Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

FXCM Inc. (NYSE:FXCM)

Q4 2013 Earnings Conference Call

March 6, 2014 08:15 ET

Executives

Jaclyn Klein - Head, Corporate Communications and Investor Relations

Drew Niv - Chief Executive Officer

Robert Lande - Chief Financial Officer

Analysts

Alex Kramm - UBS

Ken Worthington - JPMorgan

Bill Katz - Citi

Ashley Serrao - Credit Suisse

Rich Repetto - Sandler O’Neill

Arnie Ursaner - CJS Securities

Kenneth Hill - Barclays

John Dunn - Sidoti

Operator

Good day, ladies and gentlemen. And welcome to the FXCM Fourth Quarter 2013 and Full Year 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 follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ms. Jaclyn Klein. Ma’am, you may begin.

Jaclyn Klein - Head, Corporate Communications and Investor Relations

Thanks. Good morning, everyone and thank you everyone for joining us for the FXCM Inc. fourth quarter and full year 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 www.fxcm.com 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 Factors 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. FXCM assumes no obligation to update any forward-looking statements.

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

Drew Niv - Chief Executive Officer

Good morning everyone. 2013 was a solid year for FXCM and I am proud to say we achieved record results in revenues, EBITDA and retail and institutional trading volumes. I think we also showed you in the first half when trading conditions were more elevated, a glimpse at the earnings power of FXCM and the high incremental margins we have here. And that is still without interest rates which used few years ago to account for over 20% of our revenues and now are minimal.

To recap 2013 on Slide 3, adjusted pro forma revenues in 2013 were $483.8 million, up 16% from 2012 and a record for FXCM. 2013 adjusted pro forma EBITDA was $158 million, up 40% from 2012 and also a record for FXCM. Also worth noting is that in 2013, we went a long way in meeting our 41% net EBITDA target and achieved a 40% EBITDA margin on net revenues, which is revenues less our referring broker fees. We also earned adjusted pro forma EPS of $0.36 a share in 2013, up 31% from 2012. We earned 2013 GAAP EPS of $0.44 a share, up 19% from 2012. It was also a good year for cash flow generation, which we are particularly proud of with 2013 after tax cash flow from operations of $123.6 million, up 21% from 2012.

Turning now to Slide 4, in 2013, FXCM achieved record volumes in both retail and institutional segments. Our retail customers traded at $4.1 trillion, up 13% from 2012 and our institutional customers traded $2 trillion, up 72% from 2012. It is worth noting that 2013 was really the tale of two quite different markets. With a strong first half of trading conditions and immediate second half, on balance the average CVIX was 9.1 in 2013, down 2% from 2012. Retail account growth was 7% year-over-year and we finished the year with 183,679 active accounts.

Lucid had another solid year generating $57.6 million in EBITDA, down 1% from 2012 and a 70% EBITDA margin. Lucid’s current business as many of you know is really just a function of the volumes traded in large institutional currency venues, so it is not surprising that Lucid’s results in 2013 track market volatility. But yet, with solid cost control we have generated 70% EBITDA margin and threw off considerable cash. We also have some exciting plans for Lucid this year and its combination of some of the parts of Infinium business we acquired late last year, which I will talk more about that later.

On the capital side, in 2013 we had a very successful convertible offering that was over subscribed many times and raised $172.5 million at an attractive 2.25% interest rate over five years and has a fixed rate. We also increased our credit facility which is very attractively priced $205 million as well as extending its tenor for another three years. Together with $365 million of our own cash that we ended the year with we have $570 million of liquidity. So in summary 2013 was a solid year for FXCM with much improved results over 2012. I would like to take a few minutes now and talk about some of the opportunities we see for 2014.

Turning now to Slide 5, given our success with our agency model and FX execution and obtaining industry dominance in most emerging countries the Americas and non-Japan Asia, we have turned our attention to gain market share in Europe. Since acquiring ODL in 2010 and starting of CFD trading business in 2009, we estimated that we are the number four broker in Europe, up from a negligible position before 2010. Keep in mind the markets where we dominate today are markets where traders trade FX as the only asset class in their account possibly FX and personnel only. However, Europe, Australia and Singapore are different and predominantly users there trade FX and CFDs in the same accounts and consider them one in the same. In fact most brokers in these regions get the majority of their revenues from CFDs. This year we have some major plans to grow our CFD business further with the goal of attaining the number two position in Europe within the next two years. Many of you know we have developed a fairly decent sized CFD business from scratch. CFDs are otherwise known as contracts for difference and are really just leverage instruments on precious metal commodities and indices and individual stocks. They are not offered in the U.S. as I said they are very popular in Europe and some parts of Asia.

The first big change that we have been working on is an agency CFD offering truly unique in the world having pioneered an agency offering in FX we turn our minds to CFDs. And this past year we are successful in developing agency offering in gold and silver which is about half our CFD volume. And in this coming year, we expect to launch an agency offering in the other CFD products notably in commodities and indices. This promise is to be the only agency offering of its kind in the CFD industry. On these products which are the commodities and indices and should revolutionize standards and set the bar far higher than anyone has set it so far. Having agency capability in these products will also allow FXCM to expand aggressively in this category without worrying about changing the risk profile of the company.

The other category that was totally missing from our product offering and is the number one request by our clients in Europe is single share CFDs. An example of single share CFDs would be a CFD on Apple or Google. This is a very big market, but we are unwilling to offer this product and unwilling to take on the risk of offering it on the principal basis. However, this year we will be able to offer single share offering on an agency basis and together with our other agency CFD offerings that I talked about before this could be an important growth driver for us.

Apart from the CFD market on its own being significant, a $1 billion to $2 billion revenue opportunity measured by the CFD revenues of our biggest competitors, CFDs particularly in Europe are important to FX traders and in Europe unlike the U.S. where we often compartmentalize different instruments with different brokers, in Europe many traders prefer to have everything in one account. So this should also help us grow our FX business. The two leading FX CFD brokers in Europe have average account balance of 40,000 and 60,000 respectively versus our 15,000. And we believe that is mostly due to the inclusion of a broad CFD offering alongside their FX products. So having a broad CFD offering together with FX could be an important driver in asset and account growth.

