By SARAH MORGAN
Update, 9:34 a.m.: Gain Capital priced its IPO at $9 per share, less than the expected $14 per share.
INVESTORS INTERESTED IN the currency markets -- but not so keen on pulling an all-nighter to keep track of the yen -- are getting a crack at another option: buying shares in a retail foreign-exchange brokerage. GAIN Capital, the company that owns Forex.com, will go public today, the second forex broker to do so this month.
The recent offerings are yet another sign of retail investors' interest in trading global currencies. Retail forex trades have grown more than tenfold since 2001 and now represent 3.5% of the $4 trillion currency market. And as two of the leading options for retail traders, FXCM (FXCM),
FXCM costs around $13 per share; Gain goes public at around $14. So, should you buy? For online brokerages generally, there aren't a lot of new customers to fight for so a relatively new asset class that tends to draw very active traders is attractive, says Seth Dadds, an analyst with GARP Research & Securities Co. "Options was sort of the last big [new] product for the online brokerage space," he says. "Now you've got the bigger brother of options, and that's FX." Because it's a growing market, Wall Street will be expecting brokers that focus on forex to grow revenue faster than their mainstream competitors, he says. Mainstream firms hoping to draw more active traders might also be interested in buying small forex brokers down the line, he says.
Like forex trading itself, however, investing in these trading platforms is risky. As these companies' initial filings with the Securities and Exchange Commission acknowledge, the regulatory environment is still evolving. In October, new rules tightened capital requirements and limited the amount of leverage these companies can offer to customers. FXCM's filing notes that the leverage limit could lead to lower trading volume (which would mean lower revenue). GAIN Capital and another foreign exchange broker recently settled with the National Futures Association, the industry's self-regulating body, over charges that trade execution policies were bad for customers, and FXCM acknowledged in its SEC filing that the NFA has contacted the company with similar questions.
Both companies also operate globally, which means they've got regulators to deal with around the world. GAIN Capital's SEC filing acknowledges that it operates in some jurisdictions around the world without local registration or licensing. There's a risk that these companies could have to suddenly cease operating in a particular country if local rules change, says Michael Wong, an equity analyst with Morningstar.
More broadly, investing in a still-evolving business is a risky bet. "It really does seem like the Wild West out there for foreign currency trading," Wong says. For some investors, that risk and the lure of continued rapid growth may be part of the appeal. But investors with a lower risk tolerance "could probably afford to wait," Wong says. "If they're great companies now, they'll be great companies in a year or two after some of these regulatory issues have been hammered out," he says.