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Foreign Exchange

FXall’s pre-IPO statement reveals higher volumes but dwindling margins

Average daily trading volumes on multi-dealer platform, FX Alliance, grew over 50% year-on-year in the third quarter but the firm's pre-IPO statement shows average transaction fees, its main source of revenue generation, continue to fall.

FXall, which does not usually release specific volumes figures, included a detailed earnings report in an updated registration statement for its planned IPO, involving revenues, quarterly trading volumes and transaction fees. The report revealed that average daily volumes for the third quarter totalled $88,587 million, only a small increase compared with the previous quarter’s ADV of $85,737 million but a large increase over the $58,882 million recorded over the same period a year ago.

 FXall average daily volumes (millions)

 Source: SEC, EuromoneyFXnews

The increased activity of hedge funds and high frequency trading firms, and the growth in e-trading, has lowered transaction costs, increased liquidity and attracted greater participation from many client types, driving volumes higher, FXall says in its updated report.

The company said corporations’ hedging activity, which accounts for the majority of fee-driven revenues, also continued to grow as their businesses expanded operations overseas.

However, the firm said computer-generated buy-and-sell programs and other technological advances and regulatory changes in the FX market might continue to tighten spreads on foreign currency transactions and threaten to reduce the firm’s profitability.

Indeed, as the data showed, the amount of money FXall earns per million dollars has been in steady decline. The average transaction fee on active trading, related to the firm’s ECN platform and continuous stream platform – used primarily by banks, broker-dealers, hedge funds and prime brokers – is now $6.25 per million dollars, down from $7.22 at the same period a year ago.

 Active trading transaction fees (per million dollars)

 Source: SEC, EuromoneyFXnews

Meanwhile, the transaction fees on the platform’s relationship trading services – used by corporates and asset managers has dropped to $3.63 per million dollars, down from $4.04 just over a year ago.

“Tighter spreads and increased competition could make the execution of trades and dealing in FX generally less profitable, which would adversely impact our access to liquidity, financial condition and results of operations,” the firm says.

FXall’s platforms combined, account for nearly one-third of the multi-dealer market; the firm registered a market share of 28.6% in Euromoney’s 2011 FX Survey. In the second-quarter the company reported a 37% increase in average daily volumes from the same period a year ago, while registering a record daily volume of $140 billion on July 27.

FXall announced it had filed documents with the SEC in September for a proposed IPO.

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