With the first quarter of 2019 behind us, brokers which are publicly listed have been universal in their assessment that the market had dramatically slowed down. After yesterday’s earnings report from GAIN Capital however we have a widely followed key metric which speaks volumes.
The metric is Revenues Per Million traded or RPM and during the first quarter, the US-listed brokerage reported that it dropped to one of the lowest levels in the firm’s history at $50. GAIN Capital which is a company operating on a market making model reported a figure which was lower by $56 when compared to a year ago.
The metric is incredibly suppressed by any historical standards. During the first three months of 2018, the broker posted revenues of $106 per million. All that said, there is a double impact on the numbers during the first three months of 2019. While the first one is much slower markets, the ESMA’s new regulations could also be playing a role.
In a tight range-trading market, lower Leverage is playing to the advantage of retail traders, whose profitability has been greater than the usual.
Challenging Volatility
The abysmal volatility across different markets has been highlighted by the management team of GAIN Capital as the key reason for the steep drop in RPM. With the currency volatility index CVIX dropping to the lowest level since 2014 and the industry’s most traded EURUSD pair ranging in the tightest bracket ever on a quarterly basis, brokers are can only look for better times ahead.
GAIN Capital retained its long-term revenue capture expectation at $106 per million with the 12-month average until the end of March sitting at $104. Financial markets volatility is traditionally a cyclical phenomenon and periods of low activity coincide with increased upward pressure when the cycle turns.
New Clients Growth
Despite the challenging market environment, GAIN Capital’s position for the coming months looks upbeat. ESMA’s challenge for the retail brokerage industry didn’t affect the firm’s effort to attract more customers. New client direct growth increased by 38 percent year-on-year and by 27 percent quarter-on-quarter. The growth is largely a result of GAIN Capital’s increased marketing spending budget for the quarter.
As Finance Magnates reported yesterday, the firm’s net revenues dropped by 61 percent year-on-year to $38.4 million. With a net loss of $28.4 million, the firm is expecting to adjust its spending levels depending on market conditions. With cash and cash equivalents sitting at $218 million, the broker is well positioned to weather the low volatility storm.
