GAIN Capital set to entirely dominate American retail FX as it prepares $80 million cash raise

GAIN Capital is beginning to implement its plan of expansion. We examine why it could well form an almost monopolistic environment in the United States retail FX market

North American electronic trading has become almost entirely centered around exchange traded futures, whilst retail OTC derivatives firms have eschewed the most lucrative market in the world with the most loyal customers that have the highest average deposit figures and longest customer lifetime value.

Over the past six years, since the inauguration of the Dodd Frank Act, every single international FX brokerage has either canceled its NFA regulatory license and voluntarily left the US market, or has been subject to stringent regulatory censuring by the authorities and subsequently had its license revoked.

With all of the US divisions of international OTC FX brokerages a thing of the past, just three remained, those being Interactive Brokers, OANDA Corporation and GAIN Capital.

Interactive Brokers then moved away from small-ticket retail business to concentrate on eligible contract participants (ECPs), and OANDA Corporation, although having onboarded 2200 of Tradestation’s users two years ago, remains relatively small and non-progressive.

FXCM, once a global tour de force, is now an absolute shadow of its former self, with the only unit of the company in any form of rude health being the Chinese operations, which is not only a mainstay, but pretty much the only part of the firm left.

This leaves GAIN Capital in the hot seat, and the company, although having experienced a vastly fluctuating series of quarterly revenues over the past year, is most certainly setting its sights on national domination.

At close of business yesterday, GAIN Capital announced that it intends to offer, subject to market conditions and other factors, $80 million aggregate principal amount of its convertible senior notes due 2022 in a private placement to qualified institutional buyers, and to grant the initial purchasers of the notes a 30-day option to purchase up to an additional $12 million aggregate principal amount of the notes solely to cover any over-allotments that may exist.

This would provide a very significant cash injection for the company, whose CEO Glenn Stevens just two weeks ago explained to FinanceFeeds that the company intends to expand its corporate armory via mergers and acquisitions.

Glenn Stevens, CEO of GAIN Capital explained to FinanceFeeds in New York ” “Strategic M&A remains the cornerstone of our going forward plan.”

“Via this method, we can generate diversity of revenue streams, and are well positioned to invest in organic growth. This will be via growing our share in our existing markets which spans across 8 countries, and gives us an opportunity to build on our existing global reach” said Mr Stevens.

“We also wish to launch new products to diversify to new markets for new clients, and have the operating leverage to automate processes and increase the self service aspect of customer interaction in order to lower support costs” he continued.

“Another area in which we are focusing a lot of attention is with regard to the regulatory changes that are currently occurring. Impending regulatory changes will likely cause volatility and affect second and third tier providers.” said Mr Stevens.

FinanceFeeds has elaborated on the absolute masterstroke by GAIN Capital that manifested itself in how the assets of FXCM were transferred.

Mr Stevens reiterated this today by explaining that GAIN Capital was required only to pay for those accounts that were active, and to date the firm has paid $6.5 million, which in our opinion is an absolute bargain.

“This will benefit customers as well as GAIN Capital” said Mr Stevens. “We now have a 50% market share in the US retail sector, and as a result, customers are offered higher consumer protection making the brokerage business more effective in looking after customer needs. In terms of strength, we expect this transaction to add a future revenue of between $15 million and $20 million for 2017 with minimal cost to GAIN Capital” he said.

The raising of capital will take place via the issuance of $80 million in convertible notes.

The notes will be unsecured, senior obligations of GAIN Capital, and interest will be payable semi-annually in arrears. The notes will be convertible at the option of holders prior to the close of business on the business day immediately preceding April 15, 2022 only upon the occurrence of specified events or under certain circumstances.

Thereafter, until the close of business on the business day immediately preceding the maturity date of August 15, 2022, the notes will be convertible at any time. Conversions of the notes will be settled by the delivery and/or payment, as the case may be, of GAIN Capital common stock, cash, or a combination thereof, at GAIN Capital’s election.

Final terms of the notes, including the interest rate, initial conversion rate and other terms, will be determined by negotiations between GAIN Capital and the initial purchasers of the notes.

GAIN Capital intends to repurchase up to $15 million of its common stock from purchasers of notes in the offering in privately negotiated transactions effected through J.P. Morgan concurrently with the closing of the offering, which repurchases may be made using a portion of the net proceeds of the offering, amounts drawn under GAIN Capital’s existing credit agreement or other cash on hand or any combination thereof.

