Shares of retail forex broker Gain Capital (NYSE:GCAP) were up as much as 27% in early trading Friday following the company’s release of Q3 results (which included record quarterly revenues of $103 million), and of course the company’s acquisition of leading UK spreadbetting and CFDs/FX broker City Index.
We believe that most of the move in Gain’s shares relate to the City Index deal. Good financial results were expected from Gain following already-released record retail trading volume metrics in September, alongside an industry-wide pickup in trading after the summer. So the healthy revenue and profit figures should not have been too much of a surprise.
But the City Index acquisition is a game changer.
The UK online trading market is one of the world’s most lucrative, with well above average client lifetime values. But it is also a relatively closed market. The major global online brokers, such as FXCM (NYSE:FXCM) and Saxo Bank have had a tougher time in the UK – picking up some market share but still trailing the domestic leading firms such as IG (LON:IGG), CMC, City Index, ETX Capital, as well as focused newcomers such as Plus500 (LON:PLUS). (See our article on the UK CFD market here).
Having a true stronghold in the UK changes the UK market overnight, and puts firms like IG on notice that things have now changed, and that their leadership in the UK is likely to be challenged.
The City Index deal certainly is a challenge for Gain but also presents a new growth horizon. If they play their cards right, and can cut costs by combining the two companies, there could be a lot of upside from here for Gain.