Spread Betting Company IG Group Suffers From Calmer Markets

on Jul 24, 2012

While calmer markets are generally good news for global leaders, they are less beneficial for the UK spread betting company IG Group (IGG), which has seen its revenue drop in recent weeks due to less market volatility. On 17 July 2012, Reuters wrote that although IG reported an increase in adjusted profit for the year ending on May 31, slowed activity in recent weeks has led to lower revenue as compared to the same period in 2011.

IG reports that for the year, which ended on 31 May 2012, net trading revenue reached £366.8 million, up from £312.7 million the previous year, or an increase of 17.3 percent. As noted in the Reuters article, IG’s adjusted profit increased by 13.8 percent to £185.7 million while adjusted earnings per share climbed 15.3 percent to 37.54p a share.

In addition, IG’s European business saw revenues up by 26 percent to £72.2 million, Australia increased by 22 percent to £58 million while the UK, IG’s largest market, was up 15 percent to £191.8 million. According to a recent Financial Times article, however, IG’s strong results were partially offset by Japan, where revenues fell by a fifth following the tighter restrictions on leveraged trading which the Japanese authorities introduced in August.

!m[](/uploads/story/202/thumbs/pic1_inline.png)One of the reasons for the observed increase in revenue is the market volatility due to the Eurozone debt crisis. Since spread betting allows investors to benefit from market movements, volatile markets provide opportunities for traders to quickly make profits. At the end of June, the FT reported that according to spread betting experts, traders tend to pursue volatile markets so as to try and take advantage of price swings, common in times of volatility.

Similarly, calm markets are less attractive for spread betters, with that in turn leading to less profit for spread betting companies. The results of the Greek elections and the bailout of Spain’s banks have brought some optimism regarding the Eurozone and calmed the markets to a certain extent. “Revenue in the first six weeks of the current financial period has been lower than the same period last year, as dull markets in this period have presented our clients with fewer trading opportunities,” IG noted, as quoted by Reuters.

Yet, IG hopes that this is only a temporary setback. The FT quotes Tim Howkins, IG’s chief executive, who pointed out that the market was “catching its breath” after the excitement surrounding the two Greek elections in May and June. “There is not much happening in the market at the moment. I would expect that to be a fairly short-term phenomenon,” he said.
In addition to the negative impact of calmer markets, the plans of Singapore’s authorities to reduce leverage on forex trading as well as prospects for financial transactions tax in continental Europe are also likely to affect IG’s growth. Yet, Mr Howkins does not seem to be overly worried. “If you look at what has been introduced so far, it’s just a French version of stamp duty, which applies to a limited number of stocks. It doesn’t apply to derivatives and so doesn’t apply to us”, he said as quoted by the FT.