The online trader IG Group was the worst performing stock on the pan-European Stoxx 600 on Tuesday morning, losing more than 30 percent of its value, after regulators proposed tougher regulations on some financial products.
Shares of other online trading firms, such as Plus 500 and CMC Markets were also significantly lower after the Financial Conduct Authority (FCA) said it would introduce tougher regulation on firms selling CFD (contract for difference) products.
CFDs are complex financial instruments that enable speculation on rising and falling prices of currencies, commodities, indices, treasuries and shares. There are fears that retail clients don't know what they are getting themselves into, with 82 percent losing money on CFD contracts, according to the FCA.
"We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses," Christopher Woolard, executive director of strategy and competition at the FCA, said in a statement.
The financial watchdog "is not banning these products. There are certainly investors who know how to handle them and how to use them, and can take a chance and balance the risks," John Gieve, former deputy governor of the Bank of England, told CNBC on Tuesday, adding that the regulator does need to "watch out" for how these are carried out.
"It's very difficult for people in the financial sector to realize how little is understood about finance among the greater population," Gieve said.