Beware of CFDs, warns ASIC

[baby_swallow]

Beware of CFD's, warns ASIC

http://www.smh.com.au/business/beware-of-cfds-warns-asic-20101123-185nr.html

I said it before somewhere on this forum and I will say it again - "Trading CFD's is a sure way to lose money" especially if you're new to derivatives trading. If you must trade CFDs, use a direct market provider and NOT market makers. I will not name names but these two top market makers in Australia are "nobodys" in world stage. They are thriving on unsuspecting traders with huge (controlled) disparity between the movement of underlying share to the price of CFD.

 

[skc]

Beware of CFD's, warns ASIC

http://www.smh.com.au/business/beware-of-cfds-warns-asic-20101123-185nr.html

I said it before somewhere on this forum and I will say it again - "Trading CFD's is a sure way to lose money" especially if you're new to derivatives trading. If you must trade CFDs, use a direct market provider and NOT market makers. I will not name names but these two top market makers in Australia are "nobodys" in world stage. They are thriving on unsuspecting traders with huge (controlled) disparity between the movement of underlying share to the price of CFD.

"Trading CFD's is a sure way to lose money" if you don't know what you are doing... same goes with most other instruments.

Sure with CFDs you can lose more money than you have in your account... but same with futures, FX or margin loans.

The real incremental risk of CFDs is counterparty risks. Everything else are pretty spelled out (spread, interest charges etc) so they are costs, not risks.

There is also the risk of stop hunting, slower execution etc - which some people believe to be true - but they can be alleviated by using DMA providers only as already pointed out.

 

[hangseng]

I concur with all of the above comments.

5 years ago I decided to have a go at CFD's, it was an expensive lesson although thankfully I limited what I placed. I only used the market maker platform and not the DMA, only because I was trying to get my head around CFD's generally.

Well now I still do CFD's mainly on ASX stocks and only on a small trading account outside my main investment accounts of which are all FPO's and options with etrade and commsec.

I have been doing very well over the last year with CFD's, now using the DMA platform. I have made back all that I lost and some, but only by applying strict rules that require vigilance.

Errors I made that I make no longer:

• Applying stops to close;
• Using automated stops;
• Positions too large (treating CFD's the same as FPO share trading);
• Not allowing sufficient funds for margins;
• Using market maker platforms;
• Not taking profits quickly enough when the stock run ends;
• Not understanding the importance of Resistance and Support
• Not using charts for entry and exit
• Not letting profits run.
• trying to use CFD's as a Buy and Hold investment method
• Chased running stocks.
• Over traded trying to make back losses (read: gambling).

Now I do this:

• I never use pre-placed or automated stops (the CFD providers see them), I stop myself out if and when I want to;
• I never stop out on a stock that is fundamentally sound and is just being sold down because of general market sentiment;
• I quickly stop out of any stock that has turned sour due to company/operational reasons;
• I always have sufficient funds to cover margin calls so I DON'T HAVE TO SELL OUT OF PANIC;
• I carefully select position sizes;
• I pyramid winning trades;
• CFD's are only for trading not investing;
• Don't "over trade"
• Trade only when the trade is low risk entry and favours the upside.

There is a lot more, like watching positions closely once entered etc. However CFD's are not to be underestimated. You can both win and lose a great deal of money.

I now prefer the slow turtle method and wait patiently for trade entries. I never chase running stocks, nor panic sell. I also keep to myself what my stop position is, that is my business and not for the CFD provider to see.

I don't advocate anyone do this, but on one trade using DMA the stock was sold down and I was sitting on quite a loss and went into margin call. I paid the margin and in fact bought more of this stock. I didn't stop out. I remained in as I KNEW this stock was sound fundamentally and the sell off was emotive and quite frankly ridiculous.

This same stock rebounded strongly and is now trading even stronger. It was SDL and it was post the loss of the board. The CFD provider immediately raised the required margin before the stock came out of trade halt and the stock was sold down. I made a killing out of that situation as I believed the CFD provider and market was irrational. People sold out of panic without a thought as to what may happen. What I thought would happen did happen, George Jones immediately stepped back in and the sp rose strongly and has continued to do so since.

Trading is not always simply about charts

Make no mistake the CFD provider isn't Father Xmas...They want your money and will stack it against you given half a chance. Learn to think like them, know the stocks you trade and take their money instead

 

[Smurf1976]

If I deal with a broker, investment adviser etc then they have no real interest in the outcome apart from keeping me sufficiently happy to retain my ongoing custom.

A market maker, on the other hand, has a vested interest in traders losing money. As with a casino, they don't want you to win. Your loss is their profit and vice versa.

Keep well away from bucket shops IMO. Been there, tried that and ended up being stop hunted - with stops set 20% from the market on a major index (and no, the underlying index sure didn't crash overnight).

 

[hangseng]

If I deal with a broker, investment adviser etc then they have no real interest in the outcome apart from keeping me sufficiently happy to retain my ongoing custom.

A market maker, on the other hand, has a vested interest in traders losing money. As with a casino, they don't want you to win. Your loss is their profit and vice versa.

Keep well away from bucket shops IMO. Been there, tried that and ended up being stop hunted - with stops set 20% from the market on a major index (and no, the underlying index sure didn't crash overnight).

