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LeapRate’s Online Forex Industry Predictions for 2011

|Includes:FXCM Inc. (FXCM), GCAP

We’ve never been really big on predictions, especially when it comes to the unpredictable world of online Forex, but ‘tis the season, so……

LeapRate’s Top 3 Predictions for 2011:

1)      Falling trading volumes. Following several years of double-digit % growth in volumes (see our Online Forex Industry Report), we foresee a leveling off, or even slight shrinking, of global online Forex trading volumes in 2011. Our prediction is based on:

a.       Regulatory reforms in several key jurisdictions, notably the US and Japan, capping leverage in the 20:1 to 50:1 range. We are still awaiting Q4 results from firms in the US, where lower leverage levels were mandated as of October 18, 2010 (i.e. early in Q4), but we believe that lower leverage in two of the world’s three leading online Forex markets = lower overall trading volumes.

b.      Lower general market volatility, which has always been the key driver of volume for online Forex firms. For example, the EURUSD pair has traded in a fairly tight 1.30-1.40 band over the past year, following much wilder fluctuations between 1.20-1.60 the previous two years. Again, predictions in this area often don’t pan out, but unless something “shakes up” the market, triggering larger swings in Forex pairs and oil and gold prices, we see volumes at online Forex firms continuing to taper off over the coming months.

c.       Simple market saturation, following years of heavy online advertising by online Forex firms.

2)      Consolidation. This time next year, we predict that there will be fewer firms in the online Forex business (a lot fewer, actually), and the larger firms will continue to gain market share. Causing this consolidation is:

a.       Regulation. The regulatory bar continues to be set higher in the US, Europe, Japan, and elsewhere, making it harder (and more expensive) for new firms to launch, as well as more difficult for smaller firms to remain profitable. At the same time more and more countries are cracking down on i) unregulated firms operating, or ii) gaining access to investors in those countries. BVI and Mauritius are examples of i), and Canada is an example of ii).

b.      IPOs. In 2010 we saw the first two major IPOs in the online Forex business, those of FXCM and Gain Capital ( With newly minted publicly traded stock as acquisition currency – and the pressures of the stock market to show growth in what may be a stagnant market – we foresee an uptick in acquisition by these firms, as well as other non-public firms looking to “keep up with the Joneses” .

c.       A More Discerning Public. Our sense is that investors across the world are becoming less swayed by a neat Web ad or promise of deposit bonuses, and more focused on what counts in their choices of online Forex firms – proper regulation, tight and consistent spreads, the right technology and trading platform, counterparty risk, etc. This is especially true of high-net-worth retail and institutional clients, increasingly the focus of the online Forex firms. And these more discerning clients will, in our view, tend toward the larger, well-capitalized, regulated-around-the-world firms.

3)      More IPOs? The big question of 2011 is whether or not other firms will follow in the footsteps of FXCM and Gain Capital ( and look to go public in 2011. Both FXCM and Gain did not get great valuations in their IPOs (see our December 17 research piece comparing the IPOs), but just getting those deals done was, in our view, a watershed accomplishment. Whether or not other firms do go public is impossible to predict – even if firms do try, successful completion of an IPO is subject to a cooperative equity market (i.e. lucky timing), and the agreement of all major shareholders to the valuation given by the public markets, among other factors. With Gain trading at a market value of just $287 million – and this for the sixth largest non-Japanese firm globally (see our Industry Report for a list of firms by region and their trading volumes) – it is unclear if other firms will be satisfied going public based on these metrics.

To all our clients and friends a happy, healthy and successful 2011!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Stocks: FXCM, GCAP