Prospectus Summary
This summary highlights information contained elsewhere in this prospectus that we believe is important to understanding how our business is currently being conducted. You should read the entire prospectus carefully, including the “Risk Factors” section, the “Management’s Discussion and Analysis” section, the consolidated financial statements and related notes included in this prospectus and the “Prospectus Summary — Recent Developments” section concerning our cessation of our operations in China during 2008, before making an investment decision. As a result of our review of our regulatory compliance in China during 2008, we decided to terminate all service offerings to residents of China and ceased our trading operations located in that country. As of December 31, 2008, we no longer accept new customers or maintain direct customer accounts from residents of China. Therefore, we have presented certain historical information throughout this prospectus that both includes and excludes customer account activity from residents of China. We believe reporting such information without our historical China operations better assists the reader in evaluating our operating performance for comparative purposes with subsequent periods. In addition, you should also note that our preferred stock contains a redemption feature which allows the holders of our preferred stock to require us to repurchase the preferred stock at a fixed price. Such repurchase right must be recorded by us at fair value as a non-cash gain or loss from the recorded level in the immediately prior period. This embedded derivative causes fluctuation in our net income which is not reflective of our operating performance and will no longer exist at and after our initial public offering. As a result, we have presented adjusted net income, a financial measure not calculated in accordance with Generally Accepted Accounting Principles in the United States, or GAAP, which represents our net income/(loss) excluding the change in fair value of the embedded derivative in our preferred stock. This non-GAAP financial measure has certain limitations in that it does not have a standardized meaning and thus our definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. As a result, it may be difficult to compare our financial performance to that of other companies.
Our Company
We are an online provider of retail foreign exchange trading and related services founded in 1999 by a group of experienced Wall Street trading professionals. We offer our customers 24-hour direct access to the global over-the-counter, or OTC, foreign exchange markets, where participants trade directly with one another rather than through a central exchange or clearing house. Our trading platform provides a wide array of information and analytic tools that allow our customers to identify, analyze and execute their trading strategies efficiently and cost-effectively. We believe our proprietary technology, multilingual customer service professionals and effective educational programs provide a high degree of customer satisfaction and loyalty. Furthermore, our scalable and flexible technology infrastructure allows us to enhance our product service offerings to meet the rapidly changing needs of the marketplace.
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%.
Our annual net revenue grew from $22.2 million in 2004 to $190.8 million in 2008, representing a compounded annual growth rate of 71.2%. Our annual net revenue from customers residing outside of China grew from $20.8 million in 2004 to $166.4 million in 2008, representing a compounded annual growth rate of 68.2%. Our net income grew from $7.1 million in 2004 to $231.4 million in 2008, representing a compounded annual growth rate of 138.9%. Our adjusted net income, a non-GAAP financial measure which represents our net income/(loss) excluding the change in fair value of the embedded derivative in our preferred stock, increased from $7.1 million in 2004 to $49.6 million in 2008, representing a compounded annual growth rate of 62.6%.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1We believe customers residing outside the United States represent a significant area of growth for our business. We have a geographically diverse customer base and currently service customers residing in over 140 countries worldwide. For the year ended December 31, 2008, approximately 56.7% of our customer base was located outside of the United States, representing approximately 41.0% of our total trading volume. Customers residing in China represented approximately 26.8% of our customer base and approximately 11.6% of our total trading volume for the year ended December 31, 2008.
We classify our customers’ accounts as tradable accounts and traded accounts. Tradable accounts represent customers who maintain cash balances with us that are sufficient to execute a trade in compliance with our policies. As of June 30, 2009, we had 43,217 tradable accounts. The number of tradable accounts is an important indicator of our ability to attract new customers that can potentially lead to trading volume and revenue in the future, although it does not represent actual trades executed. We believe that the most relevant measurement which correlates to volume and revenue is the number of traded accounts, because this represents customers who executed a forex transaction with us during a particular period. During the six months ended June 30, 2009, 33,589 traded accounts executed a forex transaction with us compared to 37,724 traded accounts (including 10,530 traded accounts from customers residing in China) for the six months ended June 30, 2008, representing an overall decrease of 11.0%. Traded accounts from customers residing outside of China increased 23.5% during the six months ended June 30, 2009, compared to the six months ended June 30, 2008. During the year ended December 31, 2008, 52,472 traded accounts (including 11,647 traded accounts from customers residing in China) executed trades with us, compared to 42,781 traded accounts (including 11,561 traded accounts from customers residing in China) in 2007, representing an increase of 22.7%. Traded accounts from customers residing outside of China increased 30.8% for the year ended December 31, 2008, compared to the year ended December 31, 2007.
We seek to attract and support customers through direct and indirect channels. Our primary direct channel is our retail forex trading Internet website, FOREX.com, which is available in English, traditional and simplified Chinese, Russian and Arabic. It provides currency traders of all experience levels with full trading capabilities, along with extensive educational and support tools. In addition, we utilize our relationships with retail financial services firms, such as broker-dealers and Futures Commission Merchants, or FCMs, to attract additional customers. These firms offer our forex trading services to their existing customers under their own brand in exchange for a revenue sharing arrangement with us. We refer to these firms as our white label partners. We also have relationships with introducing brokers who refer their customers to us for a fee.
