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Pitfalls of the Currency Casino - Barrons.com http://online.barrons.com/article/SB500014240529...

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FEATURE | SATURDAY, APRIL 9, 2011

+ TEXT SIZE −

Want to open a trading account for $500 or less? Fund your initial trade

with a credit card? And then use leverage as high as 50-to-1 to vie

against experienced traders at giant corporations and huge banks? No

problem. Just enter the dicey and lightly regulated world of retail

foreign-exchange trading. But don't be surprised if you depart from it

with a lighter wallet.

Roughly three-quarters of individual investors who trade through forex

firms like Gain Capital Holdings lose money, resulting in an estimated

client-attrition rate of 15% to 25% a year, versus less than 5% at online

stockbrokers. Along with its peers, Gain Capital (ticker: GCAP), which operates perhaps the

industry's best-known Website, Forex.com, lets online traders buy and sell the greenback against

the euro, yen and other key currencies around the clock, from Sunday through Friday. Guppies

in a world dominated by whales, the folks who trade through these companies do an estimated

$125 billion a day in daily trading, up from $10 billion a decade ago. Not a small number, but

one that pales when contrasted with the $4 trillion in volume that courses through the global

forex market each day.

AS CASINOS HAVE SHOWN, it pays to be the house. Gain's trading volume last year totaled

$1.6 trillion. It and its rivals act as a market maker and take a small spread —averaging about

$100 per $1 million, or 0.01%–when clients buy and sell currencies in what is an over-the-

counter market. The minimum trade is $10,000. Gain gets 77% of its volume from self-directed

individual investors; the rest comes from institutional accounts.

Gain and FXCM (FXCM), the two largest

providers of retail foreign-exchange services,

completed initial public offerings in late

2010. Both are now below their IPO prices.

Investors have good reason to be wary of

forex stocks, particularly Gain Capital's. The

firm had a disappointing fourth quarter and

could face a tough 2011 because of tightened

leverage rules in the U.S. and Japan, the loss

of a key customer and a regulatory change

that will hurt a secondary business—trading

metals for its clients.

Gain Capital, now around 7, went public at 9 and could drop further, perhaps approaching its

tangible book value of $3.50 a share. Its stock-market value is almost $300 million. On the

surface, the shares don't appear expensive, trading at about eight times estimated 2011 profits of

92 cents a share, up from an adjusted 90 cents last year. But the 2011 projection could be tough

to hit; profits came in at just 10 cents a share in the fourth quarter.

The bull case for Gain is that it's a high-growth, high-margin business and, in Forex.com, has

one of the most recognized brands. Fans think Gain will expand both internally and through

acquisitions as currency trading ramps up globally. In a February conference call, CEO Glenn

Stevens said that Gain aims to develop "forex as a viable alternative asset class." Right now,

only about one million of the 100 million online brokerage accounts worldwide trade currencies.

But continued expansion may be tough, given the extent of investors' losses.

Friday, Stevens told Barron's that he sees "multiple underpinnings" of growth as active traders

around the world gravitate toward a "transparent and cost-effective" market.

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Pitfalls of the Currency CasinoBy ANDREW BARY | MORE ARTICLES BY AUTHOR

Gain Capital hopes to attract more foreign-exchange traders. That might not be easy, considering that three-quarters of its retail clients lostmoney in 2010's second half.

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Stuart Goldenberg for Barron's

Clients can open accounts with credit cards. Then,they can add leverage by trading currencies onminimal margin.

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