Single-dealer platform "shake-out" offers growth prospects for FXall, says CEO Weisberg
In his first interview since FXall completed its initial public offering (IPO), chief executive officer Phil Weisberg sets the record straight on why the company’s IPO strategy was changed, and explains the key drivers of growth in 2012 and beyond, writes Hamish Risk.
In September, FXall announced plans for an IPO, which, based on the company’s filing fee, was aimed at raising between $75 million to $100 million, to be used for working capital and other general corporate purposes, including potential acquisitions. That all changed in January, when more detailed terms of the IPO, along with updated revenue and volume data, were released in regulatory documents. The company said that the proceeds would now just be used to pay exiting shareholders.
When the deal was priced the next month, the company raised $62 million, while the offering price of $12 a share was lower than the price guidance range of $13.50-$15.50. The stock has rallied to as much as 26% since, and was trading at $14.70 on March 22.
Weisberg says these events were purely part of the process of going public – a process whereby the offering goes from being very generic to being specific, as a company approaches the market. Moreover, it was about also finding the optimal capital structure that would enable the firm to grow. While the size of the IPO might have been smaller, the company also put in place a $65 million revolving credit facility with Bank of America Merrill Lynch.
“On balance, we thought it was the right capital structure for the company at the time,” says Weisberg. “It’s a good structure going forward for the shareholders.”
FXall has two major holders of its stock. Technology Crossover Ventures, who bought a 28% stake on Feb. 13, 4 days after the firm’s stock began trading, and an unidentified block owning 29.66% of the stock, according to Bloomberg data. LabMorgan, the e-finance unit of JPMorgan, and Credit Agricole both own 5.05% of the stock.
As far as the issue of using the proceeds to pay exiting shareholders, rather than using it to fund growth through acquisitions, Weisberg says that FXall is still very much focused on investment.
“We are reinvesting in the business at a reasonably high rate,” he says. “There is a lot more going on, in terms of our current spend than maintaining the factory. And we have reasonable access to capital. I wouldn’t dwell on those specifics [of the IPO].”
Weisberg is more interested in talking about the changing dynamics of the electronic FX markets. FXall has remained far and away the most dominant player – with average daily volumes (ADV) rising 34%in 2011, reaching $83.4 billion. This is a clear margin to other rival platforms, such as 360T – one of the fastest growing multi-dealer platforms, who told EuromoneyFXNews in January that ADVs has reached $50 billion, after volumes grew 40% in 2011.
| Source: FXall, EuromoneyFXNews
However, there is little doubt that the markets have become extremely competitive. It’s becoming an increasingly competitive business, as growth has slowed and more firms have entered the business. According to Gerald Segal, CEO of the online forex analysis firm LeapRate, more firms are planning to enter the ECN [multi-dealer] market, with two or three more new serious FX-ECN players set to emerge in the next few months.
“Put that all together, and you get rapidly falling spreads and margins, which we’ve seen reported recently by each of the major players in the industry, including FXall,” says Segal.
That is reflected in the firms operating margins, or average transaction fee per million, which have been falling overtime. Weisberg says this is purely a function of rising volumes – which, on its platform, have risen 87% during the past three years.
“When you look at our transaction-fee schedules with our customers, the more volume you do the more you benefit economically,” he says. “This is not an exception to FXall, it was by design. That means we’ve gotten scale.”
| Source: FXall, EuromoneyFXNews
In its first-ever publically disclosed earnings, FXall said this month that total revenues for 2011 increased 19.4% to $118 million, while net income rose 23% to $26 million. There is a wider point that banks are looking to rein in the brokerage fees they pay to multi-dealer brokers, which is allowing the no-brokerage model to gain some traction, as seen by the rise in volumes on venues such as Bloomberg’s FXGO. In 2011, its volumes rose 44% (FXall’s rose 30%), while the number of users rose 35%, from the previous year, Tod Van Name, Bloomberg’s head of FX, told EuromoneyFXNews in January.
