Thinkorswim and Tradestation’s financial results allow us to estimate FXCM’s and other brokers’ income

Forex industry isn’t very transparent, as I’m sure you already know, and with zero retail Forex brokers being listed on public exchanges we have little chance to receive true and accurate picture of what Forex broker’s financial statements look like.

Saxo Bank being the closest to the definition releases financial statements only once a year but obtaining Forex information out of it is very difficult if not impossible. With Danes being less obsessive with numbers and statistics its document is also less informative.

thinkorswim and Tradestation released their quarterly report (Q1 2009) a few days ago and for us it’s a good opportunity to get a glimpse at what large Forex broker’s financial statement might look like.

thinkorswim and Tradestation are online brokers offering trading in stocks, options, futures and FX. Although most of their focus is options I believe that small broker of their size – $150-200m revenues for their brokerage department – should be very similar to medium/large retail Forex brokers).

Update: As John pointed out in his comment FXCM’s numbers are actually higher than my estimates by 30% with 2008 revenues being $313m and EBITDA $131m, meaning the Net income is somewhere in the $75-85m range – now that’s 25% net profitability!

What’s of particular interest is the following table (thinkorswim):

• Thinkorswim has almost 100,000 Educational active subscribers, with its Educational department accounting for almost as much revenue as its Brokerage department (now you know why everybody’s suddenly offering “educational” courses).
• 35% out of newly opened accounts actually ended up depositing (nice conversion rate).
• By the end of Q1 2009 thinkorswim had almost 108,000 funded accounts – similar to FXCM (125,000) and Alpari (100,000) if their statements are honest.
• Average client equity/retail account was $29,500 – a very important figure, although Forex accounts tend to be smaller than the equity/options ones.
• Retail Daily Average Revenue Trades (DARTs) were 69,000.*

* It is very important to understand what exactly DART is in order to be able to understand how much volume/trades clients generate per day in average: There is no info on how thinkorswim calculates DARTs but TradeStation calculates DARTs the following way: For futures and Forex, a revenue trade included to calculate DARTs is one round-turn lot (or forex deal) traded, regardless of the number of individual orders made and executed.

Tradestation reports 44,015 brokerage accounts and 105,825 DARTs in Q1 2009. That’s 2.4 daily trades per customer.

On the other hand thinkorswim’s data indicates 1.24 daily trades per customer; this might be due to different calculation method or different traders’ profile.

thinkorswim’s quarterly income was ~$77m with net income being ~$4.7m. That’s 6% profitability. Tradestation in Q1 2009 was much more effective with 13% profitability. I guess educational division is not as profitable for thinkorswim as the brokerage one (Tradestation doesn’t have an educational division).

FXCM’s income estimation:

If I was to estimate Forex broker’s income based on these numbers I would say that broker in size of FXCM – with 125,000 live accounts, average of 2.4 trades a day (round trip?) and average deposit of $4,800 should be generating something in the $50-60m range a quarter in revenues with profitability being between 15-25%.

Smaller account sizes should be offset by larger commissions and by the fact that for some trades FXCM is a market maker.

Bottom Line: FXCM should net around ~$45-60m a year. Nice business.