I just had an opportunity to talk to Drew Niv, FXCM’s CEO, about their acquisition of GCI Japan. FXCM acquired its Japanese franchise GCI Capital a few days ago thus receiving over 17,000 accounts and client equity of $110 million. FXCM will now have over 156,000 active accounts and over $750 million in client deposits. I speculated that FXCM acquired GCI now because of the expected, further, regulatory leverage decrease in Japan this summer. Last year it was reduced to 1:50 maximum and this summer it is expected to be further reduced to 1:25. Drew confirmed that this indeed was one of the main reasons.
It’s interesting to note how the decreased leverage has a dramatic impact over trading volumes – GCI has 17,000 clients and 15B monthly volume while FXCM has 139,000 clients and $250B monthly volume. This means that FXCM’s clients trade twice as much as GCI’s clients. This explains the relatively low price FXCM paid was such a large client base.
Coincidentally, when going through FXCM’s public documents I finally managed to allocate the list (at least partial one) of FXCM’s liquidity providers. I know many have been wondering whether those LPs even exist, now here’s the list:
“Our global network of FX market makers includes global banks, financial institutions and market makers. For the nine months ended September 30, 2010, over 73% of our volume was transacted with the following global banks, in alphabetical order: Barclays, Banque Nationale de Paris, Citi, Credit Suisse, Deutsche Bank, Dresdner Bank/Commerzbank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Nomura and UBS. The balance of our trading volume was transacted with our other market makers.”
GCI Capital acquisition:
What was the financial structure of the deal?
We bought the whole company for $5m. They also took $22m of their own capital back.
What was GCI Capital’s monthly volume?
About $15B per month in volume.
This adds up to FXCM’s already reported $258 billion volume, therefore FXCM will now report at least $273 billion in volume.
What was the reason for acquiring GCI Capital now especially with the upcoming additional leverage decrease in Japan?
It is exactly why we were able to make this deal happen as we have experience in running subsidiaries with conservative leverage. FXCM HK has been at 20 to 1 leverage since it was set up in early 2003 (regulators mandate 20 to 1). Customer profitability is more than double the global average and so it has its benefits, even though firm profitability really suffers and you can’t run a profitable firm unless you have large scale which GCI doesn’t but we do.
You already have a regulated Japanese subsidiary after acquiring ODL, how will GCI and ODL work together now?
GCI and ODL Japan will be merged in the coming months that should give it decent scale.
How will the Japanese regulatory climate affect your Japanese business and the global FXCM?
We expect volumes to decline in August, but rebound somewhat by late 2011. The Japanese retail FX market is by far the most competitive in the world today. The market there has been undergoing lots of consolidation with dozens of firms disappearing over the last year. We expect this trend to continue for another 18 months or so but at the end there will be a far healthier and more concentrated market in the hands of fewer firms much is more akin to the situation in the rest of the world.
Any additional acquisition plans, if so, what do you look for in a target?
You will see us very aggressive on the acquisition front all over the world, with more to come in the US, Japan, Europe, and even some more peripheral countries. Acquisitions are always tricky and tough to predict if and when they will happen as there are so many variables that can ruin a deal even in the last minute. Nevertheless we are in active negotiations with a number of firms.
Any update on the lawsuits, I assume it didn’t have much impact on your operations?
Lawsuits are an unfortunate cost of doing business in the United States and class action lawsuits are the typical problems faced by public companies, until its mandated that the accuser has to have a shred of truth in their allegations, this nonsense will continue. Allegations against us were literally copied verbatim from message boards, whether those are legitimate clients, or just employees of rival firms, or their IBs, is obviously something no one ever bothers to check. Obviously given that we are an agency broker and don’t profit from customer losses its absurd that we would try to purposely make clients lose money. We make money from numbers and size of trades not P/L on those trades. In the category of absurd it would make more sense if we had machines sending you subliminal messages to trade often. Obviously this is relevant for those firms that make a market to their clients, but given NFA scrutiny I just can’t believe any of the large market makers in the United States are actively manipulating anything either, even though they might have the incentive.
Did NFA audit you like all brokers and what do you think of all this post-Gain, post-Virtual plugin,scrutinity and the 7 reports (per platform) you need to send to NFA every day?
NFA audits us and every other FX firm every year and so this year is no different. The reporting requirements are another burden/benefit we get as a regulated entity. I think setting higher standards in FX is important We believe that in the future execution standards will actually be set in stone much more akin to exchange traded markets, the regulators are just trying to find their way towards this goal I think.
Seeing Saxo’s acquisition today of EuroInvestor do you consider buying other portals or will you continue focusing on just developing dailyfx?
Primarily we are focused on Dailyfx and we are very happy with its performance but never satisfied. Dailyfx has been around since 2002 and is now an international business with analysts covering all market time zones writing dozens of analytical pieces per day, and conducting many live events per week. We have great reviews from clients especially on the password protected portion available only for clients which is where we keep the best stuff. We have made many improvements over the past few months and expect to be making many more in the near future. Research and education are two places where users just can’t get enough and we dedicate enormous resources to making that happen.