Moving to Slide 6, we are covering another exciting opportunity for us in 2014 as we expand the Lucid platform that we acquired in 2012. One of the drivers of our original venture in Lucid was to seek out opportunities to expand their successful trading into other markets, in particular, futures market, bonds and U.S. treasuries. We recently completed the purchase of selected assets of Infinium Capital Markets, a high frequency market maker for us in the commodities in FX based in Chicago. The assets were acquired by a new joint venture called V3 Markets we created with our Lucid partners. Lucid principals will have a 49.9% stake in V3, with obviously FXCM 50.1%, which is the same percentage as Lucid today. V3 Markets provides FXCM and Lucid with an opportunity to expand into an additional array of instruments while leveraging high-speed infrastructure with connections to a large and broad variety of trading platforms. V3 will operate a subset of the trading desks of the legacy Infinium trading desks with streamlined cost structure. We expect to be cash flow positive with a modest contribution in the first half of 2014 and more meaningful contributions in the second half of this year and beyond.

Two very important notes I would like to make about this business. The first is that this will diversify our exposure to volatility across many uncorrelated asset classes. As an example, with the crazy weather we are having and Russian tanks, oil and agriculture and energy markets sparking massive volatility in those products, financial instruments like G10 currencies are completely unmoved and remain near record low volatility. As we are in the early stages of clearly rebuilding a business that is in need of a greater degree of risk supervision that it had in its prior life at Infinium Capital Markets, we have stayed in ultra-conservative mode, but as Lucid implements its risk controls and other trading smarts into the V3 infrastructure, we will be dialing up trading to take advantage of these uncorrelated volatilities.

Also as a result of the changes brought about in the U.S. and abroad by Dodd-Frank and Basel 3, many OTC derivatives in FX like options, NVFs and forwards are migrating to exchanges. This trend has only just begun, but is due to accelerate as these laws finally come to be implemented, both U.S. exchanges as well as ones in Dubai and Moscow, Singapore and others have seen massive growth in these complexes and the best is yet to come. This creates an opportunity for a leading non-bank market maker such as Lucid to break into areas that have been controlled exclusively by banks. While we will not be giving specific guidance today, we hope to give you greater clarity on a cross run-rate and revenue contribution on our next quarterly conference call, which is when you will see the first – we first see the initial contribution from the V3 business as part of the Lucid line item.

Moving to Slide 7, you can see a graph which shows the steady decline we have seen in the currency volatility over the last 5.5 years. While these present challenges to organic growth as we have mentioned on earlier calls, they create opportunities to grow share through M&A. When you combine the muted trading environment to steadily increasing regulatory burdens across most of your other jurisdictions, it becomes very difficult for brokers to survive without significant scale. This leads many to seek the exit – to exit the market creating M&A opportunities for us. FXCM has been an active acquirer over the last four years and is always evaluating a pipeline of opportunities the last months are no exception. We’ve demonstrated discipline in prices we’re willing to pay and solid execution in extracting added value from the transactions we closed. There are periods where we’re not active in the market largely due to a gap between buyer and seller price expectations. We’re starting to see price expectations are more in line with market reality, we remain optimistic that we will conclude a number of meaningful M&A transactions in 2014 and we have the financial resources to do it.

And for one reason or another these opportunities do not emerge, we’ll reassess our capital deployment strategy and look at other ways to increase shareholder value. As I’ve said before if on the Q2 earnings call we’ve not announced an acquisition that we’ll layout a plan that will set out with some clarity our capital return plans which will mostly resolve our on share buybacks. We’ll now – won’t close a door on acquisitions, we’ll not be sitting here idle with your money as it is also our money and as the largest shareholders in FXCM I and the rest of the management team don’t intend to stair at this large pack of money to make ourselves feel better.

With this I’ll turn you over to Robert who will go over quarterly financial results.

Robert Lande - Chief Financial Officer

Thank you, Drew. Drew already took you through the highlights of the full year 2013. I’d like to focus more on the fourth quarter now.

Turning to Slide 8 some of the highlights for Q4 were U.S. GAAP revenues were $113.3 million up 5% versus Q4, 2012 and our adjusted pro forma revenues for the quarter were $107.6 million down 0.5% from Q4 of 2012. Our pro forma revenues eliminated the impact of two items that I will go into more detail on the next slide.

Adjusted pro forma EBITDA was $26.8 million down 10% versus Q4, 2012. Adjusted pro forma EPS was $0.10 a share and GAAP EPS was $0.08 a share. Our retail revenue per million for the quarter was $93 per million with a more favorable mix in recent quarters and our active accounts at year end were 183,679 up 7% for the year.

During the quarter as Drew mentioned we increased our credit facility to $205 million, extended the maturity date to December 2016 and also amended the terms to provide us with additional flexibility. We repurchased 724,600 shares in the quarter for $11.8 million an average price of $16.24 per share and worth-noting we bought 1.8 million shares in all of 2013 for $28.1 million and the average acquisition price was $15.46 per share. Also in the quarter we declared a quarterly dividend payable April 1 to shareholders of record March 21.

Turning to Slide 9 with some of our more important operating metrics in the retail business, the top left graph in the average daily volume in our retail business and you can see fairly clearly our Q3 and Q4 returned to levels more consistent with 2012 after the improvements we saw in Q1 and Q2 of last year. Q4’s average daily volume or ADV of $13.9 billion a day was only a shade better than Q4, 2012’s $13.8 billion a day.

On the right hand side you can see in Q4 we earned $93 per million higher than our recent range due to a more favorable mix in our retail business basically a bit less in the mix. Our retail DARTs were 378,315 in Q4 and in the bottom right you can see the mix of volume by region – on balance; EMEA and the rest of world did better than the U.S. and Asia in Q4.

Turning now to Slide 10, our institutional business, volume wise, 2013 was a record year for our FXCM Pro institutional business as you can see from the left graph. We’ve basically completed the migration of customers to our in-house platform and as well FastMatch our joint venture with Credit Suisse and the Bank of New York had a very strong year and has gained much traction in the marketplace. On the right hand side of the page you can see the evolution of Lucid since we acquired it at the end of June 2012. It finished the year with a solid $81.9 million in revenues, $57.6 million in EBITDA and 70% EBITDA margins. Lucid’s performance as Drew pointed out has been heavily tied to the institutional FX market environment, so it’s no surprise that it had a flattish year. In fact it outperformed some of the proxies. But even a flattish year for Lucid is a highly cash generated one as they have minimal capital expenditures and as Drew also pointed out we are very excited about now bringing some of the Infinium assets to Lucid and letting Lucid work their magic with it. Hopefully as the year evolved you will see some nice growth out of the combination of Lucid with the Infinium businesses that we picked up.

