The Perils of Public Life

Submitted by William Worthington on Fri, 03/11/2011 - 18:36

FXCM and Gain’s IPOs were heralded as the dawn of the new age of transparency and respectability for the forex industry. The first few months of being public have gone dramatically against expectations. Despite a general rise in the stock market, with the S&P 500 up over 5%, both FXCM and Gain have languished, with both broker’s shares down over 10% since their IPOs.

The biggest problems have all been related to disclosure. Both FXCM and Gain have made dramatic claims regarding their trading practices and execution. These rosy proclamations seem at odd with the continued reluctance to provide true, full disclosure over trading practices and dealing rooms.

The fact that both FXCM and Gain are public entities places them under much greater scrutiny, and combined with the harsher regulatory stance post October 18th, has created an uncomfortable environment. It seems that neither Gain nor FXCM fully understood or prepared the ramifications of public life – and how they may have to alter their existing business practices to survive and thrive in this new environment.

FXCM has already been hit by two separate lawsuits. One suit alleges that FXCM violated securities law, in the run up to the IPO.  Another suit alleges that FXCM’s aggressive marketing and dealing tactics were predatory and ripped customers off. Both claims seem to have some merit. Additionally, FXCM’s stock was recently downgraded by analyst of one of the banks that did work on the IPO. This is an extremely unusual move and shows true pessimism. Banks are usually loathe to downgrade stocks, it typically means they get shut out of future deals.

While these allegations may have come to lite regardless of FXCM’s IPO, the IPO has painted a huge target on FXCM’s back. Frustrated clients – and their lawyers – now have a crystal clear idea of exactly how much money FXCM is worth. Additionally, there may be strong incentives for other frustrated clients to come out of the woodwork if the initial lawsuits are upheld. Ultimately, if the retail forex industry wants to be treated legitimately, it will have to clean up its act, not merely pretend to.

MT5, Always the Platform of Tomorrow

Submitted by William Worthington on Mon, 02/14/2011 - 08:35

For years, MT5 has been hyped as the next big forex platform. MetaQuotes has been pushing the software as a replacement for MT4, yet the market has yet to really adapt the new platform. The sheer resiliency of MT4 seems to have surprised even MetaQuotes.  Has MetaQoutes become a victim of its own success?

The success of MT4 has spawned several roadblocks making it less likely that a successful transition to MT5 will ever be fully completed. Smaller brokers, unable to afford moving their entire book to MT5 unilaterally, will have to support two trading systems simultaneously in order to manage a transition. In the face of tepid client demand, it is unlikely that many brokers will take the leap. Larger brokers, resentful of MetaQuotes fees, are more inclined to attempt to develop their own trading platform, rather than go through the hassle of moving their clients to another MetaQuotes solution.

Using Google searches as a proxy for investor interest, we see that searches for MT5 leveled off after an initial spike, and remain a fraction of MT4 searches.Based on the languages and regions displayed, MT5 doesn’t even standout in one particular region.

MetaQuotes inability to push has MT5 has not been consequence free. Metaquotes did not develop a mobile trading application for MT4, presumably hoping that MT5’s ability to trade over the iPhone would make that irrelevant. Instead, a flurry of tech start-ups have flowered to serve this market. Further investment by brokers into MT4 (buying, launching and marketing their mobile devices) are another sunk cost that will hold brokers back from migrating to the new system.

Whether MetaQuotes will be able to successfully manage this transition remains to be seen. Unless dramatic improvements in MT5 are offered, it seems likely that the planned transition will continue to move forward slowly.

Street Bullish On Retail FX

Submitted by William Worthington on Mon, 02/07/2011 - 16:40

At this point, it is a well established fact that most retail traders, be they forex, futures, equities or options traders, lose money. Famously, FXCM CEO Drew Niv conceded this fact, saying “If 15% of day traders are profitable I’d be surprised.” Many retail forex traders attempt to profit from the market using managed forex accounts and signals providers, despite a history of lackluster returns and a high prevalence of martingale strategies. Is there a better way for the retail investor to make money from forex trading?

