FX Bridge raises funds, competition in fx software market?
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A few days ago Atlanta-based FX Bridge Technologies Corp. announced that it has raised $500,000 from investment bank Croft & Bender LLC. So far the company has raised about $4.5 million since launching in 2007. FX Bridge’s software allows brokerage clients to electronically buy and sell forex, CFDs and options. The company makes money through software licensing and transaction fees.
Does this mean the Forex software market is open for competition? I hardly think so.
Generally speaking, Forex brokers can offer trading using either their own self developed software or commercial software developed by independent Forex software companies.
The independent Forex software market is almost completely dominated by Metaquotes and ACT Forex’s trading platforms. I’d say these two companies combined own 95-99% of the market share – clients and volume. Out of the whole retail Forex market commercial software (Metaquotes and ACT Forex) is about 60-70% with self developed platforms by brokers such as FXCM, GFT and MB Trading accounting for the remaining 30-40%, volume speaking.
The only innovation we lately see in the Forex software market is upgrading and improving of existing platforms – FXCM with CFDs, FXOpen with MT4 ECN, Metaquotes with its new MT5 or Currensee with its social Forex platform.
So it comes as a surprise to me that a skilled institutional investor picked a Forex software company for an investment. Perhaps I’m completely mistaken and FX Bridge despite what it says on its website focuses on Forex options only and not on spot trading – but then there is an arguments against that as well: Forex options market will never be as big as the spot market (which is a niche by itself) simply because it’s a much more complex instrument and it’ll take at least a few decades for the large institutional traders to turn their focus on that segment.
If after 9 years of operation in a relatively growing market a Forex software company still requires external funding – this is the biggest warning sign of them all.
6 Comments on this post
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Yehuda Cohn said:
I would guess that a majority of retail Forex traders trade stocks too, and of those that do a majority again probably trade stock options. (Forex traders seem to fit the risk profile.)
Options are popular among retail stock traders, what make you think options won’t be popular with much the same type of traders in a different market?
February 25th, 2010 at 3:57 pm -
Michael Greenberg said:
two reasons: 1. retail forex is a fraction of the futures or stocks markets and forex options is a fraction of that fraction.
2. forex options is a much more sophisticated product than spot fx, ergo less people will trade it.
3. forex options is a very nascent market, there’s little know-how, education or even liquidity.February 25th, 2010 at 4:50 pm -
Yehuda Cohn said:
Okay, thanks. Some comments & questions:
In re 1. My guess is there are at least several million retail Forex traders worldwide — enough to do about $2 trillion notional spot volume/mo. (and create some very profitable companies like FXCM, Gain Capital, FX Solutions, etc.) I’m not sure how that compares; but it seems significant, relative even to stocks, even more so to futures — in the retail context, that is. Got any numbers? (I don’t.)
In re 2. Would you agree that a majority of retail Forex traders trade stocks too, and of those a majority probably trade stock options as well? If so, would it not seem like an easy transition from trading stock options to trading Forex options?
February 26th, 2010 at 6:34 pm -
Yehuda Cohn said:
Just did a quick calculation.
If retail Forex does $2 trillion in notional spot volume/mo. and options volume were 5% of spot, then that’s $200 billion/mo.
Sounds like a fair amount of options, doesn’t it?
February 26th, 2010 at 6:46 pm -
Michael Greenberg said:
$200 B/month is less than Gain Capital alone in retail fx, if that seems much – then ok, you’ve got a point there. To me, that’s a very small amount which won’t allow enough liquidity therefore resulting in poor execution and wide spreads.
February 27th, 2010 at 5:12 am -
Michael Greenberg said:
it took retail fx about 10 years to reach these volumes, I would imagine it’ll take fx options around 5 more years to reach 10% of that for the reasons I mentioned above especially the complexity of the product – there are about a million of fx traders (more or less, certainly not several millions) and most of them are plain gamblers who won’t spend even a minute learning about what they are trading, let alone start calculating option prices.
and no, i don’t think that majority of retail fx traders trade stocks too – most of traders trade only one instrument be that stocks, options, futures or spot fx. It’s like the common belief couple of years ago that online gaming and retail fx are similar industries and that online gamblers would easily jump on the fx wagon. the reality was somewhat different.
February 27th, 2010 at 5:18 am
