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Forex brokers Plus 500 and CMC markets losing millions

GBPUSD News by Allie Longford on 09:13 April 13, 2019 EST

Retail brokers are having a hard time after EU regulation put an end to the worst tactic used to separate amateur investors from their hard earned money.

The Atletico Madrid sponsor Plus 500 fell as much as 40% last week in the London stock exchange after it reported a $28 million loss in their last quarter activity as a result of the effect of regulation and losing bets against its own clients. It also suffered a whopping 65% decline in revenue in the period versus the previous quarter. Its share price is now down more than 60% from this time last year as Bloomberg reports.

CMC markets, owned by Peter Cruddas ( previously involved in the cash for access scandal ) and Goldman Sachs, has also more than halved their share price in the last year.

With the introduction of Mifid II the European Union vastly restricted the brokers ability to provide insane leverage to their amateur clients. Last year a EU based broker could provide to anyone that opened an account as much as 1:500 leverage in certain instrument such as forex or CFDs. This, in essence, meant that anyone with £1,000 in their account could "borrow" from the broker as much as £500,000 when placing a bet so that magnificent returns could potentially be made and therefore advertised. However, a tiny move of the instrument in the wrong direction would quickly end with the position liquidated and the £1,000 falling in the broker's pocket which was the almost inevitable outcome. Only an amateur investor would consider using that kind of leverage hence it can be concluded that was the only reason brokers provided it.

Mifid II has not only restricted leverage but also introduced a "soft" margin call when the account margin requirement (the client's funds that guarantee payment if his active bets move against him) falls below 50% and, in this case, the client will be unable to open further positions hence putting himself more at risk when he is losing. If the margin requirement reaches 0% then positions will be liquitated as in the past. This is such a great feature that no doubt whoever drafted the directive knew extraordinarily well the industry.

The EU framework also makes compulsary for brokers to advertise the ratio of clients losing money with them and it turns out that for almost every broker 8 out of 10 clients lose money. This is the equivalent of forcing tobacco companies to display the photo of a cancerous lung on their packets.

In all we can conclude that Mifid II is a great regulation produced by the EU that has targeted the, by far, biggest issue beginner traders face, excessive leverage. The consequence is the industry is hurting and it is no longer that easy for them to make profits. We will probably see an increase of broker fees in the near future as result.