Declined Market Value of Listed FX Brokers

The year 2016 saw the loss of more than $2.4 billion off the market value of several online trading brokerages. One of the main reasons for this significant step-back is that financial regulators like CySEC in Cyprus, BaFin in Germany and the UK FCA, have decided to put a cap on brokers’ leverage which they provide to their retail traders. The FCA has set a 50:1 leverage, which is a huge concern for shareholders. CySEC has made 50:1 a maximum default leverage, yet it can be changed to a higher one upon trader’s wish. Both of the regulators are prohibiting FX bonuses and other trading benefits to comply with the ESMA policies. Also, the Netherlands contributed a little with its ban on FX advertising.

The Forex online trading brokerages which have lost substantial market value from this change are the following:

IG Group Holdings plc (LON:IGC). IG brokerage is by far the largest UK-based in the country and had continuously reported stable profits. IG had also bought the online Forex trading research website, DailyFX. Yet, after the FCA’s regulation update, IG reported a market cap drop of 38%. Since it’s the largest Forex brokerage with repeated yearly success with retail traders, there is a high possibility that IG will not be heavily hit.

CMC Markets Plc (LON:CMCX). While CMC is possibly IG’s main competitor, it was also hit hard by FCA’s tighter rules on CFD. After the new regulations were announced, CMC’s market cap dropped down by 23%. While CMC’s successful IPO in February ended well, its share price would continually drop with no recovery in sight. Currently, CMC should hope to double its shares if it wants to get back to their IPO price.

FXCM Inc (NASDAQ:FXCM). Currently, FXCM tops the list of the worst performing stocks, with nearly 58% market cap loss in 2016. And this happens after FXCM lost another 90% the previous year. While the brokerage continues to deliver, it struggles under the weight of its loan from Leucadia.

X Trade Brokers Dom Maklerski SA (WSE:XTB). The Polish forex trading broker X Trade has reported a significant drop in its shares of 39%.

Plus500 (LON:PLUS). After a major FCA investigation of Israeli Plus500 last year, the online broker had to freeze all accounts in the UK due to money-laundering concerns. Following this financial blow, Plus500 had to face yet another difficulty after the FCA announced its new CFD rules. Plus500 shares dropped more than 30% within the same day of the announcement. The overall loss for 2016 was 8%.

Gain Capital (NYSE:GCAP). Yet another brokerage with a loss of 16% after the regulation changes; its loss for the year 2016 was 19%.

What makes CFDs (“contract for differences”) potentially dangerous for retail traders and clients of brokerages is that the latter don’t really buy or sell the underlying asset. What the client buys or sells is related to the actual price of the instrument. CFDs are based on leverage, which means, the trader can deposit only a small percentage of the actual final price of the instrument.

Yet, this implies that the trader can win, or consequently lose, more than they had initially bet. For that reason, some online Forex traders may abuse their power over their clients and use aggressive measures which may lead to a loss.

Eventually, 2017 will show how the new tight regulations are going to affect both the Forex market and retail traders.