Both FXCM and GAIN Capital issued weak financial results for Q2 in early August. However, you wouldn’t have known that looking at their stock prices which have both rallied since bottoming out following their Q2 financials were reported. At a $15.63, FXCM shares have rallied 20% from their August lows. Similarly, since hitting a low on August 11th as Q2 results were delivered, GCAP shares have risen 16% to a recent $7.01.
Triggering demand in the shares has been the rebound in market volatility with most brokers and trading venues reporting double-digit MoM volume increases in August. The pickup has continued in September, with stimulus actions from the ECB leading to record trading taking place earlier in the month. Overall at KCG Hotspot during September, average daily volumes are 33.4% above August’s activity at $38.56B.
In both of their Q2 reports, FXCM and GAIN Capital stated that their financial performance was negatively affected by 25- -year lows in currency volatility. In GAIN Capital’s case, the volatility, or better stated the lack thereof, was directly correlated to a huge spike in the firm’s retail revenue per million dollars traded, dropping to $77 from around $120 during the previous few quarters. Nonetheless, both FXCM and GAIN stated publicly in their conference calls that volatility was poised to rebound due to monetary action changes expected to emanate from global central banks. So far, the prophecies have taken place thanks to the ECB. In addition, brokers are getting a boost as of late from GBP/USD moves related to Scotland’s upcoming referendum vote on Thursday.
Up to now, equity traders appear to buying into the cyclical change taking place in currency volatility. While previous volatility spikes in 2014 fizzled out, the current increase in activity may have increased staying power due to expected trader speculation as we get closer to October’s FED meeting and additional clarity on their quantitative tightening. Street analysts have also begun to expect further gains with Citigroup, Sandler O’Neill and Credit Suisse all increasing their price targets on FXCM, following the broker’s release of monthly volume metrics last week.
Interestingly though, the current rally has been specific to the US listed duo of FXCM and GAIN Capital. During the same period of their slightly more than one month rally, shares of London Stock Exchange listed IG Group and Plus500 have traded sideways, while Swiss listed Swissquote has only seen a 5% rebound from its August lows. In the case of IG and Plus500, as currency volatility declined in 2014, both firms have related to shareholders about their non-forex achievements. The current inaction in their share prices, appears to show that investors believe their story of being a diversified broker play.