According to Van Name, much of that is being driven by banks’ becoming more cost conscious, and looking to reduce their cost per trade and offer more competitive prices on FXGO. Nonetheless, Bloomberg does not disclose its FX volumes, but it is widely believed that its ADVs are rising from a low base at this stage, and thus their impact on rival market share is still muted.
|"When this shakes out, it will be
very beneficial to us. We’re seeing
the impact of that, because people
are cancelling projects that they were
While Weisberg does recognize that there is increasing competition, as the market leader in the MDP sector he is keen to point out the wider opportunity for growth for FXall, which goes beyond multi-dealer rivals and looks to cost inefficiencies in the single-dealer platform (SDP) marketplace. “There is a focus on costs, but perhaps the better question to be asking [bank liquidity providers] is: am I really getting a return on my own e-distribution platform?” he says. “Some people are, but many are not. If you look at return on investment, it drops off significantly outside the top five FX banks.
It is a compelling point, though very hard to prove, and Weisberg does not provide EuromoneyFXNews with any data that backs this assertion. But anecdotally, at least, the costs required to build and maintain connectivity of SDPs are rising, as their numbers proliferate, and as latency issues are paramount.
In EuromoneyFXNews’s e-trading survey of buyside participants in January, the results showed that customers expected to move more flow towards single-dealer platforms (SDPs), with its share of turnover expected to grow from 29% to 33% in the next two years, or by another measure, 7-times faster than on multi-dealer platforms.
Weisberg is sceptical of this trend, and argues that actually banks are now beginning to re-evaluate how they allocate resources to their e-commerce strategies.
“That’s why, when this shakes out, it will be very beneficial to us,” says Weisberg. “We’re seeing the impact of that, because people are cancelling projects that they were doing internally.”
Weisberg is very conscious about not making this seem like a multi-dealer platform (MDP)-SDP conflict, where there is a winner and a loser. This is purely about economics, and as the lower cost of regulatory capital makes FX an attractive market to enter, and electronic connectivity becomes a compulsory component of the business, the MDP model, or FXall, can offer the most competitive solution.
“Banks can add far more value in perfecting technology to price and manage risk, which is what institutional clients rely on them for, rather than building proprietary distribution facilities,” he says.
Weisberg points out the benefits of FXall’s scale as a price-distribution platform, with more than 80 banks providing liquidity, in effect means it is splitting the costs of doing business 80 different ways.
“The whole notion that SDP and MDP are different is probably flawed,” he says. “We are providing a distribution platform for the SDP liquidity pools, and we add value to the process by normalizing all of their data feeds, and making it easy for customers to change the mix of how their liquidity is sourced.”
Becoming an options swap execution facility (SEF)
Prior to filing for the IPO, Weisberg, who began his career as an options trader at JPMorgan, stated the firm’s intentions to start offering electronic options pricing as new regulations on mandated electronic trading of FX derivatives move towards implementation this year.
In May, in an interview with EuromoneyFXNews, Weisberg said that the development of an electronic options market under the new regulations would take some time and that the best approach was to be more consultative with market participants about how a trading platform should look and feel.
Weisberg is reluctant to say when FXall will launch an options pricing service, but adds it is not straightforward.
“Our basic conclusion on the whole space is that the ability for people to quote these things electronically is generally assumed to be at a higher level than it really is,” he says.
After canvassing his clients for the past 12 months, Weisberg says the predominant concerns expressed by them revolve around how they can get better control over the option environment, rather than whether they are necessarily getting the best price. He also believes that the option market, under the new regulations, will only grow if the bank option dealers are at the core of the market.
“Our premise is that a dealer-centric model is necessary for this product, versus anonymous central limit order books,” he says. “They do add a lot of value as intermediaries and clients recognize that,” he says. “What’s really important is that we bring on more of the community. I want the option traders and sales people at the banks to say that this made the market better.”
Weisberg says the most common question investors asked him on the investor roadshow was: will the FX markets continue to grow? It’s an obvious question to ask, as they perused BIS data – contained in the offer document – which showed how the market has doubled in size, to $4 trillion a day, in the space of half a decade. Were existing shareholders cashing out at the top?
Weisberg, who kept his 6% stake in the firm, says that long-term trend of internationalization and cross-border diversification are here to stay and so the long-term growth for the foreign exchange markets can be expected. Ultimately, though, Weisberg believes he has built a business that can withstand a pull back from the rapid growth of the overall market over the past decade.
He concludes: “With our single-digit market share in the broader FX market, there are a lot of opportunities for the company to grow even if the FX market at large experiences are a few flat years.”