Op Ed: Viewing a very different global FX landscape as 2014 passes halfway point

It is most certainly fair to say that this year has returned significantly different results, and created a totally contrasting business environment to the halcyon days of 2013, itself a year which generated tremendous gains in revenue compared to a very disappointing 2012.

Indeed, the very nature of our industry dictates that, as a largely online business in which transactions take place instantly, all firms which operate in the sector are equally exposed to varying degrees of success, or indeed the unwanted antithises of such.

Whilst it is commonplace to attempt to pinpoint reasons for sustained low performance, something that the entire business across all regions has experienced since the third quarter of last year when a sudden downturn occurred immediately after several months of record volume, it has become increasingly clear that specific factors imposed on the FX business are not ultimately factors which dictate its fortune or failure.

Going back two years, Japan was, as it has been for several years, accountable for 35% of all global retail FX order flow, largely conducted by domestic clients via domestic companies. The Japanese Financial Services Agency introduced a restriction on leverage, bringing it down substantially to 1:25, which was widely cited as a potential reason for ever decreasing results during that year. It has come to pass, however, that this was not a factor – indeed despite the leverage restrictions, the notoriously loyal Japanese FX traders continued to trade with existing firms and took GMO Click Securities and DMM Securities’ revenues up to over $1 trillion per month for several consecutive months last summer.

Indeed, whilst Japan’s volumes lay in the shadows of previous years, so did those of other regions, and rather unfortunately this caused concern in the boardrooms for many North American FX companies who had not only witnessed their revenues ebbing away, but also had been subject to a series of new rulings from the National Futures Association on capital adequacy, requiring $20 million in net capital as a minimum figure to remain in business. The exodus from the United States market ensued by many well known retail firms, leaving a handful of stalwarts to continue.

The point of interest here is that those which remained embarked on a series of mergers and acquisitions, often with high transaction values, in order to gain economies of scale, as well as to acquire specialist technology, skill or to enter into niche sectors. Therefore, it is not always the case that the United States is not a viable market for retail firms and should remain the preserve of the large institutional trading desks of Chicago and New York.

Indeed, on the contrary, Interactive Brokers has continued to generate profit, at the end of last year having over $84 million set aside in capital adequacy, therefore rendering the National Futures Authority rulings which so many industry executives balked at to the point of considering the region non-viable, absolutely of no concern whatsoever.

Interactive Brokers did this without adapting its business model, and without being invested in by other FX firms or banks. During the high points of 2013, the FX business witnessed large American firms battling it out between themselves to acquire entire businesses. Anything similar to last year’s GFT and GAIN Capital metaphorical tug of war would perhaps, not occur this year.

Therefore, after disappointing 2012, an astonishingly profitable 2013 and now what FXCM CEO Drew Niv considers to be the lowest sustained period of volatility in 20 years, companies are becoming more aware of how to invest in the future, and even more importantly, when to do so. FXCM’s positioning was clever this year, when it acquired $27 million in customer equity as a result of taking on FXDD’s client base on the exit from the US market of FXDD. Mr. Niv plans to expand FXCM’s market share, but is also taking a conservative view, with FXCM prepared to wait until conditions improve in order to do so.

It is a commonly held principle in traditional, offline businesses to use slow periods to invest in business development in order to raise profile and turn the poor results around. On that basis, often companies making either unsatisfactory returns or even losses would spend money that they did not have in order to attempt to turn this round via attending conferences, conducting business development or expanding sales departments.

There has been a clear development in the FX industry after the experience that most have gained over the last two years, in that this is not wise in an online business in which instant transactions take place and that clients can withdraw their business as quickly as they instigated it.

Indeed during times of low volumes, rather than attempt to raise them by onboarding new technology, increasing sales teams and investing in new campaigns to acquire clients (themselves very expensive nowadays), companies are holding back and counting the nickels and dimes during slow periods. This could indicate to a realization that the lack of volumes over such a long time is not always repairable on a macro level – ergo, if the entire industry experiences the same low points, and the same high points, at the same time with very few exceptions, then it would be wasteful to plow resources into attempting to increase results.

Instead, firms are electing to expand and increase their business during high points, as detailed last year by a series of high profile IPOs and acquisitions, some of which were conducted by businesses that have been built up around the FX industry such as payment processing firm SafeCharge which floated its stock on the London Stock Exchange earlier this year, raising $126 million.

Large banking institutions have begun reducing their headcount, the most significant recent example being Barclays which announced the proposed redundancy of 19,000 staff worldwide, as its FX volumes continued to dwindle. This is one of the largest banks in the world, and nestles among London’s long established financial center. Conversely, smaller companies which have not taken this very conservative approach of shrinking when the revenues shrink and growing when the revenues grow, have caught a cold.

Fair Trading Technology’s fiscal woes became apparent last year, and instead of addressing them via strictly conservative methods, the company grew its sales force, increased its marketing presence tremendously and sent delegates to worldwide conferences, as well as hiring a new Chief Human Resources Officer in order to select industry talent which at the time the firm could ill afford. Subsequently, Add More Value, the consultancy company associated with Fair Trading Technology, was declared bankrupt in May this year.

There are very few companies to which this theory does not apply, one of which is Swiss FX bank Dukascopy, which is highly focused on high quality in-house technology. As a Swiss Bank, its white label partners and their customers are completely absolved of any risk whatsoever, therefore the company can set itself apart from any competition by engaging in development of moving into other markets, as depicted by the introduction of the Dukascopy Connect secure messenger, which CEO Alain Broyon explained to me in a television interview this year is well placed to take on the mainstream messaging giant WhatsApp, due to its highly secure transmission of information.

Technology companies which rely on FX firms have gone down the same route, as well as using the period of low volumes to diversify their product. An example of this can be seen within Tradency’s recent corporate direction, in which the company cut its ties with MetaQuotes at the height of the period of high volumes last year, and embarked on a platform-neutral policy before releasing its own full enterprise solution this year. Indeed, if brokers are experiencing lower order flow, Tradency can now gain their attention by setting their own capitalization and attracting full brokerage business, itself an investment in the future which could bear more fruit than hoping that brokers with existing platforms process enough trades via social trading networks.

As July heads underway, it is becoming apparent that these times of lower volumes are not subsiding, therefore a conservative approach by many firms may continue.

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