S-1/A 1 y87330a3sv1za.htm S-1/A sv1za
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As filed with the Securities and Exchange Commission on November 15, 2010.
Registration No. 333-169234
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
FXCM Inc.
(Exact Name of Registrant as Specified in its Charter)
 
         
Delaware
  6200   27-3268672
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
 
32 Old Slip
New York, NY 10005
Telephone: (646) 432-2986
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
 
 
 
David S. Sassoon
Secretary and General Counsel
FXCM Inc.
32 Old Slip
New York, NY 10005
Telephone: (646) 432-2241
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
 
     
Joshua Ford Bonnie
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017-3954
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
  Robert Evans III
Shearman & Sterling LLP
599 Lexington Avenue
New York, NY 10022
Telephone: (212) 848-4000
Facsimile: (212) 848-7179
 
 
 
 
Approximate date of commencement of the proposed sale of the securities to the public:  As soon as practicable after the Registration Statement is declared effective.
 
 
 
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed Maximum
    Proposed Maximum
     
Title of Each Class of
    Amount to
    Aggregate Offering
    Aggregate Offering
    Amount of
Securities To Be Registered     be Registered(1)     Price per Unit(2)     Price(2)     Registration Fee
Class A Common Stock, par value $.01 per share
    17,319,000 shares     $15.00     $259,785,000     $18,522.67(3)
                         
 
 
(1) Includes 2,259,000 shares of Class A common stock subject to the underwriters’ option to purchase additional shares of Class A common stock.
 
(2) Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933.
 
(3) $14,260 of which has been previously paid.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED NOVEMBER 15, 2010
PRELIMINARY PROSPECTUS
 
15,060,000 Shares
 
(FXCM LOGO)
FXCM Inc.
 
 
Class A Common Stock
 
This is the initial public offering of shares of Class A common stock of FXCM Inc. No public market currently exists for our Class A common stock. We are offering all of the 15,060,000 shares in this offering. We anticipate that the initial public offering price will be between $13.00 and $15.00 per share. We have applied to list the shares of Class A common stock on the New York Stock Exchange under the symbol “FXCM.”
 
We intend to use a portion of the proceeds from this offering to purchase equity interests in our business from our existing owners, including members of our senior management.
 
Investing in shares of our Class A common stock involves risks. See “Risk Factors” beginning on page 15 to read about factors you should consider before buying shares of our Class A common stock.
 
                 
    Per Share   Total
 
Initial public offering price
  $           $        
Underwriting discount
  $       $    
Proceeds, before expenses, to FXCM Inc. 
  $       $  
 
To the extent that the underwriters sell more than 15,060,000 shares of our Class A common stock, the underwriters have the option to purchase up to an additional 2,259,000 shares of our Class A common stock from us at the initial public offering price less the underwriting discount, within 30 days from the date of this prospectus.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the shares of our Class A common stock against payment in New York, New York on          , 2010.
 
 
 
 
Credit Suisse          J.P. Morgan Citi
 
 
 
 
Barclays Capital  
  Deutsche Bank Securities  
  Sandler O’Neill + Partners, L.P.  
  UBS Investment Bank
 
 
The date of this prospectus is          , 2010


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(BACK COVER)


 

 
We are responsible for the information contained in this prospectus and in any free writing prospectus we may authorize to be delivered to you. Neither we nor the underwriters have authorized anyone to provide you with additional or different information. We and the underwriters are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our Class A common stock.
 
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 EX-5.1
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 EX-23.1
 EX-23.2
 EX-23.3
 EX-23.4
 
 
Unless the context suggests otherwise, references in this prospectus to “FXCM,” the “Company,” “we,” “us” and “our” refer (1) prior to the consummation of the Offering Transactions described under “Organizational Structure — Offering Transactions,” to FXCM Holdings, LLC and its consolidated subsidiaries and (2) after the Offering Transactions described under “Organizational Structure — Offering Transactions,” to FXCM Inc. and its consolidated subsidiaries. We refer to the owners of FXCM Holdings, LLC prior to the Offering Transactions, collectively, as our “existing owners.”
 
 
Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of the option to purchase up to an additional 2,259,000 shares of Class A common stock from us and that the shares of Class A common stock to be sold in this offering are sold at $14.00 per share of Class A common stock, which is the midpoint of the price range indicated on the front cover of this prospectus.


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SUMMARY
 
This summary highlights selected information contained elsewhere in this prospectus and does not contain all the information you should consider before investing in shares of our Class A common stock. You should read this entire prospectus carefully, including the section entitled “Risk Factors” and the financial statements and the related notes included elsewhere in this prospectus, before you decide to invest in shares of our Class A common stock.
 
FXCM
 
Our business
 
We are an online provider of foreign exchange, or FX, trading and related services to approximately 175,000 retail and institutional customers globally. We offer our customers access to over-the-counter, or OTC, FX markets through our proprietary technology platform. In a FX trade, a participant buys one currency and simultaneously sells another, a combination known as a “currency pair”. Our platform presents our FX customers with the best price quotations on up to 56 currency pairs from up to 25 global banks, financial institutions and market makers, or FX market makers, which we believe provides our customers with an efficient and cost-effective way to trade FX. 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.
 
Our agency model is fundamental to our core business philosophy because we believe that it aligns our interests with those of our customers, reduces our risks and provides distinct advantages over the principal model used by the majority of retail FX brokers. In the principal model, the retail FX broker sets the price it presents to the customer and may maintain its trading position if it believes the price may move in its favor and against the customer. We believe this creates an inherent conflict between the interests of the customer and those of the principal model broker. Principal model brokers’ revenues typically consist primarily of trading gains or losses, and are more affected by market volatility than those of brokers utilizing the agency model.
 
We operate our business through two segments: retail trading and institutional trading. Our retail trading segment accounted for 94% and 92% of our total revenues in 2009 and the nine months ended September 30, 2010, respectively. Our institutional trading segment, FXCM Pro, offers FX trading services to banks, hedge funds and other institutional customers on an agency model basis and accounted for 6% and 8% of our total revenues in 2009 and the nine months ended September 30, 2010, respectively. Our revenues have grown from $12.3 million in 2001 to $322.7 million in 2009, a compound annual growth rate, or CAGR, of 55%. Our income before income taxes has grown from $5.3 million in 2001 to $97.0 million in 2009, a CAGR of 43.8%, although income before income taxes declined from $129.0 million in 2008. Our revenues were $264.2 million and our income before income taxes was $82.9 million in the nine months ended September 30, 2010, as compared to $248.1 million and $76.0 million, respectively, in the nine months ended September 30, 2009.
 
Our operating subsidiaries are regulated in a number of jurisdictions, including the United States, the United Kingdom (where regulatory passport rights have been exercised to operate in a number of European Economic Area jurisdictions), Hong Kong and Australia. As a result of our acquisition of ODL Group Limited, or ODL, a U.K.-based FX broker, which was consummated on October 1, 2010, we are also regulated in Japan. We maintain offices in these jurisdictions, among others. We offer our trading software in 16 languages, produce FX research and content in 12 languages and provide customer support in 13 languages. For the nine months ended September 30, 2010, approximately 76% of our customer trading volume was derived from customers residing outside the United States. We believe our global footprint provides us with access to


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emerging markets, diversifies our risk from regional economic conditions and allows us to draw our employees from a broad pool of talent.
 
Retail FX industry
 
The FX market is the largest and most liquid financial market in the world. According to the Bank for International Settlements, average daily turnover in the global FX market in April 2010 was $4.0 trillion. Historically, access to the FX market was only available to commercial banks, corporations and other large financial institutions. In the last decade, retail investors have gained increased access to this market, largely through the emergence of online retail FX brokerages, like our firm. According to 2010 estimates by the Aite Group, a financial services market research firm, retail FX trading volumes have grown from average daily volumes of approximately $10 billion in 2001 to approximately $125 billion in 2009, representing a CAGR of 37%.
 
While online retail trading of FX has many similarities with online retail trading of equities, there are a number of key differences. We believe the potential market that is addressable by an online retail FX broker is larger than that addressable by an online provider of retail equities trading. Trading of equities varies by country, requiring retail equity brokers to establish significant infrastructure in each major market. Because retail spot FX contracts (FX trades for immediate rather than future delivery), are neither traded nor cleared through local exchanges, retail FX brokers do not need to build unique infrastructure in each market to offer trading services. We service our retail customers around the world from a common technological infrastructure.
 
The FX market is open 24 hours a day, five days per week, driving extensive participation and more frequent trading. Unlike equity markets that limit investors to trading during market hours, retail FX participants have the convenience of trading FX at any time throughout the day, as well as the ability to place trades immediately, rather than waiting until the equity markets reopen the next day. The result is effectively more than fifteen equity trading “days” a week. As a result, our average account traded 3.4 times per day in 2009 and 2.5 times per day in the first nine months of 2010, which we believe is significantly more frequent than the trades per day of the average online equity account. Further, retail FX brokers cannot rely on standardized and inexpensive third-party infrastructure solutions that are available to online equities brokers and must build a significant proportion of their own technology. This requires large investments of time and money but can result in points of competitive differentiation not available to retail equity brokers. We believe this differentiation enables retail FX brokers to compete on the basis of the quality of their platform rather than merely on commission per trade.
 
We believe that retail FX trading will continue to grow at high rates as retail investors seek new asset choices, become more knowledgeable about FX markets through frequent media coverage of global economic issues and recognize the advantages of online FX trading over online trading of other assets, such as equities. We also believe that retail FX investors globally are becoming more sophisticated and demanding more transparency, better execution and better customer service. We believe our agency model, scale, proprietary technology platform, network of FX market makers and customer service will continue to attract a diverse and experienced base of customers, who use a wide range of trading strategies, trade more frequently and generally maintain long term relationships with our firm.
 
Our opportunities
 
Continued growth of the retail FX market
 
Despite the strong growth of the retail FX market, online retail FX investors still represent a small fraction of the total population of online investors. According to internal estimates by the Aite Group, as of July 2010, there were over 100 million retail equity traders globally, but only 1.25 million retail FX traders. Overall awareness of FX continues to grow among investors, driven in part by increased media coverage and the central role FX plays in the global economy. Also, since retail FX is an asset class that can be traded 24 hours per day, five days a week, it is convenient to trade for many online investors as they can trade at any time of the day. Unlike equities, fixed income, real estate and many other asset classes, FX markets do not experience periods where all assets move in one direction or another. As a result, the FX market is not


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necessarily correlated to other assets popular with online investors, such as equities or options, and we believe that, as an increasing number of investors realize this, retail FX will attract more attention as a way to increase portfolio diversification.
 
Increasing sophistication of FX customers and awareness of the agency model
 
We believe that as retail FX investors grow in sophistication, they will recognize the advantages of placing trades with an agency model broker with a robust technology platform. We believe these investors value competitive prices, deep liquidity, reliable execution and the ability to use any trading strategy they choose without fear of price requotes, unfilled orders or trading slowdowns that may occur when they are trading with a principal model FX broker. For instance, we believe sophisticated customers, such as automated traders, one of the fastest growing and highest volume segments of the retail FX market, value an agency model broker who will not place restrictions on the frequency or style of trading and offers access to deep pools of liquidity and rapid execution at attractive prices.
 
Expanding our presence in Europe, a large market for retail FX trading
 
We believe the retail FX market in Europe presents a significant growth opportunity for us due to our agency model. According to Greenwich Associates, a financial services market research firm, 57% of global FX trading volume in 2009 was conducted in Europe. We believe that awareness of the advantages of the agency model is growing among European customers and regulators, despite the current prominence of principal model brokers in Europe. We believe we can significantly expand our share of this large market through our existing operations in Europe and our acquisition of ODL.
 
Regulatory changes may continue to narrow the pool of providers authorized to offer retail FX that can meet the higher regulatory standards
 
Regulators in the United States and other jurisdictions have made a series of changes that impact retail FX brokers, including substantial increases in minimum required regulatory capital, increased oversight of third-party referring brokers and, more recently, regulations regarding the execution of trades. While these regulations may increase our costs, we believe that an effect of these regulations has been to significantly reduce the number of firms offering retail FX, even as the number of customers and the volume traded has grown. As the industry consolidates, scale will become increasingly important, presenting opportunities to larger firms, such as us, that can meet the more stringent regulatory requirements. We believe that this trend will present additional opportunities for us to increase market share organically or through acquisitions.
 
Continued expansion in institutional market
 
The institutional FX market is comprised of banks, hedge funds and corporate treasury departments that trade with each other predominantly through electronic communication networks, or ECNs, and single bank platforms (FX trading platforms where pricing and execution come from a single bank). We believe that we can use our agency model to continue to expand our institutional FX segment by offering these institutions the deep liquidity of multiple FX market makers while preserving the anonymity that they value.
 
Our competitive strengths
 
Differentiated agency model that aligns our interests with our customers’ interests produces a better customer trading experience, generates more stable revenues and exposes us to less market, regulatory and reputational risk
 
We believe our agency model aligns our interests with those of our customers. Our list of products is largely limited to those we are now, or in the future will be, able to offer on an agency model basis. Because we earn our fees based on transaction volume, we design our products and services to make it easier for our customers to trade. For example, to help our customers trade more profitably, we offer research without charge on aggregate trading trends, one-click trading (which enables customers to execute a trade with a single click


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after setting up preferred trading parameters) and price improvements for price changes that may occur between order placement and execution on all order types.
 
Further, we believe our transaction volume-based revenue is more stable and predictable than revenue derived from trading against customers. In addition, because we do not take market risk and do not extend credit to our customers unless they are fully collateralized, our regulatory capital requirements are significantly lower than those applicable to principal model brokers. As a result, we have more cash we can use to pursue our growth plans. Further, we believe our exposure to regulatory and reputational risk is reduced by avoiding the inherent conflict between the interests of the customer and those of the principal model broker.
 
Business model and proprietary technology designed to minimize risk and free capital for ongoing operations and expansion
 
One of our core business philosophies is to seek to minimize risk. In addition to the reduction of risk exposure that we believe results directly from utilizing an agency model, this philosophy is exemplified by the development and implementation of our margin monitoring technology. This technology reduces the risk that customers trading on margin could lose more than they deposit by checking their margins on every price update and account update and automatically closing open positions if a customer becomes at risk of going into a negative account balance. In addition, our platform receives prices from up to 25 FX market makers. By distributing our trading activity across multiple counterparties, we reduce the risk that the failure of an individual market maker will significantly impact the trading services we offer.
 
Proprietary and scalable technology platform and award-winning products
 
In the retail FX industry, the technology and infrastructure required to implement the agency model from customer trading screen through settlement is not widely available. We have built our proprietary technology platform over the last 11 years to handle the complete lifecycle of a FX trade, as well as customized connections to our network of FX market makers and a full suite of back office and administrative systems. Our platform is scalable and can handle sudden changes in the number of trades and increases in the number of customers. Our platform is also flexible, enabling us to add new instruments.
 
We offer our customers various trading alternatives based on customer sophistication, from beginner to expert, and modes of access, from smart phones to web-based interfaces to downloadable desktop applications. Our primary trading application is award-winning Trading Station II, a desktop application. We also offer Active Trader, an internet application targeted at active equity traders. We have also introduced a trading application designed for customers who create automated trading strategies, a growing and more active segment of the retail FX trading population. Additionally, we offer our customers services without charge to help them automate their trading strategies, connect their automated trading systems to our platform and to host their strategies on our platform.
 
Widely recognized brand and an in-house marketing organization driving new customer growth
 
We believe that we have built an in-house online marketing organization that has fueled consistent organic growth in customers at low acquisition costs through a combination of web properties and internet advertising. We believe that the FXCM brand is one of the most well-known, global brands in the retail FX industry, built through over $152 million in brand advertising expenditure since 2005. In 2009, our web properties attracted on average over 2.2 million unique visitors (which represents the number of visitors to our website for any one month less the number of repeat visitors during such month) and 19 million page views per month, as measured by Omniture, a web analytics application service. Among our most popular web properties is DailyFX.com, our research and news site that is staffed by a team of nine full time analysts who produce over 30 articles a day in three languages which are syndicated on over 80 sites globally, including Thomson Reuters and Yahoo!® Finance. DailyFX is one of the top three FX news and analysis websites, measured by Alexa, a website which provides traffic information for websites. We handle all aspects of the marketing process in-house, including strategy, design, placement, execution and performance measurement,


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allowing us to accurately measure the effectiveness of each campaign and optimize the use of our marketing and advertising expenses.
 
International reach and significant scale
 
For the nine months ended September 30, 2010, we generated approximately 76% of our customer trading volume from customers outside the United States. We are continuing to expand our presence globally, especially in Europe and the Middle East where we believe retail FX investors are growing increasingly aware of the advantages of the agency model.
 
We believe we are competitively advantaged by our significant scale. For example, we believe scale is a significant factor in a retail FX investor’s choice of broker and the amount of funds such investor is willing to deposit. As of September 30, 2010, total customer equity was $424.6 million, representing an increase of 32% over that as of September 30, 2009. Our scale in online advertising allows us to lock up coveted advertising inventory at favorable rates, lowering our customer acquisition costs. Further, our balance sheet scale enables us to meet minimum regulatory capital requirements across all of our jurisdictions. Our technology platform enables us to add customers organically or through acquisitions and service them from a single infrastructure with minimal additional costs.
 
Experienced leadership team
 
Our leadership team is comprised of experienced executives that have averaged over eight years of service with us. For example, Drew Niv and David Sakhai, our chief executive officer and our chief operating officer, respectively, are two of our original founding partners and have overseen the growth of our company since its founding in 1999 into a global firm with 14 offices in 11 different countries worldwide and more than 650 full-time employees.
 
Investment Risks
 
An investment in shares of our Class A common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations and cash flows. Some of the more significant challenges and risks relating to an investment in our company include those associated with:
 
  •  The impact on our business of existing and evolving legal and regulatory requirements. We operate in a heavily regulated environment in which legal and regulatory requirements are continuously evolving. As a result, our compliance costs may increase and our failure to comply with such existing or future laws and regulations may result in legal and regulatory actions and sanctions against us.
 
  •  The risk that we are accepting customers from jurisdictions in which we are not properly registered or licensed or are not otherwise in compliance with legal or regulatory requirements. We have consulted with legal counsel in select jurisdictions for advice regarding our compliance with local laws and regulations. We have not similarly consulted with legal counsel in other jurisdictions which account for approximately 20% of our total retail customer trading volume. We are accordingly exposed to the risk that we may be found to be operating in jurisdictions without the required licenses or authorizations or without being in compliance with local legal or regulatory requirements. Furthermore, where we have taken legal advice we are exposed to the risk that our legal and regulatory analysis is determined to be incorrect.
 
  •  The retail FX market has only recently become accessible to retail investors and, accordingly, we have a limited operating history upon which to evaluate our performance. Our prospects may be materially adversely affected by the risks, expenses and difficulties frequently encountered in the operation of a new business in a rapidly evolving industry characterized by intense competition and evolving regulatory oversight and rules.
 
  •  The risk that our risk management policies and procedures may not be effective and could expose us to unidentified or unanticipated risks. We depend upon our risk management policies to identify, monitor and control a variety of risks. Some of our methods for managing risk are discretionary in nature and


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  based upon internally developed controls and observed historical market behaviors. Such policies may not adequately prevent losses or anticipate changes in the market.
 
  •  The risk of disruption or corruption of our proprietary technology. We rely on our proprietary technology to receive and properly process internal and external data. Any disruption or corruption of our proprietary technology may result in service interruptions or other negative consequences.
 
  •  The susceptibility of our revenue and profitability to changes in domestic and international market and economic conditions. Our revenue and profitability are influenced by trading volume and currency volatility, which are directly impacted by disruption and volatility in domestic and international markets and economic conditions.
 
  •  Our dependence on FX market makers to continually provide us with FX market liquidity. We rely on third party market makers to provide us with FX market liquidity. In the event that we no longer have access to the levels of liquidity we currently have, we may be unable to provide competitive FX trading services, which will materially adversely affect our business, financial condition and result of operations and cash flows.
 
  •  The risk of default by financial institutions that hold our funds and our customers’ funds. We are not required to segregate customer funds from our own funds, and in the event of insolvency of one or more of the financial institutions with whom we have deposited these funds, both we and our customers may not be able to recover our funds.
 
  •  The loss of our key personnel. Our continued success is dependent upon the retention of key employees with significant experience in the FX industry who have made significant contributions to our business and operations.
 
  •  The risk associated with our existing owners’ control of FXCM Inc. Immediately following this offering and the application of net proceeds from this offering, our existing owners will control FXCM Inc., and their interests may differ from those of our public shareholders.
 
Please see “Risk Factors” for a discussion of these and other factors you should consider before making an investment in shares of our Class A common stock.
 
Our Growth Strategy
 
Continue to use our global brand and marketing to drive organic customer growth
 
We intend to continue to use our brand and our sales and marketing efforts to increase penetration of the growing retail FX market. In existing markets, where we believe the FXCM brand is widely recognized, we are increasing the effectiveness of our campaigns and lowering the costs of acquisition per account. In markets where our penetration is low, such as Europe, we are increasing our marketing expenditure and expanding our physical presence with sales offices. Since April 2009, we have opened offices in Athens, Berlin, Dubai and Milan to accelerate our penetration in these markets.
 
Make selected acquisitions to expand our customer base or add presence in markets where we have low penetration
 
We plan to make selected acquisitions of firms with established presence in attractive markets and distribution channels to accelerate our growth. On October 1, 2010, we completed our acquisition of ODL, a London-based broker dealer of retail FX, contracts-for-difference, or CFDs, spread betting (where customers take a position against the value of an underlying financial instrument moving either upward or downward in the market), and equity options. Our acquisition of ODL is designed to increase our profile in the U.K. market and accelerate our growth in continental Europe, utilizing ODL’s relationships and sales force. We expect the retail FX industry to continue to consolidate, providing us with additional acquisition opportunities.


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Expand our range of products to add new customers and increase revenues from existing customers
 
We have an established history of introducing new products. For instance, we introduced our Active Trader platform for our high volume customers in February 2009, the trading of CFDs in September 2009, mobile trading in March 2010 and Strategy Trader in August 2010. We plan to introduce additional products in the future. We are also making investments in our technology platform to meet the demands of our customers that we believe will increase our share of the trading volumes of active and institutional FX customers.
 
Capture market share from competitors who are unable to keep pace with increasingly demanding regulatory requirements
 
Over the past three years, we believe that regulatory changes and compliance requirements have in part led to a reduction in the number of retail FX brokers. We expect that increased regulatory compliance requirements will cause additional firms to leave individual markets or exit the industry and believe that this will present additional opportunities for the remaining firms, especially agency model firms like us, to increase market share organically or through acquisitions.
 
Our Structure
 
Following this offering, FXCM Inc. will be a holding company and its sole asset will be a controlling equity interest in FXCM Holdings, LLC. FXCM Inc. will operate and control all of the business and affairs and consolidate the financial results of FXCM Holdings, LLC and its subsidiaries. Prior to the completion of this offering, the limited liability company agreement of FXCM Holdings, LLC will be amended and restated to, among other things, modify its capital structure by reclassifying the interests currently held by our existing owners into a single new class of units that we refer to as “Holdings Units.” We and our existing owners will also enter into an exchange agreement under which they (or certain permitted transferees thereof) will have the right, from and after the first anniversary of the date of the closing of this offering (subject to the terms of the exchange agreement), to exchange their Holdings Units for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. See “Certain Relationships and Related Person Transactions — Exchange Agreement”.
 
Following this offering, each of our existing owners will hold one share of Class B common stock. The shares of Class B common stock have no economic rights but entitle the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of FXCM Inc. that is equal to the aggregate number of Holdings Units of FXCM Holdings, LLC held by such holder, subject to customary adjustments for stock splits, stock dividends and reclassifications.


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The diagram below depicts our current organizational structure.
 
 
The diagram below depicts our organizational structure immediately following this offering.
 
 
See “Organizational Structure.”


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The Offering
 
Class A common stock offered by FXCM Inc. 
15,060,000 shares.
 
Over-allotment option
2,259,000 shares.
 
Class A common stock outstanding after giving effect to this offering
15,060,000 shares (or 75,300,000 shares if all outstanding Holdings Units held by our existing owners were exchanged for newly-issued shares of Class A common stock on a one-for-one basis).
 
Class B common stock outstanding after giving effect to this offering
26 shares, or one share for each holder of Holdings Units (other than FXCM Inc.).
 
Voting power held by holders of Class A common stock after giving effect to this offering
20.0% (or 100% if all outstanding Holdings Units held by our existing owners were exchanged for newly-issued shares of Class A common stock on a one-for-one basis).
 
Voting power held by holders of Class B common stock after giving effect to this offering
80.0% (or 0% if all outstanding Holdings Units held by our existing owners were exchanged for newly-issued shares of Class A common stock on a one-for-one basis).
 
Use of proceeds
We estimate that the net proceeds to FXCM Inc. from this offering, after deducting estimated underwriting discounts, will be approximately $197.1 million (or $226.7 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock). FXCM Holdings, LLC will bear or reimburse FXCM Inc. for all of the expenses of this offering, which we estimate will be approximately $6.8 million.
 
FXCM Inc. intends to use $49.7 million of these proceeds to purchase newly-issued Holdings Units from FXCM Holdings, LLC, as described under “Organizational Structure — Offering Transactions.” We intend to cause FXCM Holdings, LLC to use these proceeds to increase our working capital, to fund acquisitions of small- to mid-sized retail FX firms that we may identify in the future and for general corporate purposes.
 
FXCM Inc. intends to use the remaining net proceeds from this offering, or $147.4 million (or $177.0 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), to purchase Holdings Units from our existing owners, including members of our senior management, as described under “Organizational Structure — Offering Transactions.” Accordingly, we will not retain any of these proceeds. See “Principal Stockholders” for information regarding the proceeds from this offering that will be paid to our directors and named executive officers.
 
