a very strong year of cash generation and I’ll talk a bit about on the next slide.

When we did the convertible as well which raised a $145 million net of the hedge, although we paid back $85 million that we were drawn on the credit facility and part of the Lucid $22.9 million note payable. So really net the convertible only added about $50 million of the $149.6 million increase in our cash. Another highlight is Q3 was a good quarter of growth in customer equity, shown as customer account liabilities on the balance sheet. As many of you know customer equity has been flattish this year primarily because Japanese customers with some $400 million in customer equity in dollar terms at the beginning of this year saw their customer equity decline some $100 million due to the devaluation of the yen, again in dollar term.

But in Q3 we resumed growth in customer equity and now are 6% higher than in the end of last year and if the Japanese yen did not devalue this number in dollar terms year-to-date would be more like 15%.

In total we are very proud of our balance sheet and the strength of it, with $638 million in shareholder equity, $421.9 million of our own cash and fully undrawn on our $155 million credit facility our balance sheet has plenty of liquidity and strength to accomplish pretty much anything that we need.

Turning now to my last slide, slide 12 before turning things back to Drew. This is a slide I started showing last quarter and I think is a good summary of just how strong the cash generation of the company is. This quarter we generated $46 million in cash flow which brings our year-to-date total to a $140.8 million. That is as Drew mentioned 38% higher than the full year last year where we generated a $102 million in cash.

Our capital expenditures year-to-date are in fact should be in the low 20 for the full year leaving us with a $124 million in cash flow after capital expenditures. The box on the right side gives you all the details on our cash. And it's probably worth point out once again looking at the box under the graph of the non-cash charges in our income statement that year-to-date there are some 47 million in non-cash charges.

Depreciation and amortization year-to-date is $37.3 million and equity based comp is $9.9 million. So with that I will now turn things back to Drew.

Drew Niv

Thank you Robert. To summarize things on slide 13, we believe that we delivered solid results despite a muted trading environment in the third quarter. This is a direct result of the investments we’ve made in scaled diversification as well as the ongoing expense discipline.

Our cash flow continues to be strong with over $422 million in cash, $155 million in available credit. We have the fire power in place to make meaningful acquisition and this should be particularly true should low volatility conditions continue.

I’d like to say that we said last quarter Q2 was our best quarter in a long time so that was sort of a showcase quarter of what happened to our margins and what happens to our cash generation when trading conditions become more favorable. And this quarter obviously was not the showcase quarter for that as trading environment was not so good but this quarter showcased it but even in a fairly dire market condition FXCM is still profitable excluding the one-time reserve and FXGM generates lots of positive cash flow and we think is a very strong and healthy company that can endure lots of different market conditions.

And I will now turn the call back over to Jaclyn.

Jaclyn Klein

Thanks Drew. Operator we are ready for the questions now.

Question-and-Answer Session


(Operator Instructions). And our first question comes from Ken Worthington of [JMP] Morgan. Your line is open.

Ken Worthington - JPMorgan

Hi, thank you. First kind of on just the market conditions, Drew you always have a kind of a very interesting view on how things will shakeout. So volatility is poor rate now. Talk about how you see the outlook for the FX market, pick your time period over the next year or so. And I see that low volatility is not unprecedented and we have seen a pretty steady decline of volatility since the early credit crisis.

So I guess, what are your thoughts about the malaise continuing and then outside of acquisition which you have highlighted kind of one of the opportunities in the malaise. How do you think that FXCM should operate if this continues for another three to six to nine months or so?

Drew Niv

Yes, thank you, Ken. I think if I just may take the second question first and I think we sort of said this in 2012 that we hope for the best, plan for the worst and if market conditions continue like this then we obviously will be more aggressive in our cost cutting. As Robert showed we show, we've been very disciplined in trying to hold down cost but we’ll get more aggressive in cutting those costs and we’re doing some cost cutting and you will see that in the next six months.

