Steady retail margins, growth is in Asia, big White Labels coming...
FXCM announced its Q4-2011 results (and Feb-2012 volumes) last week, which the stock market applauded by sending FXCM stock up by more than 12%. After having a bit more time to go through FXCM's press release and Q4 investor slideshow, we had a few more observations to share.
1. Margins - very steady in retail, but eroding in institutional.
A very positive note from FXCM's Q4 numbers is that margins from retail volume (blue line above) have remained very steady, at around 2.0 pips earned per round-trip trade over the past two years. This is where FXCM makes most of its money, and if FXCM can continue to integrate acquisitions (and grow volume organically) while keeping margins at this level, then we think the future is very bright indeed for FXCM.
Institutional margins (red line above), however, tell a different story, with pips-earned falling by more than 50% from 2010 levels, reflecting an ultra-competitive institutional and ECN market in Forex. (We have also seen trends of falling ECN margins, such as at FXall). While FXCM has grown institutional volumes nicely, from about $50 billion per month two years ago to nearly $150 billion per month today, that growth has barely moved the needle at all in creating revenue for FXCM. While institutional volumes are closing in on being 1/3 of overall FXCM volumes, those volumes generate less than 7% of FXCM's trading revenues.
2. Most of FXCM's growth has been in Asia.
In Q4 Asia represented nearly half (47%) of FXCM's retail volume, up from 37% in Q4 last year, and less than 1/3 of volumes less than two years ago.
This move to Asia is not too surprising, given that FXCM made two acquisitions in Japan during 2011, although the impact from those acquisitions will be felt mostly in 2012. But clearly, Asia is the new battleground in Forex, with the leading global Forex firms positioning themselves for increased competition in Asia, and for the eventual opening of the Chinese retail market. This access-to-Asia push is one of the reason we have seen so much recent interest in Australia, with firms such as Saxo Bank, FxPro and AvaFX opening offices and growing their presences there.
3. New White Labels.
FXCM recently signed up E*Trade and its $180 billion in client assets as a White Label client for E*Trade's about-to-be-launched FX business. The deal is a 50-50 split in revenues. And FXCM projects that if just 1.5% of E*Trade clients take up FX trading, it could result in upwards of $200 million in annual revenue for FXCM (sounds somewhat overly-optimistic to us!). Apparently FXCM has two more large White Label deals in the works, one with a large European financial institution. Should be some announcements soon.