Voting rights
Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally.


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Following the Offering Transactions, each of our existing owners will hold one share of Class B common stock. The shares of Class B common stock have no economic rights but entitle the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of FXCM Inc. that is equal to the aggregate number of Holdings Units of FXCM Holdings, LLC held by such holder, subject to customary adjustments for stock splits, stock dividends and reclassifications. See “Description of Capital Stock — Common Stock — Class B Common Stock.” Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.
 
Dividend policy
The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors will take into account general economic and business conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries (including FXCM Holdings, LLC) to us, and such other factors as our board of directors may deem relevant.
 
FXCM Inc. is a holding company and has no material assets other than its ownership of Holdings Units in FXCM Holdings, LLC. We intend to cause FXCM Holdings, LLC to make distributions to FXCM Inc. in an amount sufficient to cover cash dividends, if any, declared by us. If FXCM Holdings, LLC makes such distributions to FXCM Inc., the other holders of Holdings Units will be entitled to receive equivalent distributions.
 
Exchange rights of holders of Holdings Units
Prior to this offering we will enter into an exchange agreement with our existing owners so that they may, from and after the first anniversary of the date of the closing of this offering (subject to the terms of the exchange agreement), exchange their Holdings Units for shares of Class A common stock of FXCM Inc. on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. See “Certain Relationships and Related Person Transactions — Exchange Agreement.”
 
Risk factors
See “Risk Factors” for a discussion of risks you should carefully consider before deciding to invest in our Class A common stock.
 
Proposed New York Stock Exchange symbol
“FXCM”
 
In this prospectus, unless otherwise indicated, the number of shares of Class A common stock outstanding and the other information based thereon does not reflect:
 
  •  2,259,000 shares of Class A common stock issuable upon exercise of the underwriters’ option to purchase additional shares of Class A common stock from us;


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  •  60,240,000 shares of Class A common stock issuable upon exchange of 60,240,000 Holdings Units (or, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, 57,981,000 shares of Class A common stock issuable upon exchange of 57,981,000 Holdings Units) that will be held by our existing owners immediately following this offering; or
 
  •  11,295,000 shares of Class A common stock that may be granted under the FXCM Inc. 2010 Long Term Incentive Plan, or Long Term Incentive Plan, including 7,530,000 shares issuable upon the exercise of stock options that we intend to grant to our employees and 85,890 shares issuable upon the exercise of stock options that we intend to grant to our outside directors at the time of this offering. See “Management — Long Term Incentive Plan,” “— IPO Date Stock Option Awards” and “— Director Compensation.”
 
See “Pricing Sensitivity Analysis” to see how some of the information presented above would be affected by an initial public offering price per share of Class A common stock at the low-, mid- and high-points of the price range indicated on the front cover of this prospectus or if the underwriters’ option to purchase additional shares of Class A common stock is exercised in full.
 
 
FXCM Inc. was incorporated in Delaware on August 10, 2010. Our principal executive offices are located at 32 Old Slip, New York, NY 10005 and our telephone number is (646) 432-2986.


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Summary Historical Consolidated Financial and Other Data
 
The following summary historical consolidated financial and other data of FXCM Holdings, LLC should be read together with “Organizational Structure,” “Unaudited Pro Forma Consolidated Financial Information,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus. FXCM Holdings, LLC will be considered our predecessor for accounting purposes, and its consolidated financial statements will be our historical financial statements following this offering.
 
We derived the summary historical consolidated statements of operations and comprehensive income data of FXCM Holdings, LLC for each of the years ended December 31, 2009, 2008 and 2007 and the summary historical consolidated statements of financial condition data as of December 31, 2009 and 2008 from the audited consolidated financial statements of FXCM Holdings, LLC which are included elsewhere in this prospectus, and derived the summary historical combined statement of operations and comprehensive income for each of the years ended December 31, 2006 and 2005 and the summary historical combined statement of financial condition data as of December 31, 2006 and 2005 and the summary historical consolidated statements of financial condition data as of December 31, 2007 from the audited financial statements of FXCM Holdings, LLC, which are not included in this prospectus. The consolidated statements of operations and comprehensive income data for the nine months ended September 30, 2010 and 2009, and the consolidated statements of financial condition data as of September 30, 2010 and 2009 have been derived from unaudited consolidated financial statements of FXCM Holdings, LLC included elsewhere in this prospectus. The unaudited consolidated financial statements of FXCM Holdings, LLC have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments that we consider necessary for a fair presentation of our consolidated financial position and results of operations for all periods presented.
 
                                                         
    Nine Months Ended
       
    September 30,     Year Ended December 31,  
    2010     2009     2009     2008     2007(1)     2006(1)(2)     2005(2)  
    (In thousands)  
 
Consolidated Statements of Operations and Comprehensive Income Data
                                                       
Revenues
                                                       
Retail trading revenue
  $ 234,608     $ 225,231     $ 291,668     $ 281,385     $ 144,935     $ 131,950     $ 215,672  
Institutional trading revenue
    20,779       15,367       21,107       18,439       11,695       5,610       95  
Interest income
    1,493       922       1,289       9,085       16,357       11,112       4,501  
Other income
    7,273       6,581       8,666       13,731       11,535       16,000       2,183  
                                                         
Total revenues
    264,153       248,101       322,730       322,640       184,522       164,672       222,451  
                                                         
                                                         
Expenses
                                                       
Referring broker fees
    61,680       60,787       76,628       64,567       33,211       51,360       49,420  
Compensation and benefits
    52,325       45,943       62,588       54,578       53,575       48,669       33,281  
Advertising and marketing
    16,916       24,351       29,355       24,629       27,846       28,223       25,595  
Communication and technology
    19,171       17,597       24,026       21,311       17,836       13,773       7,914  
General and administrative
    25,792       18,550       26,453       20,247       17,037       20,917       22,604  
Depreciation and amortization
    5,292       4,800       6,542       6,095       7,364       6,732       4,326  
Interest expense
    78       100       125       2,168       1,374       34       23  
                                                         
Total expenses
    181,254       172,128       225,717       193,595       158,243       169,708       143,163  
                                                         
Income (loss) before income taxes
    82,899       75,973       97,013       129,045       26,279       (5,036 )     79,288  
Income tax provision
    3,517       7,633       10,053       8,872       3,120       1,720       1,372  
                                                         
Net income (loss)
  $ 79,382     $ 68,340     $ 86,960     $ 120,173     $ 23,159     $ (6,756 )   $ 77,916  
                                                         


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    Nine Months Ended
       
    September 30,     Year Ended December 31,  
    2010     2009     2009     2008     2007(1)     2006(1)(2)     2005(2)  
    (In thousands)  
 
Other comprehensive income
                                                       
Foreign currency translation gain (loss)
  $ 226     $ (162 )   $ 452     $ 1     $     $     $  
                                                         
Total comprehensive income (loss)
  $ 79,608     $ 68,178     $ 87,412     $ 120,174     $ 23,159     $ (6,756 )   $ 77,916  
                                                         
Consolidated Statements of Financial Condition Data — End of Period
                                                       
Cash and cash equivalents
  $ 124,109     $ 128,668     $ 139,858     $ 179,967     $ 131,799     $ 67,631     $ 75,605  
Cash and cash equivalents, held for customers
  $ 424,597     $ 321,438     $ 353,825     $ 253,391     $ 315,440     $ 253,257     $ 202,554  
Total assets
  $ 591,960     $ 474,584     $ 517,936     $ 451,044     $ 472,564     $ 364,636     $ 301,611  
Customer account liabilities
  $ 424,597     $ 321,438     $ 353,825     $ 253,391     $ 315,440     $ 253,257     $ 202,554  
Total equity
  $ 139,672     $ 115,831     $ 130,788     $ 140,454     $ 96,280     $ 93,851     $ 89,902  
                                                         
                                                         
    Nine Months Ended
       
    September 30,     Year Ended December 31,  
    2010     2009     2009     2008     2007     2006     2005  
    (Dollars in thousands, except as noted)  
 
Selected Operational Data
                                                       
Net account additions(3)
    34,107       24,733       33,857       56,832       11,090       6,739       10,036  
— Standard account
    28,499       10,773       16,944       19,357       11,090       6,739       10,036  
— Micro account(4)
    5,608       13,960       16,913       37,466                    
Total tradeable accounts(5)
    174,672       131,441       140,565       106,708       49,885       38,795       32,056  
— Standard account
    114,685       80,015       86,186       69,242       49,885       38,795       32,056  
— Micro account(4)
    59,987       51,426       54,379       37,466                    
Total active accounts(6)
    134,478       115,734       116,919       86,149       59,541       69,661       55,752  
Total customer trading volume (dollars in billions)
  $ 2,342     $ 2,669     $ 3,504     $ 2,901     $ 1,729     $ 2,100     $ 1,413  
Trading days in period
    194       194       259       260       259       260       260  
Daily average trades
    314,375       358,519       347,104       165,063       70,714       76,771       60,752  
Daily average trades per active account(7)
    2.5       3.6       3.4       2.3       1.1       1.2       1.1  
Retail trading revenue per million traded
  $ 100     $ 84     $ 83     $ 97     $ 84     $ 63     $ 153  
Total customer equity(8)
  $ 424,597     $ 321,438     $ 353,825     $ 253,391     $ 315,440     $ 253,257     $ 202,554  
Capital in excess of regulatory requirements(9)
  $ 102,794     $ 87,012     $ 96,904     $ 127,030     $ 75,650     $ 79,640     $ 72,457  
Customer trading volume by region (dollars in billions)
                                                       
Asia
  $ 830     $ 943     $ 1,216     $ 800     $ 383     $ 668     $ 490  
United States
    566       843       1,069       1,010       680       800       494  
EMEA
    532       599       781       551       347       420       296  
Rest of World
    414       284       438       540       318       212       133  
                                                         
Total
  $ 2,342     $ 2,669     $ 3,504     $ 2,901     $ 1,729     $ 2,100     $ 1,413  
                                                         
 
 
(1) In 2005, a shareholder and white label (a firm that offers FX trading services to their customers on our platform under their own brand in exchange for a revenue sharing arrangement with us) of FXCM declared bankruptcy, at the time representing approximately 40% of total revenues, resulting in a significant

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disruption in the business that led in large part to the reduction in revenues and the loss recorded in 2006. As a response to such bankruptcy and its effects on the business, our senior management initiated fundamental changes to our business model, including the decision to transition to an agency model, which became fully operational in July 2007.
 
(2) Financial statements at December 31, 2006 and 2005 and for the year then ended were prepared on a combined basis. FXCM Holdings, LLC was organized in January 2007 for the purpose of consolidating the Forex Capital Markets group of companies under common management. These companies were comprised of Forex Capital Markets LLC, FXCM Canada, Ltd. and Forex Trading LLC, the latter of which was the parent company of Forex Capital Markets Limited and FXCM Asia Limited. This group of companies, absent the holding company structure or a common parent, issued audited financial statements on a combined basis as of and for the years ended December 31, 2005 and 2006. The group of companies represented affiliated entities that operated in the similar capacity of online foreign currency trading. They shared common management and functioned in a number of countries under various regulatory environments. Since the operations were all interrelated, it was deemed appropriate to present the financial statements on a combined basis as it best reflected the financial condition and the result of operations of the group as a whole.
 
(3) Net account additions represents new accounts funded less accounts closed by our customers.
 
(4) Micro accounts are accounts with limited customer service and permitted to trade in very small lot sizes; this account option was introduced in June 2008.
 
(5) Prior to June 2008, a tradeable account represents an account that had funds of $110 or more to place a trade in accordance with firm policies. After the introduction of Micro in June 2008, a tradeable account represents an account that has funds of $11 or more to place a trade in accordance with firm policies.
 
(6) An active account represents an account that has traded at least once in the previous 12 months.
 
(7) Daily average trades per active account represents the total daily average trades per average active account in period.
 
(8) Total customer equity represents the total amount of cash and unrealized profit (loss) as of that date in all our customer accounts.
 
(9) Capital in excess of regulatory requirements represents total consolidated capital less the sum of the minimum requirements of our regulated operating subsidiaries.


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RISK FACTORS
 
An investment in shares of our Class A common stock involves risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in shares of our Class A common stock.
 
Risks Related to Our Business
 
The FX market has only recently become accessible to retail investors and, accordingly, we have a limited operating history upon which to evaluate our performance.
 
The FX market has only recently become accessible to retail investors. Prior to 1996, retail investors generally did not directly trade in the FX market, and we believe most current retail FX traders only recently viewed currency trading as a practical alternative investment class. Our FX trading operations were launched in 1999, at which time we began offering FX trading services domestically and internationally. Accordingly, we have a limited operating history in a relatively new international retail FX trading market upon which you can evaluate our prospects and future performance. Our prospects may be materially adversely affected by the risks, expenses and difficulties frequently encountered in the operation of a new business in a rapidly evolving industry characterized by intense competition and evolving regulatory oversight and rules.
 
Our revenue and profitability are influenced by trading volume and currency volatility, which are directly impacted by domestic and international market and economic conditions that are beyond our control.
 
In the past few years, there has been significant disruption and volatility in the global financial markets and economic conditions, and many countries, including the United States, have been in an economic slowdown. Our revenue is influenced by the general level of trading activity in the FX market. Our revenue and operating results may vary significantly from period to period due primarily to movements and trends in the world’s currency markets and to fluctuations in trading levels. We have generally experienced greater trading volume and higher revenue in periods of volatile currency markets. In the event we experience lower levels of currency volatility, our revenue and profitability will likely be negatively affected.
 
In the first four months of 2010, volatility in the foreign currency market was moderate, continuing a trend that had started in April 2009. In May 2010, volatility increased in response to the Greek debt crisis and fears that the economic slowdown would continue or potentially worsen. As a result, during the month of May 2010, we saw an increase in volumes, deposits, new accounts and retail and institutional revenues. Volatility decreased in June 2010 and has returned to moderate levels. Significant swings in market volatility as experienced in May 2010 can increase volumes and attract new customers but can also result in increased customer trading losses, higher turnover and reduced trading volume for future months.
 
Like other financial services firms, our business and profitability are directly affected by factors that are beyond our control, such as economic and political conditions, broad trends in business and finance, changes in the volume of foreign currency transactions, changes in supply and demand for currencies, movements in currency exchange rates, changes in the financial strength of market participants, legislative and regulatory changes, changes in the markets in which such transactions occur, changes in how such transactions are processed and disruptions due to terrorism, war or extreme weather events. Any one or more of these factors, or other factors, may adversely affect our business and results of operations and cash flows. A weakness in equity markets, such as the current economic slowdown causing a reduction in trading volume in U.S. or foreign securities and derivatives, could result in reduced trading activity in the FX market and therefore could have a material adverse effect on our business, financial condition and results of operations and cash flows. As a result, period to period comparisons of our operating results may not be meaningful and our future operating results may be subject to significant fluctuations or declines.


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Our risk management policies and procedures may not be effective and may leave us exposed to unidentified or unexpected risks.
 
We are dependent on our risk management policies and the adherence to such policies by our trading staff. Our policies, procedures and practices are used to identify, monitor and control a variety of risks, including risks related to human error, customer defaults, market movements, fraud and money-laundering. Some of our methods for managing risk are discretionary by nature and are based on internally developed controls and observed historical market behavior, and also involve reliance on standard industry practices. These methods may not adequately prevent losses, particularly as they relate to extreme market movements, which may be significantly greater than historical changes in market prices. Our risk management methods also may not adequately prevent losses due to technical errors if our testing and quality control practices are not effective in preventing software or hardware failures. In addition, we may elect to adjust our risk management policies to allow for an increase in risk tolerance, which could expose us to the risk of greater losses. Our risk management methods rely on a combination of technical and human controls and supervision that are subject to error and failure. These methods may not protect us against all risks or may protect us less than anticipated, in which case our business, financial condition and results of operations and cash flows may be materially adversely affected.
 
We depend on our proprietary technology. Any disruption or corruption of our proprietary technology or our inability to maintain technological superiority in our industry could have a material adverse effect on our business, financial condition and results of operations and cash flows. We may experience failures while developing our proprietary technology.
 
We rely on our proprietary technology to receive and properly process internal and external data. Any disruption for any reason in the proper functioning, or any corruption, of our software or erroneous or corrupted data may cause us to make erroneous trades, accept customers from jurisdictions where we do not possess the proper licenses, authorizations or permits, or require us to suspend our services and could have a material adverse effect on our business, financial condition and results of operations and cash flows. For example, our technology platform includes a real time margin-watcher feature to ensure that open positions are automatically closed out if a customer becomes at risk of going into a negative balance on his or her account. Any disruption or corruption of this feature would subject us to the risk that amounts owed to us by such customer exceed the collateral in such customer’s account, and our policy is generally not to pursue claims for negative equity against our customers.
 
In order to remain competitive, we need to continuously develop and redesign our proprietary technology. In doing so, there is an ongoing risk that failures may occur and result in service interruptions or other negative consequences, such as slower quote aggregation, slower trade execution, erroneous trades, or mistaken risk management information.
 
Our success in the past has largely been attributable to our proprietary technology that has taken us many years to develop. We believe our proprietary technology has provided us with a competitive advantage relative to many FX market participants. If our competitors develop more advanced technologies, we may be required to devote substantial resources to the development of more advanced technology to remain competitive. The FX market is characterized by rapidly changing technology, evolving industry standards and changing trading systems, practices and techniques. We may not be able to keep up with these rapid changes in the future, develop new technology, realize a return on amounts invested in developing new technologies, and as such, may not remain competitive in the future.
 
System failures could cause interruptions in our services or decreases in the responsiveness of our services which could harm our business.
 
If our systems fail to perform, we could experience disruptions in operations, slower response times or decreased customer service and customer satisfaction. Our ability to facilitate transactions successfully and provide high quality customer service depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. Our systems also are vulnerable to damage or


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interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. We do not have fully redundant capabilities. While we currently maintain a disaster recovery plan, or DRP, which is intended to minimize service interruptions and secure data integrity, our DRP may not work effectively during an emergency. Any system failure that causes an interruption in our services, decreases the responsiveness of our services or affects access to our services could impair our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows.
 
We may not be able to protect our intellectual property rights or may be prevented from using intellectual property necessary for our business.
 
We rely on a combination of trademark, copyright, trade secret and fair business practice laws in the United States and other jurisdictions to protect our proprietary technology, intellectual property rights and our brand. We also enter into confidentiality and invention assignment agreements with our employees and consultants, and confidentiality agreements with other third parties. We also rigorously control access to our proprietary technology. It is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We may also face claims of infringement that could interfere with our ability to use technology that is material to our business operations.
 
In the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs and the diversion of resources and the attention of management, any of which could negatively affect our business.
 
Our cost structure is largely fixed. If our revenues decline and we are unable to reduce our costs, our profitability will be adversely affected.
 
Our cost structure is largely fixed. We base our cost structure on historical and expected levels of demand for our products and services, as well as our fixed operating infrastructure, such as computer hardware and software, hosting facilities and security and staffing levels. If demand for our products and services declines and, as a result, our revenues decline, we may not be able to adjust our cost structure on a timely basis and our profitability may be materially adversely affected.
 
We operate in a heavily regulated environment that imposes significant compliance requirements and costs on us. Failure to comply with the rapidly evolving laws and regulations governing our FX and other businesses may result in regulatory agencies taking action against us and significant legal expenses in defending ourselves, which could adversely affect our revenues and the way we conduct our business.
 
We are regulated by governmental bodies and/or self-regulatory organizations in a number of jurisdictions, including the United States, the United Kingdom (where regulatory passport rights have been exercised to operate in a number of European Economic Area jurisdictions), Hong Kong and Australia. As a result of our acquisition of ODL, which was consummated on October 1, 2010, we are also regulated in Japan. We are also exposed to substantial risks of liability under federal and state securities laws, federal commodity futures laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the Securities and Exchange Commission, or SEC, the Federal Reserve and state securities regulators.
 
Many of the regulations we are governed by are intended to protect the public, our customers and the integrity of the markets, and not necessarily our shareholders. Substantially all of our operations involving the execution and clearing of transactions in foreign currencies, CFDs, gold and silver and securities are conducted through subsidiaries that are regulated by governmental bodies or self-regulatory organizations. In the United States, we are principally regulated by the Commodity Futures Trading Commission, or CFTC, and the National Futures Association, or NFA. We are also regulated in all regions by applicable regulatory authorities and the various exchanges of which we are members. For example, we are regulated by the Financial Services Authority in the United Kingdom, or FSA, the Securities and Futures Commission in Hong Kong, or SFC, and the Australian Securities and Investment Commission in Australia, or ASIC, among others, and, as a result of


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our acquisition of ODL, the Kanto Local Finance Bureau in Japan, or KLFB. In addition, certain of our branch offices in Europe, while subject to local regulators, are regulated by the FSA with respect to, among other things, FX, CFDs and net capital requirements. These regulators and self-regulatory organizations regulate the conduct of our business in many ways and conduct regular examinations of our business to monitor our compliance with these regulations. Among other things, we are subject to regulation with regard to:
 
  •  our sales practices, including our interaction with and solicitation of customers and our marketing activities;
 
  •  the custody, control and safeguarding of our customers’ assets;
 
  •  account statements, record-keeping and retention;
 
  •  maintaining specified minimum amounts of capital and limiting withdrawals of funds from our regulated operating subsidiaries;
 
  •  making regular financial and other reports to regulators;
 
  •  anti-money laundering practices;
 
  •  licensing for our operating subsidiaries and our employees;
 
  •  the conduct of our directors, officers, employees and affiliates; and
 
  •  supervision of our business.
 
Compliance with these regulations is complicated, time consuming and expensive. Even minor, inadvertent irregularities can potentially give rise to claims that applicable laws and regulations have been violated. Failure to comply with all potentially applicable laws and regulations could lead to fines and other penalties which could adversely affect our revenues and our ability to conduct our business as planned. In addition, we could incur significant legal expenses in defending ourselves against and resolving actions or investigations by such regulatory agencies.
 
We accept customers from many jurisdictions in a manner which we believe does not require local registration, licensing or authorization. As a result, our growth may be limited by future restrictions in these jurisdictions and we remain at risk that we may be exposed to civil or criminal penalties or be required to cease operations if we are found to be operating in jurisdictions without the proper license or authorization or if we become subject to regulation by local government bodies.
 
Trading volume for 2009 with customers resident in jurisdictions in which we are not licensed or authorized by governmental bodies and/or self-regulatory organizations was in the aggregate about 55% of our total customer trading volume. We seek to deal with customers resident in foreign jurisdictions in a manner which does not breach any local laws or regulations where they are resident or require local registration, licensing or authorization from local governmental or regulatory bodies or self-regulatory organizations. We determine the nature and extent of services we can provide and the manner in which we conduct our business with customers resident in foreign jurisdictions based on a variety of factors.
 
In jurisdictions where we are not licensed or authorized, we are generally restricted from direct marketing to retail investors including the operation of a website specifically targeted to investors in a particular foreign jurisdiction. This restriction may limit our ability to grow our business in such jurisdictions or may result in increased overhead costs or lower service quality to customers in such jurisdictions. Accordingly, we currently have only a limited presence in a number of significant markets and may not be able to gain a significant presence there unless and until legal and regulatory barriers to international firms in certain of those markets are modified. Existing and future legal and regulatory requirements and restrictions may adversely impact our international expansion on an ongoing basis and we may not be able to successfully develop our business in a number of markets, including emerging markets, as we currently plan.
 
We have consulted with legal counsel in selected jurisdictions, including each jurisdiction in which residents of such jurisdiction account for one percent (1%) or greater of our total retail customer trading


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volume, for advice regarding whether we are operating in compliance with local laws and regulations (including whether we are required to be licensed or authorized) or, in some cases where licensing or authorization requirements could be read to be applicable to foreign dealers without a local presence, whether such requirements are generally not enforced. We have not similarly consulted with legal counsel in each of the other jurisdictions in which our customers reside, and trading volume from customers resident in these latter jurisdictions accounts for approximately 20% of our total retail customer trading volume. We are accordingly exposed to the risk that we may be found to be operating in jurisdictions without required licenses or authorizations or without being in compliance with local legal or regulatory requirements. Furthermore, where we have taken legal advice we are exposed to the risk that our legal and regulatory analysis is subsequently determined by a local regulatory agency or other authority to be incorrect and that we have not been in compliance with local laws or regulations (including local licensing or authorization requirements) and to the risk that the regulatory environment in a jurisdiction may change, including a circumstance where laws or regulations or licensing or authorization requirements that previously were not enforced become subject to enforcement. In any of these circumstances, we may be subject to sanctions, fines and restrictions on our business or other civil or criminal penalties and our contracts with customers may be void or unenforceable, which could lead to losses relating to restitution of client funds or principal risk on open positions. Any such action in one jurisdiction could also trigger similar actions in other jurisdictions. We may also be required to cease the conduct of our business with customers in any such jurisdiction and/or we may determine that compliance with the laws or licensing, authorization or other regulatory requirements for continuance of the business are too onerous to justify making the necessary changes to continue that business. In addition, any such event could impact our relationship with the regulators or self-regulatory organizations in the jurisdictions where we are subject to regulation, including our regulatory compliance or authorizations. If sanctions, fines, restrictions on our business or other penalties are imposed on us for failure to comply with applicable legal requirements, guidelines or regulations, our financial condition and results of operations, and our reputation and ability to engage in business, may be materially adversely affected.
 
