Leverage levels of 200:1 are quite common nowadays but some aggressive operators even allow leverage of 400:1. The FCA has taken a hard stance and is planning to cap leverage limits. It proposes to have a two-tiered setup:

Inexperienced Retail Clients (active leveraged trading experience less than 12 months): Maximum leverage limit of 25:1;

Experienced Retail Clients (active leveraged trading experience greater than 12 months): These will be “set according to the volatility of the underlying asset, to prevent plainly excessive levels being offered by firms” with a maximum leverage limit of 50:1.

Limiting leverage to 25 x or 50x is very conservative and impactful to CFD providers. People who have gambled at 100x leverage will have been margined out rapidly. A fair few probably got the size of the bet wrong! Also, the more experienced traders are likely to make up a disproportionate percentage of the traders who are profiting the markets.

People want to gamble/invest and these companies have been good at marketing to them. Same number of people will still want to gamble in the future. If they are allowed less leverage, their wad will last longer before it is gone. The regulation, if passed as drafted, is pain for the short term big market players but probably good for the long term.

Spreadbetting and CFDs are not necessarily for gamblers any more than other instruments like holding traditional shares. It has some useful features. The tax structure for one. The fact that I can invest in an index or stock without direct currency exposure or take the currency exposure without the underlying asset. I can use it to hedge other investments and it provides a wealth of ‘market’ information that conventional investment platforms do not. You can use it for gambling and if you do not know what you are doing, that is the outcome. Caveat emptor. In a healthy free society some degree of personal responsibility is a must. It’s slightly more aggressive than giving your money to a wealth manager/ fund manager combination. So long as the companies provide full information (fast markets are not properly explained so there is an opportunity for the regulator) it is up to individuals to manage their own affairs. The problem with CFD trading is naive punters over-leveraging overtrading and not thinking things thru.

I suggest what is needed is more regulation of the actual betting industry and the TV ads which imply that gambling is a desirable lifestyle choice and reflects a romantic personality. We are constantly bombarded with these. And no more sponsorships targeted to the mass media like football sponsorships and billboards advertising.

There are some interesting insights in the the volumes of shares exchanging hands last week. IG Group; approximately 10% of the shares changed hands, CMC Markets barely 3%, Plus500 much more at 20%.

Interesting difference in costs too – Plus500 have lower overheads but are spending massively more on marketing to blitz up their client base. They are spending 60% of revenue (IG and CMC Markets more like 10%) on online marketing. Their plans may have to be adjusted given the regulatory developments facing the industry. Plus500 stated the UK market makes up 20% of their business and thereby they estimate they will be impacted by this much. Their shares were up Friday, while CMC and IG were down. Odey Asset Management kept adding to his Plus500 shares holding though – now he owns like 22% of Plus500.

What I would like to know more about is about the big high roller clients who generated a massive % of revenue. I saw a few years back that 2% of these companies’ clients generated over 50% of revenues.

The UK FCA on Tuesday proposed a number of measures designed to tighten up regulation of the CFDs market. The Financial Conduct Authority tabled a package of measures to ‘limit the risks’ of these products, which it hopes will ‘enhance consumer protection’.

These include:

– Introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts to illustrate the risks and historical performance of these products.
– Setting lower leverage limits for inexperienced clients who do not have 12 months or more experience of active trading in CFDs, with a maximum of 25-to-1.
– Capping leverage at a maximum level of 50-to-1 for all retail clients and introducing lower leverage caps across different assets.
– Preventing firms from promoting CFD products by offering bonuses or benefits on new trading accounts.

Some levels of leverage presently offered to clients by some providers exceed 200:1, according to the review. The regulator said that contracts for differences, which include spreadbets and rolling spot foreign exchange products, are complex financial instruments and that, following an increase in the number of firms in the CFD market, it has concerns about the number of retail customers opening and trading spread betting style accounts, with 82% of customers losing money. The number of CFD providers has grown to 97 FCA-authorised providers compared to 2010 when there were approximately half this number yet the largest UK provider still controls 40% of the UK market with a further 6 firms taking another 30% while a number of smaller firms make up the remaining 30%. UK retail CFD providers currently hold around £3.5bn in client money.