But I think that if this continues we’ll definitely do more and that is something that we’re very keen on doing. And I think a lot of it, as I said obviously it’s very likely the regulatory changes have been going over the last few conference calls and the muted trading conditions that M&A is going to be a fairly important element of this, want to continue to grow and to be able to cut cost, synergies between two companies.

On market conditions again sort of my personal opinion and I think it’s an opinion that’s shared by a lot of people is that volatility has declined primarily because of the QE and zero interest rate and I think that if QE continues on strongly and we don't have tapering then we are likely to continue in a low volume environment, short of other exogenous factors that may unravel in the market. But at the moment as we saw in the first six months of this year when you started having speculations for QE that so many trillions of dollars of assets around the world are betting on easy money going forward but the entire investment spectrum has to completely change around in almost every asset class. So much money has to move that it can’t be that there won’t be lots of volatility when that happens.

I believe tapering holds, I think the biggest key or it’s not tapering per se, speculation on tapering holds the biggest key to volatility in the short run and obviously in the long run tapering is a foregone conclusion, so it’s just a matter of time.

Ken Worthington - JPMorgan

Okay and can you give us an update on the opportunity in China. It seems like we are or they are taking steps or moving in the direction that would be more favorable to free trading of the Yuan. So can you talk about how the political environment continues to change there and how you continue to position yourself to benefit as things loosen up there. So I guess maybe an update what they are doing and the impact on you.

Drew Niv

I think just for people who are not familiar even though this is relatively broad public information is that China per our speculating that's slowing down, that’s not growing as fast as before. But to remind people that ten years ago this was like a $4 trillion economy. Today it’s almost $10 trillion. So they don't have to grow as fast as they’ve grown historically to really increase in terms of multi-billion dollar GDP increase of demand for stock.

It's very large there, even slower growth rate I think people are sort of not realizing that we are not talking about a much more, it's not mature, it's not the right word but it's just a much bigger economy. And I can tell you that wage inflation is extremely high in China. So incomes are growing fairly rapidly but so are costs. And so I think that the Chinese are now realizing that, one there is a impetus to and there is a possibility and a real possibility of moving towards a domestic consumption as a real driver for economic growth.

And two that to hold down rapidly rising bubbles in real estate and other things and to hold down inflation of cost in general. of course that emerging middle class you have to have a freely tradable currency that reflects realistic prices in the market and I think that that’s something that they are now understanding that they are big consumer of energy and raw materials and that obviously food and that controls inflation and they need a more expensive currency to do that.

I think gradually they are adjusting. Obviously there is still that tug of war between exporters in that. But I think there it used to be a 100% victory by exporters it's no longer that, in terms of public policy in China and you can see that in the headlines every day. And I think that’s very encouraging for us. Just to give people sort of an example so like our average accounts in China has been increasing the last five years.

Even though there is capital control they artificially hold those down the averages have increased very significantly. We have an office in China that does for example translation of research. The average wages in that office have had to increase about 20% plus a year, even though it's a tiny cost in terms of it's a small amount of people but I think as a whole we are talking from 2003 those people making $1,500 a year, today those people making about $10,000 a year. It is a significant increase that, and that kind of represents most of what’s been going on, especially in Southern China but not just.

So I think that China and not just China but all of emerging markets is a fantastic story and it's why 50% of FXGM‘s growth is in [inaudible] markets, our emerging markets and a lot of our growth in emerging market, as wealth is growing there very rapidly and those people are trying to see that export are not only way to play and I think that obviously think about services, the domestic consumption service that’s a -- that’s something that we are very much benefiting from.

And I think as they adjust to that reality and have to liberalize the capital controls more, liberalize the currency regime I think we’ll be a massive beneficiary of it. We are the number one player in non-Japan Asia thus far. Very few people have the resources [suppressed] in our clients and the amount of market share that we are doing in that part of the world and I think that is a primary beneficiary to that move.