We evaluate our activities in relation to jurisdictions in which we are not currently regulated by governmental bodies and/or self-regulatory organizations on an ongoing basis. This evaluation may involve speaking with regulators, local counsel and referring brokers or white labels (firms that offer our trading services to their clients under their own brand name in exchange for a revenue sharing arrangement with us) operating in any such jurisdiction and reviewing published regulatory guidance and examining the licenses that any competing firms may have. As a result of these evaluations we may determine to alter our business practices in order to comply with legal or regulatory developments in such jurisdictions and, at any given time, are generally in various stages of updating our business practices in relation to various jurisdictions, including jurisdictions which account for one percent (1%) or less of our total retail customer trading volume. For example, we received a request from the Financial Services Agency, or JFSA, the regulatory authority responsible for the regulation of FX trading in Japan, that we submit a plan for coming into compliance with JFSA requirements with respect to transacting business with Japanese retail customers who register to trade with foreign entities not regulated by the JFSA. We have submitted a plan to transfer Japanese retail customers registered with any of our subsidiaries to our subsidiary, ODL Japan, which is regulated with the Kanto Local Financial Bureau in Japan. These customers represented approximately 5.7% of our total customer trading volume for the first nine months of 2010. As a result of transferring these clients to our Japanese regulated subsidiary, customers may decide to transact their business with a different FX broker which may adversely affect our revenue and profitability. We may also be subject to enforcement actions and penalties or customer claims.
 
We conduct our business within a heavily regulated environment and may be exposed to increased compliance costs or may be restricted from entering new markets as a result of extensive regulatory requirements.
 
The cost of compliance with international regulations may adversely increase our costs, affect our revenue and impede our ability to expand internationally. Since we operate our business internationally, we are subject to regulations in many different countries in which we operate. If we are required to comply with new


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regulations or new or different interpretations of existing regulations, or if we are unable to comply with these regulations or interpretations, our business could be adversely affected, or the cost of compliance may make it difficult to expand into new international markets, or we may be liable for additional costs, which may be substantial.
 
The Canadian regulatory environment with respect to FX products is complex and evolving and subject to provincial and territorial differences. Although we are not currently subject to regulatory proceedings, our FX trading services may not be compliant with the regulations of all provinces and territories in Canada. We may be required to register our business in one or more provinces or territories, or to restructure our Canadian activities to be in compliance. Any such restructuring could negatively impact our profitability because, among other things, we may be required to share a portion of our revenue.
 
Approximately 6% of our total customer trading volume for the first nine months of 2010 was generated from customers located in Canada. In Canada, the securities and derivatives industry is governed locally by provincial or territorial legislation, and there is no national regulator. The regulation of FX products differs from province to province and territory to territory. For example, the provincial laws of British Columbia would require us to register as an investment dealer to offer our trading services directly. We previously conducted our business in British Columbia through an affiliate that was a registered exchange contract dealer with the British Columbia Securities Commission. We currently conduct our business in British Columbia through an arrangement with a registered investment dealer in Canada. In other provinces and territories in Canada, where we conduct the bulk of our Canadian business, we have historically provided our services directly from our U.S. facilities, without registering as a dealer in Canada.
 
We have received letters from local regulators in Quebec and Manitoba requesting information about our customers resident in such provinces. We have responded to both inquiries on a voluntary basis and to date have not received any further requests for supplemental information from regulators in Manitoba. We are presently engaged in discussions with the Autorité des marches financiers, or AMF, the regulatory authority responsible for the regulation of FX trading in Quebec, concerning the resolution of any alleged violations that may have occurred.
 
We are aware that local regulators in certain Canadian provinces and territories have begun to determine that FX trading services must be carried out through a registered investment dealer. Accordingly, we are evaluating the restructuring of our Canadian activities, including possible arrangements with registered investment dealers, to address these regulatory developments. We anticipate that our profitability in Canada will decrease significantly due to the restructuring of our Canadian activities because, among other things, we may have to share a portion of our revenue. In addition to the potential adverse effect on our results of operations as a result of a need to restructure our Canadian activities, we may also be subject to enforcement actions and penalties or customer claims in any province or territory where our FX trading operations are deemed to have violated local regulations in the past.
 
Servicing customers via the internet may require us to comply with the laws and regulations of each country in which we are deemed to conduct business. Failure to comply with such laws may negatively impact our financial results.
 
Since our services are available over the internet in foreign countries and we have customers residing in foreign countries, foreign jurisdictions may require us to qualify to do business in their country. We believe that the number of our customers residing outside of the United States will increase over time. We are required to comply with the laws and regulations of each country in which we conduct business, including laws and regulations currently in place or which may be enacted related to internet services available to their citizens from service providers located elsewhere. Any failure to develop effective compliance and reporting systems could result in regulatory penalties in the applicable jurisdiction, which could have a material adverse effect on our business, financial condition and results of operations and cash flows.


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Our failure to comply with regulatory requirements could subject us to sanctions and could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Many of the laws and regulations by which we are governed grant regulators broad powers to investigate and enforce compliance with their rules and regulations and to impose penalties and other sanctions for non-compliance. Our ability to comply with all applicable laws and regulations is dependent in large part on our internal compliance function as well as our ability to attract and retain qualified compliance personnel, which we may not be able to do. If a regulator finds that we have failed to comply with applicable rules and regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of our business, removal of personnel, civil litigation or other sanctions, including, in some cases, increased reporting requirements or other undertakings, revocation of our operating licenses or criminal conviction. In 2007, the NFA filed a complaint against us and our chief executive officer alleging, among other things, that we were using deficient promotional material, had not established and implemented an adequate anti-money laundering program and failed to supervise the firm’s operations. As part of the settlement that resulted in the action being terminated, we neither admitted nor denied the allegations in the complaint and paid a fine of $175,000. Any disciplinary action taken against us could result in negative publicity, potential litigation, remediation costs and loss of customers which could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
In addition, since June 2010, the NFA has contacted a number of FX brokers, including us, requesting information regarding trade execution. We have also recently been contacted by the CFTC for similar information. Although we have complied, and continue to comply, with the NFA’s requests and are in the process of complying with the CFTC’s requests, we have not been formally notified whether or not the NFA or the CFTC intends to take any action against us with respect to our trade execution practices. Notwithstanding the foregoing, NFA has brought enforcement actions against two other FX brokers concerning their respective trade execution practices and has reached settlement agreements with both of them. Based on publicly available records, these settlements required payments by the other FX brokers of $459,000 and $320,000, respectively, and require them to refund to customers all losses incurred as a result of the improper trade execution practices identified. A similar enforcement action may be brought against us which could adversely affect our revenues and our ability to conduct our business as planned.
 
The regulatory environment in which we operate is subject to continual change. Changes in the regulatory environment could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
The legislative and regulatory environment in which we operate has undergone significant changes in the recent past and there may be future regulatory changes in our industry. The financial services industry in general has been subject to increasing regulatory oversight in recent years. The governmental bodies and self-regulatory organizations that regulate our business have proposed and may consider additional legislative and regulatory initiatives and may adopt new or revised laws and regulations. As a result, in the future, we may become subject to new regulations that may affect the way in which we conduct our business and may make our business less profitable. For example, a regulatory body may reduce the levels of leverage we are allowed to offer to our customers, which may adversely impact our business, financial condition and results of operations and cash flows. Changes in the interpretation or enforcement of existing laws and regulations by those entities may also adversely affect our business.
 
For example, in August 2010, the CFTC released final rules relating to retail FX regarding, among other things, registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards. Most significantly the regulations:
 
  •  impose an initial minimum security deposit amount of 2% of the notional value for major currency pairs and 5% of the notional value for all other retail FX transactions and provide that the NFA will designate which currencies are “major currencies” and review, at least annually, major currency designations and security deposit requirements and adjust such designations and requirements as necessary in light of changes in the volatility of currencies and other economic and market factors;


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  •  provide that referring brokers must either meet the minimum net capital requirements applicable to futures and commodity options referring brokers or enter into a guarantee agreement with a CFTC-regulated FX dealer member, along with a requirement that such referring broker may be a party to only one guarantee agreement at a time;
 
  •  require that the risk disclosure statement provided to every retail FX customer include disclosure of the number of non-discretionary accounts maintained by the futures commission merchant, or FCM, or retail foreign exchange dealer, or RFED, that were profitable and those that were not during the four most recent calendar quarters;
 
  •  require us to ensure that our customers resident in the United States have accounts with our NFA-registered operating entity;
 
  •  require that, FCMs and RFEDs are obligated when requoting prices to do so in a symmetrical fashion so that the requoted prices do not represent an increase in the spread from the initially quoted prices, regardless of the direction the market moves; and
 
  •  prohibit the making of guarantees against loss to retail FX customers by FCMs, RFEDs and referring brokers and require that FCMs, RFEDs and referring brokers provide retail FX customers with enhanced written disclosure statements that, among other things, inform customers of the risk of loss.
 
The impact on us of these new regulations, which became effective on October 18, 2010, is uncertain. However, the inability to offer customers who are U.S. residents leverage in excess of 50-to-1 (as compared to 100-to-1 previously) may diminish the trading volume of these customers which may affect our revenue and profitability. In response to the requirement that our customers resident in the United States maintain trading accounts only with our CFTC-registered operating subsidiary, we have migrated all consenting U.S. resident customer accounts established with our foreign affiliates to our CFTC-regulated operating subsidiary. All other U.S. resident accounts not established with our CFTC-regulated operating subsidiary have been locked from trading pending further instructions from the account holders. We cannot guarantee that our migration of the accounts will be deemed acceptable to the CFTC and/or acceptable under the requirements of the regulatory authorities from the jurisdictions from which they were moved. In addition, our customers may decide to transact their business with a FX broker who is not subject to this requirement, which may also affect our revenue and profitability.
 
In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, enacted in July 2010 will have broad effects on the derivatives markets generally. For example, this new law may affect the ability of FX market makers to do business or affect the prices and terms on which such market makers will do business with us. The Dodd-Frank Act may also affect the structure, size, depth and liquidity of the FX markets generally. These effects may adversely impact our ability to provide FX transactions to our customers and could have a material adverse affect on our business and profitability.
 
In the European Union, new laws have been proposed to regulate OTC derivatives. These proposals would, among other things, require mandatory central clearing of some derivatives, higher collateral requirements, and higher capital charges for bilaterally cleared OTC derivatives. These proposals are still at the consultation stage and detailed legislative proposals have not yet been published. Accordingly, it is difficult to ascertain what impact these proposals, once adopted, will have on our business, financial condition and results of operations and cash flows. If the products that we trade are subjected to mandatory central clearing, exchange trading, higher collateral requirements or higher capital charges, this may have an impact upon the economics of our business and thus have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Regulators in the European Union have also proposed stringent regulation of remuneration practices, including proposals to require 50% of variable remuneration to be paid in the form of shares or similar capital requirements, 40% to 60% of variable remuneration to be deferred, bonuses to be proportionate to fixed salary, and up-front cash bonuses to be capped at 20% of the total bonus (30% for particularly large bonuses). The U.K.’s FSA has introduced its own proposals to widen the application of its Remuneration Code to all firms subject to the Capital Requirements Directive and to include certain quantitative restrictions on bonuses in line


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with the European Union’s proposals. These proposals, if adopted, may constrain our ability to operate certain remuneration practices in relation to our operations in the U.K. and elsewhere in Europe.
 
In addition, Australia’s ASIC is considering new regulations which would limit any inappropriate advertising by the industry, provide disclosure benchmarks for over-the-counter CFD providers, and devise a policy on customer suitability.
 
These and other future regulatory changes could have a material adverse effect on our business and profitability and the FX industry as a whole.
 
In addition, the regulatory enforcement environment has created uncertainty with respect to certain practices or types of transactions that, in the past, were considered permissible and appropriate among financial services firms, but that later have been called into question or with respect to which additional regulatory requirements have been imposed. Legal or regulatory uncertainty and additional regulatory requirements could result in a loss of business.
 
We are required to maintain high levels of capital, which could constrain our growth and subject us to regulatory sanctions.
 
The CFTC, NFA and other U.S. and non-U.S. regulators have stringent rules requiring that we maintain specific minimum levels of regulatory capital in our operating subsidiaries that conduct our spot foreign exchange, CFDs, including contracts for gold, silver, oil and stock indices and securities business. As of December 31, 2009, on a separate company basis, we would have been required to maintain approximately $33.9 million of minimum net capital in the aggregate across all jurisdictions, representing a $20.4 million increase from our minimum net capital requirement at December 31, 2008. Regulators continue to evaluate and modify minimum capital requirements from time to time in response to market events and to improve the stability of the international financial system. For example, the FSA recently increased capital requirements in the United Kingdom and may do so again in the future. Additional revisions to this framework or new capital adequacy rules applicable to us may be proposed and ultimately adopted, which could further increase our minimum capital requirements in the future.
 
Even if regulators do not change existing regulations or adopt new ones, our minimum capital requirements will generally increase in proportion to the size of our business conducted by our regulated subsidiaries. As a result, we will need to increase our regulatory capital in order to expand our operations and increase our revenue, and our inability to increase our capital on a cost-efficient basis could constrain our growth. In addition, in many cases, we are not permitted to withdraw regulatory capital maintained by our subsidiaries without prior regulatory approval or notice, which could constrain our ability to allocate our capital resources most efficiently throughout our global operations. In particular, these restrictions could limit our ability to pay dividends or make other distributions on our shares and, in some cases, could adversely affect our ability to withdraw funds needed to satisfy our ongoing operating expenses, debt service and other cash needs.
 
Regulators monitor our levels of capital closely. We are required to report the amount of regulatory capital we maintain to our regulators on a regular basis, and to report any deficiencies or material declines promptly. While we expect that our current amount of regulatory capital will be sufficient to meet anticipated short-term increases in requirements, any failure to maintain the required levels of regulatory capital, or to report any capital deficiencies or material declines in capital could result in severe sanctions, including fines, censure, restrictions on our ability to conduct business and revocation of our registrations. The imposition of one or more of these sanctions could ultimately lead to our liquidation, or the liquidation of one or more of our subsidiaries.
 
The Basel Committee on Banking Supervision has proposed a new regime for regulatory capital and liquidity, known as Basel III. The proposals include more restricted definitions of what counts as eligible regulatory capital, liquidity standards, and reform of counterparty credit risk rules. These proposals, if adopted, may further increase our regulatory capital requirements.


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Procedures and requirements of the PATRIOT Act and similar laws may expose us to significant costs or penalties.
 
As a financial services firm, we and our subsidiaries are subject to laws and regulations, including the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the PATRIOT Act, that require that we know our customers and monitor transactions for suspicious financial activities. The cost of complying with the PATRIOT Act and related laws and regulations is significant. We face the risk that our policies, procedures, technology and personnel directed toward complying with the PATRIOT Act and similar laws and regulations are insufficient and that we could be subject to significant criminal and civil penalties or reputational damage due to noncompliance. Such penalties and subsequent remediation costs could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Due to the evolving nature of financial regulations in certain jurisdictions of the world, our operations may be disrupted if a regulatory authority deems them inappropriate and requires us to comply with additional regulatory requirements.
 
The legislative and regulatory environment in which we operate has undergone significant changes in the recent past and there may be future regulatory changes affecting our industry. The financial services industry in general has been subject to increasing regulatory oversight in various jurisdictions throughout the world. We have benefited from recent regulatory liberalization in several emerging markets in developing regions enabling us to increase our presence in those markets. Our ability to continue to expand our presence in these regions, however, will depend to a large extent upon continued evolution of the regulatory environment in these several markets, and there is no assurance that favorable regulatory trends will continue. Moreover, we currently have only a limited presence in a number of significant markets and may not be able to gain a significant presence there unless and until regulatory barriers to international firms in certain of those markets are modified. Consequently, our recent success in various regions may not continue or we may not be able to develop our business in emerging markets as we currently plan. To the extent current activities are deemed inappropriate, we may incur a disruption in services offered to current customers as we are forced to comply with additional regulations.
 
Attrition of customer accounts and failure to attract new accounts could have a material adverse effect on our business, financial condition and results of operations and cash flows. Even if we do attract new customers, we may fail to attract the customers in a cost-effective manner, which could materially adversely affect our profitability and growth.
 
Our customer base is primarily comprised of individual retail customers. Although we offer products and tailored services designed to educate, support and retain our customers, our efforts to attract new customers or reduce the attrition rate of our existing customers may not be successful. If we are unable to maintain or increase our customer retention rates or generate a substantial number of new customers in a cost-effective manner, our business, financial condition and results of operations and cash flows would likely be adversely affected. For the year ended December 31, 2009, we incurred advertising and marketing expenses of $29.4 million. Although we have spent significant financial resources on advertising and marketing expenses and plan to continue to do so, these efforts may not be a cost-effective way to attract new customers. In particular, we believe that rates for desirable advertising and marketing placements, including online, search engine, print and television advertising fell in 2008 and 2009 due to the overall economic slow-down and are likely to increase in the foreseeable future. As a result, we may be disadvantaged relative to our larger competitors in our ability to expand or maintain our advertising and marketing commitments, which may raise our customer acquisition costs. Additionally, our advertising and marketing methods are subject to regulation by the CFTC and NFA. The rules and regulations of these organizations impose specific limitations on our sales methods, advertising and marketing. If we do not achieve our advertising objectives, our profitability and growth may be materially adversely affected.


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We are subject to litigation risk which could adversely affect our reputation, business, financial condition and results of operations and cash flows.
 
Many aspects of our business involve risks that expose us to liability under U.S. federal and state laws, as well as the rules and enforcement efforts of our regulators and self-regulatory organizations worldwide. These risks include, among others, disputes over trade terms with customers and other market participants, customer losses resulting from system delay or failure and customer claims that we or our employees executed unauthorized transactions, made materially false or misleading statements or lost or diverted customer assets in our custody. We may also be subject to regulatory investigation and enforcement actions seeking to impose significant fines or other sanctions, which in turn could trigger civil litigation for our previous operations that may be deemed to have violated applicable rules and regulations in various jurisdictions.
 
The volume of claims and the amount of damages and fines claimed in litigation and regulatory proceedings against financial services firms have been increasing, particularly in the current environment of heightened scrutiny of financial institutions. The amounts involved in the trades we execute, together with rapid price movements in our currency pairs, can result in potentially large damage claims in any litigation resulting from such trades. Dissatisfied customers may make claims against us regarding the quality of trade execution, improperly settled trades, mismanagement or even fraud, and these claims may increase as our business expands.
 
Litigation may also arise from disputes over the exercise of our rights with respect to customer accounts. Although our customer agreements generally provide that we may exercise such rights with respect to customer accounts as we deem reasonably necessary for our protection, our exercise of these rights may lead to claims by customers that we did so improperly.
 
Even if we prevail in any litigation or enforcement proceedings against us, we could incur significant legal expenses defending against the claims, even those without merit. Moreover, because even claims without merit can damage our reputation or raise concerns among our customers, we may feel compelled to settle claims at significant cost. The initiation of any claim, proceeding or investigation against us, or an adverse resolution of any such matter could have a material adverse effect on our reputation, business, financial condition and results of operations and cash flows.
 
We may be subject to customer litigation, financial losses, regulatory sanctions and harm to our reputation as a result of employee misconduct or errors that are difficult to detect and deter.
 
There have been a number of highly publicized cases involving fraud or other misconduct by employees of financial services firms in recent years. Our employees could execute unauthorized transactions for our customers, use customer assets improperly or without authorization, carry out improper activities on behalf of customers or use confidential customer or company information for personal or other improper purposes, as well as misrecord or otherwise try to hide improper activities from us.
 
In addition, employee errors, including mistakes in executing, recording or reporting transactions for customers, may cause us to enter into transactions that customers disavow and refuse to settle. Employee errors expose us to the risk of material losses until the errors are detected and the transactions are reversed. The risk of employee error or miscommunication may be greater for products that are new or have non-standardized terms. Further, such errors may be more likely to occur in the aftermath of any acquisitions during the integration of or migration from technological systems.
 
Misconduct by our employees or former employees could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It may not be possible to deter or detect employee misconduct and the precautions we take to prevent and detect this activity may not be effective in all cases. Our employees may also commit good faith errors that could subject us to financial claims for negligence or otherwise, as well as regulatory actions.
 
Misconduct by employees of our customers can also expose us to claims for financial losses or regulatory proceedings when it is alleged we or our employees knew or should have known that an employee of our customer was not authorized to undertake certain transactions. Dissatisfied customers can make claims against


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us, including claims for negligence, fraud, unauthorized trading, failure to supervise, breach of fiduciary duty, employee errors, intentional misconduct, unauthorized transactions by associated persons and failures in the processing of transactions.
 
Any restriction in the availability of credit cards as a payment option for our customers could adversely affect our business, financial condition and results of operations and cash flows.
 
We currently allow our customers to use credit cards to fund their accounts with us, and over 81% of our customers elected to fund their accounts in this manner during 2009. There is a risk that in the future, new regulations or credit card issuing institutions may restrict the use of credit and debit cards as a means to fund accounts used to trade in investment products. The elimination or a reduction in the availability of credit cards as a means to fund customer accounts, particularly for our customers residing outside the United States, could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Our customer accounts may be vulnerable to identity theft and credit card fraud.
 
Credit card issuers have adopted credit card security guidelines as part of their ongoing efforts to prevent identity theft and credit card fraud. We continue to work with credit card issuers to ensure that our services, including customer account maintenance, comply with these rules. There can be no assurances, however, that our services are fully protected from unauthorized access or hacking. If there is unauthorized access to credit card data that results in financial loss, we may experience reputational damage and parties could seek damages from us.
 
In the current environment facing financial services firms, a firm’s reputation is critically important. If our reputation is harmed, or the reputation of the online financial services industry as a whole or retail FX industry is harmed, our business, financial condition and results of operations and cash flows may be materially adversely affected.
 
Our ability to attract and retain customers and employees may be adversely affected if our reputation is damaged. If we fail, or appear to fail, to deal with issues that may give rise to reputation risk, we could harm our business prospects. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, customer data protection, record-keeping, sales and trading practices, and the proper identification of the legal, credit, liquidity, operational and market risks inherent in our business. Failure to appropriately address these issues could also give rise to additional legal risk to us, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to regulatory enforcement actions, fines and penalties. Any such sanction would materially adversely affect our reputation, thereby reducing our ability to attract and retain customers and employees.
 
In addition, our ability to attract and retain customers may be adversely affected if the reputation of the online financial services industry as a whole or retail FX industry is damaged. In recent years, a number of financial services firms have suffered significant damage to their reputations from highly publicized incidents that in turn resulted in significant and in some cases irreparable harm to their business. The perception of instability within the online financial services industry could materially adversely affect our ability to attract and retain customers.
 
The loss of members of our senior management could compromise our ability to effectively manage our business and pursue our growth strategy.
 
We rely on members of our senior management to execute our existing business plans and to identify and pursue new opportunities. Our chief executive officer, Mr. Drew Niv, has been our chief executive officer since our founding and was one of our founders. Certain others on our management team have been with us for most of our history and have significant experience in the FX industry. Our continued success is dependent upon the retention of these and other key executive officers and employees, as well as the services provided by our trading staff, technology and programming specialists and a number of other key managerial,


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marketing, planning, financial, technical and operations personnel. The loss of such key personnel could have a material adverse effect on our business. In addition, our ability to grow our business is dependent, to a large degree, on our ability to retain such employees.
 
Our acquisition of ODL may adversely affect our business, and new acquisitions or joint ventures that we may pursue could present unforeseen integration obstacles.
 
We completed our acquisition of ODL, a London-based broker dealer of FX, CFDs, spread betting, stocks and options with substantial business in U.K. and Europe on October 1, 2010. The process of integrating ODL’s operations with ours may require a disproportionate amount of resources and management attention as the acquisition will increase the geographic footprint of our operations, especially in Europe and the Middle East. Any substantial diversion of management attention or difficulties in operating the combined business could affect our ability to achieve operational, financial and strategic objectives. The unsuccessful integration of ODL’s operations with ours may also have adverse short-term effects on reported operating results and may lead to the loss of key personnel. In addition, ODL’s customers may react unfavorably to the combination of our businesses or we may be exposed to additional liabilities of the combined business, both of which could materially adversely affect our revenue and results of operations.
 
We may also pursue new acquisitions or joint ventures that could present integration obstacles or costs. We may not realize any of the benefits we anticipated from the strategy and we may be exposed to additional liabilities of any acquired business, any of which could materially adversely affect our revenue and results of operations. In addition, future acquisitions or joint ventures may involve the issuance of additional Holdings Units or shares of our Class A common stock, which would dilute your ownership.
 
New lines of business or new products and services may subject us to additional risks.
 
From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition.
 
For example, in the past year, we introduced trading in contracts-for-difference, or CFDs. Through our acquisition of ODL, we increased the size of our CFD business and added spread betting and equity options. We face the same risks with these products that we face in our FX trading business including market risk, counterparty risk, liquidity risk, technology risk, third party risk and risk of human error. Furthermore, the volatility of the CFD and spread betting markets may have an adverse impact on our ability to maintain profit margins similar to the profit margins we have realized with respect to FX trading. The introduction of these and other potential financial products also poses a risk that our risk management policies, procedures and practices, and the technology that supports such activities, will be unable to effectively manage these new risks to our business. In addition, these offerings may be subject to regulation under applicable securities or other consumer protection laws. Our non-U.S. subsidiaries, ODL Securities Limited and Forex Capital Markets Limited (which are licensed with the Financial Services Authority in the United Kingdom), FXCM Australia Limited (which is licensed with the Australian Securities and Investment Commission) and ODL Securities K.K. (Japan) (which is licensed with the Kanto Local Finance Bureau) offer and sell CFDs outside the United States in compliance with applicable local regulatory requirements. CFDs are not and may not be offered in the United States by us and are not eligible for resale to U.S. persons. They are not registered with the Securities and Exchange Commission or any U.S. regulator. CFDs may not be enforceable in the United


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States. In the event that an offer or sale of CFDs by our non-U.S. subsidiaries was to constitute an offer or sale of securities subject to the U.S. federal securities laws or swaps, futures, forwards or other instruments over which the CFTC has, or under the Dodd-Frank Act, will have jurisdiction, we would be required to comply with such U.S. laws with respect to such offering. In that event, we may determine that it would be too onerous or otherwise not feasible for us to continue such offers or sales of CFDs. We currently derive less than 4% of our revenues from our CFD business.
 