As well as providers having an actual base in the United Kingdom, there are also about 130 providers registered to provide cross-border services into the UK under European Union passporting rules. Most of these firms are based in Cyprus. The UK providers also make use of the passporting rules with many having overseas branches in other EU countries. The Financial Conduct Authority estimated that UK providers serve about 400,000 individual active traders based outside the UK.

Traditionally, CFD products have been marketed to more sophisticated retail investors. However, with the emergence of recent entrants like Plus500, providers are increasingly targeting retail clients and the FCA has taken a stance that these products are unlikely to be suitable to ordinary investors and are being offered on terms that significantly increase the risks and probability of losses.

The FCA announcement prompted a major share selloff, with market leader IG Group falling more than 40% to 500p and rival CMC Markets dropping 35% to 115p.

CMC tried to downplay the impact of the proposed regularoty changes, stating that it already focused on higher-value experienced clients who understood the markets, rather than high-churn clients.

The providers stated in a note release: “CMC’s business model and ongoing strategy is focused on generating revenue from client trading costs and therefore believes in establishing long-term client relationships.” It added: “CMC recognises the FCA is endeavouring to ensure that any regulation is delivered in a balanced fashion and looks forward to working closely with the Financial Conduct Authority over the coming months.”

IG Group said in a statement: “The company believes in “robust and proportionate regulatory oversight” of the CFD sector in the UK and Europe and recognises that there are shortcomings in the approach to the marketing of [spread betting products] by certain firms, often operating from outside the UK. The Company has operated and will continue to operate to the highest standards in the industry, and its initial view is that certain of the FCA proposals could enhance client outcomes.

IG Group said it will now consider the implications of the FCA Consultation Paper and the courses of action open to it, with plans to respond in accordance with the deadline of March 7.

In response to the announcement, Plus500, said the topics covered by the FCA will have a “material operational and financial impact” on its UK subsidiary, which represents approximately 20% of group revenue.

Editor Note; Sooo… before we all completely lose our heads it’s worth saying that this FCA report is a consultation document and not a matter of fact and the regulatory body is unlikely to make a final decision until late 2017. This is not investing, it’s speculation and this is how it works. Successful traders won’t fail if they switch to spread betting, unsuccessful traders won’t succeed if they switch to direct access or buying the shares outright.

It is important to point out that risk is a factor of leverage AND volatility. 50:1 is quite high leverage on share CFDs but relatively low on a stable forex pair like AUD/USD. What really bugs me is that the FCA’s main argument is that most losers are from “Expected margin loss through automatic close out”. And then they are going to mince the leverage limits based on the lack of experienced retail clients. The only way these new morons are going to get any experience is to lose some more money. You can’t stop stupid. but a bit of education could go a long way.

Moreover, regulation may not entirely be a bad thing as more honerous rules are likely to encourage further industry consolidation, as new rules generally hit the smallest firms hardest. Without the high leverage, and the attraction of new money, the race to the bottom of spreads will also have to stop. Interestingly both IG and CMC point out that the majority of their profits come from ‘High Rollers’ (so called) who know exactly what they’re getting involved with when they play with leverage. The ‘know nothing’ Punter who is given 200 x leverage by Plus500 and their ilk and has his account closed before he can breathe is the target of the FCA’s regulation . This will be sorted out in the consultation process and I think we may find that this is a very small storm as far as the bigger players are concerned. It may well even strengthen their businesses as they pick up clients from the disreputable.

However, what really does seem interesting to me is that the shares of IG, CMC, Plus500 and Playtech were all trending sharply to the downside in the days preceding the FCA announcement (9% down between them in aggregate over 4 days before the announcement). It would appear that the FCA report was not so very secret after all.