Turning now to Slide 11, before getting into the detail of our income statement, I thought it would be useful to look at the key expense lines at FXCM for the past six quarters. These are the expenses that are most under our control and exclude depreciation and amortization as well as the referring broker fees that we pay our white label and referring broker partners. As you can see from the table we have been pinging between $58 million and $62 million for the past six quarters and in fact Q4 is $61.1 million in operating costs, compares favorably with last year’s – last year Q4 $60.6 million in operating costs. And this is very much the story at FXCM. We have a very fixed costs structure which we worked very hard at keeping a tight lid on. What is not on this slide is that quarterly revenues, went from $108 million in Q4’12, just to the right about line to $123 million in Q1’13 to $140 million in Q2 ’13 and back to $108 million in Q4 ’13. Through that entire period costs as you can see were pretty flat.

So with that as a backdrop, let’s turn now to Slide 12 and go through the income statement. As usual I will talk to our adjusted pro forma income statement which assumes all the FXCM Holdings units are converted into common shares of FXCM Inc., the public company and assumes that we adopt the conventional corporate tax structure and our tax that is a C-corporation in the U.S. at prevailing corporate rates. And we also adjust for some unusual items like the stock-based compensation to do an option grant we gave at the IPO in 2010 or the fine and restitution we recently settled with the FCA in the UK. A reconciliation of U.S. GAAP to adjusted pro forma results is included at the end of this presentation.

Looking at the quarter retail trading revenues were down 1% Q4 2013 versus Q4 2012 to $83 million. Basically volume in Q4 ’13 was up 1% to $895 billion and revenue per million was down 2% to $93 per million. Institutional revenues were up 14% to $21.8 million. FXCM Pro generated $6.1 million of the revenue and Lucid contributed $15.7 million. FXCM Pro’s revenues a little more than doubled from Q4 ’12 as institutional volumes were up 131% Q4 ’13 versus Q4 ’12 benefiting from the continued migration of customers to our in-house platform and an increase in FastMatch volumes. FXCM Pro’s revenue per million aiming at $12 per million in Q4 ’13 little better than our recent range and $1 per million below Q4 ’12, $13 per million.

Lucid revenues of $15.7 million were down 3% from Q4 ’12 consistent with the trading conditions of the quarter. Net interest income was $657,000 for the quarter, up $37,000 from year ago. Our net interest income continues to reflect the impact of the low interest rate environment. Other income was down $2.3 million or 52% in the quarter versus last year. Prior year other income included approximately $2 million in dormancy fees. Referring broker fees increased 11% to $19.8 million and were 23.8% of retail trading revenue. In Q4 ‘13 indirect volume represented 46% of total volume and the 23.8% of retail trading revenue in Q4 ‘13 is more consistent with recent experience concerning payments to white labels and referring brokers.

Turning now to expenses, compensation and benefits were $23.9 million consistent with more recent quarters in 2013. Advertising and marketing was down 4% to $7.3 million. As we had previously indicated, we expected marketing this year to be reduced on balance and come in around $27 million, which is exactly what it did. Communication and technology was down a bit from $10.5 million in Q4 ‘12 to $10.2 million in Q4 ‘13.

Trading costs were up slightly to $7.1 million mostly to do with higher prime brokerage fees, which we have been seeing greater than inflationary increases these days. And G&A was down 12% or $1.7 million to $12.5 million with the reductions split pretty evenly between lower regulatory expense and lower bank charges in Japan due to some rationalization we have done there. Depreciation and amortization was up $0.9 million to $13 million due to higher capital expenditures and some increased intangible amortization from recent acquisitions.

Interest expense was up $1.6 million. We were not drawn under our credit facility in Q4 ‘13, so that pretty much is entirely due to our convertible debt offering that took place in May 2013 and the commitment fees that we pay on the credit facility. Income tax provision was $1.7 million for an effective rate of 15.4%. Our provision for the quarter included a benefit from a deduction we were able to take in one of our subsidiaries in Asia. Without that deduction, our tax rate would have been more like 23% still a bit low for us and due primarily to favorable mix, specifically a bit more income sourced from the UK and Asia this quarter. At this point, going forward, we do not have any changes for previous guidance that our pro forma tax rate should be in the 28% range, but this can obviously be impacted by mix changes. After Lucid minority interest, we are left with earnings per share of $0.10 a share versus $0.13 a share in 2012.

Turning now to the full year, I do not propose going through every line item as I think Drew covered many of the highlights, but I would point out that 2013 revenues and expenses includes the full year of Lucid revenues, while 2012 revenues include six months of Lucid revenues and expenses. The line items most significantly impacted our institutional trading revenues, trading costs by brokerage and clearing fees and depreciation and amortization.

On the expense side, comp and benefits were higher in 2013 $93.2 million versus $84.3 million driven by $1.6 million in the full year of amortization of deferred compensation expense for Lucid at non-cash charge, a little under $1 million from an increase in stock comp expense and the rest from salary decreases. Advertising and marketing was down 12% as I mentioned earlier to $27.1 million. Communication and technology for the full year was up 4% or $1.3 million. The increase is primarily due to the inclusion of Lucid for the full year and fees paid to FastMatch.

G&A in 2013 was down 12% or $7.2 million. A few items worth noting, bank charges were lower in 2013 by $1.7 million due to some rationalization we did in Japan and regulatory expense was down by $1.2 million mostly in the UK with lower levies and professional fees were lower by $2.7 million due to cost controls in the company.

Interest on borrowing was $7.7 million for the year, most of which relates to the convertible notes and tax provision was a 26% effective rate for the full year leading us with $57.8 million in net income or $0.76 a share, up 31% from 2012’s $0.58 a share.

Turning now to Slide 13, our balance sheet, as for the year it was up $92.9 million to $365 million. As Drew pointed out we generated $123.6 million in after tax cash flow for the year. Our capital expenditures were $23.4 million leaving us with $100.2 million in after tax free cash flow. We then had $47.3 million in other investing activities being the acquisition of the Infinium Note of $11.9 million, Faros for $5 million, FastMatch for $3 million and a $27 million remaining amount due our Lucid. But our cash flow from financing activities was also $47 million, the issue of the convertible note, the pay down of our credit facility, repurchase of shares, etcetera. So after foreign currency translation, you can see that we – cash increased $92.9 million which is pretty much our after tax free cash flow for the year.