We may be unable to effectively manage our rapid growth and retain our customers.
 
The rapid growth of our business during our short history has placed significant demands on our management and other resources. If our business continues to grow at a rate consistent with our historical growth, we may need to expand and upgrade the reliability and scalability of our transaction processing systems, network infrastructure and other aspects of our proprietary technology. We may not be able to expand and upgrade our technology systems and infrastructure to accommodate such increases in our business activity in a timely manner, which could lead to operational breakdowns and delays, loss of customers, a reduction in the growth of our customer base, increased operating expenses, financial losses, increased litigation or customer claims, regulatory sanctions or increased regulatory scrutiny.
 
In addition, due to our rapid growth, we will need to continue to attract, hire and retain highly skilled and motivated officers and employees. We may not be able to attract or retain the officers and employees necessary to manage this growth effectively.
 
We may be unable to respond to customers’ demands for new services and products and our business, financial condition and results of operations and cash flows may be materially adversely affected.
 
Our business is subject to rapid change and evolving industry standards. New services and products provided by our competitors may render our existing services and products less competitive. Our future success will depend, in part, on our ability to respond to customers’ demands for new services and products on a timely and cost-effective basis and to adapt to address the increasingly sophisticated requirements and varied needs of our customers and prospective customers. We may not be successful in developing, introducing or marketing new services and products. In addition, our new service and product enhancements may not achieve market acceptance. Any failure on our part to anticipate or respond adequately to customer requirements or changing industry practices, or any significant delays in the development, introduction or availability of new services, products or service or product enhancements could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We may enter into a credit facility or other financing arrangement. The agreements governing such facility or arrangement may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
 
We may enter into a credit facility or other financing arrangement. Although the terms of any such facility or arrangement remain undetermined, the agreements governing such facility or arrangement may contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest. A breach of such covenants could result in an event of default under that indebtedness. Such a default may allow the creditors to accelerate that debt and terminate all commitments to extend further credit and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. Furthermore, if we are unable to repay the amounts due and payable under any such facility or arrangement, those lenders could proceed against any collateral granted to them to secure that indebtedness. In the event lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:
 
  •  limited in how we conduct our business;
 
  •  unable to raise additional debt or equity financing to operate during general economic or business downturns; or


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  •  unable to compete effectively or to take advantage of new business opportunities.
 
These restrictions may affect our ability to grow in accordance with our strategy.
 
We face significant competition. Many of our competitors and potential competitors have larger customer bases, more established brand recognition and greater financial, marketing, technological and personnel resources than we do which could put us at a competitive disadvantage. Additionally, some of our competitors and many potential competitors are better capitalized than we are and able to obtain capital more easily which could put us at a competitive disadvantage.
 
We compete in the FX market based on our ability to execute our customers’ trades at competitive prices, to retain our existing customers and to attract new customers. Certain of our competitors have larger customer bases, more established name recognition, a greater market share in certain markets, such as Europe, and greater financial, marketing, technological and personnel resources than we do. These advantages may enable them, among other things, to:
 
  •  develop products and services that are similar to ours, or that are more attractive to customers than ours, in one or more of our markets;
 
  •  provide products and services we do not offer;
 
  •  provide execution and clearing services that are more rapid, reliable or efficient, or less expensive than ours;
 
  •  offer products and services at prices below ours to gain market share and to promote other businesses, such as FX options listed securities, CFDs, including contracts for precious metals, energy and stock indices, and OTC derivatives;
 
  •  adapt at a faster rate to market conditions, new technologies and customer demands;
 
  •  offer better, faster and more reliable technology;
 
  •  outbid us for desirable acquisition targets;
 
  •  more efficiently engage in and expand existing relationships with strategic alliances;
 
  •  market, promote and sell their products and services more effectively; and
 
  •  develop stronger relationships with customers.
 
These larger and better capitalized competitors, including commercial and investment banking firms, may have access to capital in greater amounts and at lower costs than we do and thus, may be better able to respond to changes in the FX industry, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. Access to capital is critical to our business to satisfy regulatory obligations and liquidity requirements. Among other things, access to capital determines our creditworthiness, which if perceived negatively in the market could materially impair our ability to provide clearing services and attract customer assets, both of which are important sources of revenue. Access to capital also determines the degree to which we can expand our operations. Thus, if we are unable to maintain or increase our capital on competitive terms, we could be at a significant competitive disadvantage, and our ability to maintain or increase our revenue and earnings could be materially impaired. Also, new or existing competitors in our markets could make it difficult for us to maintain our current market share or increase it in desirable markets. In addition, our competitors could offer their services at lower prices, and we may be required to reduce our fees significantly to remain competitive. A fee reduction without a commensurate reduction in expenses would decrease our profitability. We may not be able to compete effectively against these firms, particularly those with greater financial resources, and our failure to do so could materially and adversely affect our business, financial condition and results of operations and cash flows. We may in the future face increased competition, resulting in narrowing bid/offer spreads which could materially adversely affect our business, financial condition and results of operations and cash flows.


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If we are unable to effectively compete in emerging international markets, either directly or through joint ventures with local firms, the future growth of our business may be adversely affected.
 
We regard emerging international markets as an important area of our future growth. Due to cultural, regulatory and other factors relevant to those markets, however, we may be at a competitive disadvantage in those regions relative to local firms or to international firms that have a well established local presence. In some regions, we may need to enter into joint ventures with local firms in order to establish a presence in the local market, and we may face intense competition from other international firms over relatively scarce opportunities for market entry. Given the intense competition from other international firms that are also seeking to enter these fast-growing markets, we may have difficulty finding suitable local firms willing to enter into the types of relationships with us that we may need to gain access to these markets. This competition could make it difficult for us to expand our business internationally as planned. For the nine months ended September 30, 2010, we generated approximately 76% of our customer trading volume from customers outside the United States. Expanding our business in emerging markets is an important part of our growth strategy. We face significant risks in doing business in international markets, particularly in developing regions. These business, legal and tax risks include:
 
  •  less developed or mature local technological infrastructure and higher costs, which could make our products and services less attractive or accessible in emerging markets;
 
  •  difficulty in complying with the diverse regulatory requirements of multiple jurisdictions, which may be more burdensome, not clearly defined, and subject to unexpected changes, potentially exposing us to significant compliance costs and regulatory penalties;
 
  •  less developed and established local financial and banking infrastructure, which could make our products and services less accessible in emerging markets;
 
  •  reduced protection of intellectual property rights;
 
  •  inability to enforce contracts in some jurisdictions;
 
  •  difficulties and costs associated with staffing and managing foreign operations, including reliance on newly hired local personnel;
 
  •  tariffs and other trade barriers;
 
  •  currency and tax laws that may prevent or restrict the transfer of capital and profits among our various operations around the world; and
 
  •  time zone, language and cultural differences among personnel in different areas of the world.
 
In addition, in order to be competitive in these local markets, or in some cases because of restrictions on the ability of foreign firms to conduct business locally, we may seek to operate through joint ventures with local firms as we have done, for example, in South Korea. Doing business through joint ventures may limit our ability to control the conduct of the business and could expose us to reputational and greater operational risks.
 
Our business could be adversely affected if global economic conditions continue to negatively impact our customer base.
 
Our customer base is primarily comprised of individual retail customers who view foreign currency trading as an alternative investment class. If global economic conditions continue to negatively impact the FX market or adverse developments in global economic conditions continue to limit the disposable income of our customers, our business could be materially adversely affected as our customers may choose to curtail their trading in the FX market which could result in reduced customer trading volume and trading revenue.


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A systemic market event that impacts the various market participants with whom we interact could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We interact with various third parties through our relationships with our prime brokers, white labels and referring brokers. Some of these market participants could be overleveraged. In the event of sudden, large market price movements, such market participants may not be able to meet their obligations to brokers who, in turn, may not be able to meet their obligations to their counterparties. As a result, if a systemic collapse in the financial system were to occur, defaults by one or more counterparties could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
The decline in short-term interest rates has had an adverse effect on our interest income and revenues.
 
A portion of our revenue is derived from interest income. We earn interest on customer balances held in customer accounts and on our cash held in deposit accounts at various financial institutions. As a result of the recent decline in short-term interest rates, our interest income has declined significantly. Short-term interest rates are highly sensitive to factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. For the nine months ended September 30, 2010 and for the years ended December 31, 2009 and 2008, our interest income was approximately $1.5 million, $1.3 million and $9.1 million, respectively. Interest income may not return to the amount we reported in prior years, and any further deterioration in short-term interest rates could further adversely affect our interest income and revenue.
 
In addition, this decline in interest rates has narrowed cross-border interest rate differentials, which has adversely affected the “carry trade”, a once popular investing strategy which involves buying a currency that offers a higher interest rate while selling a currency that offers a lower interest rate. The decline in the carry trade has resulted in a decrease in the number of retail FX customers. Accordingly, our growth could be impeded if cross-border interest rate differentials remain compressed.
 
Our operations in certain developing regions may be subject to the risks associated with politically unstable and less economically developed regions of the world. Trading in the currencies of these developing regions may expose our customers and the third parties with whom we interact to sudden and significant financial loss as a result of exceptionally volatile and unpredictable price movements and could negatively impact our business.
 
Our operations in some emerging markets may be subject to the political, legal and economic risks associated with politically unstable and less economically developed regions of the world, including the risks of war, insurgency, terrorism and government appropriation. For example, we do business in countries whose currencies may be less stable than those in our primary markets. Currency instability or government imposition of currency restrictions in these countries could impede our operations in the FX markets in these countries. In addition, emerging markets may be subject to exceptionally volatile and unpredictable price movements that can expose customers and brokers to sudden and significant financial loss. Trading in these markets may be less liquid, market participants may be less well capitalized and market oversight may be less extensive, all of which could increase trading risk, particularly in markets for derivatives, commodities and currencies. Substantial trading losses by customers or customer or counterparty defaults, or the prospect of them, in turn, could drive down trading volume in these markets.
 
We are dependent on FX market makers to continually provide us with FX market liquidity. In the event we lose access to current prices and liquidity levels, we may be unable to provide competitive FX trading services, which will materially adversely affect our business, financial condition and results of operations and cash flows.
 
We rely on third party financial institutions to provide us with FX market liquidity. As of September 30, 2010, we have established trading relationships with 25 FX market makers. These FX market makers, although under contract with us, have no obligation to provide us with liquidity and may terminate our arrangements at any time. We also rely upon these FX market makers to provide us with competitive FX pricing which we can pass on to our customers. In the event we lose access to the competitive FX pricing and/or liquidity levels that


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we currently have, we may be unable to provide competitive FX trading services, which will materially adversely affect our business, financial condition and results of operations and cash flows. As a riskless principal between our customers and our FX market makers, we provide our customers with the best bid and offer price for each currency pair from our FX market makers plus a fixed markup. When a customer places a trade and opens a position, we act as the counterparty to that trade and our system immediately opens a trade between us and the FX market maker who provided the price that the customer selected. In the event that an offsetting trade fails, we could incur losses resulting from our trade with our customer.
 
In addition, whether as a result of exceptional volatility or situations affecting the market, the absence of competitive pricing from FX market makers and/or the suspension of liquidity would expose us to the risk of a default by the customer and consequent trading losses. Although our margining practices are designed to mitigate this risk, we may be unable to close out customer positions at a level where margin posted by the customer is sufficient to cover the customer’s losses. As a result, a customer may suffer losses greater than any margin or other funds or assets posted by that customer or held by us on behalf of that customer. Our policy is generally not to seek to pursue claims for negative equity against our customers.
 
We are subject to risk of default by financial institutions that hold our funds and our customers’ funds.
 
We have significant deposits with banks and other financial institutions. As of September 30, 2010, 18 financial institutions held our funds and our customer funds of $548.7 million, of which JPMorgan Chase held approximately 42%, HSBC held approximately 19%, Citi held approximately 8% and Bank of America held approximately 9%. Pursuant to current guidelines set forth by the NFA and the CFTC for our U.S.-regulated subsidiaries, we are not required to segregate customer funds from our own funds. As such, we aggregate our customers’ funds and our funds and hold them in collateral and deposit accounts at various financial institutions. In the event of insolvency of one or more of the financial institutions with whom we have deposited these funds, both we and our customers may not be able to recover our funds. Moreover, because approximately 61% of all our customer funds are collectively held by JPMorgan Chase and HSBC, if either of such financial institutions becomes insolvent, a significant portion of our funds and our customer funds may not be recovered. In such an event, our business and cashflow would be materially adversely impacted. Because our customers’ funds are aggregated with our own, they are not insured by the Federal Deposit Insurance Corporation or any other similar insurer domestically or abroad, except to the extent of the maximum insured amount per deposit, which is unlikely to provide significant benefits to customers. In any such insolvency we and our customers would rank as unsecured creditors in respect of claims to funds deposited with any such financial institution. As a result, we may be subject to claims by customers due to the loss of customer funds and our business would be harmed by the loss of our own funds.
 
We are subject to counterparty risk whereby defaults by parties with whom we do business can have an adverse effect on our business, financial condition and results of operations and cash flows.
 
Our FX trading operations require a commitment of capital and involve risk of losses due to the potential failure of our customers to perform their obligations under these transactions. All retail customers are required to deposit cash collateral in order to trade on our platforms. Our policy is that retail customers are not advanced credit in excess of the cash collateral in their account, and our systems are designed so that each customer’s positions are revalued on a real-time basis to calculate the customer’s useable margin. Useable margin is the cash the customer holds in the account after adding or deducting real-time gains or losses, less the margin requirement. Although the retail customer’s positions are automatically closed once his or her useable margin falls to zero, it is possible for a retail customer account to go negative, for example, due to system failure.
 
We are also subject to counterparty risk with respect to clearing and prime brokers as well as banks with respect to our own deposits and deposits of customer funds. We are exposed to credit risk in the event that such counterparties fail to fulfill their obligations. Although we seek to manage the credit risk arising from institutional counterparties by setting exposure limits and monitoring exposure against such limits, carrying out periodic credit reviews, and spreading credit risk across a number of different institutions to diversify risk, if our credit and counterparty risk management processes are inadequate we could face significant liabilities


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which could have a material adverse effect upon our business, financial conditions and results of operations and cash flows.
 
We depend on the services of prime brokers to assist in providing us access to liquidity through our FX market makers. The loss of one or more of our prime brokerage relationships could lead to increased transaction costs and capital posting requirements, as well as having a negative impact on our ability to verify our open positions, collateral balances and trade confirmations.
 
We depend on the services of prime brokers to assist in providing us access to liquidity through our FX market makers. We currently have established three prime brokerage relationships which act as central hubs through which we are able to deal with our FX market makers. In return for paying a transaction-based prime brokerage fee, we are able to aggregate our trading exposures, thereby reducing our transaction costs. Since we trade with our FX market makers through our prime brokers, they also serve as a third party check on our open positions, collateral balances and trade confirmations. If we were to lose one or more of our prime brokerage relationships, we could lose this source of third party verification of our trading activity, which could lead to an increased number of record-keeping or documentation errors. Although we have relationships with FX market makers who could provide clearing services as a back-up for our prime brokerage services, if we were to experience a disruption in prime brokerage services due to a financial, technical, regulatory or other development adversely affecting any of our current prime brokers, our business could be materially adversely affected to the extent that we are unable to transfer positions and margin balances to another financial institution in a timely fashion. In the event of the insolvency of a prime broker, we might not be able to fully recover the assets we have deposited (and have deposited on behalf of our customers) with the prime broker or our unrealized profits since we will be among the prime broker’s unsecured creditors.
 
Failure of third-party systems or third-party service and software providers upon which we rely could adversely affect our business.
 
We rely on certain third party computer systems or third party service and software providers, including technology platforms, back-office systems, internet service providers and communications facilities. For example, for the nine months ended September 30, 2010, approximately 10% of our trading volume was derived from trades utilizing the Meta Trader 4 platform, a third-party technology platform we license that is popular in the international trading community and offers our customers an alternative trading interface. Any interruption in these third party services, or deterioration in their performance or quality, could adversely affect our business. If our arrangement with any third party is terminated, we may not be able to find an alternative systems or services provider on a timely basis or on commercially reasonable terms. This could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Our computer infrastructure may be vulnerable to security breaches. Any such problems could jeopardize confidential information transmitted over the internet, cause interruptions in our operations or give rise to liabilities to third parties.
 
Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems and security breaches. Any such problems or security breaches could give rise to liabilities to one or more third parties, including our customers, and disrupt our operations. A party able to circumvent our security measures could misappropriate proprietary information or customer information, jeopardize the confidential nature of information we transmit over the internet or cause interruptions in our operations. Concerns over the security of internet transactions and the safeguarding of confidential personal information could also inhibit the use of our systems to conduct FX transactions over the internet. To the extent that our activities involve the storage and transmission of proprietary information and personal financial information, security breaches could expose us to a risk of financial loss, litigation and other liabilities. Our current insurance policies may not protect us against all of such losses and liabilities. Any of these events, particularly if they result in a loss of confidence in our services, could have a material adverse effect on our business, financial condition and results of operations and cash flows.


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We have relationships with referring brokers who direct new customers to us. Failure to maintain these relationships could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We have relationships with NFA-registered referring brokers who direct new customers to us and provide marketing and other services for these customers. For the nine months ended September 30, 2010, our largest referring broker accounted for approximately 3% of our total volume. Many of our relationships with referring brokers are non-exclusive or may be terminated by the brokers on short notice. In addition, under our agreements with referring brokers, they have no obligation to provide us with new customers or minimum levels of transaction volume. Our failure to maintain our relationships with these referring brokers, the failure of the referring brokers to provide us with customers or our failure to create new relationships with referring brokers would result in a loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations and cash flows. To the extent any of our competitors offers more attractive compensation terms to one of our referring brokers, we could lose the broker’s services or be required to increase the compensation we pay to retain the broker. In addition, we may agree to set the compensation for one or more referring brokers at a level where, based on the transaction volume generated by customers directed to us by such brokers, it would have been more economically attractive to seek to acquire the customers directly rather than through the referring broker. To the extent we do not enter into economically attractive relationships with referring brokers, our referring brokers terminate their relationship with us or our referring brokers fail to provide us with customers, our business, financial condition and results of operations and cash flows could be materially adversely affected.
 
Our relationships with our referring brokers may also expose us to significant reputational and legal risks as we could be harmed by referring broker misconduct or errors that are difficult to detect and deter.
 
Our reputation may be harmed by, or we may be liable for, improper conduct by our referring brokers, even though we do not control their activities. Referring brokers maintain customer relationships and delegate to us the responsibilities associated with FX and back-office operations. Furthermore, many of our referring brokers operate websites, which they use to advertise our services or direct customers to us. It is difficult for us to closely monitor the contents of their websites to ensure that the statements they make in relation to our services are accurate and comply with applicable rules and regulations. Under the current rules of the NFA, we are responsible for the activities of any party that solicits or introduces a customer to us unless such party is a member or associate of the NFA. Although all of our referring brokers are members or associates of the NFA, any disciplinary action taken against our referring brokers in the United States and abroad, could have a material adverse effect on our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations and cash flows, and, in any event, we may be subject to claims by customers and others concerning the conduct of referring brokers. In August 2010, the CFTC adopted regulations which require that referring brokers either meet the minimum net capital requirements applicable to futures and commodity options referring brokers or enter into a guarantee agreement with a CFTC-regulated FX broker, along with a requirement that such referring broker may be a party to only one guarantee agreement at a time. If the referring brokers with whom we currently do business choose to enter into a guarantee agreement, we cannot assure you that such referring brokers will choose to enter into such a guarantee agreement with us, rather than one of our competitors. We would be liable for the solicitation activity and performance of our referring brokers we guarantee. At this time, the effect of this rule change on our operations is unclear.
 
We have relationships with white labels who direct customer trading volume to us. Failure to maintain these relationships or develop new white label relationships could have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
We have relationships with white labels which provide FX trading to their customers by using our technology platform and other services and therefore provide us with an additional source of revenue. In certain jurisdictions, we are only able to provide our services through white label relationships. Many of our relationships with white labels are non-exclusive or may be terminated by them on short notice. In addition,


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our white labels have no obligation to provide us with minimum levels of transaction volume. Our failure to maintain our relationships with these white labels, the failure of these white labels to continue to offer online FX trading services to their customers using our technology platform, the loss of requisite licenses by our white labels or our inability to enter into new relationships with white labels would result in a loss of revenue, which could have a material adverse effect on our business, financial condition and results of operations and cash flows. For the nine months ended September 30, 2010, revenue generated through our white labels represented approximately 2.6% of our total revenue, and our largest white label relationship represented approximately 2.4% of our total revenue. To the extent any of our competitors offers more attractive compensation terms to one or more of our white labels, we could lose the white label relationship or be required to increase the compensation we pay to retain the white label.
 
Approximately 1% of our customer trading volume is derived from transactions with white labels relating to customers of such white labels where the country of residency of the white labels’ customer is not identified to us. White labels with whom we have relationships accept customers from many jurisdictions and are therefore subject to regulations in a number of jurisdictions. If such regulations, or changes in such regulations, increase the white labels’ overhead costs, including compliance costs and legal fees and expenses, limit their ability to engage or grow their business and increase their market share or result in sanctions and fines, their business, financial condition and results of operations may be adversely affected. This could reduce the volume of customer trading that such white labels direct to us, which would, in turn, adversely affect our business and results of operations. Our relationships with our white labels also may expose us to significant regulatory, reputational and other risks as we could be harmed by white label misconduct or errors that are difficult to detect and deter. If any of our white labels provided unsatisfactory service to their customers or are deemed to have failed to comply with applicable laws or regulations, our reputation may be harmed or we may be subject to claims as a result of our association with such white label. Any such harm to our reputation or liability would have a material adverse effect on our business, financial condition and results of operations and cash flows.
 
Reduced spreads in foreign currencies, levels of trading activity, trading through alternative trading systems and price competition from principal model firms could harm our business.
 
Computer-generated buy and sell programs and other technological advances and regulatory changes in the FX market may continue to tighten spreads on foreign currency transactions. Tighter spreads and increased competition could make the execution of trades and market-making activities less profitable. In addition, new and enhanced alternative trading systems have emerged as an option for individual and institutional investors to avoid directing their trades through retail FX brokers, which could result in reduced revenue derived from our FX brokerage business. We may also face price competition from our competitors. Many competing firms using a principal model can set their own prices as they generate income from trading with their customers. In contrast, the prices we provide to our customers are set by our FX market makers which vary based on market conditions.
 
Risks Related to Our Organizational Structure
 
FXCM Inc.’s only material asset after completion of this offering will be its interest in FXCM Holdings, LLC, and it is accordingly dependent upon distributions from FXCM Holdings, LLC to pay taxes, make payments under the tax receivable agreement or pay dividends.
 
FXCM Inc. will be a holding company and will have no material assets other than its ownership of Holdings Units. FXCM Inc. has no independent means of generating revenue. FXCM Inc. intends to cause FXCM Holdings, LLC to make distributions to its unitholders in an amount sufficient to cover all applicable taxes at assumed tax rates, payments under the tax receivable agreement and dividends, if any, declared by it. Deterioration in the financial condition, earnings or cash flow of FXCM Holdings, LLC and its subsidiaries for any reason could limit or impair their ability to pay such distributions. Additionally, to the extent that FXCM Inc. needs funds, and FXCM Holdings, LLC is restricted from making such distributions under applicable law or regulation or under the terms of our financing arrangements, or is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition.


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Payments of dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. Any financing arrangement that we enter into in the future may include restrictive covenants that limit our ability to pay dividends. In addition, FXCM Holdings, LLC is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of FXCM Holdings, LLC (with certain exceptions) exceed the fair value of its assets. Subsidiaries of FXCM Holdings, LLC are generally subject to similar legal limitations on their ability to make distributions to FXCM Holdings, LLC. In addition, our regulated subsidiaries are subject to regulatory capital requirements that limit the distributions that may be made by those subsidiaries.
 
FXCM Inc. is controlled by our existing owners, whose interests may differ from those of our public shareholders.
 
Immediately following this offering and the application of net proceeds from this offering, our existing owners will control approximately 80.0% of the combined voting power of our Class A and Class B common stock (or 77.0% if the underwriters exercise in full their option to purchase additional shares of Class A common stock). Accordingly, our existing owners will have the ability to elect all of the members of our board of directors, and thereby to control our management and affairs. In addition, they will be able to determine the outcome of all matters requiring shareholder approval, including mergers and other material transactions, and will be able to cause or prevent a change in the composition of our board of directors or a change in control of our company that could deprive our shareholders of an opportunity to receive a premium for their Class A common stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock.
 
In addition, immediately following this offering and the application of the net proceeds therefrom, our existing owners will own 80.0% of the Holdings Units (or 77.0% if the underwriters exercise in full their option to purchase additional shares of Class A common stock). Because they hold their ownership interest in our business through FXCM Holdings, LLC, rather than through the public company, these existing owners may have conflicting interests with holders of shares of our Class A common stock. For example, if FXCM Holdings, LLC makes distributions to FXCM Inc., our existing owners will also be entitled to receive distributions pro rata in accordance with the percentages of their respective limited liability company interests in FXCM Holdings, LLC and their preferences as to the timing and amount of any such distributions may differ from those of our public shareholders. Our existing owners may also have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets, especially in light of the existence of the tax receivable agreement that we will enter in connection with this offering, whether and when to incur new or refinance existing indebtedness, and whether and when FXCM Inc. should terminate the tax receivable agreement and accelerate its obligations thereunder. In addition, the structuring of future transactions may take into consideration these existing owners’ tax or other considerations even where no similar benefit would accrue to us. See “Certain Relationships and Related Person Transactions — Tax Receivable Agreement.”
 