Ken Worthington - JPMorgan

Okay thank you very much.


Thank you. Our next question comes from Bill Katz of Citi. Your line is open.

William Katz –Citi

Okay, thanks good morning boys. Drew I was wondering if you could comment a little bit more on the pipeline, may be can you quantify it or qualify it where we are today versus may be six months ago in terms of discussions. Are they still just very generic discussions on it becoming more advanced just given the ongoing decline in volatility? And then if there is nothing on the deal side where are you in terms of just sort of prioritizing for a buy back given the strong free cash flow dynamics?

Drew Niv

So on the pipeline you mean M&A, if you mean M&A I think that pipeline what we said is we have a lot of ongoing discussions and some of them are fairly broad and still general but some of them get very specific and we are -- we've a lot of people surely a matter of good asset price, spread on price, it’s not a question of whether they want do it or we want to do it. And I think that that’s something that's obviously as I said before that volatility helps narrow bit that spread.

And regulatory changes help narrow a bit that spreads. And I think lack of volatility narrow that spreads and regulations -- I think the lack of volatility is sort of surprising everybody, as everybody sort of expected the first half of the year to continue but there are still kind of holding on some hope but I think there is a -- regulatory changes are scheduled and coming no matter what. And I think that’s something going to force hands for a lot of people.

And we said in prior calls this is something that we see it as a foregone almost a foregone conclusion that there will be a decent amount of acquisitions in our retail space simply because of the fact that those rule changes are coming primarily in Europe but even some in the United States.

And obviously a recent headline in the paper with all the currency channels are going on. We expect more changes and so this is something that the regulatory regime and financial services as a whole, something that has not, the march towards increasing that has not stopped whatsoever and is probably only increasing. And that bodes very well for M&A and M&A in short run.

DART too caveat so this one is, if there is obviously so our stock price declined too much to a level we think is too cheap. We will obviously break the wave, the wave for acquisition thing and do more than just even out our -- do more buybacks and just even out our dilution for the stock options expirations. And the other caveat is and we said this before that as June 2014 comes along and we have not done a major retail acquisition then obviously we will be changing our tunes in a pretty big way on buyback. And I think that’s something that we I am not going to sit here conference call after conference call and say the same thing and so we self imposed the deadline on ourselves to change our mind at some point.

You got to listen to the market no matter what you believe.

William Katz –Citi

Okay. And a question just as you think back to third quarter, just I think that starts meeting the revenue per million on the institution business, it continues to trend lower. Can you talk a little bit on dynamics of what’s driving and maybe outlook on a go forward basis?

Drew Niv

Yes, so a lot that the institutional business particularly as you’ve seen the proxies product is obviously hurting pretty bad. There is a lots of price movement that’s happening in that business in terms of people fighting for every decline in market share. We are specifically because in the midst of transition between platforms are offering larger than normal discount for people making those transitions.

So those transitions, people sort of pop transition if you will, the prime and institutional business is that to get people to change platforms, to do all that requires work on their hands and obviously they have been reducing staff and then reducing the amount of work they are doing and I think that’s something that to get in the queue there to get people to do that we have to decrease prices. Some of that is temporary and will bounce back, some of that's the mix of clients.

They have transitions in the client transition practice and have the best resources generate declines that pay the least because since it will be the most sophisticated clients and clients that have lower and they pay more this transition, loan has passed. So I think there is some of that in there. Hard to say where that is going given the competitive landscape. That is also tied to volatility And it’s the market was better and there will be lot more training going on, there won’t be as much pressure on all of those things.

William Katz –Citi

Okay, thank you.


Thank you. Our next question comes from Patrick O’Shaughnessy of Raymond James. Your line is open.

Patrick O’Shaughnessy - Raymond James

Hey, good morning guys.

Drew Niv

Good morning.

