Reuters logo
Struggling retail FX brokers look to institutions for growth
November 20, 2012 / 9:06 PM / 5 years ago

Struggling retail FX brokers look to institutions for growth

NEW YORK, Nov 20 (Reuters) - At one time, retail currency brokers envisioned a world where hordes of traders would be hunched in front of laptop computers, trading currencies as they did stocks.

Despite some decent growth, the army of at-home forex enthusiasts never really materialized.

Now, with declining volatility reducing activity in this business and more regulation coming, some retail currency brokers are shifting to the institutional side of the $5 trillion-a-day foreign exchange market.

Firms like FXCM and GAIN Capital, two of the largest providers of electronic platforms for individuals to speculate on currency swings, have ramped up efforts in recent months to expand their services to banks, hedge funds, money managers and high-frequency trading firms.

The retail currency trading industry in the United States has been showing signs of stress because of tougher margin and capital requirements. The decline in trading volume this year dealt another blow.

But those moving into the institutional space will find it a very different business. Less regulated, it is more along the lines of what most investors see as the usual brokerage business, acting as the intermediary for independent buyers and sellers. More fast-paced, it requires robust trading and data processing capabilities.

“It is a good strategy, but so far only the sophisticated, larger retail FX brokers have had the wherewithal to move in this direction,” said Javier Paz, senior analyst at Boston-based Aite Group.

The institutional market makes up more than 90 percent of the global foreign exchange market, dominated by banks and a dozen non-bank venues or electronic communication networks (ECNs) such as ICAP’s EBS, Currenex, and Thomson Reuters.

The size of the market should be enough for brokerages able to efficiently match institutional buyers and sellers. However, the drive for new business is not without risk, because institutional sales are facing headwinds similar to retail.

At FXCM, institutional trading volume fell 49 percent to $156 billion in the third quarter from a year ago, as low volatility caused banks to trade less and in smaller quantities. In comparison, retail volume slipped 17 percent to $861 billion in the three months to September from a year ago.

“Due to the size of the trades and amount of volume on the institutional side, when volume drops it is more significant,” said Jaclyn Klein, vice president of corporate communications at FXCM. “FXCM will monitor quarter to quarter and make adjustments to our strategy as we see fit.”


The National Futures Association said the number of retail foreign-exchange dealers has dropped from nearly 40 in 2006 to below 20 currently.

Global daily spot forex trading by retail investors accounted for just about 7 percent of the forex market, at about $313 billion in 2010, Aite Group data showed.

Retail spot currency trading is estimated to have fallen 3 percent in 2011, the firm said, in part because of regulation.

In October, Charlotte, North Carolina-based Advanced Markets LLC announced it had relinquished its U.S. retail broker registration, saying it was better off developing new products and solutions for wholesale partners and institutional traders. New York-based Forex Club stopped serving retail clients in September and transferred all of its existing customers to FXCM.

Retail currency trading is “still growing, but probably growing more in Asia and outside of the United States,” said Richard Repetto, principal of investment banking and brokerage firm Sandler & O‘Neill.

A July 2012 industry survey by Sydney-based Investment Trends indicated there were just 120,000 individual forex retail investors in the United States, a 0.05 percent penetration of the adult population.

This suggests room to expand the U.S. retail forex market, but many still prefer trading stocks. Investment Trends counts some 5.6 million online stock traders in the United States in May 2012, a 2.1 percent penetration of the adult population.


Aite Group’s Paz said he expects institutional volume for FXCM and GAIN to double to around $30 billion daily within two years. Currently, GAIN’s institutional arm trades around $7.5 billion a day, while FXCM’s institutional trading averages around $6.6 billion, the firm says.

Other retail FX brokers are making moves to attract institutional clients but not with the same steady focus as FXCM and GAIN.

Analysts said retail brokerages are attractive to some buy-side players, including high-frequency firms looking for new liquidity sources, particularly non-bank liquidity sources.

But in a business where speed is often paramount, Paz said retail firms need to have “robust FX infrastructure,” such as access to premier data centers, which will give them “a faster trade processing time.”

FXCM recently partnered with Credit Suisse to launch FastMatch, an electronic communication network (ECN) that the firm says will introduce the speed and transparency of stock trading to currencies.

“We’re making a big investment in the institutional business,” said Drew Niv, CEO of FXCM. “If you look at the size of the electronic institutional FX market, it’s insanely large - probably the only way to properly describe it.”

FXCM expects institutional trading to account for 50 percent of its revenue within two years from 10 percent today.

GAIN Capital, which owns retail forex platform, earlier this year more than doubled the size of its institutional execution desk.

Volume from Gain’s institutional customers rose to $503.7 billion in the third quarter from $260 billion in the same period a year ago. Retail volume fell to $278.7 billion in the third quarter from $447.9 billion in the same period last year.

Raymond Kamrath, chairman and chief executive officer at Stamford, Connecticut-based Faros Trading, which executes trades for hedge funds and institutional investors, said it makes sense for retail brokerage to expand their client base.

“They are going institutional because they can,” Kamrath said. “They have the liquidity and can do it, so why not widen their product offering.” (Reporting by Wanfeng Zhou, additional reporting by Nick Olivari; Editing by Leslie Adler)

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below