I don’t propose talking too much else on the balance sheet, I guess one number worth noting is that customer equity was flat year-over-year. An important contributor to this is that our Japanese customers who at the end of 2012 represented 34% of our customer equity honestly have seen in the U.S. dollar terms their customer equity declined with the devaluation of the yen. But in all, we feel very good about the growth in market share we are achieving and feel well poised in 2014 if there is any pickup in market conditions and of course Drew already laid out number of important to organic initiatives which we should benefit from. Lastly the $365 million in cash and $205 million in our credit facility versus $83 million in regulatory capital requirements and probably another $100 million to $150 million in cash requirements to support customer positions or maintain buffers and the like. We have considerable liquidity to pursue M&A opportunities should they develop.

Turning now to Slide 14, we are reporting today our February operating metrics, which you can see on the next slide. February like January was definitely improved, an improved environment from say the fourth quarter of last year. February had only 20 trading days in it, so while retail ADV declined only 2% to $15.2 billion per day with the less trading days total retail volume was $305 billion. Retail active accounts were flattish at 181,000. On the institutional side our ADV of $8.1 billion was 4% lower sequentially and total volume came in at $162 billion, pretty similar performance wise to our retail business. So we have seen a modest improvement in trading conditions in January and now February of this year. And part of it is no doubt the beginning of tapering by the Fed and part of it is no doubt emerging market volatility. However, conditions are still far from historical norms.

So to wrap up on Slide 15, before turning things over for questions we continue to show organic growth in both our retail and institutional segments despite a muted macro environment. The first half of last year where I think if you did a delta of – the first half of last year, if you did a delta of revenues and EBITDA you would see 80% incremental margins and I think shows a glimpse of the earning power of FXCM in a more favorable trading environment. We generated $124 million in after tax cash flow last year, very strong performance. Drew laid out for you today a number of important strategic initiatives for the year which we are optimistic will accelerate organic growth. And we remain optimistic that the current environment is such that we are going to be able to get some meaningful M&A done this year.

So with that I would like to now turn things over to the operator and open the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Alex Kramm of UBS. You may begin.

Alex Kramm - UBS

Hi. Good morning.

Drew Niv

Good morning.

Alex Kramm - UBS

Robert I think you laid out the expense side for the fourth quarter fairly well and also that it hasn’t really been growing for the last six months – sorry six quarters or so. So I think and as I missed it you didn’t really talk much about this year or the first quarter, so maybe you talk a little bit more about the moving pieces, what are you going to spend on marketing, where is the incremental cost coming from, I mean may be ex the Infinium stuff just how we can think about the expense side here a bit more?

Robert Lande

Sure, I mean ex-Infinium, as Drew said we are going to give greater guidance on that in the coming quarters as we have greater clarity on run rates and the like. I will let Drew talk to marketing, but Alex everything else is nothing has changed. We are going to have I showed six quarters, quarter seven and quarter eight is – quarter nine we are hoping to continue to show you some other things. We obviously will have some upward amounts on comp as dollar increase is normal for the year would kick in, but we are not planning on doing anything different and we continue to focus on costs and trying to keep them flat throughout. And maybe Drew why don’t you talk about marketing?

Drew Niv

I think just even before that we are – as you know there is (Technical Difficulty) where we said before there is some inflationary elements here due to compliance and other things that just – just those requirements just keep on going up. And I will say that to be balanced by the fact that we in this kind of environment have been very aggressive and will be more aggressive at cutting underperforming subunits and underperforming if you will sort of ventures and experiments that we have. We also – on marketing we should stay relatively similar within $1 million or so through 2013. I would say the only change that potentially come to that is the single share CFD business once launched has the potential of significantly lowering cost per acquisition by virtue of the fact that the supply-demand imbalance on internet websites for eyeball looking at stock inventory versus FX inventory there is a huge difference. Obviously, there is a lot more open inventory for on stock trading sites overseas. And therefore the advertising costs for those things are much, much lower. If that proves to be real and that translates into an increasing single share CFD business, I mean which we absolutely going to start in the latter half of this year. Then we probably will have a pickup in absolute marketing cost, but that will only occur as the cost per acquisition is meaningfully and therefore you will see also a significant pickup in account growth from that as well.

Alex Kramm - UBS

Okay, great, thank you. And then may be secondarily on Infinium, I guess you are not going to give us much color on revenue or cost contribution, I mean if you want to please go ahead. But the question has more in terms of how should we be thinking about this business throughout the year, I mean it’s not just FX, so if you can give us some round numbers in terms of how that business breaks down between FX commodities, what kind of commodities in particular, so just we have an idea of like what market in the future we should be looking at. And maybe also how quickly you think these guys can ramp in terms of expanding to other asset classes or how quickly they can actually start putting risk on, I mean what’s the expectation throughout the year I mean I think you want to hit the ground running it sounds like?

Drew Niv

Yes, so let me just give you just a little bit of thing, like actually, very specific numbers we will start giving in the Q1 call and the Q2 call as well we will lay out lot more clarity just as we did on Lucid. So I think the one thing we can probably say on numbers is that this thing is going to be cash flow positive from the get go I mean on an operating basis. On the run rate basis it’s going to be cash flow positive and should be somewhat accretive in the first half of this – of ‘14 and should be meaningfully so in the second half like I said we will layout numbers before, the stuff we did disclose publicly is obviously that when we bought the note from Infinium is $11.9 million that was – half of that was paid by Lucid and half of that is paid by Lucid’s partners, half of that is paid by FXCM. And there are some other and we will disclose the rest of it in the next quarters.

The thing I will say a bit, it is right there is no Infinium anymore that company is obviously out, we bought assets just for clarity sake. So this is now called V3. So the V3 market is the entry point going forward. We are – what we are going to be doing with it is obviously the desks that we kept the legacy desks that we kept and moved to V3 from the legacy Infinium, there is a five trading desks out of a few dozen, they are the most meaningful profitable – consistently profitable trading desks. They are trading now. They are only recently started the ramping up, but they have been trading since – some since February, some since – and some since beginning of February, some since the end of February.

And we do in terms of exposure they are exposed mostly to the futures market, options on futures, some FX. So it’s a different volatility exposure than our current. As I said in the prepared remarks it’s a different volatility exposure than what is currently done by Lucid. We think that’s a huge positive if you look at all – in agriculture and energy for example, the legacy Infinium was strong. That is many, many times the volatility of FX and has very different patterns in FX, it was impacted by things like weather and less so by things like interest rates. And I think this is something that we are very, very I think excited about kind of changing the profile.

