E*Trade takes the IB route to FX

Online stockbroker E*Trade announced today that they have joined a number of their online brokerage brethren in getting into the retail FX business, with the launch of E*Trade FX as a White Label of FXCM’s Trade Station platform.

However, as pointed out by our friends at CMAP on their corporate blog, E*Trade FX is launching as an Introducing Broker (“IB”) rather than a full Retail Foreign Exchange Dealer (“RFED”). What that means is that FXCM, and not E*Trade, will hold all the FX accounts and corresponding client funds, and FXCM will act as the counterparty to FX trades with clients, not E*Trade.

CMAP points out that as an IB, E*Trade’s NFA/CFTC requirements are far less than had they chosen to become an RFED and directly take client funds and trades. This is a similar route as taken by competitor Zecco (IB of Gain Capital), but different that the full (and more expensive) RFED route taken by other hi-profile White Labels such as Deutsche Bank’s dbFX, which was shut down last year. Some of E*Trade’s other US online trading competitors have launched their own (RFED) offerings, such as TradeStation (formerly a White Label of Gain Capital) and optionsXpress. Only TradeStation has made much of a dent so far in the ever-crowding US online Forex market, with now about $70 million in clients’ FX deposits.

From a geographic perspective, this will not have much effect outside the US. E*Trade is a sizable firm, but the vast majority of its operations and clients are in the US – in 2010 more than 98% of E*Trade’s revenues were earned in the US. (In an effort to raise capital after taking a hit in its US mortgage lending business, E*Trade has sold off most of its international operations the past three years, including the 2009 sale of its Nordic online trading business to Saxo Bank). We would expect, given the IB model chosen, that E*Trade will not do much more than market its new FX offering to its existing US client base. However that client base is sizable – E*Trade has more than 4 million client accounts and about $185 billion in client funds. 

For more on the Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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