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Spread betting shares tumble on EU clampdown

Spread betting shares tumble on EU clampdown

Shares in spread betting firms have tumbled after the European Union's financial regulator announced plans to ban the sale of binary options to retail clients.

Under new rules planned by the European Securities and Markets Authority (ESMA), firms would also face tight restrictions on the marketing, distribution or sale to retail clients of contracts for differences (CFDs).

The UK's Financial Conduct Authority said it supported ESMA's measures.

Shares in IG Group (IGG) fell 9.1% to 666.5p on the news, while CMC Markets (CMCX) was down 12.5% at 146.8p and Plus500 (PLUSP) dropped 15.7% to 780p.

Binary options, essentially a bet on whether the price of an asset will rise above, or fall below, a certain level, are one of the fastest growing financial products in the world.

Consumer group Which? has labelled the products the UK's 'biggest investment con', ponting to their exploitation by unscrupulous firms to scam victims.

James Hamilton, analyst at Numis, said IG appeared the best placed to cope with the new rules, which could be 'fatal' to some of its rivals.

'Being the closest to compliant, having the most potential professional customers and having the highest operating margin means that we believe IG is best placed,' he said.

Hamilton meanwhile reiterated his 'sell' rating on CMC. 'Our current estimates assume revenues fall 9% during 2019 and a 22% fall in earnings per share, but we expect profits could fall further when we get the full details,' he said.

'We believe Plus500 is most exposed to these proposed regulatory changes due to its very low quality customer base, higher exposure to Europe and tendency to offer trade inducements.'

Under the proposed new rules, leverage on CFDs would be restricted to between 30:1 and 5:1, providers would have to guarantee a limit on client losses, trading incentives would be restricted and client positions would be automatically closed if they ran out of margin.

In a statement, IG said that it had stopped offering its Sprint binary product to new retail clients at the beginning of the year, and that binary products represented less than 5% of revenues in the first half of its financial year.

It added that it believed clients representing over half of its revenues could be deemed 'professional' and so fall out of the scope of the new rules, and that the impact of the regulations was 'unlikely to be significant in the current financial year'.

Plus500 meanwhile emphasised that it does not offer binary options, provides protection on balances and margins and removes bonus schemes for most of its operations earlier this year.

CMC said a retail ban on binary products would be 'immaterial in a group context', while it was 'not possible to quantify the impact' on margin restrictions.

It added that its focus on 'higher value clients' would also limit the impact of the new rules.

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