The two publicly traded retail forex brokers provide an interesting way for traders to get exposure to the market, without having to trade forex themselves. Since FXCM and Gain Capital’s IPOs in December several investment banks have initiated coverage on the stocks of these two brokers. So far, the consensus opinion among Wall Street analysts is bullish.

In FXCM’s case, Barclays, UBS, Credit Suisse, and Citigroup all have “buy” ratings on the stock, with price targets set by Barclays and UBS at $18.00 per share. GCAP is being covered by Raymond James, JMP Securities, Deutsche Bank and Sander O’Neil. All but Deustche Bank have “buy” ratings on the stock withDesutche Bank having a “hold.” Price targets for Gain range from $11.00 a share to $16.00.

The stocks have been trading for only a few months now, so attempts to analyze their recent movements are handicapped due to a lack of scale. So far, the stocks have both underperformed the S&P 500. The S&P 500 is up 9.64%, while Gain is up only 7.91%, and FXCM is down 5.45%. The graph below, provided by Google Finance, compares the two stocks to the leading US equities index.

Do these bullish ratings mean investors should load up on these stocks? While the future of the retail forex industry does seem bright, any investment decision should not be made on such light analysis. Both stocks have enormous opportunity, but also hold a great deal of risk, much of which may be beyond the scope of the average retail investor to successfully identify and analyze. In the coming days, ForexOrgan will be issuing an in-depth analysis of the two stocks, with detailed recommendations for traders. Stay tuned.

FXCM Vs. Alpari

Submitted by William Worthington on Wed, 02/02/2011 - 03:26

Following FXCM’s successful IPO last December, speculation has been bubbling regarding future moves in the industry. Gain Capital was quick to follow FXCM’s IPO with a much less successful IPO of their own, and the direction and structure of the industry is in flux as rival firms attempt to sort out their place in the still evolving pecking order. FXCM raised over $200 MM during its IPO, while Gain raised only $81 MM.  Other Russia based Alpari is rapidly expanding as well, and is seeking to cement its dominant position in Europe while expanding abroad.

Alpari is in many ways a mirror image of FXCM. Alpari has expanded rapidly in Europe and is of roughly comparable size and stature as FXCM. While FXCM, largely out of growth potential in the United States, is seeking to expand in Europe, Alpari is seeking to expand in the United States. While FXCM dominates the North American market, and is considered the marquee brand globally, its expansion abroad has proceeded at a slower pace.  The acquisition of ODL Securities in the UK seemed like a potential fix, however with contrasting corporate cultures and business structures, many believe the acquisition hasn’t achieved its ambitious goals.  Vice versa, Alpari has not met its growth goals in the United States as there has been little market penetration since the opening of its first US office in New York City in mid-2006.  In the past half year, Alpari has been seeking to change that with dramatic changes in their US headquarters.

MSG

Alpari’s Recent Moves

In June of 2010, Alpari appointed Daniel Skowronski to the role of CEO of Alpari US with plans to ambitiously expand their US presence. Skowronski previously worked at Currenex. In a move to build up their US presence, Alpari launched a second US office in Boston in August of 2010 (formerly Back Bay FX), and entered into a multi-year deal to sponsor Madison Square Garden, making Alpari an official sponsor of the arena.  The scope of this bold move is unprecedented in the industry and of questionable effectiveness although it has yet to play out.

In December of 2010, Alpari appointed Mushegh Tovmasyan as the head of Global Sales, and included India as one of his primary target markets. Tovmasyan previously worked at Divisa Capital Group, managing the boutique prime brokerage and white-label technology divisions.

 

Success in Market Penetration

FXCM vs Alpari

The chart here, provided by Google, shows information on total searches for the two firms sent through Google’s engine.  While FXCM has stayed within a relatively narrow band for the past two years, Alpari has been steadily growing, after emerging in mid-2006. Given both brokers expansion plans, it is likely that the total volume of searches for both brokers will increase going forward, and the gap between them is expected to narrow.

Analysis of the search location for both brands sheds further light on the relative strengths of each brand. FXCM has a much stronger position globally, with the exception of Russia and Indonesia, dominating most regions and Languages. East Asia, in particular, represents a strong point for FXCM.  While FXCM has the upper hand now, how this rivalry plays out in the future depends largely the success of these two expansion drives.

Countries

 

 

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