What happened

Shares of Futu Holdings (FUTU 3.38%) plunged by 41.2% in October, according to data provided by S&P Global Market Intelligence.

Despite the sharp fall, shares of the Chinese online brokerage are still up 9.4% year to date.

A person wearing a headset looks at a trading app on their smartphone.

Image source: Getty Images.

So what

Futu and other Chinese online brokerages are having an increasingly tough time as China expands its regulatory crackdown. Thus far, Beijing has targeted sectors such as technology and real estate and investors are now worried that the brokerage sector could be next. The concern here is whether the government will limit domestic investors from opening an account with an offshore bank, thus preventing these investors from trading through brokers such as Futu.

There's ample reason to worry. The head of the Financial Stability Department of China's central bank has warned that online brokerages that are not licensed in China are conducting "illegal activities" by offering their services via the internet. A large proportion of Futu's customers are mainland Chinese citizens, thus any regulatory action that restricts account openings by domestic investors will severely hurt its business.

Now what

Futu recently reported a stellar set of results for its fiscal 2021 second quarter, with sharp year-over-year rises in the number of registered and paying clients. The company saw a net addition of around 211,000 accounts during the quarter, its second-best quarter since its incorporation. Paying clients also exceeded 1 million, causing total trading volume to more than double year over year to $1.3 trillion Hong Kong dollars (about $170 billion). Daily average client assets also saw breakneck growth, nearly quadrupling year over year to HK$470.2 billion.

Not only is the company reporting superb operating metrics, but its financial numbers are equally impressive. For the quarter, revenue increased by 129.3% year over year to $203.1 million while net income surged by 125.8% year over year to $68.7 million. 

Although regulatory risk remains an overhang, the company continues to improve on its platform to attract more customers. Leaf Li, the founder of Futu, emphasized that Futu continues to roll out thousands of new features and that its systems are self-developed so that troubleshooting can be done more quickly. Futu also believes in the social aspect of investing and is building a community of like-minded investors who can share their insights. 

Investors can rest assured that Futu is well equipped to grab more customers, but need to keep their eyes trained on what China's central bank may do next.