The $100bn FX hustle | FT Alphaville

The $100bn FX hustle

$100bn — that’s the daily figure for trading volume in the retail foreign exchange market, where amateur plungers play the dollar and the like.

The IPO prospectus for Gain Capital, one of the scores of firms tapping into this area of explosive growth, sets out the juicy business on offer (emphasis FT Alphaville’s):

Foreign exchange, or forex, trading is one of the fastest growing areas of retail trading in the financial services industry. According to its most recent report, the Aite Group, a financial services industry market research firm, reported that by the end of 2008, average daily trading volume in the retail forex market reached approximately $100.0 billion, a 900% increase from 2001. Our total annual customer trading volume, which is based on the U.S. Dollar equivalent of notional amounts traded, grew from $120.3 billion in 2004 to $1.49 trillion in 2008, representing a compounded annual growth rate of 87.6%. Our annual customer trading volume from customers residing outside of China grew from $114.3 billion in 2004 to $1.32 trillion in 2008, representing a compounded annual growth rate of 84.3%. 

Compound annual growth of almost 88 per cent? ALARM BELLS PLEASE!

We should state at the outset here that to our knowledge Gain Capital, better known as, are neither better nor worse than any other retail FX trading service provider.

But my, isn’t Gain profitable: net income has multiplied from $7.1m in 2004 to $231m in 2008, representing compound annual growth of 138 per cent.

But at whose cost? Step forward would-be FX speculators drawn from retail clients the world over.

The website, like the firm’s IPO prospectus, contains lots of warm words about enabling ordinary people to gain access to markets that were once the preserve of the professionals. There’s a stress on things like “education”,”managing risk in real time,” and other such intangibles.

The site also warns — in small print at the bottom of the page — that “forex trading involves significant risk of loss and is not suitable for all investors” and that “increasing leverage increases risk”. There’s also a separate page warning of the risks inherent to forex trading and the additional dangers of using an Internet-based platform.

Go to any of these sites —, Global Futures & Forex,, etc — and you will get the distinct impression that you are dealing with a warm-hearted, professional broker, where your interests are paramount.

But in many cases the exact opposite is the case. Note this line from the Gain prospectus:

The majority of our revenue is derived from our activities as a market-maker to our retail customers, where we act as the counterparty to our customers’ trades.

We would also highlight, in abstract, these two statements from the ‘risk factors’ section of the IPO doc:

Our customer base is primarily comprised of individual retail customers who generally trade in the forex market with us for short periods…

…If we are unable to maintain or increase our customer retention rates or  generate a substantial number of new customers in a cost-effective manner, our  business, financial condition and results of operations and cash flows would  likely be adversely affected. For the year ended December 31, 2008, we incurred  sales and marketing expenses of $29.3 million.

And then deeper into the prospectus:

As a market-maker, we take an equal and opposite position to our customers when executing a trade. We believe it is neither economically optimal nor necessary from a risk perspective to hedge all of our customers’ trades on a one-to-one basis…

…Trading revenue is our largest source of revenue and is derived from gains,  offset by losses, from our trading positions and our revenue resulting from  dealing spreads on customer transactions where we earn the difference between  the retail price  quoted to our customers and the wholesale price received from our wholesale  forex trading partners…

…We offer both standard and mini accounts, which allow customers 100-to-1 and  200-to-1 margin…

We could go on. The 150 page prospectus provides dozens of talking points.

But let’s concentrate on the core issue here: how do those operating retail FX punting services make so much money?


Here’s how it works.

Our Madcap Speculator (MS), having been lured by an advert or other promotion, puts up $500 to “play the dollar.”  He thinks the dollar is going to 1.75 versus the Euro — and he may well be right, given that we’ve already moved from 1.25 to 1.50 in the past six months or so. offers the Madcap Speculator 200x leverage on his initial margin deposit of $500. That allows the client to go long the euro and short the dollar to the tune of $100,000.

Now, either because he’s cautious or because FXhustle have insisted he do so, our MS places a stop loss on his trade — limiting his total possible losses to $1,000.

Which is where FXhustle becomes the near-certain winner and Madcap Speculator becomes the likely loser.

MS might be right about dollar/euro going to $1.75, but even if it does, we can be absolutely certain that it will NOT do so in a straight line. And, because he’s levered 200 times, our little speculator cannot sustain much volatility without being stopped out.

FXhustle, on the other hand, acting as MS’s counterparty, can endure much greater price divergence — even without having a view on the future of the dollar.

In its role as counterparty, the firm is taking bets from tens of thousands of customers across dozens of currency pairs. It can maintain a neutral market position while banking the spread between wholesale FX rates and the quotes it offers the Speculators of this world. But it then sweeps up as soon as a client hits a stop loss — which the volatility in FX markets, together with excess leverage, makes a certainty.

With a simple algorithm covering market volatility and the leveraged state of clients, FXhustle can make near-certain returns — in just the same way that a casino takes a pre-defined cut at the roulette wheel.

The only trouble for FXhustle is that it needs to keep finding new Madcap Speculators willing to lose their money in this way.


Returning to our real life example in the form of Gain Capital and, we can see that the firm currently has around 33,000 active customers collectively betting a nominal $1,200bn annually. For every $1m wagered by its clients, generated revenue of $122.

The firm does not appear to have divulged a figure for client churn, so it is difficult to know how many customers might be getting burnt on a monthly basis. What we do know is that advertising and promotion spending is running at $30m a year at Gain Capital, ranking second only to staff costs., like others in the same business, is regulated to the n-th degree — both from a capital adequacy perspective and from the advertising/promotion/consumer protection side.

But do the National Futures Association in the US and the FSA in the UK actually understand the hardwired hustle going on here?

If not, it’s about time they did.

Related link:
IPO prospectus
– Gain Capital