Plus500 shed a third of its market value after it warned that this year’s profits will be “materially lower” than City forecasts because of tighter European regulation around the highly speculative trading instruments it markets to retail investors.
The Israeli-based broker, which offers contracts-for-difference that enable individual traders to take high-risk bets on the future performance of currencies, stocks and cryptocurrencies, reported a 90 per cent rise in pre-tax profits for the year to December to $379m.
But the group warned that such performance was unlikely to continue amid European rules that curb the amount of money amateur traders can borrow from their brokers as they attempt to juice up the returns from CFDs. Plus has been particularly vulnerable amid this shake-up as it offers some of the highest multiples of such leverage.
The profit warning sent shares in Plus dropping 33 per cent in early London dealings, leaving it down 5.9 per cent over the past year. Competitor IG Group dropped neary 6 per cent.
Last month, Plus narrowly secured shareholder approval to increase the potential remuneration of chief executive Asaf Elimelech and chief financial officer Elad Even-Chen, with 48 per cent of investors voting against the new pay packages. Each will get an annual bonus of $1.8m if profitability criteria and hurdles linked to compliance with regulations are met, with discretionary bonuses on top.
The European Securities and Markets Authority has been applying its curbs on retail CFD trading on a temporary basis in the form of emergency product interventions — new powers enabled by the Mifid II markets rules that came into force last year.
Having made its first intervention into retail CFDs in August, Esma said in December that it would extend these temporary restrictions for three months, beginning February 1.
The UK’s Financial Conduct Authority is also cracking down on retail CFDs, and said in November it was planning tougher permanent rules
“Following our latest assessment of the impact of the Esma regulatory measures, 2019 revenue is expected to be lower than current market expectations,” Plus 500 said.
“This, combined with our intention to maintain our marketing spend, is likely to result in 2019 profit being materially lower than current market expectations.”
The broker said that in the face of tightening regulations it planned to diversify its sources of revenue by growing globally and by acquiring new operating licenses.
Plus 500 also said it would “benefit over the medium to long term from the stricter regulatory oversight, and. generate growing and increasingly sustainable returns over time.”