LONDON A British clampdown on retail trading platforms prompted warnings among industry players and investors on Tuesday that some smaller firms may not be able to sustain their business under the new stricter rules.
The Financial Conduct Authority (FCA) placed limits on the leverage which can be offered to individual investors betting on currency and other asset prices, knocking more than a third off the market values of larger players IG Group and CMC Markets..
The FCA said that on average 82 percent of individual clients lose money. Those losses tend to translate into quick and easy gains for the firms and may fall if investors post relatively higher deposits behind trades.
"Given the prices quoted, the costs of the business, advertising bans in certain key countries, for some marginal players this (change in regulation) will sound the death-knell," said David Woolcock, .
That in turn might also have a knock-on affect on bigger players, some of whom provide technology to or take clients or trades from smaller rivals.
"If people are more informed in plain language, and realise that there are real dangers, it will deter some people. There is going to be a hit there," Woolcock said.
Despite the market reaction, some welcomed the FCA's action, with IG saying it might enhance the outcomes for clients.
A risk manager with another large broker told Reuters it was not clear whether revenues would fall because clients would now be trading for longer before losing their deposits.
Marco Baggioli, head of brokerage at Abu Dhabi-owned ADS Securities, said that the FCA was protecting the industry, unlike in some European jurisdictions and reducing the leverage to 1:50 was "very healthy". Some retail customers are currently being offered more than 1:200.
"Volumes will drop for a few months and then people will come back and they will have more diversified portfolios," Baggioli said.
Dozens of small individual investors were effectively bankrupted by losses last year when the Swiss National Bank suddenly removed its longstanding ceiling on the franc, prompting regulators to look at the market.
A number of traders allege they were not treated fairly by brokers, while others have complained about their treatment by some of the dozens of brokers registered in Cyprus.
Cypriot regulator CySEC announced its own clampdown on some brokers' behaviour last week.
"It is the first volley in a closer look at the industry," said Jacob Ma-Weaver of hedge fund Cable Car Capital, which has a short position in Plus500, whose shares fell by 28 percent on Tuesday.
(Editing by Alexander Smith)