Bear of the Day: Forex Capital Markets (FXCM) - Bear of the Day

A few short years ago, a new “get rich quick” trading opportunity once reserved for big banks began to trickle into living rooms everywhere. Although its volumes far surpass that of stock markets worldwide, this brand of trading had been dwelling in relative obscurity for quite some time. Among heightened regulation and tighter standards for traditional online brokerage accounts a new, exciting opportunity for the retail trader popped up. Welcome to the exciting world of foreign exchange.

I'm not pointing the finger at any of the retail trading world. I'm a trading junky myself. You can ask anyone that knows me and they'll tell you I probably check my phone 137 times a days to look at what the euro, yen, pound and now my latest fascination, the Turkish Lira, are doing against their US Dollar counterpart. I can't get enough of this stuff. And it's open 24 hours a day. It's my dream come true. I don't have to wait for the US market to open to follow our stocks. Just look at a screen shot of all those colors.

Looking past the appeal of the trading arcade, there were a few companies in this space that were making some serious money. Among them is our Bear of the Day, Forex Capital Markets (FXCM). It sort of pains me to put them in such a bad light but I didn't make the numbers up. In the last 30 days, two analysts have revised earnings estimates to the downside, dropping the consensus estimates for the current year from 94 down to 86 cents per share and next year's numbers down to $1.09 from $1.18. These revisions have helped slap a Zacks Rank #5 (Strong Sell) on the stock.

FXCM is having a tough time finding growth opportunities. Overall volume of trading has dropped. FXCM makes a small amount each and every time a trader enters an order. Each currency pair traded has a spread, that is the difference between the bid and the ask or where you can buy the pair and where you can sell it. FXCM makes money hidden inside of this spread, which is shown to the retail trader as wider than the interbank market truly is.

Regulation by the CFTC helped put stress on retail forex brokers as well. When I first started to dabble in forex I could get 100:1 leverage on the majors, now that has been restricted to 30:1 with even lower leverage available on the exotics and crosses. Compare this to retail stock brokerage where Pattern Day Traders can get leverage at 4:1, a far cry from the currencies. Just keep in mind that pairs like the EUR/USD rarely move more than a couple percentage points a day.

One area FXCM is trying to expand is in CFD trading. CFD trading or “Contract For Difference” trading is basically a private contract between a retail client and their broker. It allows access to different markets such as futures contracts, without having to adhere to the margin requirements and contract size specifications of the exchanges. For example, the standard West Texas Intermediate Crude Oil contract from the CME is for 1,000 barrels and carries an initial margin requirement over $3,000. A CFD could be constructed that allows traders to trade as little as 10 barrels of oil at a time with a margin required of $30. This makes different markets more accessible to the retail trader. Unfortunately for US clients, CFDs are not allowed, so this market for FXCM will be exclusively overseas.

The technical picture is pretty foul right now too. There has been a steady downtrend for the stock to start the year. FXCM has traded below its downward sloped 25 day moving average shifted by 5 (25x5 SMA) and has an oversold stochastic. Thursday the stock retested the November 2013 low. The last five trading days have seen FXCM sell off from the mid-$16 range all the way below $15 with this low as the last chance for support until $14 even.

Investors looking for alternatives in the space can turn to Gain Capital Holdings (GCAP). Gain is a Zacks Rank #1 (Strong Buy).