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How Changes in Key Interest Rates May Affect FXCM Performance

All Forex traders are aware of the effects that key interest changes have on the movements of currencies: some traders try to benefit from these movements, while others shun trading around such announcements of central banks. But as individual traders with our own wallets and accounts, we often neglect the fact that interest rate changes affect heavily the financials of Forex brokers. In this article, we briefly depict the impact of a change in the key interest rates by the U.S. Federal Reserve on the fortunes of the biggest retail Forex broker in the US – FXCM.
 
You must be smiling right now, as the Fed has kept the rates ultra low – at 0.25% for five years in a row. 
 
Photo credit: Forex Factory.
 
With an eye on the recent changes in the stimulus policy, however, some foresee a possible rate increase in the future. Let's take a look at how this will concern FXCM's retail and institutional trading volumes and revenues, as well as interest income:
 

Impact on Retail Trading Revenues 

 
If the interest rate differentials rise, traders tend to flock to the so-called carry trade: they buy the currency with the high interest rate in exchange for a currency with a lower interest rate. We are talking usually about the USD/JPY, AUD/JPY, NZD/JPY. As rollover charges come into play, traders seek to profit from those and the value of positions held over night skyrockets. This allows the broker to earn from this increase in a combination with the margin on interest it gets. If the value of positions triples from current levels to $15 billion and the broker makes a 25% margin, then:
 
Extra revenues and earnings = $15 billion * 1% interest rate differential * 25% = $37.5 million
 
Volumes will increase as traders seek to profit from carry trade, beefing up FXCM's earnings as the broker gets a mark-up from each trade. Currently the mark-up is at $90 per million dollars. So, if the monthly volumes increase by 10%:
 
Additional Revenues = 400 billion * $90/million = $36 million
 
 

Impact on Institutional Trading Revenues

 
Many algorithms for institutional trading make use of interest rate differentials. As the latter increase, so will the price movements and the trade volumes. If higher (monthly) institutional volumes combine with the mark-up, then: 
 
Extra revenues = 200 billion * $10/million = $2 million
 
 

Interest Income

 
If the interest rates rise, FXCM earns more from its own cash and the cash of its customers. 
 
 
As you can see, fellow traders, it's not only us who monitor the developments around central banks behavior. But only the future will tell us more about any end to the quantitative easing or whether this will result in changes in the key rates.
 

About FXCM Inc. 

 
FXCM Inc. (NYSE:FXCM) is a global online provider of foreign exchange, or FX, trading and related services to retail and institutional customers world-wide. 
 At the heart of FXCM's client offering is No Dealing Desk FX trading. Clients benefit from FXCM's large network of forex liquidity providers enabling FXCM to offer competitive spreads on major currency pairs. Clients have the advantage of mobile trading, one-click order execution and trading from real-time charts. FXCM's U.K. subsidiary, Forex Capital Markets Limited, offers Contract for Difference ("CFD") products with no re-quote trading and allows clients to trade oil, gold, silver and stock indices along with FX on one platform. In addition, FXCM offers educational courses on FX trading and provides free news and market research through DailyFX.com.
 
Mathematical examples in the article are from FXCM's presentation at the CJS Securities 14th Annual New Ideas for the New Year Investor Conference.  
TAGS: fxcm  fxcm forex broker  fxcm us  us forex broker  federal reserve  key interest rates  interest rates  rates differential  retail forex  forex volumes  forex revenues 

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