FXCM's IPO Reasonably Priced Before Thursday's Debut

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FXCM Inc.'s (FXCM) $211 million IPO with a market cap of $1 billion at a price range mid-point of $14 is
scheduled for Thursday, December 1, 2010.

Valuation and Summary

FXCM is reasonably priced at a P/E discount to both online brokers including OptionsXpress (NASDAQ:OXPS), Interactive Brokers (NASDAQ:IBKR), Charles Schwab (NYSE:SCHW), TD Ameritrade (NASDAQ:AMTD) and E trade (NASDAQ:ETFC) and to exchanges & trading platforms including IntercontinentalExchng (NYSE:ICE), CME Group (NASDAQ:CME), CBOE Holdings (NASDAQ:CBOE) and MarketAxess (NASDAQ:MKTX).

FXCM Valuation Metrics

FXCM provides an easy way to trade global macro economic trends -- in currencies -- similar to ETFs (Exchange Traded Funds). It's financially strong with internally generated growth plus acquisitions, never used outside capital and to-date has paid $378 million in dividends. If there are no acquisitions then FXCM doesn’t expect to maintain high levels of cash, and will pay out.


FXCM is an online retail/institutional agency broker trading currencies rather than equities. Doesn’t take positions as a principal. Generates recurring revenue from 175,000 customers in 184 countries with 76% of trading derived from outside the US. FXCM generates positive cash flow.

Market Consolidation

FXCM says there has been a 70% reduction in providers in the US since 2006. Regulatory changes may continue to narrow the pool of providers authorized to offer retail FX that can meet the higher regulatory standards. FXCM plans to acquire customer accounts from weaker competitors as the industry consolidates.

Wholsale FX Market Makers and Prime Brokers

FXCM’s global network of FX market makers includes global banks, financial institutions and market makers. For the nine months ended September 30, 2010, 73% of volume was transacted with the following global banks, in alphabetical order: Barclays, Banque Nationale de Paris, Citi, Credit Suisse, Deutsche Bank, Dresdner Bank/Commerzbank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Nomura and UBS. The balance of trading volume was transacted with other market makers

How It Works

FXCM offers customers access to over-the-counter, or OTC, FX markets through proprietary technology platform. In a FX trade, a participant buys one currency and simultaneously sells another, a combination known as a “currency pair”. The company's platform presents FX customers with the best price quotations on up to 56 currency pairs from up to 25 global banks, financial institutions and market makers, or FX market makers

FX Market Grows 37% CAGR

According to 2010 estimates by the Aite Group, a financial services market research firm, retail FX trading volumes have grown from average daily volumes of approximately $10 billion in 2001 to approximately $125 billion in 2009, representing a CAGR of 37%.

The FX market is the largest and most liquid financial market in the world. According to the Bank for International Settlements, average daily turnover in the global FX market in April 2010 was $4.0 trillion. Historically, access to the FX market was only available to commercial banks, corporations and other large financial institutions. In the last decade, retail investors have gained increased access to this market, largely through the emergence of online retail FX brokerages, like FXCM firm.

FX Market Open 24 Hours Per Day, Five Days a Week

Unlike equity markets that limit investors to trading during market hours, retail FX participants have the convenience of trading FX at any time throughout the day, as well as the ability to place trades immediately, rather than waiting until the equity markets reopen the next day.

As a result, FXCM’s average account traded 3.4 times per day in 2009 and 2.5 times per day in the first nine months of 2010, which FXCM believes is significantly more frequent than the trades per day of the average online equity account. FXCM is open 24/7 for customer service

Profits Peaked in 2008

Although profits peaked in 2008 FXCM generated CAGRs from 2001 to 2009 of 55% for revenues & 44% for income before taxes.

Sales and Marketing

Tradeable customer accounts have grown from 49,885 for the year ended December 31, 2007 to 140,565 for the year ended December 31, 2009, a CAGR of 68%. Active customer accounts have grown from 59,541 for the year ended December 31, 2007 to 116,919 for the year ended December 31, 2009, a CAGR of 40%.

Two Business Segments

The retail trading segment accounted for 94% and 92% of total revenues in 2009 and the nine months ended September 30, 2010, respectively. The institutional trading segment, FXCM Pro, offers FX trading services to banks, hedge funds and other institutional customers on an agency model basis and accounted for 6% and 8% of total revenues in 2009 and the nine months ended September 30, 2010, respectively

Three Sales Channels

These include direct marketing, indirect marketng and institutional sales and marketing. The indirect, white label channel is the smallest of three new customer acquisition channels.

In the indirect channel FXCM is a party to an agreement with Deutsche Bank AG (NYSE:DB) for FXCM to provide sales, trade execution, processing and other back office services to DB in relation to DB’s offering of its retail foreign currency trading platform, which operates under the trade name dbFX

Scaleable Proprietary Technology Platform

On average, FXCM has 58,000 customers logged on the technology platform at any given time. The platform divided into three main groups: front-end technology platforms and trading decision support tools, agency model technology platform and back office applications for account management, operations, reporting and reconciliation processes.

Retail Competition

The retail FX trading market is fragmented and highly competitive. Competitors in the retail market can be grouped into several broad categories based on size, business model, product offerings, target customers and geographic scope of operations. Competition in the institutional market can be grouped by type, technology and provider.

U.S. based retail FX brokersprimary competitors are Gain Capital Holding LLC, Global Futures & FX, LLC and OANDA Corporation. They are well capitalized, have their own technology platforms and are recognizable brands. All of these firms operate using the principal model.

FXCN also competes with smaller retail FX brokers such as Capital Markets Services, LLC, FXDirectDealer, LLC and InterbankFX, LLC. These firms, to date, have not been core competitors due to their smaller size, technology and marketing limitations. With the exception of InterbankFX, all of these firms operate using the principal model.

International multi-product trading firms outside the United States with whom FXCM competes include Saxo Bank, CMC Group, IG Group Holdings plc and City Index Limited. Other than Saxo Bank, the international firms tend to focus on CFDs and spread betting and derive less than 50% of their revenues from retail FX.

Other online trading firms offering a lesser degree of competition include traditional online equity brokers OptionsXpress Holdings, Inc., E*TRADE Financial Corp., TD Ameritrade, TradeStation and Interactive Brokers. These firms generally tend to focus on listed products and may already, or will in the future, provide retail FX principally as a complementary offering.

With the exception of Interactive Brokers, the firms in this category that have entered the FX market have generally done so through a relationship with a retail FX broker who specializes in FX.

International banks and other financial institutions with significant FX operations are also competitors. Financial institutions generally choose to enter into a joint venture with an independent retail currency firm in lieu of building a retail operation. For example, FXCM has a white label relationship with dbFX, the online retail FX offering from Deutsche Bank.

Institutional Competition

In the institutional market that the FXCM Pro segment competes, FXCM faces competition from three principal sources.
(a) Other multi-bank ECNs (Electronic Communication Network. An electronic system that brings buyers and sellers together for the electronic execution of trades, and is not an exchange) such as State Street Banks’ Currenex, Knight Capital’s Hotspot FX and ICAP’s EBS.
(b) Single bank platforms such as Deutsche Bank’s Autobahn, Barclays’ Barx and Citi’s Velocity.
(c) Desktop aggregators including Progress Software’s Apama, Flextrade and Integral.

Use of Proceeds

Of $197mm:

  • $50mm to fund acquisitions of small- to mid-sized retail FX firms that FXCM may identify in the future and for general corporate purposes.
  • Balance to purchase stock from current shareholders, including management

FXCM Valuation Metrics

Disclosure: None