Cutting Through the Storm

By Michael Condon

James Gow and FXOnline ride the waves of volatility

Noon, late February 2009, Tokyo. It’s lunchtime in the Onarimon district of the capital and hundreds of uniformly dark suited salarymen flood onto the streets in search of lunch. The popular ramen shops have lines going out the door and a few businessmen too slow out the door wander reluctantly towards the local McDonald’s.

To most from the West, the hard slog of the company men seems like a depressing prospect. Of late, however, it appears a lot more attractive than the alternatives. It didn’t take long for the realities of the Lehman collapse and the financial storm that followed to hit home. As both the markets and currencies abroad collapsed, manufacturers here looked at their balance sheets and forecasts and realized the game had changed to a fight for survival.

Each day the financial papers carry articles proclaiming new records of despair and benchmarks of hopelessness. Meanwhile, the central government and the independent Bank of Japan squabble about what needs to be done to keep credit flowing and to combat the hyper-deflation that could kill the already badly injured manufacturing giants and exporters that put money in the pockets of the nation’s consumers.

But on the 9th floor of a non-descript Onarimon office building, the view is somewhat different. James Gow stands in one of his company’s meeting rooms. Behind him, Zojoji Temple sits. The sakura trees that surround the massive Buddhist temple remain bare but it won’t be long before the cherry blossoms start to bud.

James GowJames Gow

2008 was a big year for Gow, capped off by the sale of 87.5 percent of his retail forex trading company, FXOnline, to the London-based financial derivatives trading company IG Group. It was a sale that made headlines in the financial press around the world—IG Group bought out all the major stakeholders except for Gow for 21.9 billion yen. Gow sold the majority of his remaining 37 percent stake, keeping 12.5 percent and staying on as CEO. It was only the previous year that 49.9 percent of the company was sold to FinTech Global (44.9 percent) and Mizuho Capital Co. (5 percent) for 9.5 billion yen (at that time about $100 million). It was a far cry from the beginnings of the company in 2002—two laid-off money brokers with a couple of laptops using some desk space rented from a headhunter.

In some ways, the sale to IG went through in the nick of time. FXOnline had been in the final stages of the deal when Lehman Brothers went down. While volatility increases forex trading, the chaos that followed the collapse of the bank meant that nothing could be taken for granted. The deal did go through however, a week after the collapse. The sale was reported in much of the major financial media across the globe but resolutely ignored at home in the Japanese press, much to the chagrin of Gow.

It was almost certainly the highest price paid for a company started by a foreigner in Japan. Considering the company had only been in existence for six years and had been started by two independent entrepreneurs with a relatively small amount of money, it was an impressive feat. The sale to IG meant that FXOnline could strengthen its technology base, allowing for faster trades and better service for clients. It also meant the company could introduce thousands of new products to trade via IG’s online CFDs (contract for difference) trading platform. At the end of March, Gow will launch the new product range which allows customers to trade anything from company shares to gold to commodities.

It’s an ideal time for the company to expand. While businesses throughout the world have been hit hard by the economic downturn, increased movement in the forex translates to more trading. Business has actually increased for FXOnline since the Lehman collapse.

The balance sheets are impressive. For the year ending March 2008 the company reported a turnover of $65.9 million with pretax profits of $46.15 million. In the six months prior to the deal, the company saw an increase in profit of about 10 percent. With a customer base in excess of 30,000, the company holds four percent of the Japanese retail FX market. Each month the company processes in excess of 1 million transactions, totalling a nominal trade amount of around $50 billion.

The beginning
In a roundabout way, the road to the FXOnline deal started with rocks, or more accurately, Gow’s realization that the earth sciences weren’t for him. After graduating with a degree in geology, Gow decided to take some time off and travel to Japan where his brother was living. The initial stay of three months in 1988 turned into nine months. The then 23-year-old taught English and attempted to make himself as proficient in Japanese as possible. After returning to England, Gow entered an ad agency, where he was involved in media planning and buying. His two-and-a-half year stint at the agency would give him skills that he would later apply to FXOnline. Gow’s advertising career came to an abrupt halt when he was laid off. At this point the move was made into the finance world—money broking.

He says of that time, “my Japanese was not much more than ‘konichi wa’ but these guys in London were desperate and said ‘we need someone who speaks Japanese because the off-balance sheet market, the interest rate swap market, is about to explode in Japan.’ So I applied and they said ‘say something in Japanese’ so I said ‘Watashi wa Jim Gow desu’ and they said ‘That’s great.’ They trained me up for six months and sent me back to Japan. That was in ’93.”