Our existing owners could take steps so that we would qualify for exemptions from certain corporate governance requirements available to a “controlled company” within the meaning of the New York Stock Exchange rules.
 
Upon completion of the offering of our Class A common stock, our existing owners will continue to control a majority of the combined voting power of all classes of our voting stock. Under the New York Stock Exchange corporate governance standards, a company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of the New York Stock Exchange, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) the requirement that we have a compensation committee that is composed entirely of independent directors


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with a written charter addressing the committee’s purpose and responsibilities. While we do not currently intend to take advantage of the exemptions available to a “controlled company” under the New York Stock Exchange corporate governance standards, if we were to do so we would not be required to have a majority of independent directors and our compensation and corporate governance and nominating committees would not be required to consist entirely of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.
 
FXCM Inc. will be required to pay our existing owners for certain tax benefits it may claim arising in connection with this offering and related transactions, and the amounts it may pay could be significant.
 
As described in “Organizational Structure — Offering Transactions,” FXCM Inc. intends to use a portion of the proceeds from this offering to purchase Holdings Units from our existing owners, including members of our senior management.
 
We will enter into a tax receivable agreement with our existing owners that will provide for the payment by FXCM Inc. to our existing owners of 85% of the benefits, if any, that FXCM Inc. is deemed to realize as a result of the increases in tax basis resulting from our purchases or exchanges of Holdings Units and certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. See “Certain Relationships and Related Person Transactions — Tax Receivable Agreement.”
 
We expect that the payments that FXCM Inc. may make under the tax receivable agreement will be substantial. Assuming no material changes in the relevant tax law, and that we earn sufficient taxable income to realize all tax benefits that are subject to the tax receivable agreement, we expect future payments under the tax receivable agreement relating to the purchase by FXCM Inc. of Holdings Units as part of the Offering Transactions to aggregate $62.8 million (or $75.4 million if the underwriters exercise their option to purchase additional shares) and to range over the next 15 years from approximately $3.0 million to $6.7 million per year (or approximately $3.5 million to $8.1 million per year if the underwriters exercise their option to purchase additional shares) and decline thereafter. Future payments to our existing owners in respect of subsequent exchanges would be in addition to these amounts and are expected to be substantial as well. The foregoing numbers are merely estimates, and the actual payments could differ materially. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding tax receivable agreement payments. There may be a material negative effect on our liquidity if, as a result of timing discrepancies or otherwise, the payments under the tax receivable agreement exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement and/or distributions to FXCM Inc. by FXCM Holdings, LLC are not sufficient to permit FXCM Inc. to make payments under the tax receivable agreement after it has paid taxes. The payments under the tax receivable agreement are not conditioned upon our existing owners’ continued ownership of us.
 
In certain cases, payments under the tax receivable agreement to our existing owners may be accelerated and/or significantly exceed the actual benefits FXCM Inc. realizes in respect of the tax attributes subject to the tax receivable agreement.
 
The tax receivable agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, or if, at any time, FXCM Inc. elects an early termination of the tax receivable agreement, FXCM Inc.’s (or its successor’s) obligations with respect to exchanged or acquired Holdings Units (whether exchanged or acquired before or after such transaction) would be based on certain assumptions, including that FXCM Inc. would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. As a result, (1) FXCM Inc. could be required to make payments under the tax receivable agreement that are greater than or less than the specified percentage of the actual benefits FXCM Inc. realizes in respect of the tax attributes subject to the tax receivable agreement and (2) if FXCM Inc. elects to terminate the tax receivable agreement early, FXCM Inc. would be required to make an immediate payment equal to the present value of the anticipated future tax benefits, which upfront payment may be made years in advance of


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the actual realization of such future benefits. Upon a subsequent actual exchange, any additional increase in tax deductions, tax basis and other benefits in excess of the amounts assumed at the change in control will also result in payments under the tax receivable agreement. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity. There can be no assurance that we will be able to finance our obligations under the tax receivable agreement.
 
Payments under the tax receivable agreement will be based on the tax reporting positions that we determine. Although we are not aware of any issue that would cause the Internal Revenue Service, or the IRS, to challenge a tax basis increase, FXCM Inc. will not be reimbursed for any payments previously made under the tax receivable agreement. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of the benefits that FXCM Inc. actually realizes in respect of the increases in tax basis resulting from our purchases or exchanges of Holdings Units and certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
 
The requirements of being a public company may strain our resources and distract our management.
 
As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to join our firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We expect to incur significant additional annual expenses related to these steps and, among other things, additional directors and officers liability insurance, director fees, reporting requirements, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses.
 
Our internal controls over financial reporting currently do not meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and common stock price.
 
Our internal controls over financial reporting currently do not meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act that eventually we will be required to meet. Because currently we do not have comprehensive documentation of our internal controls and have not yet tested our internal controls in accordance with Section 404, we cannot conclude in accordance with Section 404 that we do not have a material weakness in our internal controls or a combination of significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls. If we are not able to complete our initial assessment of our internal controls and otherwise implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the adequacy of our internal controls over financial reporting.
 
Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules, which may result in a breach of the covenants under our financing arrangements. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our


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financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect us and lead to a decline in the price of our Class A common stock.
 
Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.
 
Our certificate of incorporation and bylaws will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. Among other things, these provisions:
 
  •  authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of Class A common stock;
 
  •  prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
 
  •  provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws and that our stockholders may only amend our bylaws with the approval of 80% or more of all of the outstanding shares of our capital stock entitled to vote; and
 
  •  establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.
 
These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our Class A common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.
 
Risks Related to this Offering
 
A significant portion of the proceeds from this offering will be used to purchase Holdings Units from our existing owners, including members of our senior management.
 
We intend to use $147.4 million of the proceeds from this offering (or $177.0 million if the underwriters exercise in full their option to purchase additional shares) to purchase Holdings Units from our existing owners, including members of our senior management, as described under “Organizational Structure — Offering Transactions.” Accordingly, we will not retain any of these proceeds.
 
There may not be an active trading market for shares of our Class A common stock, which may cause shares of our Class A common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of Class A common stock you purchase.
 
Prior to this offering, there has not been a public trading market for shares of our Class A common stock. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained which would make it difficult for you to sell your shares of Class A common stock at an attractive price or at all. The initial public offering price per share of Class A common stock will be determined by agreement among us and the representatives of the underwriters, and may not be indicative of the price at which shares of our Class A common stock will trade in the public market after this offering.
 
The market price of our Class A common stock may decline due to the large number of shares of Class A common stock eligible for exchange and future sale.
 
The market price of shares of our Class A common stock could decline as a result of sales of a large number of shares of Class A common stock in the market after the offering or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us


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to sell shares of Class A common stock in the future at a time and at a price that we deem appropriate. See “Shares Eligible for Future Sale.”
 
In addition, we and our existing owners will enter into an exchange agreement under which they (or certain permitted transferees thereof) will have the right, from and after the first anniversary of the date of the closing of this offering (subject to the terms of the exchange agreement), to exchange their Holdings Units for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments. The market price of shares of our Class A common stock could decline as a result of the exchange or the perception that an exchange could occur. These exchanges, or the possibility that these exchanges may occur, also might make it more difficult for holders of our Class A common stock to sell such stock in the future at a time and at a price that they deem appropriate. See “Certain Relationships and Related Person Transactions — Exchange Agreement.”
 
If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our Class A common stock, our stock price and trading volume could decline.
 
The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who covers us downgrades our Class A common stock or publishes inaccurate or unfavorable research about our business, our Class A common stock price may decline. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our Class A common stock price or trading volume to decline and our Class A common stock to be less liquid.
 
The market price of shares of our Class A common stock may be volatile, which could cause the value of your investment to decline.
 
Even if a trading market develops, the market price of our Class A common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our Class A common stock in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results or dividends, if any, to stockholders, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals, and in response the market price of shares of our Class A common stock could decrease significantly. You may be unable to resell your shares of Class A common stock at or above the initial public offering price.
 
In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against public companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
 
Investors in this offering will suffer immediate and substantial dilution
 
The initial public offering price per share of Class A common stock will be substantially higher than our pro forma net tangible book value per share immediately after this offering. As a result, you will pay a price per share of Class A common stock that substantially exceeds the per share book value of our tangible assets after subtracting our liabilities. In addition, you will pay more for your shares of Class A common stock than the amounts paid for the Holdings Units by our existing owners. Assuming an offering price of $14.00 per


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share of Class A common stock, which is the midpoint of the range on the front cover of this prospectus, you will incur immediate and substantial dilution in an amount of $11.83 per share of Class A common stock. See “Dilution.”
 
You may be diluted by the future issuance of additional Class A common stock in connection with our incentive plans, acquisitions or otherwise.
 
After this offering we will have more than 2.98 billion shares of Class A common stock authorized but unissued, including approximately 60.2 million shares of Class A common stock issuable upon exchange of Holdings Units that will be held by our existing owners. Our certificate of incorporation authorizes us to issue these shares of Class A common stock and options, rights, warrants and appreciation rights relating to Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 11,295,000 shares for issuance under our Long Term Incentive Plan, including 7,530,000 shares issuable upon the exercise of stock options that we intend to grant to our employees and 85,890 shares issuable upon the exercise of stock options that we intend to grant to our outside directors at the time of this offering. See “Management — Long Term Incentive Plan,” “— IPO Date Stock Option Awards and “— Director Compensation.” Any Class A common stock that we issue, including under our Long Term Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase Class A common stock in this offering.


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FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under “Risk Factors.” These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
 
MARKET DATA
 
This prospectus includes market and industry data and forecasts that we have derived from independent consultant reports, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.
 
Our internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had this information verified by any independent sources.


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ORGANIZATIONAL STRUCTURE
 
Existing Organizational Structure
 
The diagram below depicts our current organizational structure.
 
(FLOW CHART)
 
Organizational Structure Following this Offering
 
Immediately following this offering, FXCM Inc. will be a holding company, and its sole material asset will be a controlling equity interest in FXCM Holdings, LLC. As the sole managing member of FXCM Holdings, LLC, FXCM Inc. will operate and control all of the business and affairs of FXCM Holdings, LLC and, through FXCM Holdings, LLC and its subsidiaries, conduct our business. Under U.S. GAAP, FXCM Holdings, LLC will meet the definition of a variable interest entity. FXCM Inc. will be the primary beneficiary of FXCM Holdings, LLC as a result of its 100% voting power and control over FXCM Holdings, LLC and as a result of its obligation to absorb losses and its right to receive benefits of FXCM Holdings, LLC that could potentially be significant to FXCM Holdings, LLC. FXCM Inc. will consolidate FXCM Holdings, LLC on its consolidated financial statements. FXCM Inc. will report a noncontrolling interest related to the Holding Units held by our existing owners on its consolidated statements of condition, operations, and comprehensive income.
 
Our post-offering organizational structure will allow our existing owners to retain their equity ownership in FXCM Holdings, LLC, an entity that is classified as a partnership for United States federal income tax purposes, in the form of Holdings Units. Investors in this offering will, by contrast, hold their equity ownership in FXCM Inc., a Delaware corporation that is a domestic corporation for United States federal income tax purposes, in the form of shares of Class A common stock. We believe that our existing owners generally find it advantageous to hold their equity interests in an entity that is not taxable as a corporation for United States federal income tax purposes. Our existing owners and FXCM Inc. will incur United States federal, state and local income taxes on their proportionate share of any taxable income of FXCM Holdings, LLC. We do not believe that our organizational structure gives rise to any significant benefit or detriment to our business or operations.
 
As described below, our existing owners will also hold shares of Class B common stock of FXCM Inc. Although these shares have no economic rights, they will allow our existing owners to exercise voting power at FXCM Inc., the managing member of FXCM Holdings, LLC, at a level that is consistent with their overall equity ownership of our business. Under the certificate of incorporation of FXCM Inc., each holder of Class B common stock shall be entitled, without regard to the number of shares of Class B common stock held by


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such holder, to one vote for each Holdings Unit held by such holder. Accordingly, the voting power afforded to our existing owners by their shares of Class B common stock is automatically and correspondingly reduced as they sell Holdings Units to FXCM Inc. for cash as part of the Offering Transactions or subsequently exchange Holdings Units for shares of Class A common stock of FXCM Inc. pursuant to the exchange agreement described below (which will provide that they (or certain permitted transferees thereof) will have the right, from and after the first anniversary of the date of the closing of this offering (subject to the terms of the exchange agreement), to exchange their Holdings Units for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications).
 
The diagram below depicts our organizational structure immediately following this offering.
 
(FLOW CHART)
 
Incorporation of FXCM Inc.
 
FXCM Inc. was incorporated as a Delaware corporation on August 10, 2010. FXCM Inc. has not engaged in any business or other activities except in connection with its formation. The certificate of incorporation of


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FXCM Inc. authorizes two classes of common stock, Class A common stock and Class B common stock, each having the terms described in “Description of Capital Stock.”
 
Following this offering, each of our existing owners will hold one share of Class B common stock of FXCM Inc., each of which provides its owner with no economic rights but entitles the holder, without regard to the number of shares of Class B common stock held by such holder, to one vote on matters presented to stockholders of FXCM Inc. for each Holdings Unit held by such holder, as described in “Description of Capital Stock — Common Stock — Class B Common Stock.” Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.
 
Reclassification and Amendment and Restatement of Limited Liability Company Agreement of FXCM Holdings, LLC
 
Prior to the completion of this offering, the limited liability company agreement of FXCM Holdings, LLC will be amended and restated to, among other things, modify its capital structure by creating a single new class of units that we refer to as “Holdings Units.” We refer to this as the “Reclassification.” There is no current legal obligation to effect the Reclassification, which we anticipate will be effected following the time that the registration statement of which this prospectus forms a part becomes effective and prior to the completion of this offering. We believe that creating a single class of unit that will be held by all of the owners of FXCM Holdings, LLC, including FXCM Inc., will make our ownership structure simpler and also more transparent to investors in this offering. Immediately following the Reclassification but prior to the Offering Transactions described below, there will be 71,500,000 Holdings Units issued and outstanding.
 
Pursuant to the limited liability company agreement of FXCM Holdings, LLC, FXCM Inc. will be the sole managing member of FXCM Holdings, LLC. Accordingly, FXCM Inc. will have the right to determine when distributions will be made to the members of FXCM Holdings, LLC and the amount of any such distributions. If FXCM Inc. authorizes a distribution, such distribution will be made to the members of FXCM Holdings, LLC pro rata in accordance with the percentages of their respective limited liability company interests.
 
The holders of limited liability company interests in FXCM Holdings, LLC, including FXCM Inc., will incur United States federal, state and local income taxes on their proportionate share of any taxable income of FXCM Holdings, LLC. Net profits and net losses of FXCM Holdings, LLC will generally be allocated to its members (including FXCM Inc.) pro rata in accordance with the percentages of their respective limited liability company interests. The limited liability company agreement provides for cash distributions to the holders of limited liability company interests in FXCM Holdings, LLC if FXCM Inc. determines that the taxable income of FXCM Holdings, LLC will give rise to taxable income for its members. In accordance with the limited liability company agreement, we intend to cause FXCM Holdings, LLC to make cash distributions to the holders of limited liability company interests in FXCM Holdings, LLC for purposes of funding their tax obligations in respect of the income of FXCM Holdings, LLC that is allocated to them. Generally, these tax distributions will be computed based on our estimate of the taxable income of FXCM Holdings, LLC allocable to such holder of limited liability company interests multiplied by an assumed tax rate equal to the highest effective marginal combined United States federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses and the character of our income).
 
See “Certain Relationships and Related Person Transactions — FXCM Holdings, LLC Limited Liability Company Agreement.”
 
Exchange Agreement
 
We and our existing owners will enter into an exchange agreement at the time of this offering under which they (or certain permitted transferees thereof) will have the right, from and after the first anniversary of the date of the closing of this offering (subject to the terms of the exchange agreement), to exchange their Holdings Units for shares of our Class A common stock on a one-for-one basis, subject to customary


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conversion rate adjustments for stock splits, stock dividends and reclassifications. The exchange agreement will provide, however, that such exchanges must be for a minimum of the lesser of 1,000 Holdings Units or all of the vested Holdings Units held by such existing owner. The exchange agreement will also provide that an existing owner will not have the right to exchange Holdings Units if FXCM Inc. determines that such exchange would be prohibited by law or regulation or would violate other agreements with FXCM Inc. to which the existing owner may be subject. FXCM Inc. may impose additional restrictions on exchange that it determines to be necessary or advisable so that FXCM Holdings, LLC is not treated as a “publicly traded partnership” for United States federal income tax purposes. As a holder exchanges Holdings Units for shares of Class A common stock, the number of Holdings Units held by FXCM Inc. is correspondingly increased as it acquires the exchanged Holdings Units. See “Certain Relationships and Related Person Transactions — Exchange Agreement.”
 
As noted above, our existing owners will also hold shares of Class B common stock of FXCM Inc. Although these shares have no economic rights, they will allow our existing owners to exercise voting power at FXCM Inc., the managing member of FXCM Holdings, LLC, at a level that is consistent with their overall equity ownership of our business. Under the certificate of incorporation of FXCM Inc., each holder of Class B common stock shall be entitled, without regard to the number of shares of Class B common stock held by such holder, to one vote for each Holdings Unit held by such holder. Accordingly, the voting power afforded to our existing owners by their shares of Class B common stock is automatically and correspondingly reduced as they sell Holdings Units to FXCM Inc. for cash as part of the Offering Transactions or subsequently exchange Holdings Units for shares of Class A common stock of FXCM Inc. pursuant to the exchange agreement.
 
Offering Transactions
 
At the time of the consummation of this offering, FXCM Inc. intends to consummate the purchase, for cash, of newly-issued Holdings Units from FXCM Holdings, LLC and of outstanding Holdings Units from our existing owners, including members of our senior management, in each case at a purchase price per unit equal to the initial public offering price per share of Class A common stock in this offering net of underwriting discounts. While FXCM Inc. does not have any agreements with our existing owners to purchase their Holdings Units, our existing owners, including members of our senior management, have advised us that they intend to sell Holdings Units to FXCM Inc. as described in this prospectus. Although FXCM Inc. does intend to purchase Holdings Units from our existing owners for cash with a portion of the proceeds of this offering, our existing owners will not have the right to exchange their Holdings Units for shares of Class A common stock at the time of this offering, which right will only arise from and after the first anniversary of the date of the closing of this offering in accordance with the terms of the exchange agreement. Assuming that the shares of Class A common stock to be sold in this offering are sold at $14.00 per share, which is the midpoint of the range on the front cover of this prospectus, at the time of this offering, FXCM Inc. will purchase from FXCM Holdings, LLC 3,800,000 newly-issued Holdings Units for an aggregate of $49.7 million and purchase from our existing owners 11,260,000 Holdings Units for an aggregate of $147.4 million (or 13,519,000 Holdings Units for an aggregate of $177.0 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock). The issuance and sale of such newly-issued Holdings Units by FXCM Holdings, LLC to FXCM Inc. will correspondingly dilute the ownership interests of our existing owners in FXCM Holdings, LLC. FXCM Holdings, LLC will bear or reimburse FXCM Inc. for all of the expenses of this offering. See “Principal Stockholders” for information regarding the proceeds from this offering that will be paid to our directors and executive officers. Accordingly, following this offering FXCM Inc. will hold a number of Holdings Units that is equal to the number of shares of Class A common stock that it has issued, a relationship that we believe fosters transparency because it results in a single share of Class A common stock representing (albeit indirectly) the same percentage equity interest in FXCM Holdings, LLC as a single Holdings Unit.
 
As described above, we intend to use a portion of the proceeds from this offering to purchase Holdings Units from our existing owners, including members of our senior management. In addition, the unitholders of FXCM Holdings, LLC (other than FXCM Inc.) may, from and after the first anniversary of the date of the


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closing of this offering (subject to the terms of the exchange agreement), exchange their Holdings Units for shares of Class A common stock of FXCM Inc. on a one-for-one basis. The purchase of Holdings Units and subsequent exchanges are expected to result in increases in the tax basis of the assets of FXCM Holdings, LLC that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that FXCM Inc. would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. We will enter into a tax receivable agreement with our existing owners that will provide for the payment by FXCM Inc. to our existing owners of 85% of the amount of the benefits, if any, that FXCM Inc. is deemed to realize as a result of these increases in tax basis and certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. These payment obligations are obligations of FXCM Inc. and not of FXCM Holdings, LLC. See “Certain Relationships and Related Person Transactions — Tax Receivable Agreement.”
 
We refer to the foregoing transactions as the “Offering Transactions.”
 
As a result of the transactions described above:
 
  •  the investors in this offering will collectively own 15,060,000 shares of our Class A common stock (or 17,319,000 shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and FXCM Inc. will hold 15,060,000 Holdings Units (or 17,319,000 Holdings Units if the underwriters exercise in full their option to purchase additional shares of Class A common stock);
 
  •  our existing owners will hold 60,240,000 Holdings Units (or 57,981,000 Holdings Units if the underwriters exercise in full their option to purchase additional shares of Class A common stock);
 
  •  the investors in this offering will collectively have 20.0% of the voting power in FXCM Inc. (or 23.0% if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and
 
  •  our existing owners, through their holdings of our Class B common stock, will collectively have 80.0% of the voting power in FXCM Inc. (or 77.0% if the underwriters exercise in full their option to purchase additional shares of Class A common stock).
 
Regulated Subsidiaries
 
Other than the United States (which represented approximately 24%) and China (which represented approximately 12%), customers resident in no single country generated ten percent (10%) or greater of our total retail customer trading volume for the nine months ended September 30, 2010, although certain of our white labels, representing approximately 1% of our customer trading volume, do not identify to us the jurisdictions in which their customers are resident.
 
We operate our business through our operating subsidiaries, some of which are subject to the requirements of various regulatory bodies.


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As of October 1, 2010, the following companies were our principal operating subsidiaries:
 
         
Name of Subsidiary
  Primary Operations/Services   Applicable Regulator(s)
 
Forex Capital Markets LLC, a Delaware limited liability company   Registered FCM engaging in FX trading services   CFTC; NFA
FXCM Asia Limited, a Hong Kong limited company   Registered entity engaging in FX trading services   Hong Kong Securities and Futures Commission
Forex Capital Markets Limited, a limited company incorporated in England and Wales   Registered entity engaging in FX, CFD and spread betting trading   Financial Services Authority
FXCM Australia Limited, a limited company incorporated in New Zealand   Registered entity engaging in FX and CFDs trading   Australian Securities and Investment Commission
ODL Securities Limited, a limited company incorporated in England and Wales   Registered entity engaging in foreign currency, CFDs, spread betting, equity and equity option trading   Financial Services Authority; Member of the London Stock Exchange and NYSE Euronext
ODL Securities K.K. (Japan), a stock company incorporated in Japan   Registered entity engaging in FX and CFD trading services   Kanto Local Finance Bureau
 
For further information regarding our regulated subsidiaries, see “Business — Regulation”.


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USE OF PROCEEDS
 
We estimate that the proceeds to FXCM Inc. from this offering, after deducting estimated underwriting discounts, will be approximately $197.1 million (or $226.7 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock). FXCM Holdings, LLC will bear or reimburse FXCM Inc. for all of the expenses of this offering, which we estimate will be approximately $6.8 million.
 
FXCM Inc. intends to use $49.7 million of these proceeds to purchase newly-issued Holdings Units from FXCM Holdings, LLC, as described under “Organizational Structure — Offering Transactions.” We intend to cause FXCM Holdings, LLC to use these proceeds to increase our working capital, to fund acquisitions of small- to mid-sized retail FX firms that we may identify in the future and for general corporate purposes.
 
FXCM Inc. intends to use all of the remaining proceeds from this offering, or $147.4 million (or $177.0 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), to purchase Holdings Units from our existing owners, including members of our senior management, as described under “Organizational Structure — Offering Transactions.” Accordingly, we will not retain any of these proceeds. See “Principal Stockholders” for information regarding the proceeds from this offering that will be paid to our directors and named executive officers.
 
Pending specific application of these proceeds, we expect to invest them primarily in short-term demand deposits at various financial institutions.
 
See “Pricing Sensitivity Analysis” to see how the information presented above would be affected by an initial public offering price per share of class A common stock at the low-, mid- and high-points of the price range indicated on the front cover of this prospectus or if the underwriters’ option to purchase additional shares of Class A common stock is exercised in full.


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DIVIDEND POLICY
 
The declaration, amount and payment of any future dividends on shares of Class A common stock will be at the sole discretion of our board of directors and we may reduce or discontinue entirely the payment of such dividends at any time. Our board of directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant.
 
FXCM Inc. is a holding company and has no material assets other than its ownership of Holdings Units in FXCM Holdings, LLC. We intend to cause FXCM Holdings, LLC to make distributions to us in an amount sufficient to cover cash dividends, if any, declared by us. If FXCM Holdings, LLC makes such distributions to FXCM Inc., the other holders of Holdings Units will also be entitled to receive distributions pro rata in accordance with the percentages of their respective limited liability company interests.
 
Any financing arrangements that we enter into in the future may include restrictive covenants that limit our ability to pay dividends. In addition, FXCM Holdings, LLC is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of FXCM Holdings, LLC (with certain exceptions) exceed the fair value of its assets. Subsidiaries of FXCM Holdings, LLC are generally subject to similar legal limitations on their ability to make distributions to FXCM Holdings, LLC. In addition, our regulated subsidiaries are subject to regulatory capital requirements that limit the distributions that may be made by those subsidiaries.
 
