Capital Markets, Financial

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Categorized | Financial

CMC Markets suffers 29% profit fall as clients rein in trading

Posted on November 23, 2016

CMC Markets revealed that first-half profits fell by almost a third as the online trading company failed to capitalise on the market volatility that followed the UK’s EU referendum.

While many markets, such as currencies and derivatives, experienced big moves, activity on share markets — where a large proportion of CMC’s clients trade — was more muted in the past three months. CMC said the sharp swings in share prices that immediately followed the EU vote had been shortlived.

Clients, “particularly in indices”, had experienced “more limited trading opportunities” during the quiet market periods during the summer, the company said. Revenues from index betting accounted for 39 per cent of its revenue for the six months to September 30, down from 49 per cent a year earlier.

Analysts said CMC’s performance did not reflect the sector. “This looks like a specific company shooting themselves in the foot,” said Jonathan Goslin, an analyst at Numis.

Rival IG Group reported a 5 per cent rise in revenues during the corresponding quarter. Online trading platform Plus500 said revenues fell 4 per cent for July to September but its nine-month revenues were up 14 per cent.

Shares in CMC dropped 5 per cent on Thursday to 193p. CMC became a public company in February, floating at a price of 240p per share and triggering a windfall of more than £200m for Peter Cruddas, who set up the group in 1989.

Mr Cruddas, chief executive and a supporter of Brexit, described the 29 per cent year-on-year fall in pre-tax profits, to £18.8m, as “disappointing”.

Despite CMC’s client base growing 8 per cent, the value of client trades was 18 per cent lower.

Net operating income fell 4 per cent to £75.5m. CMC issued a trading update on September 7, alerting investors that revenues were likely to be lower than forecast.

To protect itself against extreme market volatility around the EU referendum, CMC raised the margin requirements for customers by as much as 500 per cent on some products. Traders are required to supply margin — the insurance that backs trades — to keep their positions open.

Many retail brokers and online venues were caught out last year by the sudden appreciation of almost 30 per cent of the Swiss franc in a matter of minutes. Many suffered heavy losses and some had to be rescued by third parties.

Grant Foley, CMC’s chief financial officer, defended the group’s recent strategy. “By raising margin requirements ahead of the referendum, we deterred clients from overtrading and taking on unreasonable levels of risk, which in turn reduced CMC’s exposure. It was without doubt the correct thing to do in the circumstances,” he said.

Mr Cruddas, who donated £1m to the Vote Leave campaign, said he still expected Brexit to pay off for his business: “It is going to generate volatility for us over the coming months and years as Britain negotiates its exit from the European Union. We think it will be good for business.”

However, some analysts signalled that they would be downgrading their forecasts.

Mr Goslin at Numis said he would be revising down expectations. Paul McGinnis of Shore Capital wrote that the group expected “to be reducing our fair value” on CMC, while a note from Liberum said CMC’s “very confusing outlook statement [was] likely to cause some concern.”

CMC said it would be making an interim dividend payout of 2.98p, a third of the full-year dividend.

Additional reporting by Philip Stafford