The Retail Forex Spot

With the October 31st deadline for the first Net Capital requirement increase fast approaching, many may be wondering: “Whatever happened to all that market consolidation that was supposed to reshape the Forex industry?” Some smaller, and more importantly less reputable, firms have fallen by the wayside in recent years, yet the number has been relatively small. Further, given the size of many of those firms, their exit from the retail FX space has had little or no impact on the industry. With the October increase just around the corner we now see that few firms are likely to be seriously affected. The CFTC just released Futures Commissions Merchant (FCM) financial data for the end of August. Let’s take a look at who is and isn’t making the cut. For the sake of being thorough let’s begin with the comprehensive list of FX service offering registered FCMs; 31 players in all.

Now let’s start with some easy trimming. The very top of the list includes firms such as MF Global and Interactive Brokers. Though they do offer FX services, retail Forex is not a major part of their business and to top it off they could meet the new requirements without batting an eyelash. Let’s also add TradeStation and Rosenthal Collins to that category.

Now let’s take a look at some of the Forex industry’s more established players, the guys that are definitely making the cut. The following Forex dealers all have $20 million or more in Adjusted Net Capital: Oanda, FXCM (Official name on the list: Forex Capital Markets), GFT (Global Futures & Forex), Gain (also known as Forex.com), Interbank FX, PFG (Peregrine Financial Group, a Futures firm with a strong FX offering) and CMS Forex (Capital Market Services). Let’s also add FX Solutions to the list. Given that the firm is owned by City Index, I think they’ll manage to scrape the remaining $425,897 from underneath Michael Spencer’s couch cushions. IFX Markets joins the pack as well. The firm is being eliminated as an independent entity after its merger with FX Solutions. But this is by no means due to a lack of capital, but rather due to the fact that both firms are now owned by City Index.

Now let’s trim a little from the bottom of the list. How are the significantly undercapitalized doing? MG Financial is indeed a casualty. The firm has been sold to Rosenthal Collins Group in order to avoid extinction. Bacera is moving offshore. Few will notice its departure as few had even noticed its existence. Advanced Markets, though highly undercapitalized, is not likely to face extinction. The firm counts the Australian banking giant Macquarie Group amongst its shareholders and is unlikely to be hung out to dry.

Let’s also take a few not so relevant players off the list. Dorman Trading offers FX through an FX Solutions White Label Partnership (WLP.) The established Futures boutique could probably scrape together the necessary capital, but given that FX is not the core of its business it is anyone’s guess as to whether it will actually bother. Yet again its presence in the retail FX space has not been significant and no one is likely to notice its departure. Friedberg finds itself in a similar position. The 37 year old financial services firm will be left to decide whether the retail FX space is worth a contribution of capital. While we are at it, let’s also check off CMC Markets who recently ceased all U.S. operations. Given the Contracts for Difference (CFD) trading behemoth’s size it was not for want of money.

Before we go any further let’s quickly add and remove FXDD (FXDirectDealer) from the list. This Forex Dealer has neglected registration until the very last moment, doing its best to ride out every last possible loophole. The firm’s FCM registration is currently pending though. FXDD whose parent company Tradition booked an operating profit of 150 million Swiss Franc in 2007, is unlikely to be strapped for cash.

This leaves us with a much shorter list of 12 Forex dealers. These are our walking undead, the firms whose future is allegedly in limbo.

Yet even here we don’t seem to get the chance to witness any serious market instability. Firstly let’s note that the numbers we see are for the end of August. Extreme volatility and equity market collapse in September and October has lead to record profits for many Forex dealers. This could easily shore up the books of several firms. Furthermore the FX market’s fast passed growth has made it a darling for private equity firms who may be willing to fund an undercapitalized broker (at a discount of course) if it has the size and stamina to demonstrate serious perspective growth. This may add significant capital to the books of some FX dealers.

Forex Club and Alpari can easily funnel in more money from their Russian operations or simply target the U.S. market from offshore. I Trade will probably make the cut despite its recent regulatory problems. In the worst case scenario it is likely to bring in some capital from its prior Jamaican investors. ACM is likely to bring funds in from its larger Swiss operations and OLD and IG from their U.K. home offices. No one is shedding a tear for Hotspot either, whose parent Knight Capital Group will easily pony up the missing capital. IKON could bring in capital from its New Zealand operations or likely find the necessary capital on its own. MB Trading should also do well, potentially moving funds from its Broker Dealer (BD) arm or by merging capital with 3D Forex with whom it shares common ownership.

Granted there is no guarantee that these firm’s parent companies or foreign operations will be willing or able to front enough cash to meet the $20 million requirement. If this is the case though, most will not be acquisition targets but will either move their FX business offshore or operate the FX portion of their business as introducing brokers.

The only firms whose fate is really up in the air are GFS and Easy Forex and even these two might just prove capable of bringing money in from their foreign operations or by moving entirely offshore if they are not able to bring on private equity. All in all few firms are really likely to meet their maker due to the increased capital requirements. Even if a few of the firms on the short list do end up moving offshore or selling their U.S. FX operations to a competitor the effect on the industry will be minor at best.