IG Group prevents new margin trades on small cap-stocks

A trading frenzy headed by retail investors on social media has resulted in IG Group restricting leveraged trading in around 900 small cap-stocks, including recognisable firms such as Hiscox, Hammerson, and Superdry.

New restrictions have been set largely due to the rise of functionality issues caused by retailing platforms’ immense pressure to keep pace with the rapid growth in retail investing. Retail platforms have reported experiencing outages and crashes during periods of high volume, often resulting in trading having to be halted. It is said that part of this strain has been driven by a sharp increase of new amateur investors.

The brokerage firm IG Group, one of Europe’s largest trading platforms, has a number of specific financial requirements. These requirements include clearinghouse deposits and FCA net capital obligations. They can often vary depending on the volatility of stock markets. Never were they more substantial than when Reddit investors were teaming up to rally particular stocks.

IG Group

Service disruptions during a short period of frantic trading have been attributed to Reddit users, particularly its WallStreetBets group, who are said to have inflated the price of GameStop stocks in order to punish the hedge fund’s betting against it. This phenomenon saw IG Group and other brokers having to suspend new client registrations, while UK brokers were forced to suspend options trading for GameStop stock due to power outages on its platform.

IG Group’s new measures will see them increasing the amount of money its clients using leverage must have in their brokerage account following a stock purchase, meaning they will only prevent customers from placing new margin trades on stocks.

Customers essentially borrow funds from brokers to fund up to 99% of their investment when they trade on margin, making profits or losses then appear amplified. As such, clients will now be expected to deposit the entire value of their position using personal capital in advance of trading small-cap stocks.

To prevent more large-scale Reddit investments, other brokers have also moved to curb the trading of shares held by amateur investors. Depending on security, they are doing so by varying restrictions, including banning short sales, limiting leverage levels, and increasing margins.

The brokerage announced on Monday its decision to remove cryptocurrencies from its offering to UK-based retail clients, prompted by UK FCA’s ban on crypto derivatives sale. The Group recently issued a trading update regarding Brexit for its EEA clients asking them to transfer their accounts to IG Europe.

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