GAIN Capital has stated that these repurchases could increase, or prevent a decrease in, the market price of GAIN Capital common stock or the notes and could result in a higher effective conversion price for the notes.

Interestingly, the strengthening of GAIN Capital’s corporate presence is likely to be viewed as an expansion of one of the world’s largest retail FX brokerages, and could well lead to an almost monopolisitic situation in the United States, however this will also be of benefit to liquidity takers, as GAIN Capital’s institutional division, GTX, could well place itself among the larger prime of primes.

FinanceFeeds met with William Klippel, Director of Sales & Operations at GAIN Capital’s GTX Direct in New York recently, who outlined GAIN Capital’s ability to maintain a multi-faceted prime brokerage relationship with several Tier 1 banks, largely due to its $362 million balance sheet and six year unblemished operating period.

With 10 prime brokerage relationships, GAIN GTX is a fully independent FX ECN which, similarly to that of Saxo Bank, combines bank and non-bank pricing via its credit engine. The technology allows users to trade with all GTX participants, not just the traditional liquidity providers, thus has client-to-client capabilities.

Thus, systems such as GTX are here to stay and have absolutely weathered the OTC credit storm with no such impact on execution of retail orders.

Added to this, the lack of brokerages in the US did not spur others to re-enter the market, which is ripe for good quality competition right now.

Thus, in the nation which runs its entire business ethos via competition, there is likely to be no competition for GAIN Capital on its home market for some time.

Read this next

Retail FX

Weekly Roundup: John Oliver rips into MetaTrader, Binance to pay $10 billion

Welcome to this week’s roundup, where we delve into the latest developments in the Forex, Fintech, and cryptocurrency markets. Stay ahead of the curve with our comprehensive overview of the week’s most impactful events and trends across these dynamic sectors.

Retail FX

Lark Funding reopens to US traders, MyFundedFX picks cTrader

Canada-based prop trading firm Lark Funding announced it will once again welcome clients from the United States.

Institutional FX

Cboe FX volume falls to lowest level since summer

Cboe’s institutional spot FX platform, known as Cboe Spot, today announced its trading volume for the month ending February 2024, which took a step back after a strong rebound in December.

Retail FX

ThinkMarkets secures lucrative DFSA license in Dubai

Melbourne-based broker ThinkMarkets has secured a license from the Dubai Financial Services Authority (DFSA) after it has already incorporated its new subsidiary in the Dubai International Financial Center (DIFC).

Digital Assets

New Horizen Lays Out Its Vision Of A Modular, Proof Verification Layer For Web3 Networks

Horizen is forging a new path for the future of blockchain with its New Horizen initiative, which is building a modular Proof Verification layer that’s dedicated to verifying cryptographic proofs for any settlement layer, beginning with Ethereum. 

Digital Assets

Karma3 Labs Raises a $4.5M Seed Round Led By Galaxy and IDEO CoLab to Build OpenRank, a Decentralized Reputation Protocol

Using OpenRank, developers and web3 companies can build consumer apps where people can discover, use, fund, read, or buy something on-chain without worrying about getting spammed or scammed.

Digital Assets

Worldcoin down as Elon Musk sues OpenAI CEO Sam Altman

Worldcoin’s (WLD) token dropped following news of a lawsuit against related company OpenAI. The lawsuit was filed by Elon Musk and accused OpenAI and CEO Sam Altman of breach of contract.

Institutional FX

Exegy’s Liquidity Lamp adds intraday data to outperform S&P 500 by 31.8%

Exegy has incorporated intraday signals into its AI-powered iceberg order detection tool, Liquidity Lamp. By adding intraday data to a baseline mean reversion strategy, Exegy’s model outperformed the baseline by 10.5% and the S&P 500 (SPY) by 31.8%, respectively in the out-of-sample testing.

Industry News

Think Elon Musk backed your crypto exchange? ASIC’s latest reveal may shock you

In an absolutely shocking turn of events that nobody could have possibly seen coming, the Australian Securities and Investments Commission (ASIC) has bravely stepped forward to reveal that, yes, those videos of Elon Musk passionately endorsing a cryptocurrency exchange are as fake as a three-dollar bill.

<