And given that Infinium obviously was one of Chicago’s leading 60 years back obviously it did not do well given the fact that we bought its debt and foreclosed on its assets. So we are restarting that operation with Lucid risk controls and Lucid’s software and that’s going to take a little bit to ramp up to where we wanted to ramp up to. But the way you should think about it going forward is this is going to be a Lucid like operation and other financial instruments is kind of the short end and of that. And I think it’s something that we are very hopeful should be very meaningful in the years to come.

Alex Kramm - UBS

Alright, very good, I will jump back in the queue. Thanks.

Operator

Thank you. Our next question is from Ken Worthington of JPMorgan. You may begin.

Ken Worthington - JPMorgan

Hi, good morning. Thank you for taking my questions. I wanted to explore the CFD business first a little bit more. I see how the CFD business complements your existing business, but why is this a good business overall. And then what kind of allows you to break in and grow this market, like in many parts you are trading what has to kind buy their way in, is this something that you are going offer to kind existing clients or is there kind of a more complex strategy to kind of enter and grow that business?

Drew Niv

Yes. That’s a great question Ken because I think the beauty of this business is that isn’t complex to get into. So if you look at sort of our – there is public proxies for this like IG Markets trade in the UK. There is London Capital Group trade in the UK, Saxo Bank all of which have publicly displayed financials and some I believe segment breakdowns as well. And what you will see if you go for example and be a customer of those is that essentially can trade all these instruments in the same account it’s the exact same profile of customers that we have in Europe. Obviously, on our platform in Europe you can trade some CFDs already that obviously are currently as you can see from our filings in the mid to high teens of revenues already coming from CFDs of our retail business. So this is not a business that we are just starting.

We are simply broadening out the amount of instruments we have and offering it on an agency base, half of it right now is on agency basis as I said the precious metals are, but we were very low to increase this business to a much larger percentage and be too aggressive about it given the principle exposure that would create those profile changes for our business. This is something that’s now the ability to take this in an agency fashion we are going to be much more aggressive. And but it doesn’t – I understand, it doesn’t really require a big – there is no platform outside single share CFDs. For the other stuff there in the platform changes outside of backend stuff that we have done. There is a – that an user doesn’t really feel a difference and it’s a seamless thing that we are offering to all exist – we are going to offering to all existing clients. We are going to be offering to and absolutely broadening out to new clients as well.

We think it will have a very large appeal in that business. It does not require acquisitions. It does not require any special changes. I don’t want to trivialize and say it has required an enormous amount of backend work to do this simply because for example an index and commodity business there is no institutional proxy market and institutional clearance services for it. So, unlike FX or even single share CFDs, which there is an institutional market for which you can back up trading for trade, there isn’t such a thing. So we have to create it with (HSD) partners of ours as well as create from scratch a backend clearing mechanism to back that stuff with third party trading partners. I think this is something that is unique, it’s a completely misspoke solution, extraordinarily difficult to replicate. We think it will be something that will be a competitive advantage for a long period of time. The industry is not ready for it. And essentially we don’t believe it is ready for it at all. And we will raise the bar on this industry in a pretty significant way in terms of what this allows clients to do and the service it will give to clients. We think that the revolution we did in FX with the agency trading business we can do in the CFD business as well, given that we will be the only one that is something that is fairly unique.

The other thing that we are very confident about is that it just comes and during this backdrop where the – in previous call we talked about all the new capital requirements, all these new rules going on into place in Europe. This is – they are going to be very favorable for us. CFDs got more expensive on the Basel 3 and just to remind everyone that essentially the European regulators have mandated Basel 3 compliance, and that’s just for European banks, the European brokerage firms and this is as of January of 2014. And it’s being phased in over a two year period, so it’s an accelerated period. We think this will give us also the advantage of, a lot of our CFD competitors going out of business in Europe, so that will increase market share as well. And that’s why we have a pretty significant degree of confidence that this is going to be a rather simple land grab of market share and not some difficult exercise into a new business.

Ken Worthington - JPMorgan

Okay, great. And then the follow-up, when I compare kind of Lucid dynamics revenue and maybe the retail revenue dynamics, it seems that they have diverse a little bit either retailers doing better or Lucid is doing more, I am not sure which is the best way to describe it is, why is there that divergence kind of as we look over the last kind of six quarters?

Drew Niv

I think the retail business has the benefit of essentially it’s a number of customers and most importantly its customer profile growing. So we have gotten as you saw average balances have been increasing, we’ve gone more so, average account sizes are up, we’ve got a better degree of customers as you see those balances increasing, that retail business has grown essentially needs a lower amount of volatility to generate on the same returns that it did before and I think that is a wind in a back of the retail business. And if you look at sort of like our presentations from the various investment constants that we were in posted on a website and we show that slide of how customer equity has grown across our Japanese business, across our organic on business that we didn’t acquire. It’s been pretty meaningful and as Robert said in his remarks, Japanese customer balances are in the yen and they trade in yen and those balances are up significantly, those customers are doing well could obviously the trades have gone in that direction, because we display it as a U.S. company in dollars that looks like is very needed, but actually in yen, if you adjust their sort of what they’re seeing that had been increases and absolutely that has done very well for Japanese business.

So, we think those are just kind of the win back of the retail business. Lucid institutional business think of it as where we described and this is a specialist on all the “FX exchanges” which are mostly OTC CNs, but as those venues come under pressure, lower volatility competition from the single dealers that have been very successful in competing against those venues, especially the large FX dealers, this has obviously as it takes the wind out of their sales, it takes the wind out of Lucid sales in proportional amount and sometime disproportional amount a little bit, but by virtue of all.

Ken Worthington - JPMorgan

Okay, great. Thank you very much.

Drew Niv

Sure.

Operator

Thank you. Our next question is from Bill Katz of Citi. You may begin.

Bill Katz - Citi

Okay, thanks so much. Just on the – just following up on that line of questioning, you mentioned before that your average account size about 15,000 versus some of the competitors being 40-60. Can you frame exactly how many accounts you think that you might be able to work up to a higher sort of revenue output opportunity. So, help frame the revenue opportunity so you have on the slide, one to 2 billion, I presume that’s the marketplace, I’m trying to see what kind of opportunity you have that would meet that.