Our customer base is comprised primarily of self-directed retail traders who utilize our online platform and tools to trade forex and certain other asset classes. Our customer base also includes accounts managed by authorized intermediaries, such as money managers, trading on behalf of a retail account holder, which we refer to as managed accounts. For the six months ended June 30, 2009, self-directed investors represented 93.1% of our customer trading volume and managed accounts represented the remaining 6.9% of our customer trading volume.
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 provide both buy and sell quotes for each of the 43 currency pairs we offer. We have extensive experience in the forex market and have used this experience to develop risk management systems and procedures that allow us to manage market and credit risk in accordance with pre-defined exposure limits in real-time. Key components of our approach to managing risk are that we do not take proprietary directional market positions, we continuously evaluate market risk exposure, and we actively hedge customer transactions with our wholesale forex trading platform on a continuous basis. As a result of our hedging activities, we usually have open positions in various currencies at any given time. We also maintain liquidity relationships with three established, global prime brokers and at least six other wholesale forex trading partners, which we believe provide us with access to a deep forex liquidity pool. We maintain levels of capital in excess of those currently required under applicable regulations.
Our Market Opportunity
Historically, participation in the forex trading market was only available to commercial and investment banks and other large institutional investors. We believe that the expansion of online forex trading firms, such as our company, has led to reduced trading costs and increased investor awareness of the forex market, resulting in greater retail participation. We believe that improved accessibility and convenience has spurred the growth of our industry, similar to the impact online equity brokers had on growth in the U.S. equities markets in the late 1990s.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1The forex market is one of the highest notional dollar volume traded financial markets in the world, with daily trading volumes growing at a compounded annual growth rate of 14.8% from approximately $1.4 trillion per day in 2001 to approximately $3.2 trillion per day by April 2007, as stated by the Bank for International Settlements.
We believe retail forex trading is poised for continued, rapid growth as a result of the following trends:
Our Competitive Strengths
We believe that we have maintained and will continue to enhance our strong position in the retail forex market by leveraging the following competitive strengths:
Leading FOREX.com brand name and strong global marketing capability
We believe that we have developed FOREX.com into the category-defining brand in the online forex trading industry. For the six months ended June 30, 2009, FOREX.com averaged over 1.3 million unique visitors per month and we currently service customers from over 140 countries.
Our sales and marketing strategy leverages the strength of the FOREX.com brand name by employing a combination of direct marketing techniques and focused branding programs. Through our direct marketing efforts, we generated 1,158,682 registered practice trading account users in 2008 (including 380,025 registered practice trading account users in China), representing a compounded annual growth rate of 81.8% from 105,959 registered practice trading account users in 2004. For the six months ended June 30, 2009, we generated 435,347 registered practice trading account users. Complementing our direct marketing strategy, we have assembled a multilingual, 98-person retail sales force that utilizes a highly interactive approach to convert registered practice trading accounts into tradable accounts and manages ongoing customer retention efforts. We have further leveraged the FOREX.com brand name to successfully forge partnerships with white label partners and introducing brokers to allow us to acquire customers that we believe we could not otherwise efficiently attract.
We have achieved significant growth through the international expansion of our customer base. We have grown our company internationally through an efficient business model that combines our centralized trading, middle- and back-office functions located in the United States with direct and indirect marketing techniques tailored for each local market. This approach is designed to achieve a consistent brand experience while minimizing overhead costs.
Superior customer experience and service focus
We offer current and prospective customers a high level of service and a wide range of customizable tools and resources to assist them in learning about trading forex and certain other asset classes and to prepare them for trading in the market. We have a multilingual customer service staff located in the United States that is available seven days a week to handle customer inquiries via telephone, email and online chat, with continuous coverage beginning Sunday at 10:00 a.m. through Friday at 5:00 p.m. and Saturday 9:00 a.m. to 5:00 p.m. (Eastern Standard time). We also offer comprehensive education and training programs, the majority of which are utilized by prospective customers, which have been internally developed and designed to accommodate a variety of experience levels and learning preferences, from self-study to fully instructional programs.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1Our emphasis on providing a superior customer experience is evidenced by our high customer satisfaction. In July 2007, we conducted a customer survey to our English-speaking active customers who executed a trade with us 90 days prior to the survey, in which over 90.0% indicated they would recommend FOREX.com to a friend or family member. When asked to rank their reasons for choosing FOREX.com, the three most common responses were execution quality, quality of the trading platform and customer service.
Consistent execution quality
We believe our customers choose us in part due to the consistent quality of our trade execution capabilities, which is comprised of three main aspects: timing, certainty of execution and pricing. We believe that our proprietary rate engine provides our customers with access to forex liquidity at competitive market rates. We are able to provide our customers with a high degree of certainty in the execution of their trades as a result of our liquidity relationships with three established global prime brokers, Deutsche Bank, The Royal Bank of Scotland plc, or RBS, and UBS AG, or UBS, as well as relationships with at least six other wholesale forex trading partners. Through these relationships, our access to a deep pool of forex liquidity assists in ensuring that we are able to execute our customers’ trades in any of the 43 currency pairs and notional amounts they desire.