The Company made distributions to its existing owners in the amount of $97.1 million and $76.0 million during 2009 and 2008, respectively. Distributions to our existing members amounted to $71.0 million to date in 2010. These distributions exceeded the amounts distributed to members pursuant to the tax distribution provisions of the then-effective limited liability company agreement of FXCM Holdings, LLC. We anticipate that future distributions by FXCM Holdings, LLC to FXCM Inc. and the other members of FXCM Holdings, LLC generally will not significantly exceed the amounts distributed to members pursuant to the tax distribution provisions of the amended and restated limited liability company agreement of FXCM Holdings, LLC, although future distributions may from time to time exceed such amounts.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2010:
 
  •  on a historical basis for FXCM Holdings, LLC; and
 
  •  on a pro forma basis for FXCM Inc. giving effect to the transactions described under “Unaudited Pro Forma Consolidated Financial Information,” including the application of the proceeds from this offering as described in “Use of Proceeds.”
 
You should read this table together with the information contained in this prospectus, including “Organizational Structure,” “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.
 
                 
    September 30, 2010  
    Actual     Pro Forma  
    (In thousands,
 
    except share and
 
    per share amounts)  
 
Cash and cash equivalents
  $ 124,109     $ 179,921  
                 
Long-term debt
        $  
Total members’ equity
  $ 139,672        
Class A common stock, par value $0.01 per share, 3,000,000,000 shares authorized, 15,060,000 shares issued and outstanding on a pro forma basis
          151  
Class B common stock, par value $0.01 per share, 1,000,000 shares authorized, 100 shares issued and 26 shares outstanding on a pro forma basis
           
Retained earnings
          (1,461 )
Additional paid-in capital
          58,004  
                 
Total members’ equity/Total stockholders’ equity attributable to FXCM Inc. 
    139,672       56,694  
                 
Non-controlling interest
          182,454  
Total equity
    139,672       239,148  
                 
Total capitalization
  $ 139,672     $ 239,198  
                 
 
See “Pricing Sensitivity Analysis” to see how the information presented above would be affected by an initial public offering price per share of Class A common stock at the low-, mid- and high-points of the price range indicated on the front cover of this prospectus or if the underwriters’ option to purchase additional shares of Class A common stock is exercised in full.


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DILUTION
 
If you invest in shares of our Class A common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of Class A common stock and the pro forma net tangible book value per share of Class A common stock after this offering. Dilution results from the fact that the per share offering price of the shares of Class A common stock is substantially in excess of the pro forma net tangible book value per share attributable to our existing owners.
 
Our pro forma net tangible book value as of September 30, 2010 was approximately $127.4 million, or $1.78 per share of Class A common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, and pro forma net tangible book value per share of Class A common stock represents pro forma net tangible book value divided by the number of shares of Class A common stock outstanding, after giving effect to the Reclassification and assuming that all of the holders of Holdings Units in FXCM Holdings, LLC (other than FXCM Inc.) exchanged their Holdings Units for newly-issued shares of Class A common stock on a one-for-one basis.
 
After giving effect to the transactions described under “Unaudited Pro Forma Financial Information,” including the application of the proceeds from this offering as described in “Use of Proceeds,” our pro forma net tangible book value as of September 30, 2010 would have been $163.1 million, or $2.17 per share of Class A common stock. This represents an immediate increase in net tangible book value of $0.39 per share of Class A common stock to our existing owners and an immediate dilution in net tangible book value of $11.83 per share of Class A common stock to investors in this offering.
 
The following table illustrates this dilution on a per share of Class A common stock basis assuming the underwriters do not exercise their option to purchase additional shares of Class A common stock:
 
                 
Assumed initial public offering price per share of Class A common stock
              $ 14.00  
Pro forma net tangible book value per share of Class A common stock as of September 30, 2010
  $ 1.78          
Increase in pro forma net tangible book value per share of Class A common stock attributable to investors in this offering
  $ 0.39          
                 
Pro forma net tangible book value per share of Class A common stock after the offering
          $ 2.17  
                 
Dilution in pro forma net tangible book value per share of Class A common stock to investors in this offering
          $ 11.83  
                 
 
Because our existing owners do not own any Class A common stock or other economic interests in FXCM Inc., we have presented dilution in pro forma net tangible book value per share of Class A common stock to investors in this offering assuming that all of the holders of Holdings Units in FXCM Holdings, LLC (other than FXCM Inc.) exchanged their Holdings Units for newly-issued shares of Class A common stock on a one-for-one basis in order to more meaningfully present the dilutive impact on the investors in this offering.
 
See “Pricing Sensitivity Analysis” to see how some of the information presented above would be affected by an initial public offering price per share of Class A common stock at the low-, mid- and high-points of the price range indicated on the front cover of this prospectus or if the underwriters exercise in full their option to purchase additional shares of Class A common stock.


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The following table summarizes, on the same pro forma basis as of September 30, 2010, the total number of shares of Class A common stock purchased from us, the total cash consideration paid to us and the average price per share of Class A common stock paid by our existing owners and by new investors purchasing shares of Class A common stock in this offering, assuming that all of the holders of Holdings Units in FXCM Holdings, LLC (other than FXCM Inc.) exchanged their Holdings Units for shares of our Class A common stock on a one-for-one basis.
 
                                         
                            Average
 
    Shares of Class A
    Total
    Price per
 
    Common Stock Purchased     Consideration     Share of Class A
 
    Number     Percent     Amount     Percent     Common Stock  
    (In thousands)  
 
Existing owners
    60,240,000       80.0 %   $ 192,430       47.7 %   $ 3.19  
Investors in this offering
    15,060,000       20.0 %   $ 210,840       52.3 %   $ 14.00  
                                         
Total
    75,300,000       100.0 %   $ 403,270       100.0 %   $ 5.36  
                                         


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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
 
The unaudited pro forma consolidated statements of operations for the year ended December 31, 2009 and for the nine months ended September 30, 2010 present our consolidated results of operations giving pro forma effect to the acquisition by FXCM Holdings, LLC of ODL described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Acquisition of ODL” and to the Offering Transactions described under “Organizational Structure” and the use of the estimated net proceeds from this offering as described under “Use of Proceeds,” as if such transactions occurred on January 1, 2009. The unaudited pro forma consolidated statement of financial condition as of September 30, 2010 presents our consolidated financial position giving pro forma effect to the Offering Transactions described under “Organizational Structure” and the use of the estimated net proceeds from this offering as described under “Use of Proceeds,” as if such transactions occurred on September 30, 2010. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions on the historical financial information of FXCM Holdings, LLC.
 
The unaudited pro forma consolidated financial information should be read together with “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.
 
The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of FXCM Inc. that would have occurred had we operated as a public company during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the Offering Transactions described under “Organizational Structure” and the use of the estimated net proceeds from this offering as described under “Use of Proceeds” occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.
 
The pro forma adjustments principally give effect to:
 
  •  the acquisition by FXCM Holdings, LLC of ODL as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Acquisition of ODL”;
 
  •  the purchase by FXCM Inc. of Holdings Units from FXCM Holdings, LLC and from our existing owners with the proceeds of this offering and the related effects of the tax receivable agreement. See “Organizational Structure — Offering Transactions” and “Certain Relationships and Related Person Transactions — Tax Receivable Agreement”; and
 
  •  in the case of the unaudited pro forma consolidated statements of income, a provision for corporate income taxes on the income of FXCM Inc. at an effective rate of 38.0%, which includes a provision for United States federal income taxes and assumes the highest statutory rates apportioned to each state, local and/or foreign jurisdiction.
 
The unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of the option to purchase up to an additional 2,259,000 shares of Class A common stock from us and that the shares of Class A common stock to be sold in this offering are sold at $14.00 per share of Class A common stock, which is the midpoint of the price range indicated on the front cover of this prospectus. See “Pricing Sensitivity Analysis” to see how certain aspects of the Offering Transactions would be affected by an initial public offering price per share of Class A common stock at the low-, mid- and high-points of the price range indicated on the front cover of this prospectus or if the underwriters’ option to purchase additional shares of Class A common stock is exercised in full.


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FXCM Inc.

Unaudited Pro Forma Consolidated Statement of Financial Condition
As of September 30, 2010
(Amounts in thousands, except share amounts)
 
                                                 
                ODL
          Pro Forma
       
    FXCM
    ODL
    Acquisition
          Offering and
       
    Holdings
    Actual
    Related
          Other
    FXCM Inc.
 
    LLC Actual     (U.S. GAAP)(10)     Adjustments(1)     Sub Total     Adjustments     Pro Forma  
    (In thousands)  
Assets
Current assets
                                               
Cash and cash equivalents
  $ 124,109     $ 3,113     $ 7,644     $ 134,866     $ 45,055 (3)   $ 179,921  
Cash and cash equivalents, held for customers
    424,597       162,446           $ 587,043           $ 587,043  
Restricted Cash
    9,356             (9,356 )                  
Due from brokers
    876       2,603             3,479             3,479  
Accounts receivable
    9,539       11,146             20,685             20,685  
Deferred tax asset
                            3,557 (4)     3,557  
                                                 
Total current assets
    568,477       179,308       (1,712 )     746,073       48,612       794,685  
Deferred tax asset
    300       3,452             3,752       70,318 (4)     74,070  
Office, communication and computer equipment, net
    11,525       7,678             19,203             19,203  
Intangible assets and goodwill, net
    1,133             63,881       65,014             65,014  
Other assets
    10,525       75       1,504       12,104       (2,713 )     9,391  
                                                 
Total assets
  $ 591,960     $ 190,513     $ 63,673     $ 846,146     $ 116,217       962,363  
                                                 
Liabilities and Equity
Current liabilities
                                               
Customer account liabilities
  $ 424,597     $ 186,810     $     $ 611,407     $       611,407  
Accounts payable and accrued expenses
    19,509       6,254             25,763       6,705 (5)     32,468  
Due to brokers
    682       1,351             2,033             2,033  
Deferred revenue
    6,000                   6,000             6,000  
Deferred tax liability
                4,803 (2)     4,803             4,803  
Payable to related parties pursuant to tax receivable
                            3,023 (4)     3,023  
                                                 
Total current liabilities
    450,788       194,415       4,803       650,006       9,728       659,734  
Payable to related parties pursuant to tax receivable agreement
                            59,771 (4)     59,771  
Deferred tax liability
                2,210 (2)     2,210             2,210  
Long term lease
                                   
Deferred revenue
    1,500                   1,500             1,500  
                                                 
Total liabilities
    452,288       194,415       7,013       653,716       69,499       723,215  
Common stock, $0.01 par value per share
          3,223       (3,223 )                    
Members’ Capital
    139,672             52,758       192,430       (192,430 )      
Class A
authorized to issue 3,000,000,000 shares, par value $0.01 per share;15,060,000 shares issued and outstanding on a pro forma basis
                            151 (6)     151  
Class B
authorized to issue 1,000,000 shares, par value $0.01 per share; 100 shares issued and outstanding; 100 shares issued and 26 shares outstanding on a pro forma basis
                            (6)      
Additional paid-in capital
          33,650       (33,650 )           58,004 (7)     58,004  
Retained earnings
          (40,775 )     40,775             (1,461 )(8)     (1,461 )
Non-controlling interest
                            182,454 (9)     182,454  
                                                 
Total liabilities and equity
  $ 591,960     $ 190,513     $ 63,673     $ 846,146     $ 116,217       962,363  
                                                 


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(1) ODL Acquisition
 
We acquired a 100% voting and equity interest in ODL on October 1, 2010. The purchase price was a 5.25% equity interest in FXCM Holdings, LLC, and $2.2 million in cash (together “Consideration”).
 
The purchase price has been allocated to the assets acquired and liabilities assumed based on management’s preliminary estimate of their respective fair values. Independent valuation specialists assisted FXCM’s management in the acquisition in determining the preliminary fair values of the net assets acquired and the intangible assets. The work performed by the independent valuation specialists has been considered by management in determining the fair value reflected in these unaudited pro forma financial statements. The valuations are based on the estimated assets acquired and liabilities assumed as of September 30, 2010 and management’s consideration of the independent specialists’ valuation work. All balances are preliminary as final closing balances are currently not known.
 
The total preliminary purchase price is estimated at $54.9 million, which includes $2.2 million of cash. The value of the Consideration was the cash paid and management’s estimate of the fair value of the equity component of the Consideration given based on a dividend discount approach, a comparable public company approach and a comparable private market transactions approach.
 
Statement of financial condition data as of September 30, 2010 have been translated at the period-end exchange rate of 1.581 British pounds to the U.S. dollar. Statement of operations data for the twelve months ended December 31, 2009 and the nine months ended September 30, 2010 have been translated at the average exchange rates for the period of 1.566 and 1.534 British pounds to the U.S. dollar, respectively. ODL financial data has been converted from U.K. to U.S. GAAP and reclassified to conform to FXCM’s financial statement presentation.
 
The following is a summary of the preliminary allocation of the purchase price in the ODL acquisition as reflected in the unaudited pro forma consolidated statement of financial condition as of September 30, 2010:
 
         
    (U.S. dollars in thousands)  
 
Fair value of net tangible assets acquired:
  ($ 1,920 )
Fair value of identifiable intangible assets:
       
Customer relationships
    17,963  
Non-compete agreements
    6,460  
Trade name
    623  
         
Total fair value of identifiable intangible assets
    25,046  
Deferred tax impact of identifiable intangible assets
    (7,013 )
Residual goodwill created from the ODL acquisition
    38,835  
         
Total preliminary purchase price
  $ 54,948  
         


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The preliminary allocations to adjust the book value of ODL assets to their estimated fair value and record amortization expense on ODL intangible assets are as follows:
 
                                 
          Estimated
          Estimated
 
          Average
    Estimated Annual
    Nine Month
 
          Remaining
    Depreciation and
    Depreciation and
 
          Useful Life
    Amortization
    Amortization
 
    Value     (in Years)     Expense for 2009     Expense for 2010  
                (U.S. dollars in thousands)  
 
Intangible assets:
                               
Customer relationships
  $ 17,963       3-5 years     $ 5,436     $ 4,077  
Non-compete agreements
    6,460       2-3 years       2,300       1,725  
Trade name
    623       2 years       312       234  
                                 
Total depreciation and amortization expense
                  $ 8,048     $ 6,036  
                                 
Total intangible assets
  $ 25,046                          
 
a.   Customer Relationships
 
The fair value of ODL’s retail and institutional customer relationships was valued separately and estimated using the excess earnings method. This valuation approach relied on assumptions regarding projected revenues, attrition rates, and operating cash flows for its customers, which were projected up to 2 years. The useful life is based on the period the customer relationships are expected to contribute to future cash flows as determined by the company’s historical experience. The cash flows were then tax-effected at a rate of 28%, the U.K. statutory rate, and were discounted at 18%.
 
b.   Non-Compete Agreements
 
The fair value of the non-compete agreements being entered into with certain key employees of ODL were estimated using the income approach. This approach estimates the present worth of the profits that would be lost if these employees were to compete. Such loss would arise from their ability to divert existing and future business from ODL. Based upon our knowledge of ODL and the market, we estimated the likelihood and impact of competition and the solicitation of other executives for each covenanter. In estimating the fair value of the non-compete agreements, two scenarios were analyzed. The first scenario was one in which the non-compete agreement was in place and no profits were expected to be lost due to competition and the second scenario represented a situation whereby there was no non-compete agreement in place and, consequently, some profits were lost due to competition. We calculated the present value of those cash flows using an 18% discount rate and the resulting difference between the cash flows under the two scenarios provided an estimate of the fair value of the non-compete agreements.
 
c.   Trade Name
 
The fair value of ODL’s trade name was estimated using the relief-from-royalty method where it is assumed that the trade name is owned by a third party and that the true owner would be required to pay a royalty for the privilege of using the trade name. Under the relief-from-royalty approach, we estimated the fair value of the ODL trade name by considering the benefits of ownership of the trade name in the form of future cash flows. To develop future cash flows attributable to a trade name, we started with a projection of future revenues from the business operations of ODL. From the projected revenue, the annual royalty savings was estimated by applying an estimated royalty rate of 1% to the projected revenue stream. The annual royalty savings was then adjusted to reflect taxes at a 28% rate to arrive at the after-tax cash flow savings associated with ownership of the trade name. The resulting cash flows were discounted to a present value based on an 18% discount rate and then summed.
 
Other ODL acquisition related adjustments include: (i) an increase of $2.0 million in cash and cash equivalents reflecting a capital contribution by ODL shareholders at closing on October 1, 2010, (ii) a $9.4 million movement from restricted cash to cash and cash equivalents reflecting a capital contribution


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made by FXCM into ODL at closing, and (iii) a $1.5 million other asset, representing a loan made by FXCM to certain ODL shareholders.
 
(2) Reflects a $4.8 million current deferred tax liability and a $2.2 million non-current deferred tax liability (a total deferred tax liability of $7.0 million) that has been set up against the $25.0 million value of ODL’s intangible assets outlined in the above table. The deferred tax liabilities represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($25.0 million) and the nil tax basis of such assets. The estimated amount of $7.0 million is determined by multiplying the difference of $25.0 million by the pro forma U.K. effective tax rate of 28%. We have decided to invest all ODL’s earnings indefinitely.
 
(3) Reflects the net effect on cash and cash equivalents of the receipt of net offering proceeds of $197.1 million, offering expenses remaining to be paid of $4.1 million and the uses of proceeds described in “Use of Proceeds”. Also reflects the payment to our chief financial officer of a cash bonus of $0.6 million to which he is entitled at the time of an initial public offering of our company as described in “Management — Executive Compensation — Compensation Discussion and Analysis — Actions Taken in 2010 and Anticipated Actions in connection with Offering.”
 
(4) Reflects adjustments to give effect to the tax receivable agreement (as described in “Certain Relationships and Related Person Transactions — Tax Receivable Agreement”) based on the following assumptions:
 
• we will record an increase of $73.9 million in deferred tax assets ($70.3 million non-current and $3.6 million current) for estimated income tax effects of the increase in the tax basis of the purchased interests and certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement, based on an effective income tax rate of 38.0% (which includes a provision for U.S. federal, state, local and/or foreign income taxes);
 
• we will record $62.8 million ($59.8 million non-current and $3.0 million current), representing 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due to existing owners under the tax receivable agreement;
 
• we will record an increase to additional paid-in capital of $11.1 million, which is an amount equal to the difference between the increase in deferred tax assets and the increase in liability due to existing owners under the tax receivable agreement; and
 
• there are no material changes in the relevant tax law and we earn sufficient taxable income in each year to realize the full tax benefit of the amortization of our assets.
 
(5) In settlement of an arrangement with a former employee of ours, we will become obligated to make a payment in 2011 of $6.7 million or 0.75% of the value of us implied by the initial public offering price, adjusted for certain exclusions relating to the capital raised in the offering, offering expenses, and undistributed offering capital.
 
(6) Represents an adjustment to stockholders’ equity reflecting par value for Class A common stock and Class B common stock to be outstanding following this offering.
 
(7) Represents an increase of $58.0 million to additional paid-in capital as a result of the amounts allocable to FXCM Inc. of net proceeds from this offering (offering proceeds, net of underwriting discounts, of $197.1 million, less $147.4 million used to purchase Holdings Units from existing owners), less $6.8 million of offering expenses and less par value reflected in note 6 and the elimination of members’ capital of $192.4 million upon consolidation. Also reflects the increase of $11.1 million due to the effect of the tax receivable agreement described in note (4).
 
(8) Represents the effect on retained earnings of the compensation-related payments described in notes (3) and (5).
 
(9) As described in “Organizational Structure,” FXCM Inc. has become the sole managing member of FXCM Holdings, LLC. FXCM Inc. will initially own less than 100% of the economic interest in FXCM Holdings, LLC, but will have 100% of the voting power and control the management of FXCM Holdings, LLC. As a result, we will consolidate the financial results of FXCM Holdings, LLC and will record non-controlling interest on our consolidated statements of financial condition. Immediately following this


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offering, the non-controlling interest, based on the assumptions to the pro forma financial information, will be $182.5 million. Pro forma non-controlling interest represents 80% of the pro forma equity of FXCM Holdings, LLC of $228.1 million, which differs from the pro forma equity of FXCM Inc. as the former is not affected by the adjustments relating to the tax receivable agreement described above in note (3).
 
(10) Accounting principles adopted by the U.K. differ in certain material respects from those adopted by the U.S. Under U.K. GAAP, all deferred tax amounts are classified as current in the balance sheet. Under U.S. GAAP, amounts are classified as current or non-current based on the nature of the related asset or liability. As of September 30, 2010, only $2.5 million of the Group’s deferred tax asset would be classified as current under U.S. GAAP.
 
Software development expenses are capitalized under U.K. GAAP as intangible assets if they have a readily ascertainable market value. Under U.S. GAAP, preliminary stage and post implementation costs are expenses if not adding material functionality. Adjustments to conform equity to U.S. GAAP as of September 30, 2010 were to reduce capitalized software costs by $0.2 million and increase the deferred tax asset due to the above adjustment by $0.06 million.


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FXCM Inc.
 
Unaudited Pro Forma Consolidated Statement of Operations
For the Fiscal Year Ended December 31, 2009
 
                                                 
                ODL
          Pro Forma
       
    FXCM
    ODL
    Acquisition
          Offering
       
    Holdings
    Actual
    Related
          and Other
    FXCM Inc.
 
    LLC Actual     (U.S. GAAP)(1)     Adjustments(2)     Sub Total     Adjustments     Pro Forma  
    (In thousands except share and per share data)  
 
Revenues
                                               
Retail trading revenue
  $ 291,668     $ 58,977     $     $ 350,645     $     $ 350,645  
Institutional trading revenue
    21,107       1,940             23,047             23,047  
Interest income
    1,289       3,164             4,453             4,453  
Other income
    8,666       405             9,071             9,071  
                                                 
Total revenues
    322,730       64,486             387,216             387,216  
Expenses
                                               
Referring broker fees
    76,628       20,240             96,868             96,868  
Compensation and benefits
    62,588       22,814             85,402       8,925 (3)     94,327  
Advertising and marketing
    29,355       4,520             33,875             33,875  
Communication and technology
    24,026       12,327             36,353             36,353  
General and administrative
    26,453       23,493             49,946             49,946  
Depreciation and amortization
    6,542       4,435       8,048       19,025             19,025  
Interest expense
    125       207             332               332  
                                                 
Total expenses
    225,717       88,036       8,048       321,801       8,925       330,726  
                                                 
Income before income taxes
    97,013       (23,550 )     (8,048 )     65,415       (8,925 )     56,490  
Income tax provision (benefit)
    10,053       (6,026 )     (2,253 )     1,774       3,944 (4)     5,718  
                                                 
Net income (loss) attributable to the controlling and the non-controlling interests
  $ 86,960     $ (17,524 )   $ (5,795 )   $ 63,641     $ (12,869 )     50,772  
                                                 
Less: Net income attributable to the non-controlling interest
                                    44,513 (5)     44,513  
                                                 
Net income attributable to FXCM Inc. 
                                          $ 6,259  
                                                 
Weighted average shares of Class A common stock outstanding(6)
                                               
Basic
                                            15,060,000  
Diluted
                                            15,060,000  
Net income available to Class A common stock per share(6)
                                               
Basic
                                            0.41  
Diluted
                                            0.41  


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(1) Accounting principles adopted by the U.K. differ in certain material respects from those adopted by the U.S. Please refer to Note 32 of the ODL consolidated financial statements as of December 31, 2009 for a discussion of the principal differences between U.K. GAAP and U.S. GAAP that are significant to ODL’s financial statements.
 
(2) ODL Acquisition
 
We acquired a 100% voting and equity interest in ODL on October 1, 2010. For additional information, see “Unaudited Pro Forma Consolidated Statement of Financial Condition as of September 30, 2010.”
 
(3) As described in “Management — IPO Date Stock Option Awards to Employees,” at the time of this offering we intend to grant awards of stock options to purchase an aggregate of 7,530,000 shares of our Class A common stock pursuant to the Long-Term Incentive Plan to certain of our employees. Each stock option to purchase our Class A common stock will have an exercise price equal to the initial public offering price per share in this offering and, subject to the option holder’s continued employment, vest in equal annual installments over a four year period. As a result, we expect to record deferred stock-based compensation equal to the grant-date fair value of the stock options issued of $35.7 million, which will be recognized over the four year vesting period and recorded into the expense category in accordance with the manner in which the option holders’ other compensation is recorded. Adjustment gives pro forma effect to the amount that would have been recorded if the award were made on January 1, 2009.
 
(4) Following this offering we will be subject to U.S. federal income taxes, in addition to state, local and international taxes with respect to our allocable share of any net taxable income of FXCM Holdings, LLC, which will result in higher income taxes. As a result the pro forma statements of income reflect an adjustment to our provision for corporate income taxes to reflect an effective rate of 38.0%, which includes a provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state, local and/or foreign jurisdiction.
 
(5) As described in “Organizational Structure”, FXCM Inc. will become the sole managing member of FXCM Holdings, LLC. FXCM Inc. will initially own less than 100% of the economic interest in FXCM Holdings, LLC, but will have 100% of the voting power and control the management of FXCM Holdings, LLC. Immediately following this offering, the non-controlling interest will be 80.0%. This amount has been determined based on an assumption that the underwriters’ option to purchase additional shares is not exercised. If the underwriters’ option to purchase additional shares is exercised, the ownership percentage held by the non-controlling interest would decrease to 77.0%. The percentage of the net income attributable to the non-controlling interest will vary from these percentages due to the differing level of income taxes applicable to the controlling interest.
 
(6) The shares of Class B common stock do not share in our earnings and are therefore not included in the weighted average shares outstanding or net income (loss) per share.
 
On a pro forma basis for the year ended December 31, 2009 and the nine months ended September 30, 2010, the Holdings Units (which are exchangeable on a one-for-one basis for shares of our Class A common shares) were antidilutive and consequently the effect of their exchange for shares of Class A common stock has been excluded from the calculation of diluted net income available to Class A common stock per share.
 