Gow worked for Kobayashi Ltd., a lower-tier Japanese money broker affiliated with the London/Frankfurt-based Martin Bierbaum Group until 1995, when he moved to Cantor Fitzgerald Securities where he was the Japanese government bond repo desk manager until 1999. He then changed from money broking when he joined ING Bearings Securities Japan, becoming a Topix Sales Trader.

An exit strategy
FXOnline wasn’t the first entrepreneurial venture by Gow. Prior to this, the money broker learned the hard way that the road to the entrepreneurial dream is fraught with danger. In 1995, Gow, with a number of other would-be entrepreneurs, attempted to introduce to Japan the “snow-scoot,” a BMX crossed with a snowboard. The group bought the import license from the French inventor but the company failed. “It was like a joke,” he says. “There was a German guy, a Japanese guy and a French guy… and a couple of Brits. And the Brits, we put the money in and lost all of it…”

Just after the turn of the millennium, Gow was looking to start up an izakaya in Vancouver as another way out from his day job. It was at this point that Tony Collick, an old money broking friend, approached him about setting up a “white label” (franchised) online retail forex trading company. “We basically massively underestimated the potential and the work—I thought it would be a nice little pocket money thing but nothing too serious.”

At the end of 2002 Collick was laid off. Two months later Gow lost his job as well. “I laughed and said ‘we better make this work.’ And then I got laid off and was sitting next to him two months later saying ‘we better make this work.’ ”

The two rented some desk space from the headhunter who Gow visited the day after he lost his job. The initial period was tough and although both Gow and Collick believed they had the best product on the Japanese market, the tiny company struggled to attract customers. “It was a kind of ‘build it and they will come’ philosophy and it didn’t work.”

In 2002 most Japanese broking houses offered spreads of 50 to 60 pips and charged fees of 30,000 to 40,000 yen per transaction. FXOnline was modeled on online forex trading broking houses outside Japan, offering much smaller spreads of around five pips with a commission of just 2000 yen. This was a radically different business model to their Japanese business competitors. “When we started we didn’t have much of a clue; I had to buy a laptop, we didn’t know anything about the Internet, we didn’t have any B to C experience, our Japanese was rubbish.”

The two money brokers soon slipped into their distinct roles. Gow became the business frontman and Collick became the tech guy, teaching himself how to make Websites.

Eventually the first customer came, a postman, followed by their second customer, a financial market professional. “The postman got everything right for the first 20 trades or so and the financial professional got everything wrong. So the postman was going up and the other guy was going down. We thought it was hilarious the postman was doing so well.”

After about two months, Collick and Gow worked out that they had made about 14,000 yen profit. Frustration was vented with a PC mouse being thrown across the tiny office. Gow had to go back to his day job and would surreptitiously work from his office while Collick held the fort back at the FXOnline office.

“We were getting about one new customer a week but it was just enough to pay the rent,” Gow says. “I didn’t pay myself a salary, we paid Tony a salary—it was just enough to keep things going. And we were learning things and the longer we did it the more we understood.”

The two hired their first employee, Shenbo Huang, a Chinese national who could speak and read Japanese well and who understood trading. He was offered 200,000 yen a month and five percent of the company.

Between the three of them, they would be on call 24-hours a day in case anything technical broke down, as it sometimes would.

Everything was outsourced from abroad and due to the fact most of the Western technology was about five years ahead of that within Japan, they found they had the best technology on the market combined with what they believed to be the best product. Through word-ofmouth, the customer base grew and eventually FXOnline began affiliated marketing campaigns through online marketing company ValueCommerce.

Gow and Collick continually came up with cheap and effective viral marketing ideas such as widgets and a forex toolbar where traders could choose five currencies that would update in semi-real time.

Going independent
The franchised model allowed Gow and Collick to cut their teeth in the business without needing a large amount of capital and with minimal exposure to losses. The trades were going through the London trading house that they bought the “white label” from.

But in 2005, it came time for the company to cut the umbilical cord. They went independent, launching a commissionfree trading business model. It was a big gamble. The company needed to increase the amount of trades being made in order to make a profit, as going to zero commission would mean cutting off their one sure source of income.