Having said that I’m sure brokers in less regulated countries will be pleased with the news as in future international clients will probably prefer to trade in these jurisdictions.

The new design includes a more modern and responsive layout and additional tools like a new charting package on the execution-only platform TradeHub®.  This includes the addition of 13 different chart types and more than 170 technical drawing indicators to help clients with technical analysis.

Revamped Ayondo Website

Trading with ayondo markets provides negative balance protection per client, additional free insurance of up to GBP 500,000 for clients, variable margin and free guaranteed stop loss orders for certain products depending on trade size limits.

New Offices

Ayondo Markets has also moved to new and larger offices at London’s Silicon Roundabout along Old Street and East Road.  London’s Silicon area is the place where many other technology and fintech and e-commerce UK companies are basing themselves; hence the area being dubbed Silicon Roundabout after Silicon Valley in California.

‘Our new location at Silicon Roundabout represents the very core of what ayondo is all about; the intersection of world-class financial services and cutting-edge technology,’ said Robert Lempka, CEO and Co-Founder of ayondo.

Ayondo Singapore has also moved to newly renovated offices at Armenian Street, which is at the heart of the city’s civic and cultural district.  The company set up an office in Singapore several years ago under the name ayondo Asia PTE Ltd.

Ayondo claims to have over 210,000 users from 195 countries on its social trading platform. Back in April the company  announced that it was working on a Reverse Takeover (RTO) transaction which could make it the first fintech company to be listed on the Singapore Exchange (SGX).

On Thursday CMC Markets surprised the market by stating in its trading update that its clients have been trading less frequently.  CMC blamed lower market volatility that has provided fewer trading opportunities for clients in August for the decrease in trading activity.  The turbulence that immediately followed the Brexit referendum didn’t last and the markets have been quieter over the last couple of months compared to last year.  Some other providers have also felt the slower activity and rivals IG Group and Plus500 also retreated- albeit not so much as CMC.

CMC Markets’s last trading update in late July didn’t mention this so investors in the company were taken by surprise and CMC’s shares dropped 12% when they disclosed the slower trading.  Trading volumes for the first 5 months of the years have declined despite a healthy growth in client deposits and new and active clients which have increased 19% over last year.

CMC Markets floated on the London Stock Exchange in January 2016.  Traders like movements in stocks and currencies but interventions by the Bank of England (after Brexit) have calmed the potential turmoil so far resulting in a quiet summer for the stock market.  The Vix volatility index, also known as Wall Street’s “fear index”, dipped to less than 12 – close to a 20-year low

CMC is trading at about 14 times forward earnings at present and is about half the size of IG.  In the long term the industry faces increasing scrutiny from the FCA which is reviewing industry practices.

This has many people worried, particularly the bosses of spread betting and CFD firms, who think that customers may make potentially risky trades, and that wild swings in the market could see fortunes gained and lost. So trading firms in the City of London are making moves to protect both themselves and over enthusiastic customers.

IG Group, the industry’s largest provider of spread betting and CFD services, is already planning to reduce the amount of leverage it gives to traders, thereby limiting the amount that can be staked. Whatever happens, it’s a fair bet that the Brexit vote will cause some turbulence in the markets, and IG wants to moderate its impact.

And this is not being done out of an “abundance of caution”, but out of a very real threat to the markets. Only last year, CFD provider and foreign exchange broker Alpari went bust because without warning the Swiss National Bank unpegged the franc from the euro. The resultant move of nearly 30% in the foreign exchange markets not only brought down Alpari, but also compelled FXCM, the US foreign exchange broker, to seek out a $300 million bailout in order to stay in business.

The head of trading at ETX Capital, Joe Rundle, said that his company is planning for a 20% fall in sterling and a 20% rise in the dollar, for a total 40% move due to the vote. He anticipates the move may happen instantly, with no trading in-between and time to unload unfavourable positions. He foresees greatly increased volatility and higher volumes of trading, and reducing client leverage is one way that the impact can be lessened.