Drew Niv

Sure. I think just to making clear this – we’re talking about account sizes in Europe so, Western Europe, the – which is why thereby double the size of our global average, which is about7500, which includes obviously emerging markets and smaller –countries and smaller balances. But if you look at sort of what in places where we are dominant we are think of it as a customer – your primary account will be either with FXCM or with one of our big competitors, but FXCM would get a line share of the primary accounts and some of the smaller competitors or the other competitors will get is at the same user, we get a secondary account, someone would open an account with X with us versus 0.3 of X or 0.5 of X with a competitor to be a secondary account.

In Europe, it’s reversed essentially because we didn’t offer single share CFDs and do not offer a broad CFD at all. Essentially we are the secondary account provider so, the primary account providers for example, the two biggest examples being IG and Saxo Bank, those are two examples we gave for account balances. Those providers as where the customers most likely to have is primary account therefore, most of his trading and most of his balances there and we’re likely to beginning the secondary accounts from those customers, obviously some customer do not have two accounts, but this is kind of gives you an idea. This is something where we believe some customer feedback. We have a far superior service in FX, far superior platform. We believe that as you extend the product offering which is essentially our only short coming in that region that essentially versus our competitors. That essentially evened our playing field and we will get a bigger share of those customers moving us their primary account, we also think that, I can’t 100% give you what is there in clients, but it’s the potential pride there is very large, it’s in the hundreds of thousands of clients obviously.

It’s – this is like I said some $1 billion to $2 billion revenue opportunity just if you look at the top European CFD progress. So I think this is something that is not a – is a very meaningful thing. And just because of just recent changes, one is technological capability increase in partnership with external parties to be able to agency this business and partially for reasons, rule changes, central clearing of derivatives and things like that, that allow us to do this in a much more cost effective manner going forward. It’s going to be something that we think we can make a dent without taking on the same asymmetric risks and problems that the traditional CFD business has had, which is why we stayed away from it.

Bill Katz - Citi

Okay. Look forward to more disclosure in that. Second question is just on acquisitions, can you frame out what the pipeline looks like today versus three months ago both in terms of number of opportunities as well as size of incremental free cash flow that might be available from a target perspective?

Drew Niv

I think we have the ability to spend targets wise, there is a few midsize targets and one fairly large one and we have something that if they all come true, which I like – which all comes through, which I don’t believe we are talking north of $100 million and maybe far more than that to spend. But I think this is in terms of acquisition costs, but it’s something that the pipeline is pretty much the same as it was a few months ago. I would say that we are closer with some, further away with other. It’s very tricky to give you a real guidance on, because as you know these are fairly dicey and emotional conversations with most of the entrepreneurs that are fairly part of the decision is rationale and part of the decision is fairly emotional. So I think this is something that is hard to predict when things close, hard to predict what conditions will be. We are fairly certain that eventually these things do occur just because the mathematical ability for a lot of these businesses, sustained business giving unless market conditions quickly improve, is limited, but most of them do have the same power to stay on for the foreseeable future if they still choose obviously not doing well doing that, but it is something that there is a possibility there won’t be any – I just I am fairly certain we will have some, but I can’t guarantee any of this because of the dicey nature of those negotiations.

Bill Katz - Citi

Okay, thanks for taking my questions.

Operator

Thank you. Our next question is from Ashley Serrao of Credit Suisse. You may begin.

Ashley Serrao - Credit Suisse

I guess, if we could just first start off with the CFD opportunity laid out, can you just talk about why your competitors are not trying to go agency as well? And then maybe how big is your largest competitor in terms of revenues? And what kind of margin profile should we expect from the business?

Drew Niv

And you are talking about why our competitors are now going agency and CFD?

Ashley Serrao - Credit Suisse

Yes.

Drew Niv

So there is sort of two answers to this, three if you will. One is the first – the same answer as why do most people not go agency and FX, obviously because dollars in million are a way higher to be principal in this business, especially this is an OTC market, where execution standards are unclear and undefined as they are in exchange rate marketplaces. And I think that this is something that as that changes, those advantages decline, but from a revenue per million perspective. And remember a lot of these businesses do not think in terms of risk reward and sort of that element, I think in absolute return. And I think in absolute return, there is no question that principal business is a better business.

And so from a dollars per million perspective, if that’s the only thing you look back. And I think a lot in this environment is extraordinarily difficult to change. If you remember, FXCM change from principal to agency and FX in late ‘06 early ‘07 the market was a far better market. Market conditions were far better. FXCM was a private company owned by a few people who could easily say, you know what, we can take 30% to 40% revenue hit for now and hope for a better future, because it’s a better business plan going forward and it’s better to our customers obviously a public company cannot do that. And our business that is trading lot cannot do that either. So we were in a luxurious position to do that many years ago, that is not available and it’s kind of suicidal to do that now for most people. So they kind of stuck.

Second, that’s kind of agency in general. I think the specific thing with CFDs is the industries and commodity CFD business, there is no ability to stray forward agency that as you would with FX, because you do not have traditional banks and other people making markets in those instruments, because the only people who do that are people who do that in future. So there isn’t really a straight corollary like there is in FX. We have because of our FX business some amazing relationships with a number of high-frequency trading stocks that are giving us essentially a very bespoke and a truly unique solution for this, which has to be cleared inside of FXCM makes it even trickier for those people, because they cannot prime broker at a large institution as they are used to. So this is something that makes that relationship very tricky. They wouldn’t do it with a lower rated entity that isn’t public and doesn’t have to hold money there. They would have to have a place, where there is enough volume, because they are again making completely bespoke markets. I think this is a fairly unique trading proposition.

In the single shares CFD business, there are other agency businesses, but they are extraordinarily expensive from a capital perspective to do and most people cannot afford it. And so therefore usually kind of a principal trading operation and this is something that new derivative rules, which have prompt the central clearing of derivatives and essentially make this capital less cheaper. This is something that is relatively new phenomenon and we are hoping to take advantage of that as well.

Ashley Serrao - Credit Suisse

Got it. And just maybe just a follow-up to that like how big is your largest competitor today and do you think that, that revenue set is the right opportunity in front of you given they are probably principal and you are going down to the agency revenue?

