Gain Capital down 7%, FXCM down 4% on KBW research downgrade

It was a very mixed day Wednesday in the trading of shares of publicly traded FX brokers. While London-listed Plus500 (LON:PLUS) saw its shares rocket 9% after reporting robust Q3 results (marking a two-day rise of nearly 16% for Plus500), on the other side of the ocean FXCM (NYSE:FXCM) and Gain Capital (NYSE:GCAP) fell sharply after somewhat negative research reports were issued on both by investment bank Keefe, Bruyette & Woods (KBW).

KBW initiated research coverage of FXCM with an ‘underperform’ rating and a $15 price target – below FXCM’s current share price – citing price cuts (i.e. lower spreads/margins) and the risk of account closures as FXCM moves to higher-value, higher-turnover accounts (a move KBW likes, however). In KBW’s words:

We like how [FXCM] management is strategically moving to higher-value, higher-turnover accounts. However, we see risk that the price cuts and account closures through this transition are not yet fully reflected in consensus estimates or the stock price… We think FXCM is positioned nicely for the cyclical turn to better FX volatility and trading and structurally for more non-bank trading and market making, and generally more electronic trading.

Gain Capital was already covered by KBW, but they lowered their rating on GCAP to ‘market perform’ from ‘outperform’ and now cite an $8 price target. KBW’s thesis on Gain was simply a risk-reward analysis of GCAP’s shares, in the shadow of Gain Capital’s expense growth and competitive pressures on market share. KBW’s report cites:

We’re concerned that growing expenses [at GAIN Capital] could offset the potentially higher revenue and we’re cautious about market share movement in the retail business—especially as one of GAIN’s competitors gets more aggressive on pricing and targets entering the CFD market, a growing product for GAIN.

FXCM and GCAP share price

FXCM and GCAP share prices over past 12 months. Source: Google Finance.

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Gain Capital down 7%, FXCM down 4% on KBW research downgrade


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