IG Group (IGGHY) stock rose sharply Wednesday after saying that it expects modest growth in its bottom line for the year, but analysts have warned investors of a looming threat posed to the company by the British regulator.
The London broker, which is a key rival to FXCM (GLBR) and Gain Capital (GCAP) - Get Report , said that fourth-quarter revenue grew by around 7% and the full-year bottom line is likely to be "modestly ahead" of the prior year.
Investors cheered the announcement, pushing the stock higher by more than 5%, which saw the shares changing hands at an intraday high of 584.5 pence.
However, analysts have warned that a pending decision by British regulator, the Financial Conduct Authority, on whether to impose harsh limits on the amount of leverage offered to retail traders poses a risk to the company.
"We urge caution on consensus numbers given the FCA's review of the industry, which we regard as the biggest risk to IG, is still outstanding," said Justin Bates, an analyst at Liberum Capital.
The FCA said in December that brokers should be banned from offering retail traders more than 50- to-1 leverage, which implies a minimum deposit of 2% for margin trades, and made a number of other proposals for tougher regulation.
Currently there are no restrictions on the leverage retail traders can use and so it is not uncommon for brokers to offer 400 or 500-to-one, implying that traders pay a deposit of between 0.20% and 0.25% to enter a trade, which enables them to take bigger positions in greater numbers.
If the regulator goes ahead with its plan then the new rules would restrict the size and volume of trades that U.K. clients are able to enter at a time when the retail trading industry is already struggling with low volumes.
IG Group earns around 51% of its top line from the U.K. Gain Capital and the beleaguered FXCM will also be hit by any changes as almost 70% of group revenues being drawn from the U.K.