FXCM IPO and Average Forex Trader Data
Retail foreign exchange trading took a big step up in December when Forex Capital Markets, otherwise known as FXCM (also the ticker symbol) went public. As part of filing for an IPO, and fulfilling new regulatory requirements for forex brokers, the company shed an interesting light into how the industry works, the brokers profit per account, and which traders are and aren’t profitable.
The Macro View
Not only does FXCM provide a foreign exchange brokerage service, but it also operates DailyFX.com, a news and blog portal designed for bringing important events to traders, and teaching new traders the in and outs of trading currencies through a retail broker. So, at least some of the company’s profits, though likely very little, can be attributed to this website.
FXCM earned a whopping $98 million in 2009 on revenues of $339 million, generated mostly from the spreads charged from each trade on more than 135,000 active accounts. Simple division finds that on each of these 135,000 active accounts, FXCM generates an average of $2511 in revenue and $725 in profits. That is an exceptionally large amount of earnings per account, since for each lot FXCM generates some $20-50 in revenue. For each mini-lot, however, the company generates only $2-5 in revenues.
How FXCM Makes Money
FXCM went above and beyond new regulatory protocol to provide data that while not necessarily required, does go a long way in helping investors and forex traders understand the mechanics of the foreign exchange brokering business.
FXCM admits that a number of its clients aren’t turning a profit. In fact, from 9/1/2009-9/30/2010, no more than 26% of its accounts were profitable. As one would expect, the percentage of profitable traders rose with the account size. Only 27.90% of traders with less than $1,000 in their account were profitable. Those with account sizes of $1,000-$4,999 were significantly more profitable, with 40.52% of traders in that account size range taking more from the markets than they had put in.
From $5,000-9,999 there was another incremental increase to 42.36% profitability and 47.74% of those with more than $10,000 in their accounts were profitable.
|Account Size||% Profitable|
Unfortunately, FXCM did not release initial deposit data, which may have provided a better look into the profitability of the average currency trader. Obviously, those with account balances of $999 or less are more likely to be losers since, well, they have smaller account balances. As balances rise, the number of profitable traders grows as these traders have profits banked in their account.
A Changing Industry
The foreign exchange brokering business still has plenty of time before it is fully accepted as a retail exchange meant for average investors. However, as the business of investing grows more complex, currencies are only a natural segway, and I believe the currency markets will only further develop to a point at which virtually every investor uses some kind of foreign exchange related product to hedge their bets.
The above data presents a pretty gloomy picture for forex brokers. For one, profits are obscenely high, and losing traders (especially those with small account balances) are losing hand over fist. Also, it confirms what most have believed for a very long time: foreign exchange broker commissions and profits per account are exceptionally thick, even if the pip spread seems small at first. FXCM isn’t hurting in the pocketbook, and regulators may soon crack down tight.