Plus500 said that new rules from the European Securities and Markets Authority (ESMA) limiting the amount of leverage that can be given to retail customers would mean profit would be “materially lower than current market expectations” this year. Revenue is also expected to fall.
Shares in Plus500 fell by 35% in response:
The stock of Plus500’s rivals also suffered as a result of the warning. IG shares were down 5.2% and CMC Markets was down by 5%.
CMC and IG have warned in the past that new rules would hit profits. Russ Mould, investment director at AJ Bell, said: “Plus500 has looked like an anomaly for some time.
“While its peer group have all had to downgrade earnings expectations because of tighter rules on contracts-for-difference – a high-risk way of betting on stocks, currencies, commodities and cryptocurrencies – Plus500 delivered a series of statements that kept saying it would beat earnings forecasts. Its run of good luck has come to an abrupt halt.”
All three companies offer spread betting and contract for difference (CFDs) products. These are effectively bets on short-term movements in stock, asset, or index prices. Proponents argue that they allow investors to benefit from rising prices without having to pay the high fees associated with buying the underlying asset.
However, a Financial Conduct Authority (UK) review in 2016 found that 82% of clients that used the products lost money. CFD and spread betting platforms also offer leverage, allowing individual customers to juice their bets using borrowed money. This means customers can often find themselves losing more money than they deposited and owing money to the platform.
Both the FCA and ESMA have proposed capping the amount of leverage that can be offered to customers and introducing new rules to protect investors from outsized losses.
Plus500 CEO Asaf Elimelech said: “The year was notable for the introduction of regulatory measures by the European Securities and Markets Authority in August 2018.
“Although we have seen a marked reduction in Group revenue directly attributable to this, we welcomed the new regulatory framework, as it is aimed at ensuring a level playing field across industry providers and increased transparency and fairer outcomes for customers.”
Despite warning on profits for the year ahead, Plus500 reported strong results for 2018. Revenues rose by 65% to $720.4m, boosted by cryptocurrency trading, and net profits rose by 90% to $379m.
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.