Gow says it was while on holiday with his girlfriend in Goa, India, that he knew for certain that FXOnline would be a true success. On the morning of his 40th birthday, a coconut fell onto the roof of the hut he was in, causing a piece of tile to fall through and smack Gow in the head, waking him. Shortly after, Collick rang him and told him that something strange had happened: ten new customers had signed up in just one day. “Overnight we went from three customers every two weeks to ten customers every day, it was really that black and white.”

This was a turning point for the company. Some customers found the concept suspicious, after all, how could the company make money if not for commission? The concept was not new in the West but radical in the Japanese market. “Thankfully it was a gamble that paid off and we never really looked back,” says Gow.

The industry clean out
In February 2005, there were rumblings of new strict regulations. The government was prompted to act after complaints by customers about the business practices of some within the industry. Much of the year was spent preparing for the new regulations and in 2006, when the new licenses were issued, only about 70 forex trading companies of about 500 were left standing. FXOnline was one of them.

At the end of 2006, the first major sale by the stakeholders in FXOnline took place. FinTech Global, a financing company which had made a lot of money through mezzanine financing and real estate, wanted to market a new range of products to FXOnline’s customer base and so negotiated a deal where it would buy 44.9 percent of the company. Mizuho Capital would buy five percent, adding a good amount of credibility to the forex trading company’s branding. FXOnline was valued at 19 billion yen, the deal worth about $100 million.

Gow says Christmas Day in 2006 was a somewhat bizarre day, spent with the upper echelons of FinTech Global’s management, Mizuho Capital representatives and about a dozen Japanese journalists in the boardroom in Mizuho’s office.

The initial plan was for FXOnline to IPO and so FinTech was brought on, with the help of M&A specialists Optima Capital as a strategic partner. The next step was to float the company but as Gow puts it “the road to IPO is littered with mines,” and so FXOnline looked to sell a minority stake to a partner that could help them get there. Five companies were courted, again with the help of Optima, four of which were foreign.

“I totally underestimated the interest from the foreign companies. Japan was this unknown entity—No. 2 economy in the world, of course very important, but Westerners have no idea about how to do business over here. But here, in the middle, was effectively a Japanese company with gaijin DNA, run by me and Tony—people who they could speak to, they could understand culturally.”

Four companies came back and put bids on the table. But the companies were only interested in buying a majority stake in FXOnline.

In a complicated deal that took about 20 business trips abroad, $5 million in technological upgrades and about a year of negotiations, IG settled—87.5 percent of the company was sold for 21.9 billion yen. On September 24, 2008, Fintech and Mizuho, Collick and the other smaller stakeholders were bought out. Gow was left with 12.5 percent and remained as CEO.

The next step
For Gow, much of 2008 was consumed by the IG deal. Now, FXOnline has IG Group’s technology and access to the company’s range of over 9000 products. The company is now ready to take on the market in a stronger position.

A new marketing campaign concentrating on branding through TV and print ads has been devised and a new educational program for the company’s thousands of clients will be ready for the launch of the CFDs platform.

In the quagmire of financial devastation that followed the Lehman collapse, Gow’s company is one of the positive stories to be found. JI

From FX to everything online

At the end of March, FXOnline begins its next chapter, offering an online CFDs (Contract For Difference) trading platform. IG Group is recognized as one of the world leaders in retail stock market and FX trading, with over 9000 products to trade from indices to shares and commodities.

Up until now, FXOnline enabled its customers to trade only foreign currency over the Internet but the sale to IG Group means the Japanese company now has access to IG’s phenomenal technology and its product range. For the uninitiated, a CFD is a type of financial derivative that mirrors exactly the underlying investment, be it stock, commodity, index, bond or exchange-traded fund (ETF). It allows investors to invest, for example, on share price movements, without the need for actual ownership of the underlying shares. If the difference between opening the position and closing it is positive, the seller pays, if it’s negative, the buyer pays. Where it differs from actually trading the underlying share, however, is its flexibility in terms of greater leverage and short selling, and ease of access to a diverse range of markets.

FXOnline will expand its product range to include shares, bonds, ETFs, commodities, and indices in all major international markets, together with options on all the above. The platform offers real-time trading with free live news feeds from Reuters on each individual share, market analysis, trade ideas and professional real-time graphs with algorithmic trading capability.

The company will offer at-home training programs for clients to educate themselves about the swathe of new products and plans to open a new office where customers can take in-house seminars in order to fully understand the thousands of products available.