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About GAIN: News & Events |
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Foreign exchange site serves growing market
By Jerry Minkoff
Web Finance, June 25, 2001
Day traders, small hedge funds and mid-sized businesses are all turning to the Internet for foreign exchange (FX) trading, according to Gain Capital CEO Mark Galant. Launched just over a year ago, Gain has carved out a niche in an underserved market and plans to add more financial products when its application to be regulated by the Commodity Futures Trading Commission is approved. Gain saw some success in its first year. The number of clients grew rapidly, increasing 35% per month since the beginning of the year, the company said in a statement. Between the fourth quarter of 2000 and the first quarter of 2001, Gain's clients tripled. In addition, quarterly trade volume more than quadrupled during the same period.
Galant credited the stock market slump with supplying some of the new foreign exchange traders. "The same guys who were speculating in stocks over the last couple of years look at FX and say, 'That's great. I can trade it 24 hours a day, it gives 50-to-1 leverage and there are no transaction fees,'" he said. In addition, Galant said Gain was attracting middle-market hedge funds and other traders who were too small to obtain a credit line with, or were getting poor service or wide spreads from, the banks that traditionally controlled the largest part of the market.
Not all industry observers have seen a movement from equities to foreign exchange, at least in this country. Dave Potterton, research director of e-financial services at Meridien Research, said he was unaware of a significant number of day traders turning to currency speculation. "I would say if it's going on, it's happening more in Europe and Asia, where dealing with currencies and exchange rates is more of a given than it is in the U.S.," he said.
More of an Evolution
On the corporate side, Potterton said that while the Internet-based FX trading platforms are becoming more important, they can't be called revolutionary. "It's more of an evolutionary thing, more of a movement. You've gone from a phone-based model to institutions having their own proprietary online systems," he said. Moving to the Internet is the next step.
Banks are participating in online platforms-Currenex, launched in April 2000, and fxAll, launched in May 2001, are two examples-and promoting them to their customers. "In many cases, I don't think the people who are buying foreign exchange are necessarily asking for it. It's the banks who are saying, 'We need to be more efficient, to cut our costs' because margins are very thin," Potterton said. Whether customers will migrate to the new systems is an open question. Inertia is a powerful force: "People are used to dealing with their trader. They deal with banks for certain reasons. They will continue to do that," said Potterton. Customers may occasionally put a large contract out for bids, but for the most part will stay with an existing relationship. "Price might not be the largest decider," he added.
Real-Time Pioneer
Galant disagreed that price is not important, since one of the major selling points of Gain's online platform is price transparency. "We were the first people to roll out real-time, streaming quotes that you could instantly deal on. Everyone else was using Request for Quote [RFQ] pricing," he said. RFQ pricing systems move slowly, leaving traders exposed to market moves against them before their orders are filled. Galant knows of no other Internet foreign exchange market maker that currently offers this type of real-time execution. "We're bringing the interbank rate to everybody in the market. There's little incentive for the banks that are making healthy spreads off their smaller clients to offer those rates. Because of people like us, those margins are going to contract and they're going to make less money," Galant said.
Another unusual aspect of Gain's business model is its application for registration as a Futures Commission Merchant with the Commodity Futures Trading Commission. Although it isn't clear if foreign exchange trading requires regulation under the Commodity Futures Modernization Act, Galant sees advantages in becoming a Futures Commission Merchant.
"Even though we don't have to fall under the act, the benefits we get from our client base knowing we're a regulated entity will offset any hassles of being regulated. Also, we will be able to expand our offering to include options trading as well as other products," he said.
Gain's growth is likely to be duplicated in other online trading sites, Potterton said, since corporate treasurers are using the Internet more and more for research and transactions. "All the stuff we've seen says that's going to continue. They're getting more comfortable with the Internet and FX is part of that," said Potterton.
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Overview