2012 Forex Industry Summary

   
Article originally published on Forex Magnates

Reflecting on an eventful 2012, many developments have taken place. A shift in dynamic has been compounded by decreasing volumes throughout the marketplace.

Events during the inaugural part of 2012 set the scene for the following months ahead, where the entire market showed a significant decrease in trading volume compared with the previous year. Japan, whose market is renowned across the industry for its significant volume, was no exception with large number of brokers reporting plummeting trading volumes. This downward trend is attributable in part to last year’s stringent imposition of leverage restrictions by Japanese regulators, whereby 25:1 became mandatory. Japanese traders have traditionally shown higher volumes over previous years, and are less risk-averse than traders in certain other markets, therefore perhaps seeking to invest internationally where they are not bound by such conservative leverage policies. To further impede confidence, trading volumes generated by institutional brokers and ECNs were down substantially as well. Subsequently, the Japanese forex market, once the very largest, accounting for 45-50% of all forex transactions few years ago, has now become considerably smaller. In the last 2 months of 2012 the Japanese volume for several major brokers has managed to rebound but it is still debatable as to whether it is the beginning of recovery or a temporary spike.

As Japan stagnated, Europe’s industry participants too displayed major volume decreases, citing the global economic slowdown as one of the reasons. It is also attributable to a decline in trading volatility since the forex market entered an unprecedented range of trading and thus did not present opportunities to traders. Most affected by this were institutional brokers, for instance FXCM’s institutional trading unit reported volumes dropping by 60% and more. Additional reasons cited for the plummeting volumes were increased global regulations and major surge in total number of brokers – increasing the competitiveness. The decline in Euro-Dollar trading accelerated during the first 6 months of the year, seeing UK spot trading fall by 24% according to the Bank of England’s report.

One forex trading venue which has bucked the trend is LMAX Exchange, who managed to grow by offering services as a liquidity provider to start-up ECN brokerages wishing to use their MT4 bridge. In packaging the entire system to facilitate aggressive cost-per-million fees and connection to the MT4 via bridge comprising a full brokerage system that can be implemented within a matter of days, this diversification has proved a wise one for LMAX, who delivered an annualized run-rate of approximately $300 billion in April 2012 alone. The stratospheric increase in number of trades rose from just 4,000 a month in the first quarter of 2011, to 300,000 per month by April 2012. In December 2012 LMAX was spun off from parent company Betfair in a management buyout led by CEO David Mercer.

Acquisitions

Industry giant FXCM has considered 2012 a year of studying its smaller competitors for the purposes of acquisition, making this low volume year an investment into their future. FXCM purchased a 50% share of Lucid Markets, a UK based market maker, in mid-2012. An institutional forex broker, Lucid Markets was founded three years prior to its acquisition by FXCM, and brought in revenues of $149 million during 2011. FXCM issued shares to conduct the acquisition, to the value of $176 million. The point of interest here is that FXCM were able to purchase 50% of Lucid at a value well below average multiples, and in doing so got in on a company which had an EBITDA of $113 million in 2011, which was more than FXCM itself’s 2011 revenue of $112 million. This shows FXCM cashing in on the weak forecasts for volumes in the US and Europe, as their previous acquisitions had been in the Japanese market (GCI and Foreland respectively). It may be fair to say that such an acquisition would not have been possible at this price under normal market conditions.

Binary Options

Binary options have been on the increase, with many new companies springing up and attracting retail customers, having an impact on forex volumes, especially those of private investors new to the online trading world. During the year, binary options providers such as SpotOption, Tradologic, MarketsPulse, TradeSmarter and TechFinancials, whose platforms are aimed toward white label partners, saw a major influx in demand from forex brokers looking to diversify their offerings.

For new entries into the binary options space, this is a straightforward enterprise. Binary options firms simply provide the entire CRM and back office facilities, and the white label partner employs a sales and retention team and conducts the customer facing activity only.

Social, Auto and Copy-Trade

Social and copy-trade trading platforms have been marketed widely this year, and have become a point of great interest worldwide, and in particular the Far East. So much so, that MetaQuotes, the platforms market leader, has been trialing their own copy-trade trading system which will be integrated into the MT4 platform and released imminently. There will no doubt be a great many brokers who will look to market this feature as a method of increasing volume.

Mobile Trading

Trading the market while on the move via smartphone applications has increased in popularity this year. A great many brokers added the option of mobile trading to other smartphones as well as the iPhone, as a result of such releases becoming widely available to brokers as off-the-shelf software. One example of this is the integrated package offered by MobiTradeOne, who offer multiplatform trading systems for smartphones. MobiTradeOne have geared their entire solution toward easy access to trading by including full compatibility with iPhone, Android, Windows Mobile, Blackberry and JAVA enabled mobile phones. GFT offer a branded mobile trading solution by the name of DealBook. Within the DealBook platform offering, a DealBook-Mobile option has been added to the brand, which from a marketing perspective keeps it integrated along the lines of their web and downloadable platforms.

Increased popularity of mobile solutions led MetaQuotes into taking mobile firm Xogee to court in Cyprus claiming it hacked its protocols. Xogee was the most popular provider of Metatrader mobile solutions.

With the faster connection speeds and wide availability, plus the ability to use on all tablet PC devices, it is a case in point as to whether the new levels of accessibility will serve to increase trading volumes worldwide over the next year.