Lower revenues and profits should not have been a surprise, however market was spooked somewhat by FXCM’s $15 million regulatory reserve.
Leading forex broker FXCM ( NYSE:FXCM ) saw its shares dive by 8% on Thursday after FXCM reported Q3 results earlier in the day.
While FXCM’s financials were somewhat disappointing — revenues down 19% from Q2, EBITDA down 39% — the results should not really have surprised the market, as FXCM already had reported all its July, August and September trading volumes, which the market knew were down from earlier in the year. Also, FXCM reported along with Q3 results its October volume metrics which increased nicely from September, especially its higher-margin retail volumes, which were up 11% from September.
In fact, from an operational perspective, other than lower volumes during Q3 (some of which is seasonal due to the slow summer months), nothing else seems wrong at FXCM. FXCM’s margins remained steady during Q3 (see graph below), with retail margins holding at about 1.8 pips per round-trip-trade, and institutional volumes at 0.8 pips. Nothing structurally wrong at all here, and if volumes come back up so should revenues and profits.
Source: FXCM financial reports, LeapRate analysis.
What seems to have precipitated the selloff was FXCM’s noting of a $15 million reserve set aside in Q3. While not at all large for a company like FXCM with a $1.1 billion market cap, the reserve itself seems to spooked some investors.
FXCM had this to say about the reserve:
“During Q3 2013, FXCM established a $15M reserve for a longstanding regulatory matter with the FCA pertaining to an ongoing investigation regarding past trade execution practices concerning the handling of price improvements in the FXCM trading system prior to August 2010. As of August 2010 FXCM enhanced its trading execution policy to help ensure that clients benefit from positive slippage on all market, limit and limit entry orders. The policy was further enhanced in December 2010 to address all order types, including stop and margin call orders, through FXCM’s No Dealing Desk (“NDD”) forex execution model. At this stage the enforcement investigation has not yet been resolved and there has been no finding of wrong doing. FXCM is one of the only FX brokers to give clients price improvements.”
The market reaction to FXCM also dragged down shares of rival Gain Capital ( NYSE:GCAP ) — Gain shares were off 5% on Thursday. Gain had already reported Q3 results last week, it too saw its shares drop 7% the day after. Gain Capital is now, at $10.10 per share, off 31% from its peak of $14.62 set in late September. FXCM is down 26% from its all time high of $19.97.