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Screenshot of a breaking news alert e-mail from Q2 2017
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.
- 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.
- 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.