How an entrepreneur struck gold in Japan's FX market

Jim Gow, founder and CEO of FXOnline, made $250 million selling his foreign exchange company in Japan.

Jim Gow is a lanky Brit with the distinction of being a successful entrepreneur, an especially small group in Japan, whether Japanese or foreign. There is something unusually engaging about his story. Perhaps it's the English gift of not taking things too seriously. Gow does not come across as your usual suited-and-booted, MBA-brainwashed, capitalist foot soldier. Rather, he candidly admits to being not very good at maths, and to having been fired from several jobs. A classic case of a rolling stone who ended up in Japan and made it big -- although one hasn't heard that kind of story since the 1980s.

Gow, who knew he had hit it big on his 40th birthday (or so his superstitious girlfriend told him after he was struck by a falling coconut one night in Goa), has a background in money brokering and advertising. Both of these have helped him in his current business. Brokering has an obvious connection, while advertising gave him a keen sense of marketing.

He bartered some broken-down Japanese into a job with a UK money broker in the early 1990s, and they sent him to Tokyo within six months. That was a decision he was happy with, having always been keen to move around and explore the world. He worked as a money broker in Tokyo from 1992 to 2000, when he moved to ING as a sales-trader. "At that point, I woke up to the fact that I was actually really quite ignorant about finance," he said. However, he made up for that with what he reckons was an unusual degree of empathy with the Japanese.

"Me and my then-partner also got on with the Japanese, and had Japanese friends. I think that was important in getting things done, especially once we had started our business. We avoided all those disastrous faux-pas that foreigners fresh off the boat so often make," he said.

It was in 2002 that Gow decided to make the step to founding his own business. Bizarrely, he was on the point of getting on to a boat and setting off for Vancouver, where a friend had suggested setting up a Japanese-style pub. But his crony from his money brokering days suggested he set up an online FX brokerage instead. "I was not far from being 40 and pretty desperate to have something sorted out. So this venture was very important for me," he recalled.

But the first two years were not encouraging. The industry was largely deregulated, the upside of which was that the team did not have to cope with a strict regulator. The downside was that the industry had a bad reputation from the presence of numerous dishonest operators in a fragmented market. Spreads were wide, and high trading commissions were routine. FXOnline was signing up customers at a pitiful rate -- less than two per week, on average. In addition, Gow did not pay himself a salary for two years. In the end, the situation grew so dire that he went back to work for somebody else -- and that first pay-check was very welcome. That apart, going back to work for someone else was an uncomfortable experience: "It was like going back in time to what I'd been doing years ago -- not a good feeling. The only good thing was that I was able to work on FXOnline in my spare time," he says.

By 2005, the time was ripe for some bold decisions. The firm could either struggle on, or it could look to what was happening in the West and adapt it to Japan. It was this cultural arbitrage that proved the key to Gow's future success. "Even when we first set up, the Japanese brokerages seemed blind to what was going on overseas. They were developing their own electronic trading systems from scratch. We looked oversees, found some great technology, and became a franchisee. So we got a top-of-the-line system, which gave us a major first-mover advantage over the local players," he recalled.

But the real killer move was abolishing fixed commissions in 2005, and taking a piece out of the spread instead. But even that nibble from the spread had to be kept as small as possible in order to generate volume. Revenue then came from volume (facilitated by providing margin of up to 100 times). FXOnline was the first company in Japan to do so.

It was after this fateful decision that the coconut crashed through the roof of the hut he and his girlfriend were staying in. Like the girlfriend said, it turned out to be a good omen. Gow was called the very next morning and by the staff in the Tokyo office who told him that the number of new customers was rocketing. The commission-free approach was working, and despite the lack of an advertising blitz, the company was becoming known through word of mouth for its low rates and strong technological platform.

These developments had not gone unnoticed. The firm had already sold 49% of itself to another investor in December 2007, and Gow and his partners were interested in an initial public offering. But none of the investors they approached were satisfied with a minority stake. Eventually, the most likely deal looked like it would come from another industry player -- but the ultimate buyer, IG Markets, was something of a surprise to Gow.

"We'd always thought we'd be bought by a Japanese house. In the end, it was that cultural arbitrage which won out again. With the industry newly re-regulated by the Financial Services Agency (FSA), and some foreigners running the company, we ended up becoming an interesting target for a foreign company. We were lucky with our timing. IG managed to raise the funds to buy us out just days after the collapse of Lehman Brothers in [September] last year," remembered Gow.

Even now that the deal with IG, which valued FXOnline at a whopping $250 million, has gone through, Gow can't relax. He still owns 12.5% of the company and is committed to bringing FXOnline to the next level. That essentially means introducing the investing public to CFDs (contracts for difference), which were launched in March. CFDs are derivatives which track underlying stocks and other assets, allowing retail investors to buy almost any asset in the world -- from the Brazilian stock market to gold and sugar. It is a far more complex offering that FXOnline originally provided, and could only have been rolled out under the aegis of the new owners. There are only four other companies involved in the CFD business, according to Gow, meaning that FXOnline is on the frontline of brokerage developments.

The company is also offering features like guaranteed stops, which means that the limit stipulated by the customer will be respected -- even if FXOnline has to carry the loss. (Usually, there is a degree of 'slippage' in the small print, which stipulates that the broker will do its best to respect the customers limit, but only on a 'best effort' basis.) The company also helps customers by providing the original price of a deal, even when the price deteriorates during execution. Another development is the company's shift to B2B (business to business), again thanks to IG Markets. This involves finding franchisees for the IG Market's technology.

Overall, and despite the rigours of the experience, Gow's story confirms that Asia can still be a gold mine, and that even risk-averse Japan can reward the right person who has that special blend of guts and sensitivity that working outside your culture requires.

This story first appeared in FinanceAsia's April Japan Supplement.

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