Betfair IPO a Success. Will FXCM Succeed Where GAIN Did Not?

The Betfair Group IPO was initially mooted back in 2005, but was then put back on the shelf.  On September 21st Betfair announced that they intended to list their shares on the London Stock Exchange and last week the prospectus was published at long last, informing any interested readers that:

Conditional dealings in the Shares are expected to commence on the London Stock Exchange at 8.00 a.m. on 22 October 2010. It is expected that Admission will become effective, and that unconditional dealings in the Shares will commence at 8.00 a.m. on 27 October 2010.

Initial guidance on the offer pricing stated that:

The indicative price range of the Offer has been set at between £11.00 and £14.00 per Share, which is equivalent to an equity value for Betfair of between approximately £1.16 billion and £1.48 billion based on its issued share capital. This indicative price range is expected to make Betfair eligible for inclusion in the FTSE 250 Index in due course.

On October 25th the Betfair Group formally announced that:

Betfair Group plc (LSE: BET), the world's largest international online sports betting provider and the world's biggest betting community, announces that LMAX, its FSA-authorised subsidiary, has today launched its exchange platform for online retail financial trading of contracts for difference  (CFDs) and foreign exchange contracts (FX).  LMAX will initially allow customers to trade CFDs in market indices, fixed income instruments, commodities and FX. Other asset classes will be added to the platform in due course.

Today is October 28th 2010, and as I write this Betfair Group shares are trading on the LSE at 1506/1508, well above that indicative price range.

I imagine everyone involved is very pleased with that outcome, particularly since in the early days some commentators weren't terribly optimistic. MoneyWeek for example concluded:

Don't buy Betfair. One side effect of the float is that Betfair now has to make available a huge amount of information it could previously keep under wraps. That's likely to prove mouth-watering to wannabe competitors. In other words, the risks of rivals trying to muscle in on Betfair's business are rising.

Possibly those commentators weren't aware of the potential of LMAX Trader?  Whether that is the case or not, MoneyWeek was certainly correct about the huge amount of information suddenly revealed to competitors and potential clients alike.

While Betfair now seem to be successfully floating here in the UK, FXCM are planning their own initial public offering over on the other side of the Atlantic. Another big US forex broker, GAIN Capital (better known by their FOREX.com brand) were also initially planning an IPO last year, but theirs seems to have been sat on the shelf for a bit much like Betfair's was for 5 years! Like Betfair both companies have also made publicly available huge amounts of information of interest both to competitors and potential customers in their S-1 filings.

I can't help but wonder if either FXCM or GAIN have anything along the lines of LMAX Trader up their sleeves to tempt investors with at the last moment. Whilst we wait to discover the answer to that question let's sift through all that competitive intelligence to see what we can discover.

Page 40 of the Betfair prospectus states that:

While the Betting Exchange model carries no financial risk to the operator as Core Betfair generates a commission from the winners of matched bets, Core Betfair has gradually increased the number of sports products on which it accepts house risk. For the year ended 30 April 2010, 93 per cent. of Core Betfair Sports revenue was generated from non-risk-taking products (93 per cent. in FY09 and 95 per cent. in FY08).

Page 1 of the FXCM S-1 states that:

We utilize what is referred to as agency execution or an agency model. When our customer executes a trade on the best price quotation offered by our FX market makers, we act as a credit intermediary, or riskless principal, simultaneously entering into offsetting trades with both the customer and the FX market maker. We earn trading fees and commissions by adding a markup to the price provided by the FX market makers and generate our trading revenues based on the volume of transactions, not trading profits or losses.

Page 51 of the GAIN S-1 states that:

For the six months ended June 30, 2010, approximately 75.7% of our customer trading volume was directed into our managed flow portfolio, allowing us to keep part or all of the dealable spread and resulting in daily mark-to-market gains or losses based on the performance of the managed flow portfolio. During the same period we offset 11.8% of transaction volume from customers by executing equal and offsetting trades with our wholesale forex trading partners.

More on this and other revelations in future posts. Until then here's a couple of things to ponder. Do you suppose prospective investors in the United States will prefer FXCM's "agency model" to GAIN Capital's "managed flow portfolio"?  How about prospective U.S. clients of those two presumably soon to be public foreign exchange brokers?  Finally, will U.S. resident forex traders be able to utilize Betfair's LMAX financial exchange any time soon?