April 26, 2011: Gain Capital buys (but loses its largest IB), Deutsche Bank (dbFX) quits, FXCM loses major WL client, Alpari announces, TradeStation sells, Saxo Bank to sell?


1) The Gain Capital (Forex.com) / dbFX / FXCM triangle. First, some background. Of the major Forex firms, FXCM is the one which relies the least on White Label clients (less than 3% of overall volumes) – possibly due to an unpleasant experience it had back in 2005 following the bankruptcy of Refco, its largest White Label (accounting for 40% of FXCM volumes and at the time also a major shareholder in FXCM), causing a significant disruption in FXCM's business. FXCM scored a major coup about a year later when it landed Deutsche Bank as a White Label client, when Deutchse Bank established dbFX. In 2010 dbFX represented FXCM’s largest White Label client and about 90% of FXCM’s overall White Label related revenues, with the business coming from dbFX accounting for about 2.3% of FXCM’s overall revenues. Based on those numbers, we estimate dbFX’s average monthly volumes to be in the $10-12 billion range.

Apparently, dbFX decided to exit the retail FX business, and held what amounted to a small auction for its existing clients, won by Gain Capital. What Gain is actually buying remains a little unclear. Apparently it is mainly purchasing the right to try to get dbFX clients to move over to Gain – buying dbFX does not guarantee that all of dbFX's clients will agree to move their accounts to Gain and its proprietary platform. As dbFX was using FXCM’s platform, clients which decide to stay with that familiar platform can just as easily move their accounts to FXCM. For that reason, we do not believe that a lot of money changed hands here (transaction details were not disclosed, we might learn more later in the summer when Gain Capital announces its second quarter results). We also expect a relatively high attrition rate of soon-to-be-ex dbFX clients to FXCM and possibly other firms.

We do not expect this transaction to have a material effect on either FXCM or Gain Capital – the volumes at play are not large to begin with, FXCM will not be losing much and Gain Capital will not be adding much. The stock market however wasn’t impressed with either Gain Capital or FXCM, with their share prices down 2.0% and 1.9% respectively the day the deal was announced, while the overall market was up about 0.5%. Gain Capital shares are now down 28% since going public in December.

We believe that the major lesson here is that the online Forex industry is just not one which suits the traditional commercial banking world. There remains Citigroup’s CitiFX Pro (a White Label of Saxo Bank) and the recent entrance of Barclays to the sector (also via a White Label agreement with Saxo Bank), but overall the world’s large banks and other institutional players in the “traditional” FX business are not present in the online retail FX sector – the reasons for which we discuss in our Online Forex Industry Report.

Separately, FXCM announced its monthly numbers for March, with volumes rising significantly to $314 billion (from $250 billion in February), marking what we believe will be a good quarter for the overall industry – not surprising given the high volatility in exchange rates and commodity prices during the second half of the quarter.

2) Alpari announces (some of) its results for 2010
. In announcing its monthly volumes at $160 billion, Alpari hand-picked November 2010 as opposed to reporting an annual average (sometimes it pays to read the fine print!). Not surprising, since for several brokers November was the only really good month in the second half of 2010. FXCM, for example, reported November volume of $322 billion, nearly 25% above its annual average for 2010. Given that and the fact that several other Europe-centric brokers such as Saxo Bank and FxPro saw volumes drop precipitously in the second half of 2010, we believe the average / run-rate at Alpari to be closer to $100 billion per month than their reported $160 billion. Our volume estimates for other US and European online Forex firms can be found in our Online Forex Industry Report.

3) TradeStation, a multi-asset online trading platform company in the US (Nasdaq: TRAD), was acquired by Japanese online brokerage firm Monex for $411 million – about 3.2x 2010 Revenues and 36x Net Income. Less than two weeks prior TradeStation had announced the launch of TradeStation Forex to operate its online Forex business, meaning that TradeStation would no longer act as an introducing broker to Gain Capital – TradeStation had been Gain Capital’s largest IB, accounting for 6.6% of overall Gain Capital volumes and 12.7% of Gain Capital’s customer assets in 2010. Based on these figures, TradeStation Forex (assuming all clients stay with them and their new proprietary platform) will start life doing about $8-9 billion in monthly volume, mostly in the US.

From Gain Capital's point of view, it basically comes out even, picking up close to $10 billion monthly from the dbFX acquisition while losing roughly the same amount from TradeStation going it alone. Except that Gain had to pay money to acquire dbFX, but (presumably) got nothing for the lost TradeStation clients – White Label agreements are nice, but they typically can be ended on short notice, with no recourse to the firm supplying the White Label.

The greater implication of the acquisition and launch of TradeStation Forex is simply more competition in the US retail Forex market.

4) Saxo Bank’s two major outside shareholders, private equity firm General Atlantic and Portuguese financial outfit Espirito Santo Financial Group, were rumored to be close to selling their combined 33% stake in Saxo Bank to unnamed US private equity firms based on a company value for Saxo Bank of almost $3 billion, according to Danish newspaper Borsen. We question the valuations being reported, given that they are way out of line with both publicly traded and M&A multiples for the industry, which we present in our Online Forex Industry Report. For more on this also see our report from April 21, immediately below.

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April 26, 2011: Gain Capital buys (but loses its largest IB), Deutsche Bank (dbFX) quits, FXCM loses major WL client, Alpari announces, TradeStation sells, Saxo Bank to sell?

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