Patrick O’Shaughnessy - Raymond James

So my first question on retail revenue capture. Obviously trading lines kind of dipped a little bit during the quarter and the yen has stabilized to some extent. I guess I was expecting your trading mix to kind of shift away from the yen and if I recall from previous quarters the yen was one of your lower revenue capture product.

So Rob I think you kind of touched on this earlier but can you just talk a little bit more about the trends that you are seeing in retail revenue capture and is it reasonable to expect that should move back up over the next few quarters or if this is kind of the new kind of steady state for you guys.

Robert Lande

Yeah I think so while the yen stabilized or reduced in volatility in Q3 relative to everything else it still was more volatile and so it still was proportionately a very yen centric quarter and just an overall quarter of lower volume. So that kind of why we are still in the high 80s.

I think of course in the longer run if interest rates heaven forbid ever come back then that’s going to take quantum leap upward in our revenue capture. I think really between now and then what it really is going to boil down to a little bit is whether some of the non-yen crosses pick up in terms of volatility. The UCB today saw cut rates so this now is causing euro to start to move around which has been really astonishingly quiet euro for certainly through the past quarter but generally speaking for the whole year.

So I think we have to stay tuned, we don't see necessarily much downward pressure in the revenue capture but I think whether we are going to start to get back up into the 90s and it’s really going to depend on volatility of non-yen stuff.

Patrick O’Shaughnessy - Raymond James

Okay, that’s fair. I appreciate that. And then my follow up, so the legal size regulatory reserve that you guys took this quarter. Can you maybe provide little bit more color on what happened there and I know for previous issues I guess that have popped up resulting from actions before the company went public, [sound] just kind of stepped up and hit the ball. Is that something that’s contemplated in this case?

Drew Niv

Not contemplating in this case and this is sort of something that’s been kind of come up. We have obviously warned about this in previous filings but this is something that sort of heated up and there’s a lot of -- it’s obviously for prior stuff but there is different jurisdictions, different standard then they are holding us to, so different things and I don't want to say too much about it but it is obviously as far as customers are concerned this is very ancient stuff and is not relevant to anything we have done today. But from the legal perspective there is it’s not, from a legal perspective it’s not the exact same litigation as before.

Patrick O’Shaughnessy - Raymond James

Okay, I appreciate. Thank you.


Thank you. Our next question comes from Mike Adams of Sandler O’Neill. Your line is open.

Michael Adams – Sandler O’Neill

Good morning Drew, good morning Robert. I would like to talk on some of the cost controls that you guys have. Looking at the nine month results you are sort of tracking right in-line with that 42% EBITDA margin but given currently revenue run rates and some of the commentary we’re hearing on the fourth quarter, I am just curious how much flexibility you have in the cost side and how important that 42% margin target is for you to hit?

And then you know sort of tied to this, Drew I think earlier you mentioned cost cutting that might take place over the next six months and maybe if you could try to frame that the magnitude of the cost reduction we could see potentially.

Drew Niv

I think that you know one thing I'd like to say is that we, there is unfortunately no way to adjust cost as fast as revenues, that's adjusted by the market. So this is as you know largely a fixed cost business. So unlike Lucid where largely the costs are trading cost, and current fees which are very much variable, DRD, costs in FXCM are -- half of the cost are much more fixed and that causes margins to fluctuate. And we cannot make cost decisions based on one quarter.

At the same time as a target the 42% target's important to us and it is sort of the same thing as we said in 2012. If we see that, that is the run rate that’s going to last for a while then we are going to make more adjustments to cost. I don’t have magnitudes for you today but it is something that is meant to sustain the 42%.

Michael Adams – Sandler O’Neill

Okay, and then I just wanted to follow up on an earlier question about the institutional revenue cash. I’m curious the addition of Faros I believe it closed right before quarter end. Did that have any material impact on the institutional RPM, just I know you mentioned there was a higher touched customers that you are now in contact with. So have you seen any move up in that institutional revenue in the end of 3Q and into the 4Q?