Drew Niv

Yes. The largest, I don’t recall, exact revenues although they are pretty big. I do markets in the UK, which is a publicly traded company is if I recall correctly is about $4 billion market cap. So it’s not a tiny revenue company at all. And you are talking while they are meaningfully larger than everybody else you are talking about a few large firms in Europe who have hundreds of millions of dollars in addition to IG, there is a few that have hundreds of millions of dollars of CFD revenues annually. And so if you look at that sort of pie which I laid out of $1 billion, $2 billion in CFD revenues that put our margin on that and some profit margin on that and a market cap you can see sort of where that is.

Ashley Serrao - Credit Suisse

Got it. And guess finally on Lucid and your expansion into other asset classes, why do you think you can give some of the established non-banking companies run for the money and maybe like as you spoke about your asset classes like futures, bonds and treasuries, which one you are most excited about like what’s more lower hanging fruit and what’s the more challenging task?

Drew Niv

I don’t want to do lot of those specifics, but I think that for just not to give away much of the secret sauce and what we’re going to be doing, but I think that so, I won’t go instrument specific, but the stuff we laid out in futures includes options in futures, which is obviously the Infinium – legacy Infinium specialty also that we’re very excited about these things, we think that these are big things Infinium had or is a big player in that space and obviously for had stumbles and overexpansion and risk management that lead to the demise of that firm as lead demise of many in that industry.

We think those are fixable errors that can be very – it can be very much corrected given the Lucid expertise and we do have, which is why this is a JV that has a same economics as Lucid, with Lucid owning the same percentage and that is something that we’re very optimistic about and Lucid is able to do this in spot foreign exchange, which is one the most competitive and most plain (indiscernible) instrument and we believe that therefore lot of the instruments that are V3 will be trading far more complex and therefore have a higher yield through per million and have less competition in them and then that’s something that we think we have an opportunity to do the Lucid magic. Lucid is not some star in the space and in spite the fact is either the number one or number two market maker on most of the venues are competes on as not something that we think we’re some smallish guy that is starting from number 10 and trying to get to number two.

Robert Lande

And just as a point of clarification is something said earlier we didn’t foreclose on Infinium’s asset, but the note that we bought we used as consideration to purchase the selected asset that we want is to get. So, look forward to reporting more a bit is actually in coming quarters. Right now, it’s still early days and no point in us giving you run rates and ballparks until we have it on board.

Ashley Serrao - Credit Suisse

Great, thanks for all the color.

Operator

Thank you. Our next question is from Rich Repetto of Sandler O’Neill. You may begin.

Rich Repetto - Sandler O’Neill

Yes, thanks, operator for squeezing me in here. So, I guess the first question is on the balance sheet so, if you get no pursuable short-term and no pursuable longer term rise of $6 million, I’m assuming that it just showed up this quarter, I’m assuming it has to do with the purchase note from Infinium.

Drew Niv

Yes, that has to do with the Infinium – the Infinium purchase, yes.

Rich Repetto - Sandler O’Neill

Okay. My only other question is so you talked about the CFDs and you say that’s accretive so what would you expect to be successful, what would you expect or how revenues and expenses if you’re successful going to be say in 2014?

Drew Niv

I think that in terms of the CFD business rise, there are no additional expenses – the same expense structure, the same cost expense, the same fixed cost expense structure that we have today. I said if it’s successful we may ramp-up a little bit of marketing outside of that we see the costs staying the same. Obviously in CFD, the dollars per million even on an agency basis are $120 to $150 so, if we have a higher mix to CFDs, we expect that you guys will see a creep up in the dollars per million and obviously, we are hoping that we’re going to grab a decent market share out of that pie may not happen in the next two months but it is something that we think that we’re launching some of this stuff in a few months, some of this stuff single shares in the second half of 2014 and as we begin to make traction in it we think it will be fairly meaningful. I’m hoping to give you more (glimpse) like more progress on that going forward. We probably starting in the Q2 conference call we’re able to give you a lot more progress on this and how it’s going. But I think some of that you’ll see it in the dollars per million hopefully in the volume and accounts as well.

Rich Repetto - Sandler O’Neill

Great. Thanks.

Robert Lande

In retail on your first question just the notes that we bought together with the Lucid principals, the maturities were different. So that’s why this split between current and long-term. But that adds up to the $11.8 million of notes that we purchased from Infinium which will – as I – as mentioned it’s now gone away because we use that as consideration to – for the assets that we now purchased. Next question?

Operator

Our next question is from Arnie Ursaner of CJS Securities. You may begin.

Arnie Ursaner - CJS Securities

Hi, good morning. I think my question for Drew is Drew you’ve been talking about regulatory change leading many of your competitors at year end due to higher requirements and other factors essentially giving up and consolidating. It hasn’t happened, why is that?

Drew Niv

I think some of it is that no different than if you saw sort of Dodd-Frank and you just – Dodd-Frank was passed in 2010. Its initial implementation date was July 2011. And the first product to – that was the first derivative that was in swaps that was made available to trade was effective February 2014. So that just shows you how slow regulatory stuff kind of scrolls along. And so it’s harder than predicting market, just predicting regulatory deadlines and changes except the one benefit that we had in regulations versus predicting market is that we know the regulations for sure are getting tougher and not better.

So the – in that sense that’s an inevitability and if you look at all the stuff that has been clearly outlined by regulators and some of the stuff that is coming that’s probably a little less clear, that inevitability makes clear that most people will not be able to survive, obviously there is a gap there between them laying that out and implementing it than enforcing it evenly across the board and sort of much more broadly. And I think that’s something that still left to be done. But it is an inevitability just a question of getting I got the timing wrong, I don’t – the substance is there in black and white.

Arnie Ursaner - CJS Securities

But there was no specific change in the regulatory environment that will enable people to wait six months or a year before building up reserves or other factors?

Drew Niv

No, it’s just been a lot of delays not just here but in Europe and everywhere else and the implementation of a lot of these rules and it’s been – there is delays obviously in enforcing these rules in places like Europe you have EU passes laws and obviously every national regulator has to come up with a framework how they’re going to enforce it and how they’re going to do something with that. And I think that, that’s something that we’re eventually all kind of falls into line but obviously it’s not an overnight process. I am fairly confident that my prediction comes true I am pretty sure that like I said those rules are in black and white. It’s just a question of when and I realize as we kind of do this every quarter there is a – it’s very hard for me to say oh in the next three months this dam will break or that will break. But there is like the rules are the rules and they are I don’t want to say in our favor, they are in our favor in a sense that we’re hurt less by them than other people.