On a pro forma basis for the year ended December 31, 2009 and the nine months ended September 30, 2010 the options to purchase shares of Class A common stock were antidilutive and consequently the effect of their exercise has been excluded from the calculation of diluted net income available to Class A common stock per share.


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Certain compensation-related payments that arise as a result of the completion of the offering have not been reflected in the Unaudited Pro Forma Consolidated Statements of Operations as they were determined by management to be non-recurring. As described in “Management — Executive Compensation — Compensation Discussion and Analysis — Actions Taken in 2010 and Anticipated Actions in Connection with Offering,” our chief financial officer is entitled to a cash bonus of $0.6 million at the time of an initial public offering of our company. In addition, in settlement of an arrangement with a former employee of ours, we will become obligated to make a payment during 2011 of $6.7 million, or 0.75% the value of us implied by the initial public offering price, adjusted for certain exclusions relating to the capital raised in the offering, offering expenses, and undistributed pre-offering capital. Accordingly, we anticipate recording a one-time charge of $7.3 million in respect of these items during the period in which the offering occurs. These items have been reflected in the Unaudited Pro Forma Consolidated Statement of Financial Condition.


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FXCM Inc.
 
Unaudited Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 2010
 
                                                 
                ODL
          Pro Forma
       
    FXCM
    ODL
    Acquisition
          Offering and
       
    Holdings
    Actual
    Related
          Other
    FXCM Inc.
 
    LLC Actual     (U.S. GAAP)(1)     Adjustments(2)     Sub Total     Adjustments     Pro Forma  
          (In thousands except share and per share data)        
 
Revenues
                                               
Retail trading revenue
  $ 234,608     $ 29,499     $     $ 264,107     $     $ 264,107  
Institutional trading revenue
    20,779       4,452             25,231             25,231  
Interest income
    1,493       1,466             2,959             2,959  
Other income
    7,273       2,157             9,430             9,430  
                                                 
Total revenues
    264,153       37,574             301,727             301,727  
                                                 
Expenses
                                               
Referring broker fees
    61,680       8,412             70,092             70,092  
Compensation and benefits
    52,325       13,020             65,345       6,694 (3)     72,039  
Advertising and marketing
    16,916       1,471             18,387             18,387  
Communication and technology
    19,171       7,690             26,861             26,861  
General and administrative
    25,792       23,618             49,410             49,410  
Depreciation and amortization
    5,292       2,310       6,036       13,638             13,638  
Interest expense
    78       220             298               298  
                                                 
Total expenses
    181,254       56,741       6,036       244,031       6,694       250,725  
                                                 
Income (loss) before income taxes
    82,899       (19,167 )     (6,036 )     57,696       (6,694 )     51,002  
Income tax provision (benefit)
    3,517       40       (1,690 )     1,867       4,861 (4)     6,728  
                                                 
Net income (loss) attributable to the controlling and the non-controlling interests
  $ 79,382     $ (19,207 )   $ (4,346 )   $ 55,829     $ (11,555 )     44,274  
                                                 
Less: Net income attributable to the non-controlling interest
                                    39,535 (5)     39,535  
                                                 
Net income attributable to FXCM Inc. 
                                          $ 4,739  
                                                 
Weighted average shares of Class A common stock outstanding(s)(6)
                                               
Basic
                                            15,060,000  
Diluted
                                            15,060,000  
Net income available to Class A common stock per share(s) per common share(6)
                                               
Basic
                                            0.31  
Diluted
                                            0.31  


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(1) Accounting principles adopted by the U.K. differ in certain material respects from those adopted by the U.S. Under U.K. GAAP, software development expenses are capitalized as intangible assets if they have a readily ascertainable market value. Under U.S. GAAP, preliminary stage and post implementation costs are expenses if not adding material functionality. Adjustments to conform net income to U.S. GAAP for the nine months ended September 30, 2010 were a reduction in expense due to lower capitalized software costs by $1.0 million and increase deferred tax on the above adjustment by $0.3 million.
 
(2) ODL Acquisition
 
We acquired a 100% voting and equity interest in ODL on October 1, 2010. For additional information, see “Unaudited Pro Forma Consolidated Statements of Financial Condition as of September 30, 2010.”
 
(3) As described in “Management — IPO Date Stock Option Awards to Employees,” at the time of this offering we intend to grant awards of stock options to purchase an aggregate of 7,530,000 shares of our Class A common stock pursuant to the Long-Term Incentive Plan to certain of our employees. Each stock option to purchase our Class A common stock will have an exercise price equal to the initial public offering price per share in this offering and, subject to the option holder’s continued employment, vest in equal annual installments over a four-year period. As a result, we expect to record deferred stock-based compensation equal to the grant-date fair value of the stock options issued of $35.7 million, which will be recognized over the four-year vesting period and recorded into the expense category in accordance with the manner in which the option holders’ other compensation is recorded. Adjustment gives pro forma effect to the amount that would have been recorded if the award were made on January 1, 2009.
 
(4) Following this offering, we will be subject to U.S. federal income taxes, in addition to state, local and international taxes with respect to our allocable share of any net taxable income of FXCM Holdings, LLC, which will result in higher income taxes. As a result the pro forma statements of income reflect an adjustment to our provision for corporate income taxes to reflect an effective rate of 38%, which includes a provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state, local and/or foreign jurisdiction.
 
(5) As described in “Organizational Structure”, FXCM Inc. will become the sole managing member of FXCM Holdings, LLC. FXCM Inc. will initially own less than 100% of the economic interest in FXCM Holdings, LLC, but will have 100% of the voting power and control the management of FXCM Holdings, LLC. Immediately following this offering, the non-controlling interest will be 80%. This amount has been determined based on an assumption that the underwriters’ option to purchase additional shares is not exercised. If the underwriters’ option to purchase additional shares is exercised, the ownership percentage held by the non-controlling interest would decrease to 77.0%. Net income attributable to the non-controlling interest will vary from these percentages due to the differing level of income taxes applicable to the controlling interest.
 
(6) The shares of Class B common stock do not share in our earnings and are therefore not included in the weighted average shares outstanding or net income (loss) per share.
 
On a pro forma basis for the year ended December 31, 2009 and the nine months ended September 30, 2010, the Holdings Units (which are exchangeable on a one-for-one basis for shares of our Class A common shares) were antidilutive and consequently the effect of their exchange for shares of Class A common stock has been excluded from the calculation of diluted net income available to Class A common stock per share.
 
On a pro forma basis for the year ended December 31, 2009 and the nine months ended September 30, 2010 the options to purchase shares of Class A common stock were antidilutive and consequently the effect of their exercise has been excluded from the calculation of diluted net income available to Class A common stock per share.


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Certain compensation-related payments that arise as a result of the completion of the offering have not been reflected in the Unaudited Pro Forma Consolidated Statements of Operations as they were determined by management to be non-recurring. As described in “Management — Executive Compensation — Compensation Discussion and Analysis — Actions Taken in 2010 and Anticipated Actions in Connection with Offering,” our chief financial officer is entitled to a cash bonus of $0.6 million at the time of an initial public offering of our company. In addition, in settlement of an arrangement with a former employee of ours, we will become obligated to make a payment during 2011 of $6.7 million, or 0.75% the value of us implied by the initial public offering price, adjusted for certain exclusions relating to the capital raised in the offering, offering expenses, and undistributed pre-offering capital. Accordingly, we anticipate recording a one-time charge of $7.3 million in respect of these items during the period in which the offering occurs. These items have been reflected in the Unaudited Pro Forma Consolidated Statement of Financial Condition.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
The following selected historical consolidated financial data of FXCM Holdings, LLC should be read together with “Organizational Structure,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus. FXCM Holdings, LLC will be considered our predecessor for accounting purposes, and its consolidated financial statements will be our historical consolidated financial statements following this offering.
 
We derived the selected historical consolidated statements of operations and comprehensive income data of FXCM Holdings, LLC for each of the years ended December 31, 2009, 2008 and 2007 and the selected historical consolidated statements of financial condition data as of December 31, 2009 and 2008 from the audited consolidated financial statements of FXCM Holdings, LLC which are included elsewhere in this prospectus, and derived the selected historical combined statement of operations and comprehensive income for each of the years ended December 31, 2006 and 2005 and the selected historical combined statement of financial condition data as of December 31, 2006 and 2005 and the summary historical consolidated statements of financial condition data as of December 31, 2007 from the audited financial statements of FXCM Holdings, LLC which are not included in this prospectus. The entities included in the 2005 and 2006 combined financial statements are Forex Capital Markets LLC, FXCM Futures, LLC, FXCM Canada, Ltd., Forex Trading LLC, Forex Capital Markets Limited and FXCM Asia Limited. The consolidated statements of operations and comprehensive income data for the nine months ended September 30, 2010 and 2009, and the consolidated statement of financial condition data as of September 30, 2010 and 2009 have been derived from unaudited consolidated financial statements of FXCM Holdings, LLC included elsewhere in this prospectus. The unaudited consolidated financial statements of FXCM Holdings, LLC have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments that we consider necessary for a fair presentation of our consolidated financial position and results of operations for all periods presented.
 
                                                         
    Nine Months Ended
       
    September 30,     Year Ended December 31,  
    2010     2009     2009     2008     2007(1)     2006(1)(2)     2005(2)  
    (In thousands)  
 
Consolidated Statements of Operations and Comprehensive Income Data
                                                       
Revenues
                                                       
Retail trading revenue
  $ 234,608     $ 225,231     $ 291,668     $ 281,385     $ 144,935     $ 131,950     $ 215,672  
Institutional trading revenue
    20,779       15,367       21,107       18,439       11,695       5,610       95  
Interest income
    1,493       922       1,289       9,085       16,357       11,112       4,501  
Other income
    7,273       6,581       8,666       13,731       11,535       16,000       2,183  
                                                         
Total revenues
    264,153       248,101       322,730       322,640       184,522       164,672       222,451  
                                                         
Expenses
                                                       
Referring broker fees
    61,680       60,787       76,628       64,567       33,211       51,360       49,420  
Compensation and benefits
    52,325       45,943       62,588       54,578       53,575       48,669       33,281  
Advertising and marketing
    16,916       24,351       29,355       24,629       27,846       28,223       25,595  
Communication and technology
    19,171       17,597       24,026       21,311       17,836       13,773       7,914  
General and administrative
    25,792       18,550       26,453       20,247       17,037       20,917       22,604  
Depreciation and amortization
    5,292       4,800       6,542       6,095       7,364       6,732       4,326  
Interest expense
    78       100       125       2,168       1,374       34       23  
                                                         
Total expenses
    181,254       172,128       225,717       193,595       158,243       169,708       143,163  
                                                         
Income (loss) before income taxes
    82,899       75,973       97,013       129,045       26,279       (5,036 )     79,288  
Income tax provision
    3,517       7,633       10,053       8,872       3,120       1,720       1,372  
                                                         
Net income (loss)
    79,382       68,340       86,960       120,173       23,159       (6,756 )     77,916  
                                                         
Other comprehensive income
                                                       
Foreign currency translation gain (loss)
    226       (162 )     452       1                    
                                                         
Total comprehensive income (loss)
  $ 79,608     $ 68,178     $ 87,412     $ 120,174     $ 23,159     $ (6,756 )   $ 77,916  
                                                         


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    Nine Months Ended
       
    September 30,     Year Ended December 31,  
    2010     2009     2009     2008     2007(1)     2006(1)(2)     2005(2)  
    (In thousands)  
 
Consolidated Statements of Financial Condition Data — End of Period
                                                       
Cash and cash equivalents
  $ 124,109     $ 128,668     $ 139,858     $ 179,967     $ 131,799     $ 67,631     $ 75,605  
Cash and cash equivalents, held for customers
  $ 424,597     $ 321,438     $ 353,825     $ 253,391     $ 315,440     $ 253,257     $ 202,554  
Total assets
  $ 591,960     $ 474,584     $ 517,936     $ 451,044     $ 472,564     $ 364,636     $ 301,611  
Customer account liabilities
  $ 424,597     $ 321,438     $ 353,825     $ 253,391     $ 315,440     $ 253,257     $ 202,554  
Total equity
  $ 139,672     $ 115,831     $ 130,788     $ 140,454     $ 96,280     $ 93,851     $ 89,902  
 
 
(1) In 2005, a shareholder and white label relationship of FXCM declared bankruptcy, at the time representing 40% of total revenues, resulting in a significant disruption in the business that led in large part to the reduction in revenues and the loss recorded in 2006. As a response to such bankruptcy and its effects on the business, our senior management initiated fundamental changes to our business model, including the decision to transition to an agency model, which became fully operational in July 2007.
 
(2) Financial statements at December 31, 2006 and 2005 and for the year then ended were prepared on a combined basis. FXCM Holdings, LLC was organized in January 2007 for the purpose of consolidating the Forex Capital Markets group of companies under common management. These companies were comprised of Forex Capital Markets LLC, FXCM Canada, Ltd. and Forex Trading LLC, the latter of which was the parent company of Forex Capital Markets Limited and FXCM Asia Limited. This group of companies, absent the holding company structure or a common parent, issued audited financial statements on a combined basis as of and for the years ended December 31, 2005 and 2006. The group of companies represented affiliated entities that operated in the similar capacity of online foreign currency trading. They shared common management and functioned in a number of countries under various regulatory environments. Since the operations were all interrelated, it was deemed appropriate to present the financial statements on a combined basis as it best reflected the financial condition and the result of operations of the group as a whole.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The statements in this discussion regarding industry trends, our expectations regarding the future performance of our business, and the other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in the “Risk Factors” section. You should read the following discussion together with the section entitled “Risk Factors” and our consolidated financial statements and notes thereto included elsewhere in this prospectus.
 
The historical financial information discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects the historical results of operations and financial position of FXCM Holdings, LLC. This historical financial information does not give effect to our acquisition of ODL or to the completion of this offering. See “Organizational Structure,” “Unaudited Pro Forma Financial Information” and “— Acquisition of ODL”.
 
OVERVIEW
 
Business
 
We are an online provider of foreign exchange, or FX, trading and related services to approximately 175,000 retail and institutional customers globally. We offer our customers access to over-the-counter, or OTC, FX markets through our proprietary technology platform. In a FX trade, a participant buys one currency and simultaneously sells another, a combination known as a “currency pair”. Our platform presents our FX customers with the best price quotations on up to 56 currency pairs from up to 25 global banks, financial institutions and market makers, or FX market makers, which we believe provides our customers with an efficient and cost-effective way to trade FX. 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 fees 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.
 
Industry Trends
 
Economic Environment — Customer FX trading volumes are impacted by the volatility levels in markets including foreign currency and cash equities. Over the past 12 months to September 30, 2010, we have experienced periods of low and high volatility. The recent fiscal crises in Greece and other European Union (E.U.) nations elevated FX market volatility levels across multiple markets, resulting in an increase in our trading activity during the second quarter of 2010. It is difficult to predict volatility in the FX market.
 
Competitive Environment — The retail FX trading market is fragmented and highly competitive. Our competitors in the retail market can be grouped into several broad categories based on size, business model, product offerings, target customers and geographic scope of operations. These include U.S. based retail FX brokers, international multi-product trading firms, other online trading firms, and international banks and other financial institutions with significant FX operations. We expect competition to continue to remain strong for the foreseeable future.
 
Regulatory Environment — Our business and industry are highly regulated. Our operating subsidiaries are regulated in a number of jurisdictions, including the United States, the United Kingdom (where regulatory passport rights have been exercised to operate in a number of European Economic Area jurisdictions), Hong Kong and Australia. As a result of our acquisition of ODL, which closed on October 1, 2010, we are also regulated in Japan. These government regulators and self-regulatory organizations oversee the conduct of our business in many ways and several conduct regular examinations to monitor our compliance with applicable statutes and regulations. For example, recently, in the United States and other jurisdictions there have been a series of changes to how retail FX firms are regulated. These changes included substantial increases in minimum regulatory capital requirements, increased oversight of third-party solicitors (such as


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referring brokers) and increased transparency in the execution of trades. We believe that regulators across major international markets will continue to increase the minimum regulatory requirements for capital, protection of customer assets and transparency of trading. Examples of recently adopted or currently proposed regulations from various jurisdictions include limits on the amount of leverage a customer may use, requiring referring brokers to be registered, and precluding providers of trading services from using customer funds to support open positions.
 
We expect that increased regulatory compliance requirements will cause some competing firms to leave individual markets or exit the FX industry and believe that this will present additional opportunities for the remaining firms, especially agency model firms like us, to increase market share organically or through acquisitions. As the industry consolidates, scale will become increasingly important and may present advantages to larger firms, such as us, that can meet the stricter requirements, invest in better technology and promote their brand. However, to the extent the regulatory environment is less beneficial for us or our customers or that we cannot capitalize on opportunities, our business, financial condition and operating results could be negatively affected.
 
Changes in the regulatory environment could also impact costs of compliance. For example, the CFTC recently adopted new regulations implementing statutory changes requiring the registration of FX referring brokers, trading advisers and pool operators. Additionally, the new CFTC regulations mandate disclosure of client profitability and increases in minimum security deposits. The CFTC will require us to ensure that retail customers resident in the United States maintain their accounts with our CFTC-registered operating entity. The requirement for referring brokers to register and maintain minimum capital requirements will potentially reduce the cost of compliance as registered brokers will be monitored directly by self-regulatory organizations, such as the NFA, reducing some of the oversight burden that was previously borne solely by our compliance department. Disclosure of client profitability is not expected to have a meaningful impact on compliance costs as this information can be produced using existing reporting systems. The change in minimum security deposits will require additional client communication and education when implemented, but is not expected to impact ongoing compliance costs. Similarly, the requirement for all U.S. resident retail traders to have their FX accounts with a U.S.-based, registered counterparty will require staff to assist in moving retail accounts currently housed with our non-U.S. based entities to our CFTC-registered entity. While this will require additional staff time and an overall increase in the number of retail accounts housed at our U.S. entity, we do not expect there to be an ongoing increase in compliance costs. Although we do not expect that these recent statutory and regulatory changes will result in any significant increase in compliance costs, we cannot be certain that other future regulatory changes would not result in increased compliance costs.
 
Business Strategy
 
We believe that we can build on our competitive strengths by implementing the following strategies:
 
  •  Continue to use our global brand and marketing to drive organic customer growth;
 
  •  Make selected acquisitions to expand our customer base or add presence in markets where we currently have low penetration;
 
  •  Expand our range of products to add new customers and increase revenues from existing customers; and
 
  •  Capture market share from competitors who are unable to keep pace with the changing and demanding regulatory landscape while capitalizing on the long-term benefits associated with a more transparent financial marketplace.
 
Primary Sources of Revenues
 
Most of our revenues are derived from fees charged as a commission or markup when our retail or institutional customers execute trades on our platform with our FX market makers. This revenue is primarily a function of the number of active accounts, the volume those accounts trade and the fees we earn on that volume.


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Retail Trading Revenue — Retail trading revenue is our largest source of revenue and is primarily driven by: (i) the number of active accounts and the mix of those accounts, such as low versus high volume accounts; (ii) the volume these accounts trade, which is driven by the amount of funds customers have on deposit and the overall volatility of the FX market; (iii) the size of the markup we receive, which is a function of the mix of currency pairs traded, the spread we add to the prices supplied by our FX market makers and the interest differential between major currencies and the markup we receive on interest paid and received on customer positions held overnight; and (iv) the amount of additional retail revenues earned, including revenues from contracts-for difference (CFD) trading, fees earned through white label relationships and payments we receive for order flow from FX market makers. In addition, 11% and 3% of our retail trading revenues for the nine months ended September 30, 2010 and twelve months ended December 31, 2009, respectively, were derived from such additional retail revenues earned.
 
Institutional Trading Revenue — We generate revenue by executing spot foreign currency trades on behalf of institutional customers through our institutional trading segment, FXCM Pro, enabling them to obtain optimal prices offered by our FX market makers. The counterparties to these trades are external financial institutions that hold customer account balances and settle these transactions. We receive commissions for these services without incurring credit or market risk.
 
Other — We are engaged in various ancillary FX related services and joint ventures, including use of our platform and trading facilities, providing technical expertise, and earning fees from data licensing.
 
Primary Expenses
 
Referring Broker Fees — Referring broker fees consist primarily of compensation paid to our referring brokers and white labels. We generally provide white labels access to our platform, systems and back-office services necessary for them to offer FX trading services to their customers. We also establish relationships with referring brokers that identify and direct potential FX trading customers to our platform. Referring brokers and white labels generally incur advertising, marketing and other expenses associated with attracting the customers they direct to our platform. Accordingly, we do not incur any incremental sales or marketing expense in connection with trading revenue generated by customers provided through our referring brokers and/or white labels. We do, however, pay a portion of the FX trading revenue generated by the customers of our referring brokers and/or white labels and record this under referring broker fees.
 
Compensation and Benefits — Compensation and benefits expense includes employee and member salaries, bonuses, benefits and employer taxes. Changes in this expense are driven by fluctuations in the number of employees, increases in wages as a result of inflation or labor market conditions, changes in rates for employer taxes and other cost increases affecting benefit plans. In addition, this expense is affected by the composition of our work force. The expense associated with our bonus plans can also have a significant impact on this expense category and may vary from year to year.
 
As described in “Management — IPO Date Stock Option Awards to Employees,” at the time of this offering we intend to grant awards of stock options to purchase an aggregate of 7,530,000 shares of our Class A common stock pursuant to the Long-Term Incentive Plan to certain of our employees. Each stock option to purchase our Class A common stock will have an exercise price equal to the initial public offering price per share in this offering and, subject to the option holder’s continued employment, vest in equal annual installments over a four year period. As a result, we expect to record deferred stock-based compensation equal to the grant-date fair value of the stock options issued of $35.7 million, which will be recognized over the four year vesting period and recorded into the expense category in accordance with the manner in which the option holders’ other compensation is recorded.
 
Advertising and Marketing — Advertising and marketing expense consists primarily of electronic media, print and other advertising costs, as well as costs associated with our brand campaign and product promotion.
 
Communications and Technology — Communications and technology expense consists primarily of costs for network connections to our electronic trading platforms; telecommunications costs; and fees paid for access to external market data. This expense is affected primarily by the growth of electronic trading, our network/


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platform capacity requirements and by changes in the number of telecommunication hubs and connections which provide our customers with direct access to our electronic trading platforms.
 
General and Administrative — We incur general and administrative costs to support our operations, including:
 
  •  Professional fees and outside services expenses — consisting primarily of legal, accounting and outsourcing fees;
 
  •  Bank processing fees — consisting of service fees charged by banks primarily related to our customer deposits and withdrawals;
 
  •  Regulatory fees — consisting primarily of fees from regulators overseeing our businesses which are largely tied to our overall trading revenues; and
 
  •  Occupancy and building operations expense — consisting primarily of costs related to leased and/or owned property including rent, maintenance, real estate taxes, utilities and other related costs. Our company headquarters are located in New York, NY, with other U.S. offices in Plano, TX and San Francisco, CA. Outside the United States, we have offices in London, Paris, Berlin, Athens, Milan, Hong Kong, Dubai, Sydney, Jerusalem and Tokyo.
 
We expect that our general and administrative expenses will increase as a result of the additional legal, accounting, insurance and other expenses associated with being a public company. Among other things, we expect that compliance with the Sarbanes-Oxley Act and related rules and regulations will result in a significant increase in legal and accounting costs.
 
Depreciation and Amortization — Depreciation and amortization expense results from the depreciation of long-lived assets purchased and internally developed software that has been capitalized. Amortization of purchased intangibles primarily includes amortization of intangible assets obtained in our acquisitions of customer relationships from our competitors.
 
Income Taxes — We are currently, and will until consummation of the Offering Transactions be, treated as a partnership for the purposes of U.S. federal and most applicable state and local income tax. As a partnership, our taxable income or loss is currently passed through to, and included in the tax returns of our members. Accordingly, the accompanying consolidated financial statements of FXCM Holdings, LLC do not include a provision for federal and most state and local income taxes. However, we generally make distributions to our members, as required by the terms of our limited liability company agreement, related to such taxes. We are subject to entity level taxation in New York City, and certain foreign subsidiaries are subject to entity level foreign income taxes. As a result, the accompanying consolidated statements of income include tax expense related jurisdictions where those subsidiaries operate.
 
After consummation of the Offering Transactions, FXCM Inc. will become subject to U.S. federal, state, local and foreign income taxes with respect to its allocable share of any taxable income of FXCM Holdings, LLC at the prevailing corporate tax rates.
 
Other
 
Non-Controlling Interest — After consummation of the Offering Transactions, FXCM Inc. will be a holding company, and its sole material asset will be a controlling equity interest in FXCM Holdings, LLC. As the sole managing member of FXCM Holdings, LLC, FXCM Inc. will operate and control all of the business and affairs of FXCM Holdings, LLC and, through FXCM Holdings, LLC and its subsidiaries, conduct our business. FXCM Inc. will consolidate the financial results of FXCM Holdings, LLC and its subsidiaries, and the ownership interest of the other members of FXCM Holdings, LLC will be reflected as a non-controlling interest in the consolidated financial statements of FXCM Inc.


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Segment Information
 
The FASB establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. FXCM’s operations relate to foreign exchange trading and related services and operate in two segments — retail and institutional, with different target markets with separate sales forces, customer support and trading platforms.
 