Highly scalable proprietary technology with a proven track record of innovation
We believe that our proprietary technology provides us with significant competitive advantages. Our scalable and flexible technology infrastructure allows us to quickly adapt to meet the rapidly changing needs of the marketplace. For example, in 2009 we introduced trading in the gold and silver spot market onto our platform. In addition, our proprietary technology allows us to quickly integrate other trading platforms that can benefit from our aggregated price feeds and colocation facilities and are attractive to our customers. In 2007, we began offering MetaTrader, an online trading platform popular with the international retail trading community, which we license from a third party. We believe that our integrated online trading platform, including our proprietary rate engine which aggregates price feeds from our wholesale forex trading partners and publishes real-time quotes, offers our customers a consistent level of trade execution and decision support for all products we offer.
Extensive risk management experience and capital position in excess of current regulatory requirements
We have extensive experience in the forex market and have leveraged this experience to develop proprietary risk management systems and procedures that allow us to manage market and credit risk in accordance with predefined exposure limits in real-time and maintain a conservative capital position while taking into account specific market events and market volatility. Key components of our approach to managing risk are that we do not take proprietary directional market positions, we continuously evaluate market risk exposure and we actively hedge customer transactions with our wholesale forex trading partners on a continuous basis. As a result of our hedging activities, we are likely to have open positions in various currencies at any given time.
As part of our risk management philosophy, we maintain capital levels in excess of those required under applicable regulations in multiple jurisdictions. We believe that our excess capital position in the United States compares favorably to that of many of our competitors and positions us favorably for potential future increases in minimum capital requirements domestically and abroad. Additionally, we believe that our capital position enhances our access to foreign exchange liquidity, thereby improving our ability to provide customers with attractive pricing and facilitating our trading and hedging activities. In addition, our capital position allows us to provide capital to our affiliates as needed, to accommodate their business growth and meet potential increases in minimum capital requirements.
Experienced management team
Our senior management team is comprised of experienced executives with significant forex and financial technology expertise. In addition, our senior management team has extensive experience in many critical aspects of our business, including trading and risk management, retail brokerage operations, compliance, application development and technology infrastructure. We believe the experience of our senior management team has been integral to our success to date and will be critical to our successful expansion into new markets and products in the future.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1Our Growth Strategy
We intend to pursue the following strategies to continue to grow our forex business and to continue to expand our product offerings to our customers:
Increase penetration in our existing markets
We plan to increase penetration in our existing markets by continuing to focus on reaching the greatest number of prospective customers who may open registered practice trading accounts. We seek to accomplish this by employing a mixture of on- and off-line advertising, search engine marketing, email marketing, television and radio advertising, attendance at industry trade shows and strategic and public media relations. We intend to continue to focus on converting our registered practice trading accounts into traded accounts in order to grow our business and increase our market share. We believe we can most effectively generate registered practice trading accounts and convert them into traded accounts by continuing to tailor our marketing strategy to each customer type we target and by offering prospective customers training, educational tools and superior customer service.
Continue the international expansion of our customer base
We intend to enhance our growth through the continued expansion of our international customer base into new markets and continue to penetrate existing international markets. We believe owning and operating a leading forex Internet domain name enhances our ability to promote our advanced trading technology and tools, as well as our market leading customer service, while also generally building awareness of the forex market among retail investors. In addition to leveraging the FOREX.com brand name globally, we intend to grow internationally by continuing to open offices in areas where a local presence is helpful to our growth efforts and by selectively pursuing strategic acquisitions. For example, we are currently seeking local registration, licensing and authorization to conduct our forex trading services in Australia and Singapore. To successfully expand into other new international markets, we intend to employ a strategy that centralizes brand management, trading, middle- and back-office functions at our U.S. headquarters and tailors marketing programs and sales and customer support to the local market.
Expand our product offering
We intend to grow our business by offering our customers additional products which are complementary to our current product offerings. Since customers who trade in forex often trade in other financial products, we believe we have significant growth opportunities to cross-sell complementary products to these customers. Expanding our product offerings to include other financial products will enable our customers to execute diversified trading strategies across various products from a single, integrated trading platform. We believe our proprietary and scaleable technology infrastructure, along with our extensive forex trading experience, will allow us to introduce new products efficiently and cost effectively. As a result, we believe the expansion of our product offerings will allow us to attract and satisfy our customers’ increased trading needs, which will in turn result in increased customer trading volume with us. For example, we recently introduced spot trading in gold and silver, and have also introduced GAIN Capital Securities Inc., or GAIN Securities, a registered broker-dealer, for trading of equity securities. Some other products we intend to offer include:
We intend to offer additional forex trading products, including more currency pairs, currency options and a range of other currency-related investment products.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1Outside the United States, we intend to expand on our contracts for difference, or CFDs, offerings. CFDs are instruments linked to the performance of the price of an underlying financial instrument, including precious metals, energy products and other commodities, as well as stock indices and government bonds. Because CFDs are margin-based and are OTC traded, we believe that we can effectively apply our market-making and risk management expertise to these financial instruments.