Sandler O'Neill Analyst: In Hindsight, FXCM Took On Too Much Risk

Speaking to Benzinga, Sandler O’Neill & Partners LP Analyst Richard Repetto said that in hindsight, FXCM Inc (NYSE: FXCM) took on too much risk.

Shares of FXCM are halted after falling more than 85 percent in pre-market trading.

Repetto said that FXCM offers clients leverage, a common practice in the retail industry. FXCM clients had a 2 percent margin, or 50x leverage, he explained, which means a client only needs $2 for every $100 that he can trade.

The reason regulators allow that kind of leverage is because a volatile currency move is usually only 0.5 percent, Repetto said, adding that the 15 percent move in the EUR/CHF pair was unheard of.

When asked if FXCM took on too much risk with that margin, he said, “Certainly. In hindsight, yes.”

But he went on to say that it’s still a tough call. He explained that another forex brokerage, Gain Capital Holdings Inc (NYSE: GCAP), didn’t experience the same types of losses as FXCM but it had lowered the leverage and increased the margin.

“Instead of 2 percent and 50x leverage,” he said. “They required a 5 percent margin, and the leverage was 20x.”

Shares of FXCM are still halted, while Gain was trading 3.86 percent higher Friday.

Image credit: Allan Ajifo, Wikimedia