And if you look at some of our presentations we put out most of our competitors are significantly smaller than us, significantly less resources. We know a lot of them, we’ve done due diligence in a bunch of them as the majority of the mid-sized firms in this industry are either unprofitable flat out or marginally so. It does not –we’ll not pay for them to being business and that’s without any sort of one-off hits or any sort of worsening of conditions or worsening of regulations. We should think worsening of regulations is inevitability.

Arnie Ursaner - CJS Securities

My final question is if you look at your institutional and retail business. What is the current exposure today of agency versus principal and with the additions of Infinium and the new initiatives in CFD, how it’s changed the mix in your opinion and the risk profile on the overall business?

Drew Niv

So I think sort of looking it that from sort of in two ways, one is the only reason we’re going to be doing a large increase in the CFD business is we did not do before is the fact that we’re going to be able to take a much lower amount of risk given the fact that most of that stuff will be agency going forward. So I think that’s something that right now for about half the CFD business is a principal business.

I think going forward that’s going to be quite different though I can’t predict at 100% that is – as we get we’ll not – we’re not willing to scale that business as aggressively as we could because we then want to change the risk profile of the firm. But that is something that now we’re able to do, but because it’s an agency product I think the other from the Infinium perspective the risk is largely Lucid type risk.

So yes you can call it a principal business but it is not the – make directional large bets type proprietary trading business. It is the – largely be high frequency trading extraordinarily short timeframe, high sharp ratio picking pennies from the floor type business. And I think that, that’s one of the best way to describe it, it is not shooting for big wins or something like that, that it is largely a high frequency business and I think that’s something that we’re – we believe contains the risks of a very large degree. So normally it is called a principal business, it is not obviously not to be compared with a normal sort of proprietary trading operation.

Arnie Ursaner - CJS Securities

Thank you.

Operator

Thank you. And our next question comes from Kenneth Hill of Barclays. You may begin.

Kenneth Hill - Barclays

Hey good morning, Drew and Robert.

Drew Niv

Good morning.

Kenneth Hill - Barclays

Just had a quick follow-up here on the institutional side, the institutional platform, I think Robert early you mentioned that the migration was largely done with customers. So just kind of wondering how to think about trading per million and which improved this quarter but how to think about that going forward given some of the incentives you guys made – had in place and maybe how long those could potentially remain in place in the competitive environment there just on like a core basis?

Drew Niv

I would say in the institutional trading business Ken it’s largely a – it’s a extraordinarily competitive business and unlike in the retail business we’re a dominant player, we’re knocking institutional business. So we do see sort of that high single-digits to low double-digits as the range of where that goes dollars per million are going to be. And for right now we think that as we got more visibility as to see that our pressures ease maybe that will change. But I think right now those dollars per million is we’re not ready to call that higher at all. The – that market is obviously still a significantly challenging market from the fact that it’s being impacted by some – the participants in that market, banks and other players like that are being impacted by so many changes than it is structurally a market that is hurting and you can see that in the proxies for the institutional business in FX.

Kenneth Hill - Barclays

Okay, that’s it from me. Thanks for the color there.

Operator

Thank you. Our next question is from John Dunn of Sidoti. You may begin.

John Dunn - Sidoti

Good morning guys.

Drew Niv

Good morning John.

John Dunn - Sidoti

And just on the retail side and the retail RPM, can you just talk about some of the larger puts and takes in 4Q and how maybe that shaping up in 1Q?

Drew Niv

Yes. In 4Q, it’s really just there was less yen, which means less trading from our Japanese customers. And that had been a scene through all of 2013 pretty much. And as we have said in previous calls that Japan is the one market where it’s very competitive and that’s the revenue per million is lower there. So if that represents a larger share of our overall volume that will impact us. Yes. So far, I mean, we are only just a little past halfway I guess in the quarter, but I think it’s looking a little better than where we were in Q4 and we will have to wait and see whether we can continue to kind of be in this level of low 90s now, but it hasn’t been as much yen centricism as well in January and February. Let’s wait and see how the quarter pans out.

John Dunn - Sidoti

Got you. And then just as a follow-up, you mentioned institutional is ultra competitive, has the prospects are taking share from the big guys, specifically the big banks gotten better or is it basically the same as second half of last year?

Drew Niv

I would say it’s the institutional business is sort of a tail of two cities. If you look at your traditional, I am sorry to making that term, prime institutional business of business that is essentially, let’s not use the word prime as kind of the – is used to trading with the big dealers is using traditional prime brokers has good access to that market. That business has gotten tougher over the last few years as FX Vol has declined in a lot of like their macro funds and sort of FX trading houses of the last FX trading to do. They are focusing a lot more. They are trading with their bigger relationships, which it does not include us and that’s obviously a place where there is loss share if you look at. And I think we are the only people who have gained share has been sort of top five dealers and all the (indiscernible) have lost share on that front.

If you look at the where we have gained share is sort of the lower tier institutions and the institutions in emerging markets, where the top dealers have focused less on and have been sort of not been able to service them as well. This is where we have taken share and allow where our lot of our volume gains has been coming from. So if you look at that giving all the emerging market scandals are happening now. That trend we believe is likely to continue as there is no worse fair weather trend in the Wall Street and that emerging market institutions here only find that out fairly painfully. Every time, they go into a crisis that they lose the amount of people that have come to call them and visit them. So that is a something we think is encouraging for our institutional business from that perspective, but like I said the traditional institutional business is under stress because of current conditions.

And if you look at sort of all the changes that the Federal Reserve has done, Basel 3 and others that essentially have raised the cost of capital for banks that has led banks to essentially insist on a higher return from their trading relationships and be much more adamant that for the financing of prime brokerage services that they provide or similar things that they receive a higher proportion of client trading and that obviously has impacted those people I am not willing to do that. So we don’t have the resources. So, I think that this is a fairly significant thing that has led to the pressure in the institutional space, not to mention that obviously volatility has led to – has kind of played a huge role in this, but that’s something that we are like I said, our one advantage here is the smaller institutional, especially in emerging markets and other countries, where there isn’t, they are willing there to go do that. We are able to go and do that and we capture market share commensurately.

John Dunn - Sidoti

Got it. Thank you very much.

Operator

Thank you. I am showing no further questions at this time. I would like to turn the conference back over to Jaclyn Klein for closing remarks.

Jaclyn Klein - Head, Corporate Communications and Investor Relations

Thanks operator. On behalf of Drew, Robert, and everyone here at FXCM, I would like to thank you for joining us this morning. And we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for participation. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts