FCA suggests stricter rules for CFD and Spread-Betting brokers, is the industry in trouble?
Today the FCA has announced plans to increase the regulation on CFD and Spread-Betting brokers. Put simply, they say to be introducing these measures in order to protect you, the retail investor. Personally, I had been expecting this move at some point, and it is mostly concerned with protecting the inexperienced trader.
In this article I want to focus on the investment opportunity, or not, of this industry after the major sell offs we have seen today in companies such as IG Group Holdings Plc (LON:IGG) -38%, CMC Markets Plc (LON:CMCX) -33% and Plus500 Ltd (LON:PLUS) -28%.
Does the industry deserve such a sell-off?
Firstly, I am not saying this is a great piece of news for the CFD and Spread-Betting industry if you are currently holding the share. What I do want to discuss is whether the market possibly sold off too much, if this is simply panic, or if we are seeing new justified levels here? Let’s consider following:
Don’t just buy something because its half price, some people might heard the analogy “Don’t catch a falling knife”. Some investors may have seen some shares drop by 50% during the financial meltdown and ended up buying them, only to only see the share price halve once more. Sometimes on the other hand big news lead to an overshoot and might start recovering after the news are fully understood and digested
Specific example IG Group Holding
I picked IG as my specific share as they are one of biggest CFD providers in the world to retail investors and based in London to analyse their 38% drop at the close. When I read the news about the change I thought, I wonder what hit IG took. Its market cap dropped from £2.8 to £1.8 billion. I am not convinced this reduction of one billion GBP in market cap is justified, and this is why:
- Nothing is final, we will have to wait and see what the FCA will tell us further on the 7th of March. Changes will come but let them happen first.
- Even if it hits the UK market profitability for IG which is important, it also has overseas customers that likely won’t be affected.
- Will the FCA really enforce these hard rules which don’t apply to other global brokers? Will this move not ruin the UK as a place to setup a CFD brokerage, or could it perhaps even make existing ones move abroad?
By writing this article I want you the reader to really think about the news that get released and make up your own mind. Buying a share after a major drop is always risky and there for proper risk management should always be followed. Is the industry worth a buy after this major drop? Unfortunately only hindsight will tell us for sure.
Explained by Stefano Ceacmacudis