CMC Markets Share Price Loses 20% on Updated Revenue Forecast
London-based CMC Markets Plc, an online trading platform provider, announced on Friday, February 22, 2019, that it expected a bigger decline in fourth-quarter sales for the division that offers financial products like contracts for difference (CFDs) for retail traders. The drop in revenue is more prominent than initially anticipated because of the tighter regulation coming from the EU.
Revenue Forecast Hits Share Price
CMC Markets’ announcement was published right after the UK Financial Conduct Authority (FCA) stated that the temporary ban of CFDs by the European Securities and Markets Authority (ESMA) would be incorporated in the UK law when the country leaves the EU at the end of March. The bearish news put even more pressure on the CFD and spread betting platform provider, causing its share price to drop by 22.81% on the London Stock Exchange (LSE).
In December last year, the ESMA announced that it would prolong the restrictive measures on marketing and sale of CFDs to retail clients for three more months starting from February 1 of this year. The decision touches upon the leverage ratio for different asset types, margin close rules, negative balance protection, and risk warning procedures among others.
CFDs are financial instruments that allow investors to bet on the price movement of an underlying asset without actually owning it. CMC Markets has been one of the largest CFD trading platform providers in the UK. However, the recent regulatory pressure on this trading instrument affected the company’s revenue figures. CMC now expects its quarterly sales from CFDs and spread betting to decline by 25-35% compared with the previous forecast suggesting a 20% drop.
CMC CEO Peter Cruddas commented:
This is a period of adjustment for CMC and the industry following the implementation of the ESMA rules. While it has been a challenging year for the group, not helped by difficult trading conditions, we remain confident as we improve our understanding of how clients are trading under the new regulations.
I continue to believe that the industry will benefit from regulatory change over the medium-term and that CMC is strongly positioned to do so across its business due to its investment in leading technology and strategic diversification through its stockbroking and institutional businesses.
On Friday, the stock price of CMC fell to the lowest level in two years, losing over 20% to 90.00 pounds. On Monday, CMC shares are trading at 87.69 pounds as at 12.41 GMT.
Rivals Also Affected by ESMA Rules
While CMC updated its forecast for revenue figures, it is not the only CFD and spread betting firm to demonstrate a bearish mood. IG Group Holdings fell 5.74% on Friday and so far 4.82% on Monday on the ESMA news. Elsewhere, Plus500 was down 5.28% on Friday.
Regarding Plus500, we reported last week that the company had gone through a difficult month as it had suffered from a drafting error in its 2017 annual report, which misled investors by hiding some losses from customer trading. Since the start of February, the share price of Plus500 has lost half of its value, currently trading at about 779 pounds.
However, while customer wins are affecting the revenue of CFD brokers, analysts at Liberum believe that the recent growth in client wins will help CMC in the longer term. The investment bank reportedly said in a note to clients:
If a customer wins, that does not mean that the profit and loss gains have necessarily been withdrawn. Over time, it's the spreads on the leveraged notional that generates the revenue for the platforms. Gross wins in the short term are propitious for spreads revenue in the medium term.” the note reads.
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