Drew Niv

No, there is no material stuff there for Faros yet but we do expect by end of Q1, I think you will see some upward movement because of it and I think that's that something that we are very much hoping to be a more of a value-added provider to some of our customers rather than just a liquidity provider. And I think that, that's something that we would be very, very positive but it is not yet.

So I want to see how it play down in the next few quarters because it is going to be higher per million by lower volumes obviously, because these are higher touch trades. So it is going to be interesting to see how it melts into our results and what it reflects.

Michael Adams – Sandler O’Neill

Okay, I will get back in the queue. Thank you.


Thank you. Our next question comes from Howard Chen of Credit Suisse. Your line is open.

Howard Chen - Credit Suisse

Hi Drew, Hi Robert.

Drew Niv

Hi. Howard.

Howard Chen - Credit Suisse

Drew, you said a lot of time with us in the past on the regulatory landscape and we are seeing increasing FX headlines in the broader institutional markets for the dealers in recent months. I am curious, do you think these issues and headlines are impacting overall institutional activity as an industry? And second can you just update us on how you are broadly thinking about the opportunities and risks of regulation litigation from both kind of a retail and an institutional angle? Thanks.

Drew Niv

Yeah, I think, yeah, unfortunately that is like one of the key prophet of the day for anyone in financial services today those type of things. And I would say that just to clarify we don’t know the currency, the headlines make it look like the whole currency market's manipulated or something like that or fixed and that’s ridiculous. And the trading at the fixing the 4 PM London fixing our only fixing for that matter is a tiny, tiny percentage of the trading that's going on in the FX world. But a very sort of small subset of customers it's not the typical FX speculator but a peripheral use of FX is primarily the trader or something else.

And I think that, that's even if the worst that is claimed is true about the 4 PM fix, the 4 PM London fix market, I don’t know how much it touches practically the rest of the FX market. That said because the media makes it looks like it's all FX market, the regulators are looking at like it's all FX markets and I think that engenders loads of new stock that potentially could come and I don’t have any concrete insight into it, outside of the fact that, that’s just a pattern of behavior, go outside of the six years.

So, it’s very likely that the people are caught in the fix, so it's kind of politically sensitive institutions on both sides, the dealers and the asset managers are involved. So we are the victims of "victims on this thing" and I think it's going to mean a lot more regulatory fall out for FX and I don’t know exactly what that’s going to be. But it's not going to be positive near term for volumes, risk taking by dealers which is not going to be probably positive for the market.

But in a long run sort of the same view I have is because of Volcker because of all the regulations. This is just an increase that a year from now or whenever sort of that fall out kind of plays out the dealers are going to play a small and smaller role in the FX market in comparison to everybody else and then specially when it comes to risk taking and that’s something that we believe is something that shows a lot of promise.

One for our ECM product and two for Lucid. And I think this still holds true and it is something that we are very we believe is long term good for us even though in the short run only god knows what’s going to happen. But it's going to be, it's probably not going to be good.

Howard Chen - Credit Suisse

Okay thanks, Drew. And then just kind of segueing off on the institutional front you walked through a bit of this, but it's a big bounce for twelve months. Can you just walk us through like with all these pieces that you have been putting together and the really active quarter that you had, can you just help connect the dots for us and walk us thorough just your vision for the business as it stands now?

Drew Niv

Sure, I think a lot of it that is for the institutional businesses only. I think that and what we are trying to accomplish is one, as we walk with you but before I think all our current customers right and the new customers were signing up and we have a lot of those customers and try to increase our electronic market share by lowering the cost and the latency if they connect to us, try to win a slightly higher market share then we do today and even a slight pickup in market share for us is pretty big jump in the business.

The other thing is to try to increase our dollars per million on that flow partially with Lucid partially with things like Faros which not only increased the dollars per million and make us a stickier kind of party and a more value added kind of party to a lot of our customers and add a completely new customer base that we have very few of those customers today.

