FXCM Inc shares drop 11% Wednesday after revenue per million guidance lowered

Rough day of trading in shares of FXCM Inc (NYSE:FXCM).

FXCM saw its shares drop 11% to close at $14.87 on Wednesday, its lowest level since late October, on heavy volume with 1.8 million shares trading hands.

Despite FXCM’s very strong volumes showing for both December and Q4 as a whole, investors seem to be focused on FXCM’s announcement yesterday that its retail revenues per million dropped to about $70 million for the fourth quarter 2014, versus the $75-$80 per million expectation given on FXCM’s third quarter 2014 earnings call.

The reason for what amounts to a drop in gross margins at FXCM? Two reasons, actually.

  1. Strong Japan volumes. Ironically, higher than expected volume from FXCM’s Japanese subsidiary as well as higher global trading in Yen currency pairs – where pricing is typically more competitive with tighter spreads – was a primary contributor to the adjusted guidance.
  2. FXCM’s new pricing plan. There were a greater proportion of clients trading on FXCM’s new pricing plan in the quarter. About four months ago FXCM launched a new pricing model in selected geographic markets, offering pure prices from its liquidity providers with a commission displayed separately. When compared to the markups offered on a number of the top currency pairs in these geographic markets, the new pricing could reduce client trading costs by as much as 60%.

As a result of the new guidance, investment bank Keefe, Bruyette & Woods lowered its Q4 EPS estimate for FXCM to $0.14 from $0.19.

Wall Street certainly has the right to focus on near-term profitability (which we aren’t convinced will be hit that much at FXCM). But we think that punishing FXCM for its recent pricing moves might be a case of getting a little too trigger-happy.

FXCM’s cutting prices may hurt its near-term per million revenues, but it seems to have succeeded strategically in boosting overall client trading volumes (retail volumes were up 40% in Q4 over Q3), and – most importantly – in bringing new clients and fresh client assets into FXCM. As we recently posted, FXCM saw a 9% rise in US client assets during November bringing in more than $20 million of new assets, while its main competitors (Oanda and Gain Capital) actually saw a drop.

And in a business predicated on bringing in new client deposits, FXCM seems to be doing quite well.

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