It is rumoured that the Financial Conduct Authority (FCA), the regulator in charge of the UK trading markets, has been in contact with all the trading firms under its jurisdiction, requiring them to draw up plans to show how they will cope with a drastic market event.

For its part, IG Group has already notified its customers of an increase in margin for spread bets on FTSE stocks and for foreign exchange pairs including the pound sterling. From 3 PM on Friday, 10 June, IG will require 1% rather than the current 0.5%. IG proposes further increases in margin on the following Friday, and on Wednesday, 22 June, the day before the Brexit referendum. Any open positions will be required to have an adequate account balance, or generate a margin call.

The IG Group lost around £30 million due to the Swiss Bank unpegging last year, so is leading the industry in taking safeguards against violent market moves; however Rundle said that ETX Capital will similarly be increasing its margin requirements leading up to the Brexit vote. The trading environment is likely to be stressful, so spread bettors who are not comfortable with this level of risk are advised to stay out of these markets until the situation settles down.

CMC recently stated that the market volatility has been positive for its business, as more clients attempt to profit from the fast-moving markets. The company was founded in 1989 by Peter Cruddas and is operational in 14 countries. CMC Markets reported a net operating income of about 78.9 million pounds for the six months ending 30 Sept. 2015. The IPO offering of 31%, or equivalent to 90.6 million shares round up to about 218 million pounds. Mr Cruddas and his wife are now reported to own 62.5% of the company, down from 90%, while Goldman Sachs has reduced its stake from 10% to 4.99% after the company has gone public. The Cruddas have got £190m windfall from the float while Goldman Sachs has received £35m out of the IPO. About £15m in additional funds have been raised for the company. The major shareholders plan to reduce their stake by a further 15% if there is sufficient demand in the market

The FCA published a letter urging providers to do more to protect consumers from losses after a survey conducted on the practices of 10 execution-only firms revealed that a number of risk warnings vetting the suitability of those complex financial products were inadequate. The report examined sales of CFDs, spreadbets and rolling spot forex products. The Financial Conduct Authority highlighted that providers did not collect enough information about clients and their investment experience to adequately judge their suitability. In most cases clients were simply requested to tick a box acknowledging they understood the risks instead of doing a proper risk assessment. In particular the regulator found that most approaches to assessing the ‘appropriateness’ of CFD trading for new applicants were not in line with guidelines set by the FCA. Measures to tackle money laundering by high risk clients were also found to be too weak.

In the letter addressed to the CEOs of CFD providers, Megan Butler, the FCA’s executive director of enforcement highlighted that CFDS are complex and leveraged products that can put clients at risk of losing amounts in excess of their original investment and companies aren’t doing enough to educate consumers about the risks of trading these products. Such letters from the Financial Conduct Authority are rare and ofen are a precursor before further enforcement action is taken.

The FCA regulated about 100 providers that offer CFD products in the UK with an additional 100 companies registered elsewhere in the EU but trading locally under Mifid regulations. Megan stated that the findings suggest that providers may not always be acting in the best interests of their clients and treating them fairly.

“We also saw evidence of poorly worded risk warnings that did not set out the nature and risks of CFD products in a manner that was clear, fair and not misleading,” she added.

‘We request you to consider whether your company is in compliance with FCA requirements for sales of CFD products and the points we raise in this letter regarding the process that your firm follows when taking on new clients,’ concludes Megan Butler, the Executive Director of Supervision, Investments, Wholesale & Specialists Division at the FCA.

Letter to CEOs of FCA Regulated Brokerages

In its 2014 Annual Report with the UK Companies House, ETX Capital noted that it had ended the year with £53.67 million in net funds, compared to £43.19 million in 2013.  Client net obligations were listed at over £104 million, translating into almost a 50% increase in customer net asset value funds.

Most of the 2014 growth was down to ETX’s retail trading operations which witnessed a 55% increase in revenues.  ETX’s high-net worth brokerage operation registered flat revenues at £8.11 million.  Total online trading revenues amounted to £26.55 million compared to £17.03 million in 2013.