And I think that’s something that we are very, very excited about I think it's something that we think will bring a lot of balance to our business overall. I think we have a lot to contribute there and I think we are seeing already decent uptick of this. The Faros just started so that's not yet but it's something that we are very, very excited about.

Howard Chen - Credit Suisse

Thanks, and Drew if I can just ask you one more quick one. In classic way, in the FX trading market you need more rate differentials. But are there certain initiatives or further initiatives you can take to just promote more trading in a low vol environment?

Drew Niv

Yeah I wish. I think that the promise is our customer base is self directed customers and we don’t really offer direct trading or advice do this trade or do that trade and because our customers trade by themselves they essentially, they make their own decisions and they generally do need some input as ForEx as we think of like trying to trade stock without a lot [inaudible] evaluation model it's kind of hard to analyze and we’ve had to analyze, do you have a sense of where this stuff should be or go.

And this is sort of what’s going on in FX with our interest rate movement sort of the basic valuation model for currencies and currency direction are sort of lacking and that makes currencies more of a crap shoot and I think that, that is holding trading back. But I think that it's not the advent of interest rate, it's speculation of the advent of interest rate that will move the market so we don’t need to see interest go up as much as we need to see the speculation on when those interest rates go up.

And I think the market is so rate sensitive today in all assets classes, but the amount of money that will move at the slightest drop and we saw that in the first half of this year, what happened in emerging markets and what happened in fixed income. So across the spectrum speculation as you had the speculation on tapering is that coming back and that sounds more solid and tapering actually happened. So I think it’s what we'll get the market moving. Unfortunately there is not many ways that we can get people to do it.

Howard Chen - Credit Suisse

Okay. Thanks.


Thank you. Our next question comes from Arnie Ursaner of CJS Securities. Your line is open.

Lee Jagoda - CJS Securities

Hi, this is actually Lee Jagoda for Arnie.

Drew Niv

Hi, Lee.

Lee Jagoda - CJS Securities

If I look at your white label the 46% you reported is roughly flat sequentially. Can you just provide a status update regarding the various white label partners and how we should think about trends on a go-forward basis?

Drew Niv

I think there is not a change there. I think from a perspective of us signing up white labels and continued penetrations into those client spaces of those white labels, that's at the same pace it's been. Unfortunately those customers are no different than our standard customer and they trade when volatility happens. So they are subject to the same forces that slow down generic things.

I think from a progress on accounts sign up, organic sign up to white labels we actually are doing quite well and we think that we are for the same reasons we’ve been winning RFPs for white labels before, we are still winning them today. I don't that has materially change at all.

I think the environment is just really causing us to monetize less of it in a give quarter that’s really all that's going on.

Lee Jagoda - CJS Securities

Okay. And then just switching gears a little bit looking at the regulatory issues from a couple of years back, what if anything's changed in your business and how you run your business that your potential to prevent these type of things from recurring in the future.

Drew Niv

Yeah, I think that’s a good question. Unfortunately I don't have the world’s great answer for it. To be honest with you the problem with regulations are the stuff that was considered standard five years ago, ten years ago is regulator [comments say] today that we don’t believe that was right and we want you to change it now. You can fight them on it but obviously that’s not a factor that’s working for anyone.

And I think that’s something where there is, I can tell you that standards have gone up and if we are going towards a model where we say FX is moving towards a more exchange traded it’s not changed to say but the standards of like exchange trading, FXCM is closest to those standards than any of our peers and any of our peers not [inaudible] in the retail market even in institutional markets that’s not happening, that’s not there, again we are at the forefront of that.

If that is the direction and that is currently the direction that regulators are pressing since they want the same standards that are available in equities trading to do on in FX. And I think that as a trend if you will we are as close to that as an FX provider can be.

At the same time what new thing people come up with and say well that’s not right, or that’s not enough, it’s hard to say and I think from a regulatory perspective, the regulators are looking to anything they can find and this is a very, very hot topic today. This is not a small thing in FXCM and the retail space is a big target because it’s one of the biggest players and unfortunately being an agency provider is more transparent you can see for every trade that we do with our customer you can also see the offsetting trade with one of the market makers on the street.

