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The Brokers (re) Evolution: The CEO's reply

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Glenn Stevens, CEO at GAIN Capital Group: "A $20MM requirement would go even further in protecting retail clients"

Fri, Oct 12 2007, 14:30 GMT
by Marina Schiaffino

FXstreet.com

Glenn Stevens, CEO at GAIN Capital Group, has become the 7th top FX industry's CEO to answer the second questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent regarding new NFA requirements and their potential impact on the FX industry.

[ View the full interview ]

Mr Francesc Riverola would like to thank Mr. Stevens and GAIN Capital Group - owner of www.forex.com one of the most visited FX sites on the web - for collaborating with FXstreet.com.

GAIN Capital Group is joining GFT, FXCM or Saxo Bank in answering our questionnaire. We are sure we still have many to come.

Questionnaire:

1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?

We support the new $5MM minimum net capital requirement, as it helps to ensure that all FDMs are better capitalized. In fact, we support Daniel Roth’s recommendation of an even higher $20MM minimum capital requirement. At the rate retail investors are coming into the markets and with the volatility we’ve seen lately, it’s critical that FDMs are on solid financial footing. A $20MM requirement would go even further in protecting retail clients and helping to avoid any further insolvencies.

2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?

Our current accounting practices are already in line with the proposal. Deloitte is our long standing auditor and our books and records are GAAP compliant. Our shareholders include several large venture capital and private equity firms; our financial statements and internal procedures are audited every year. Although this methodology may be more burdensome and costly, it reflects a firm’s ability to accommodate a higher level of independent scrutiny.

3 - Do you consider these measures could be a breath of fresh air that could result in more investors joining the FX Market?

The new standards being considered will create a broader base of potential investors as our member firms achieve higher levels of financial reporting standards.

4 - Switzerland has recently started a similar process, what is your opinion about it?

Currently, regulation can vary pretty dramatically from country to country and there is no reciprocity among the major regulatory bodies. It’s a pretty confusing landscape for retail investors as they don’t understand the regulatory framework in each country. Ideally, in the future there will be more reciprocity between the major regulatory agencies around the world -- but we’re not there yet.

5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?

We’ve already assumed the customer accounts from some of the smaller FDMs that would not have been able to meet the new capital requirements. We are in active discussions with several others.

6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?

With regard to M&A activities, I differ from some of my colleagues on this topic. I do believe there will be some M&A activity over the next few couple of years. We’ve seen some pretty significant private equity investments in the space recently. I expect that we’ll see a few more of those over the next year. Also, the bank white label deals that have been announced over the past year are almost certainly a precursor to the banks entering the space. It’s clear that banks are now starting to realize the potential of this market. I would not rule out a few banks taking strategic equity stakes in retail FX firms within the next year.

7 - For many, the very business model of Forex brokerage firms that needs to be decided is whether or not such brokerage houses can take opposite trading positions to those held by their customers, i.e., trading 'against them', which contradicts traders' well-being. What is your company position on this? How do you hedge your customers' trades?

This question highlights the fact that most retail investors do not fully understand how Over the Counter (OTC) markets operate. In any OTC market (equities, derivatives, etc.), each trade is a contract between two parties – there is no exchange through which trades are routed. Wholesale FX desks at banks run a “book” (the net of their customer trades), laying off risk as needed by trading with their own counterparties. Retail dealing desks are designed in the same manner. There is no inherent conflict of interest or degradation in price/ execution quality in a dealing desk model.

"The bank white label deals that have been announced over the past year are almost certainly a precursor to the banks entering the space. It’s clear that banks are now starting to realize the potential of this market. I would not rule out a few banks taking strategic equity stakes in retail FX firms within the next year."

However, all you need to do is spend a few minutes on the forums to realize that some retail firms have clearly taken advantage of their customers to boost their own profits, most often by stop hunting or re-quoting during news events. Customers quickly caught onto which firms were operating in that manner, and out of the backlash came the non-dealing desk firms.

In the end, what should matter most to retail traders is their ability to get into a trade quickly and at the price they request, and where their resting orders are filled. Where the order is ultimately routed to a retail dealing desk or a bank dealing desk is inconsequential - as long as the execution is solid. That’s why GAIN has always employed experienced bank traders - their job is to make tight markets 24 hours a day, ensure quality fills for our customers, and manage our risk effectively. We’ve had the same model since we started back in 2000 and have maintained steady growth each year. Our customer satisfaction is very high – in a recent FOREX.com customer survey over 90% of our customers told us they would recommend FOREX.com to a friend or relative. I think our track record speaks for itself.

8 - Would you like to add something else?

Thank you, Francesc, for offering this opportunity to comment on the important issues facing our industry.

Glenn Stevens
CEO
GAIN Capital Group

Disclaimer: The above information is provided as an opinion of the author. The author shall not be held liable for any acts or omissions on the part of the reader based on the information provided in this opinion. No severed part of this opinion shall be copied, transmitted electronically or otherwise, modified, linked or used without prior written approval by the author. All rights to the entire contents are reserved by the author. The recipient of this correspondence or any other reader is allowed to read, download, print this opinion as a whole, but is NOT granted any rights to the use of this opinion. The opinion(s) expressed above must be used with this accompanying disclaimer at all times.

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Published on  Fri, Oct 12 2007, 14:47 GMT