RESULTS OF OPERATIONS
 
Consolidated Results
 
Nine Months Ended September 30, 2010 and 2009
 
The following table sets forth our consolidated statement of operations and comprehensive income for the nine months ended September 30, 2010 and 2009:
 
                 
    September 30,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Revenues
               
Retail trading revenue
  $ 234,608     $ 225,231  
Institutional trading revenue
    20,779       15,367  
Interest income
    1,493       922  
Other income
    7,273       6,581  
                 
Total revenues
    264,153       248,101  
                 
Expenses
               
Referring broker fees
    61,680       60,787  
Compensation and benefits
    52,325       45,943  
Advertising and marketing
    16,916       24,351  
Communications and technology
    19,171       17,597  
General and administrative
    25,792       18,550  
Depreciation and amortization
    5,292       4,800  
Interest expense
    78       100  
                 
Total expenses
    181,254       172,128  
                 
Income before income taxes
    82,899       75,973  
Income tax provision
    3,517       7,633  
                 
Net income
    79,382       68,340  
                 
Other comprehensive income
               
Foreign currency translation gain (loss)
    226       (162 )
                 
Total comprehensive income
  $ 79,608     $ 68,178  
                 
 
Highlights
 
  •  For the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, we experienced strong growth in customer balances with a 32% increase in customer equity to $424.6 million and a 16% increase in active accounts to 134,478. Retail trading volume declined by 12%, however, primarily due to lower trading activity from South Korean referring brokers as a result of regulatory changes in that market that occurred in 2009.


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  •  Total revenues increased 6.5% to $264.2 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. This increase was due primarily to increases in retail and institutional trading revenues. Retail trading revenues increased due to the inclusion of CFD trading, a new product offering introduced in September 2009, increased payments for order flow and higher fees from our white labels.
 
  •  Net income increased 16.2% to $79.4 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 primarily due to a decrease in our effective tax rate and an increase in our revenues which were partially offset by an increase in total expenses.
 
  •  In May 2010, we signed a stock purchase agreement to acquire ODL, a leading broker of retail FX, CFDs, spread betting, and equity options headquartered in the U.K. Our acquisition of ODL is intended to increase our profile in the U.K. market and accelerate our growth in continental Europe, utilizing ODL’s relationships and sales force. We consummated our acquisition of ODL on October 1, 2010.
 
Revenues
 
                 
    September 30,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Revenues:
               
Retail trading revenue
  $ 234,608     $ 225,231  
Institutional trading revenue
    20,779       15,367  
Interest income
    1,493       922  
Other income
    7,273       6,581  
                 
Total revenues
    264,153       248,101  
                 
Customer equity
  $ 424,597     $ 321,438  
Tradeable accounts
    174,672       131,441  
Active accounts
    134,478       115,734  
Total retail trading volume(1) (billions)
    2,342       2,669  
Retail trading revenue per million traded(1)
  $ 100     $ 84  
 
 
(1) — Volumes translated into equivalent U.S. dollars
 
Retail trading revenue increased by $9.4 million or 4.2% to $234.6 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The increase is attributable to an increase in markup on retail trading revenue, primarily due to the inclusion of revenues from CFD trading, a new product offering introduced in September 2009, increased payments for order flow and higher fees from our white label relationships.
 
Institutional trading revenue increased by $5.4 million or 35.2% to $20.8 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Our institutional business grew through continuing expansion of its customer base and a reduction in the number of competitors in 2009.
 
Interest income increased by $0.6 million or 61.9% to $1.5 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 due primarily to cash balances which increased by 22% at September 30, 2010 versus September 30, 2009. In addition, the average interest rate received on our cash balances increased to 0.4% for the nine months ended September 30, 2010 compared to 0.3% for the nine months ended September 30, 2009.
 
Other income increased by $0.7 million or 10.5% to $7.3 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 primarily due to an increase in other fee income from our ancillary FX related and joint ventures offset by the decrease in trade execution and support fees from FXCM Japan, a third party. In 2009, the Company renegotiated how it charges FXCM Japan. The fee


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structure changed from a fixed monthly fee that was included in Other Income, to a variable per trade fee that is included in Retail Trading Revenue.
 
Expenses
 
                 
    September 30,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Expenses:
               
Referring broker fees
  $ 61,680     $ 60,787  
Compensation and benefits
    52,325       45,943  
Advertising and marketing
    16,916       24,351  
Communications and technology
    19,171       17,597  
General and administrative
    25,792       18,550  
Depreciation and amortization
    5,292       4,800  
Interest expense
    78       100  
                 
Total expenses
  $ 181,254     $ 172,128  
                 
 
Referring broker fees increased by $0.9 million or 1.5% to $61.7 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. This increase is primarily due to an increase in commissions paid to referring brokers as a result of a new white label arrangement. However, in the nine months ended September 2010, there was a decrease in the proportion of volume attributable to South Korean referring brokers as a result of regulatory changes in that market.
 
Compensation and benefits expense increased by $6.4 million or 13.9% to $52.3 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, due primarily to an increase in headcount mostly in our sales and operations departments reflecting our higher level of business activity.
 
Advertising and marketing expense decreased by $7.4 million or 30.5% to $16.9 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 as advertising purchases returned to more normalized levels. In the nine months ended September 30, 2009, we incurred higher advertising and marketing expense as we took advantage of attractive pricing of electronic media as well as initiated a campaign to increase customer account balances that had declined in the second half of 2008 with the difficult trading environment resulting from the global financial crisis.
 
Communications and technology expense increased by $1.6 million or 9% to $19.2 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 due to enhanced network capacity requirements.
 
General and administrative expense increased by $7.2 million or 39% to $25.8 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, due primarily to $2.4 million of professional fees and other expenses resulting from our acquisition of ODL, $0.8 million of expenses relating to the write-off of advances made to a software developer, $2.0 million due to the an increase in operations support activities and professional costs as a result of an expansion of our business, and $1.0 million due to increased rent and occupancy expenses resulting from additional branch office openings in Europe, the move of our Hong Kong office and increased office space in New York.
 
Depreciation and amortization expense increased by $0.5 million or 10.3% to $5.3 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 as we financed a portion of our server and technology upgrades through capital expenditures as opposed to financing through operating leases.
 
Interest expense was primarily unchanged at $0.1 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 as interest bearing customer accounts remained nominal.


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Income Taxes
 
                 
    September 30,
  September 30,
    2010   2009
    (In thousands, except percentages)
 
Income before income taxes
  $ 82,899     $ 75,973  
Income tax provision
  $ 3,517     $ 7,633  
Effective tax rate
    4.2 %     10.0 %
 
Income tax provision decreased by $4.1 million or 53.9% to $3.5 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, due to a change in the jurisdictional sourcing of income with less income subject to New York City Unincorporated Business Tax. This resulted in a decrease in our effective tax rate from 10.0% to 4.2%. Additionally, net income in the U.K. decreased primarily due to changes in transfer pricing arrangements initiated to more appropriately match revenues with expenses. We are currently treated as a partnership for U.S. federal and certain state income tax purposes. Accordingly, shifts in the proportion of income derived in the United States, generally not subject to federal, state or local income taxes with the exception of certain unincorporated business taxes, to the U.K. with a 28% statutory rate, result in increases in our effective tax rate.
 
Acquisition of ODL
 
In May 2010, we signed a stock purchase agreement to acquire ODL, a leading broker of retail FX, CFDs, spread betting and equity options headquartered in the U.K. Our acquisition of ODL is intended to increase our profile in the U.K. market and accelerate our growth in continental Europe, utilizing ODL’s relationships and sales force. The acquisition was consummated on October 1, 2010. As consideration, we provided for $2.2 million in cash and issued to ODL shareholders a 5.25% equity interest in FXCM Holdings, LLC. Following the offering, the ODL shareholders will hold a less than 5.0% equity interest in FXCM Holdings, LLC and less than 5.0% of the voting power at FXCM Inc.
 
We will be recording the assets acquired, measured at their fair values as pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) No. 820, Fair Value Measurements and Disclosures (ASC 820). We expect the acquisition will result in a significant increase in goodwill and intangible assets in our statement of financial condition. Intangible assets that we will be acquiring as part of the transaction include non-compete agreements, retail customer relationships, institutional customer relationships, trade name and other items. We expect the acquisition will result in a significant increase in amortization of intangible assets in our statement of operations as these intangible assets are amortized over their estimated useful lives.


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Year Ended December 31, 2009 and 2008
 
The following table sets forth FXCM’s consolidated statement of operations and comprehensive income for the years ended December 31, 2009 and 2008:
 
                 
    December 31,
    December 31,
 
    2009     2008  
    (In thousands)  
 
Revenues
               
Retail trading revenue
  $ 291,668     $ 281,385  
Institutional trading revenue
    21,107       18,439  
Interest income
    1,289       9,085  
Other income
    8,666       13,731  
                 
Total revenues
  $ 322,730     $ 322,640  
                 
Expenses
               
Referring broker fees
    76,628       64,567  
Compensation and benefits
    62,588       54,578  
Advertising and marketing
    29,355       24,629  
Communications and technology
    24,026       21,311  
General and administrative
    26,453       20,247  
Depreciation and amortization
    6,542       6,095  
Interest expense
    125       2,168  
                 
Total expenses
    225,717       193,595  
Income before income taxes
    97,013       129,045  
                 
Income tax provision
    10,053       8,872  
                 
Net income
    86,960       120,173  
                 
Other comprehensive income
               
Foreign currency translation gain
    452       1  
                 
Total comprehensive income
  $ 87,412     $ 120,174  
                 
 
Highlights
 
  •  The year ended December 31, 2009 experienced strong growth in customer balances with a 40% increase in customer equity to $353.8 million and a 36% increase in active accounts to 116,919, in large part due to a successful marketing campaign in the first half of 2009. Total volume in 2009 increased 21% despite the comparison to the volume levels of 2008 which benefited from extraordinarily high volatilities and the significant increases in customer trading volumes brought on by the global financial crisis of the second half of 2008.
 
  •  Total revenues was primarily unchanged at $322.7 million for the year ended December 31, 2009 compared to the year ended December 31, 2008 due primarily to increases in retail trading revenues and institutional trading revenues being more than offset by decreases in interest income and other income. The year ended December 31, 2009 saw continuing declines in short term interest rates.
 
  •  For the year ended December 31, 2009, net income declined by 28% to $87.0 million due to lower revenues, higher expenses and a higher effective tax rate.
 
  •  Referring broker expense increased due to a shift in the year in volumes derived by some of our larger referring brokers with higher-cost commission arrangements.


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Revenues
 
                 
    December 31,
    December 31,
 
    2009     2008  
    (In thousands)  
 
Revenues:
               
Retail trading revenue
  $ 291,668     $ 281,385  
Institutional trading revenue
    21,107       18,439  
Interest income
    1,289       9,085  
Other income
    8,666       13,731  
                 
Total revenues
    322,730       322,640  
                 
Customer equity
  $ 353,825     $ 253,391  
Tradeable accounts
    140,565       106,708  
Active accounts
    116,919       86,149  
Total retail trading volume(1) (billions)
  $ 3,504     $ 2,901  
Retail trading revenue per million traded(1)
  $ 83     $ 97  
 
 
(1) Volumes translated into equivalent U.S. dollars
 
During the year ended December 31, 2009 compared to the year ended December 31, 2008, retail trading revenue increased $10.3 million or 4% to $291.7 million as volumes increased 21%, partially offset by a 14% decline in retail trading revenue per million traded or retail trading revenue per million. For the year ended December 31, 2009, trading volume growth was led by a 40% increase in customer equity and a 36% increase in active accounts as we initiated a significant marketing campaign in the first half of 2009 to grow customer accounts and balances. The decline in markup was due primarily to declines in income we earn on rollover as the “carry trade”, a strategy of buying a currency that offers a higher interest rate while selling a currency that offers a lower interest rate, significantly declined with the narrowing of interest rate differentials globally as well as lower volatilities in 2009 as compared to 2008.
 
Institutional trading revenues rose by $2.7 million or 14% to $21.1 million for the year ended December 31, 2009 compared to the year ended December 31, 2008. Our institutional business benefited from increases in institutional demand for trading FX as well as continuing momentum from 2008 where a number of competitors experienced significant disruptions as they had been using American International Group (AIG) or Lehman Brothers as their sole prime broker, both of which faltered in second half of 2008. Our institutional business maintains multiple prime brokerage relationships for risk management purposes.
 
The low interest rate environment caused interest income to fall $7.8 million or 86% to $1.3 million for the year ended December 31, 2009 compared to the year ended December 31, 2008 as short term interest rates continued their declines to near-zero levels precipitated by the global financial crisis of the second half of 2008. The average annual interest rate received on our cash balances declined to 0.3% for the year ended December 31, 2009 compared to 2.2% for the year ended December 31, 2008.
 
Other income decreased 37% or $5.1 million to $8.7 million for the year ended December 31, 2009 compared to the year ended December 31, 2008 due primarily to the renegotiation of our arrangement with FXCM Japan, resulting in $2.0 million lower trading execution and support fees from, and a one-time recovery of $2.1 million in bad debt from a former shareholder and white label of FXCM in 2008.


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Expenses
 
                 
    December 31,
    December 31,
 
    2009     2008  
    (In thousands)  
 
Expenses
               
Referring broker fees
  $ 76,628     $ 64,567  
Compensation and benefits
    62,588       54,578  
Advertising and marketing
    29,355       24,629  
Communications and technology
    24,026       21,311  
General and administrative
    26,453       20,247  
Depreciation and amortization
    6,542       6,095  
Interest expense
    125       2,168  
                 
Total expenses
  $ 225,717     $ 193,595  
                 
 
Referring broker fees increased $12.1 million or 19% to $76.6 million for the year ended December 31, 2009 compared to the year ended December 31, 2008 due to a 4% increase in retail trading revenue and a shift in volumes during the year ended December 31, 2009 to some of our larger referring brokers which have higher-cost commission arrangements.
 
Compensation and benefits expense increased $8.0 million or 15% to $62.6 million for the year ended December 31, 2009 compared to the year ended December 31, 2008 due primarily to an increase in staffing levels of 13% from 610 to 687 employees, mostly in our sales and operations departments reflecting our higher level of business activity as well as our expansion into new markets including Australia and France.
 
Advertising and marketing expense increased $4.7 million or 19% to $29.4 million for the year ended December 31, 2009 compared to the year ended December 31, 2008 as we took advantage of attractive pricing of electronic media as well as initiated a campaign to increase customer account balances that had declined in the second half of 2008 with the difficult trading environment resulting from the global financial crisis.
 
Communications and technology expense increased $2.7 million or 13% to $24.0 million for the year ended December 31, 2009 compared to the year ended December 31, 2008 due principally to $1.1 million in higher service provider fees relating to the growth in our institutional trading volumes and $1.2 million in expense relating to capacity increases of our relational database software.
 
General and administrative expense increased $6.2 million or 31% to $26.5 million for the year ended December 31, 2009 compared to the year ended December 31, 2008. This was due primarily to $1.9 million in the write-off of advances made to a software developer, $1.3 million increase in prime brokerage fees relating to new prime broker relationships entered into during the year to enhance our risk and cash management processes, a $1.1 million increase in bank fees, $0.8 million for the expansion of operations support activities of our Israel office and $0.4 million in increased rent expense attributable to the expansion of our office in New York and the opening of offices in Dubai and Australia.
 
Depreciation and amortization expense rose $0.4 million or 7% to $6.5 million during the year ended December 31, 2009 compared to the year ended December 31, 2008 as we financed a portion of our server and technology upgrades through capital expenditures as opposed to financing through operating leases.
 
Interest expense declined $2.0 million or 94% to $0.1 million during the year ended December 31, 2009 compared to the year ended December 31, 2008, due primarily to the repayment of a note payable to a member as well as lower interest rates.


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Income Taxes
 
                 
    December 31,
  December 31,
    2009   2008
    (In thousands, except percentages)
 
Income before income taxes
  $ 97,013     $ 129,045  
Income tax provision
  $ 10,053     $ 8,872  
Effective tax rate
    10.4 %     6.9 %
 
Income tax provision increased $1.2 million or 13% to $10.1 million for the year ended December 31, 2009 compared to the year ended December 31, 2008. While income before taxes decreased 25%, our effective tax rate increased from 6.9% to 10.4% due primarily to a shift throughout 2009 of trading activity from the United States to the U.K., increasing the level of business activity in the U.K. and the provision for income taxes in the U.K. We are currently treated as a partnership for U.S. federal and certain state income tax purposes. Accordingly, changes in the proportion of income derived in the United States, generally not subject to federal, state or local income taxes with the exception of certain unincorporated business taxes, to the U.K. with a 28% statutory rate, result in increases in our effective tax rate.
 
Year Ended December 31, 2008 and 2007
 
The following table sets forth our consolidated statement of operations and comprehensive income for the years ended December 31, 2008 and 2007:
 
                 
    December 31,
    December 31,
 
    2008     2007  
    (In thousands)  
 
Revenues
               
Retail trading revenue
  $ 281,385     $ 144,935  
Institutional trading revenue
    18,439       11,695  
Interest income
    9,085       16,357  
Other income
    13,731       11,535  
                 
Total revenues
    322,640       184,522  
                 
Expenses
               
Referring broker fees
    64,567       33,211  
Compensation and benefits
    54,578       53,575  
Advertising and marketing
    24,629       27,846  
Communications and technology
    21,311       17,836  
General and administrative
    20,247       17,037  
Depreciation and amortization
    6,095       7,364  
Interest expense
    2,168       1,374  
                 
Total expenses
    193,595       158,243  
                 
Income before income taxes
    129,045       26,279  
Income tax provision
    8,872       3,120  
                 
Net income
    120,173       23,159  
                 
Other comprehensive income:
               
Foreign currency translation gain
    1        
                 
Total comprehensive income
  $ 120,174     $ 23,159  
                 


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Highlights
 
  •  The global financial crisis of the second half of 2008 resulted in a highly favorable operating environment for us with extraordinarily high volatilities and significant increases in customer trading volumes. In contrast, 2007 was a transition year for us as we completed our migration to the agency model from the principal model.
 
  •  During the year ended December 31, 2008, total revenues increased by 75%, due primarily to a 94% increase in retail trading revenues and a 58% increase in institutional trading revenues.
 
  •  Net income increased by 419% during the year ended December 31, 2008 compared to the year ended December 31, 2007, due primarily to the 75% increase in total revenues as compared to only a 22% increase in total expenses.
 
  •  Customer balances declined by 20% to $253.4 million during the year ended December 31, 2008 in large part due to the difficult trading environment brought on by the global financial crisis.
 
Revenues
 
                 
    December 31,
    December 31,
 
    2008     2007  
    (In thousands)  
 
Retail trading revenue
  $ 281,385     $ 144,935  
Institutional trading revenue
    18,439       11,695  
Interest income
    9,085       16,357  
Other income
    13,731       11,535  
                 
Total revenues
    322,640       184,522  
                 
Customer equity
  $ 253,391     $ 315,440  
Tradeable accounts
    106,708       49,885  
Active accounts
    86,149       59,541  
Total retail trading volume(1) (billions)
  $ 2,901     $ 1,729  
Retail trading revenue per million traded(1)
  $ 97     $ 84  
 
 
(1) Volumes translated into equivalent U.S. dollars
 
Retail trading revenues increased by $136.5 million or 94% to $281.4 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. Trading revenues significantly increased in the latter part of 2008 as a result of the high volatility brought on by the global financial crisis. In addition, 2007 revenues were depressed in the first half of the year as the firm was completing its migration from the principal model to the agency model.
 
Institutional trading revenues increased by $6.7 million or 58% to $18.4 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. Our institutional platform gained significant momentum in 2008 as it benefited from the large volume increases brought on by the global financial crisis as well as disruptions a number of competitors experienced who had been using AIG or Lehman Brothers as their sole FX prime brokers, both of which faltered in the second half of 2008. Our institutional business maintains multiple prime brokerage relationships for risk management purposes.
 
Interest income decreased by $7.3 million or 44% to $9.1 million for the year ended December 31, 2008 compared to the year ended December 31, 2007 as a result of declines in short term interest rates. The average annual interest rate received on our cash balances declined to 2.1% for the year ended December 31, 2008 compared to 4.3% for the year ended December 31, 2007.
 
Other income increased by 19% or $2.2 million to $13.7 million for the year ended December 31, 2008 compared to the year ended December 31, 2007 due to the one-time recovery in 2008 of $2.1 million in bad debt from a former shareholder and white label of FXCM.


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Expenses
                 
    December 31,
    December 31,
 
    2008     2007  
    (In thousands)  
 
Expenses:
               
Referring broker fees
  $ 64,567     $ 33,211  
Compensation and benefits
    54,578       53,575  
Advertising and marketing
    24,629       27,846  
Communications and technology
    21,311       17,836  
General and administrative
    20,247       17,037  
Depreciation and amortization
    6,095       7,364  
Interest expense
    2,168       1,374  
                 
Total expenses
  $ 193,595     $ 158,243  
                 
 
Referring broker fees increased $31.4 million or 94% to $64.6 million for the year ended December 31, 2008 compared to the year ended December 31, 2007 in correlation with the 94% increase in Retail Trading revenue.
 
Compensation and benefits expense increased $1.0 million or 2% to $54.6 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. Though we experienced a 19% increase in general staffing levels from 514 to 610 employees during the year, mostly in our sales, operations, finance and administration departments reflecting our higher level of business activity, the increase was largely offset by a reduction in the compensation for certain of our senior management. Additionally, we transitioned more back office operations and sales functions to our Texas office which operates in a lower cost environment.
 
Advertising and marketing expense decreased $3.2 million or 12% to $24.6 million in the year ended December 31, 2008 compared to the year ended December 31, 2007 as certain marketing campaign inefficiencies were identified during the year and reliance on larger, more expensive digital sites was reduced.
 
Communications and technology expense increased $3.5 million or 19% to $21.3 million for the year ended December 31, 2008 compared to the year ended December 31, 2007 principally due to enhanced capacity and infrastructure.
 
General and administrative expense increased $3.2 million or 19% to $20.2 million for the year ended December 31, 2008 compared to the year ended December 31, 2007 due primarily to $1.6 million in increased bank charges as we initiated acceptance of credit cards resulting in growth in customer deposits and a $1.2 million increase in NFA fees due to the inception late in 2007 of regulatory fees by the agency based on customer volume.
 
Depreciation and amortization expense decreased $1.3 million or 17% to $6.1 million for the year ended December 31, 2008 compared to the year ended December 31, 2007 due primarily to the termination of a capital lease and associated amortization relating to our relational database software.
 
Interest expense increased $0.8 million or 58% to $2.2 million for the year ended December 31, 2008 compared to the year ended December 31, 2007 due primarily to an increase in the interest rate of a promissory note held by one of the founding members that was amended in 2008.
 
Income Taxes
                 
    December 31,
  December 31,
    2008   2007
    (In thousands,
    except percentages)
 
Income before income taxes
  $ 129,045     $ 26,279  
Income tax provision
  $ 8,872     $ 3,120  
Effective tax rate
    6.9 %     11.9 %
 
Income tax provision increased $5.8 million or 184% to $8.9 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. This was due to an increase of $102.8 million or 391% in income before taxes, partially offset by a reduction in the effective tax rate from 11.9% to 6.9%. The


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decrease in the effective tax rate was due to a higher proportion of our income in 2008 compared to 2007 from our U.S. operations relative to our foreign operations, principally in the U.K. and Hong Kong. We are currently treated as a partnership for U.S. federal and certain state income tax purposes. Accordingly, changes in the proportion of income derived in the United States, generally not subject to federal, state or local income taxes with the exception of certain unincorporated business taxes, from the U.K. and Hong Kong with a 28% and 17% statutory rate respectively, result in decreases in our effective tax rate.
 
Segment Results
 
Nine Months Ended September 30, 2010 and 2009
 
Retail Trading — Retail Trading is our largest segment and consists of providing FX trading and related services to approximately 175,000 retail customers globally as of September 30, 2010.
 
Revenues, operating expenses and income before income taxes of the Retail Trading segment for the nine months ended September 30, 2010 and 2009 are as follows:
 
                 
    September 30,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Revenues
  $ 243,374     $ 232,734  
Operating expenses
    121,478       122,613  
                 
Income before income taxes
  $ 121,896     $ 110,121  
                 
 
Revenues for our Retail Trading segment increased by $10.6 million or 4.6% to $243.4 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Retail trading volume decreased by 12.3%, due primarily to decreases in trading from our South Korean referring brokers as a result of changes in regulations, the declines in volume were more than offset by a 19% increase in markup or retail trading revenue per million traded, due primarily to the inclusion of revenues from CFD trading, a new product segment that was introduced September 2009, increased payments for order flow, a new white label arrangement as well higher fees from this business.
 
Operating expenses for our Retail Trading segment decreased by $1.1 million or 0.9% to $121.5 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 due primarily to lower advertising and marketing expense which resumed to more normal levels, decreasing $7.4 million or 30.6%. This was partly offset by higher Referring broker fees which increased $0.9 million or 1.5% to $61.7 million. While there was a decrease in the proportion of volume attributable to large referring brokers that typically have higher-cost commission arrangements, commissions paid to referring brokers increased slightly as a result of a new white label arrangement. Higher compensation and benefits expenses also contributed to minimize the variance. Income before income taxes for the Retail Trading segment increased by $11.8 million or 10.7% to $121.9 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.
 
Institutional Trading — Our Institutional Trading segment operates under the name FXCM Pro and generates revenue by executing spot foreign currency trades on behalf of institutional customers, enabling them to obtain optimal prices offered by our FX market makers. The counterparties to these trades are external financial institutions that hold customer account balances and settle these transactions. We receive commissions for these services without incurring credit or market risk.


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Revenues, operating expenses and income before income taxes of the Institutional Trading segment for the nine months ended September 30, 2010 and 2009 are as follows:
 
                 
    September 30,
    September 30,
 
    2010     2009  
    (In thousands)  
 
Revenues
  $ 20,779     $ 15,367  
Operating expenses
    11,327       9,965  
                 
Income before income taxes
  $ 9,452     $ 5,402  
                 
 
Institutional Trading revenue increased $5.4 million or 35.2% to $20.8 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The Institutional Trading segment grew through continuing expansion of its customer base and an increase in institutional FX trading volumes of 48.7%.