The UK accounted for 55% of ETX Capital’s revenues for 2014, however the international expansion of the company appears to be gaining traction as only 45% of new accounts at ETX originated from the UK in 2014.  In particular, ETX has experienced good growth in Germany, France and Sandinavian countries as well as the Far East with ETX having opened an office in Shanghai.

The company acquired Dublin-based Shelbourne Markets (formerly known as MarketSpreads) in mid-2014 and more recently acquired Alpari’s UK client list (the last of which wasn’t reflected in this set of accounts as this was done in 2015).  In 2014, ETX also acquired Ariel Communications which was the company that originally developed ETX’s multi-asset trading platform; which acquisition ETX expects to decrease its maintenance IT costs where it expects to save £600,000 on a yearly basis.

Highlights of ETX Capital for the year 2014:

Revenues of £34.7 million (USD $54 million), up 38% over 2013 (£25.2 million)
EBITDA of £5.4 million ($8 million), up 93%
Net profit £2.487 million ($4 million), up 217% over 2013 (£783,080)
Client deposits at year-end £38.1 million ($59 million), up 23%
ETX employed 142 people at year-end 2014, up from just 79 in 2013

‘We are very excited about this deal as it complements two of our main strategic drives: the expansion of our MT4 offering and the continued expansion of our international customer base” said Andrew Edwards, CEO of ETX Capital’

The Deal

• Over 160,000 accounts and supporting documentation being acquired, allowing ETX to setup accounts instantly for all ex-Alpari clients.
• Mechanism in place to help clients transfer their money owed by KPMG and the FSCS direct to their ETX account.
• ETX has also set up a helpline for Alpari clients to assist them in getting their money back.
• Those clients had over $100 million in balances.
• ETX has hired 20 new staff to support the growth in London and in their technology centre in Hemel Hempstead – 5 from Alpari at least.
• This could increase ETX’s size and worldwide reach by up to 50%.

Andrew Edwards, CEO of ETX Capital stated that this was all about giving Alpari clients an acceptable resolution after a difficult period.  Clients had a choice either to either pursue their funds themselves via the  the administration process, or have the funds transferred to an ETX Capital account and enjoy certain benefits that they would otherwise not have had.

‘These benefits included the ability to receive up to 30% of their expected balance as an advance, the possibility to swap their funds (released in USD) to the currency of their choice at market rates, and spread rebates during their first month of trading. Add to that the chance of getting a first deposit bonus for newly deposited funds, and it’s easy to see why so many former Alpari clients are now trading with ETX Capital.’

‘There’s been a very positive response from ex-Alpari clients looking to take us up on our offer,’ said Edwards. ‘We now have thousands of former Alpari clients trading with us, with many of those opting to keep their released funds in their ETX Capital accounts rather than withdrawing them.  This is the second transaction of this kind that ETX Capital has managed to execute and we hope to be in a position to find other opportunities to further grow our customer base,’ said John Wilson, Chairman of ETX Capital.

In 2013 ETX Capital successfully acquired the customer base of Shelbourne markets, the second largest CFD provider in Ireland.

Last year ETX Capital announced the extension of their international expansion strategy by launching ETX in the Czech Republic, Hungary and Poland. The company also recently acquired its technology partner Ariel, meaning that now ETX fully owns and controls its own bespoke platform technology.

Of course, Ayondo also offers an additional facility of guaranteed stops* in Spread Betting/CFD Trading. And in Social Trading, you also have the option to use the Loss Protection function for your account which acts as a further risk management feature.

The above features provides clients with a safety net so you can concentrate on the essentials .i.e. trading. However, this does not affect your obligation to maintain sufficient account margin and Ayondo may request additional margin as and when required.

This is in contrast with other brokers like IG [IG Index] who were accused of prioritising their trades during the Swiss franc frenzy debacle and where a number of clients were left with huge negative balances.