It is very easy thought at FXCM is to see exactly a hair of difference between those two prices where obviously it’s a lot more nebulous with guys who make their market, whether that market making provided a good price or not is sort of subject to lot of interpretations and obviously there are some things that are more obvious like some of the stuff in the newspaper but I think it just depends on where standards are going. But I can tell you that where the standards are going today is more sort of the change trading space standards and I think that we’re at the forefront of it.

So the short answer is we are trying. I can’t guarantee that means there is no more, nothing ever happens again. We don't know if anything that’s coming but that has not stopped anyone from being a more step up.

Lee Jagoda - CJS Securities

Thanks very much.


Thank you. It looks like we have a follow up from Patrick O’Shaughnessy of Raymond James. Your line is open.

Patrick O’Shaughnessy - Raymond James

Yeah, just a follow up question on M&A. As I am kind of looking back at your transcript from last quarter, I think comment was made that in fact you’re very close to at least one large scale deal and obviously that hasn't closed. Can you just talk about little bit more about are you frustrated with how difficult it is to get these deals done and at this point should investors kind of say maybe this is going to happen or is it still probably going to happen kind of how should we view the language for a meaningful deal for you guys in next few quarters.

Drew Niv

I think the probability is still good. If we thought probability was bad we would start buying shares. You know the probability is good. I am not giving myself infinite rope, infinite room to do it, so we imposed a deadline of June to do that. But I think that’s and that's not complete till it's done but it is something that we are trying to be wise with shareholder money and as you know for FXCM management is a very good chunk of the shareholders and so we are trying to be very judicious with ours and your and the client's money.

And I think that’s something where we’re definitely trying to you know not going to hang this on forever. But I think the odds are not bad and not bad at all. M&A is tricky because there’s a thousand things that can go wrong and obviously prices it is not exactly a market where prices are easy to decide and actually fairly emotional and driven by a lot of things that are not practical in the short run. But I think that in the long run, when I say the long run over the next six months or so there is lots of changes and lots of things happening with, we’ll drive the M&A.

I am relatively sure of it, only because one of the things we can’t be sure of is we are to prepare ourselves for regulatory changes, we do assessments of what will happen to capital requirements and are we prepared for that and what will happen to reporting requirements and all these other things and as we size up what the cost to us is going to be, that to a degree depending on the order of magnitude smaller or larger, target obviously it is usually a smaller target, what their class is going to be and I have seen most of the people on the street in our business are operating at much lower profit margins than we are and a lot of those midsized players are operating almost at no profit now.

And so a decent uptick in cost or uptick in the capital requirements, pretty much backs a lot of people into a wall and it's just a foregone conclusion they are going to be out of business. They may not sell to us they may not sell at all, just go out of - fade, but rationale says when people are forced into a wall we do a bunch of transactions as well.

And I think that one of my key things, I think for the next 12 months is I do think that especially given the time spent in the FX market that all our standards for FX trading are going to be, it’s not going to be reinvented it’s something that the regulators have been pushing in every product and something that they have overlooked FX on and I think we’ll be pushing it for FX now too as it is shown that is not free from problems, as it was suggested close to 2008 crisis and that happened, the M&A environment gets much, much bigger relatively quickly.

Patrick O’Shaughnessy - Raymond James

Yeah, all right. Very good, makes sense, thank you.


Thank you. I am not showing any other questions in the queue. I would like to turn the call back over to management for any further remarks.

Jaclyn Klein

On the half of Drew, Robert, and everyone here at FXCM I’d like to thank you for joining us this morning. I’d also like to apologize for anyone that had trouble dialing in this morning. As a reminder a replay of the full call will be available on our website later today. And we look forward to speaking with you next quarter.


Ladies and gentlemen thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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