I agree smurf and why I don't trade anything but shares with DMA. I occasionally have a very small flutter (read: gamble) on FX with the AUD/USD but that is about it.

The index "minis" are are great way to lose money IMO. Those occasional incredible spikes up/down that don't match the market are done for one reason only. I always used to find it amasing that no sooner had I placed a position with a stop on FX and mini indexes, it just headed towards the stop. When stopped out it would head back up again...surprise surprise

DMA access to shares though can't be messed with by the CFD provider. It is in the market direct so they are also at the mercy of the market.

Mini's though are controlled by the market maker...read: taking your money is their only mission, they are not their to make you money.

 

[skc]

The index "minis" are are great way to lose money IMO. Those occasional incredible spikes up/down that don't match the market are done for one reason only. I always used to find it amasing that no sooner had I placed a position with a stop on FX and mini indexes, it just headed towards the stop. When stopped out it would head back up again...surprise surprise

Are you really sure that happens??

Get another FX feed and verify it. If that is true, then arbitrage the manipulated price with the real market and it's free money...

I love a CFD provider who make up prices

 

[hangseng]

Are you really sure that happens??

The only thing I am sure of is the spikes that occur without reason and the movements that are not directly related to the real market on occasions. I can but speculate why they occur but I have heard every reason from the CFD provider from a "fat finger" by a big trader to "just following market movements".

I will let them play the games, I will just trade shares as I do now. Whatever I am doing of late is working so I will just keep doing the same. Their recommended way I lost...

 

[nukz]

I would think you could loose money on anything if you don't know what your doing lol.

I wouldn't say trading cfd's is that bad, i think its better if your interested to start off with a demo account so you can get the basic idea of leverage/margins and buy/sell ect.

hangseng Gong Xi Fa Cai nice one 888 for life!!!

 

[SilverRanger]

As a derivative, CFD is probably the simplest you can get - it merely tracks the underlying (and provide leverage of course), but there's no need for Black-Scholes or Greeks. What is complex about this is merely the provider or counterparty risk, especially with clauses like "you are an unsecured creditor in the unlikely event of insolvency" or "your account fund will be pooled with other clients". In a way, I am quite happy to see more regulatory/media attention in this, so to keep the CFD providers honest.
Although I am not too sure about seeing CFD being fully regulated, as that will reduce competition in the market, hence increase costs.

 

[silence]

I have to agree that CFDs are quite risky, and people can quickly get out of their league because they don't fully understand the risks.

 

[Allegre]

What about the index "minis" offered by DMA operators. Ive thought about using these as a cheap way for training myself to pull the trigger without hesitation. If minis are controlled by the market maker, how does this work if they are supposed to be DMA.?

 

[skc]

What about the index "minis" offered by DMA operators. Ive thought about using these as a cheap way for training myself to pull the trigger without hesitation. If minis are controlled by the market maker, how does this work if they are supposed to be DMA.?

Not every product by a DMA provider is DMA.
I don't know of anyone who offers such thing as index minis DMA (though I could be wrong). Same with most FX CFDs.

 

[prawn_86]

Same with most FX CFDs.

FX is an OTC product so there isnt any one particular exchange, so pretty much every FX provider has to use CFDs/derivatives as their product, unless you can afford a bloomberg terminal

 

[skc]

FX is an OTC product so there isnt any one particular exchange, so pretty much every FX provider has to use CFDs/derivatives as their product, unless you can afford a bloomberg terminal

Listen to Prawn - he is the FX professional

P.S. My suspision is that Bloomberg terminals are constructed from recycled x386 computers - can you confirm that?

 

[Paulo30]

It was my understanding FX brokers are slightly different to CFDs, in that you are not being charged or given interest on positions as in CFD trades? Or is this done only on CFDs on equities?

I've traded CFDs in the past, and currently only do FX, and they do look very similar in execution (e.g. spread commission). I understand that FX are OTC and as such all done through one broker who is taking positions against individual traders.

FX is an OTC product so there isnt any one particular exchange, so pretty much every FX provider has to use CFDs/derivatives as their product, unless you can afford a bloomberg terminal

 

[prawn_86]

It was my understanding FX brokers are slightly different to CFDs, in that you are not being charged or given interest on positions as in CFD trades? Or is this done only on CFDs on equities?

To be totally honest i dont know if your charged interest on an FX CFD. Would be interested to find out.

Yes you are better using a 'specialist' FX broker if you want to do regualr trading, but if someone just wants to do the odd trade here and there and already has a CFD account they might as well use that as there is no DMA as such for FX

 

[cynic]

To be totally honest i dont know if your charged interest on an FX CFD. Would be interested to find out.

Yes you are better using a 'specialist' FX broker if you want to do regualr trading, but if someone just wants to do the odd trade here and there and already has a CFD account they might as well use that as there is no DMA as such for FX

I've traded with three cfd providers (two mm and one DMA) over the past five years and although I normally only trade overseas indices, I have read the various pds's for each one of them.
Based on my recollection of what I read, daily interest adjustments are applied in respect to FX cfd's.
To the best of my recollection the only cfd's that are exempt from interest adjustments are the forward contracts which have a designated settlement date.

 

[cynic]

I used to attribute my regular cfd trading losses to my own inexperience as a trader and chose to believe that I had a chance of one day succeeding, provided that I further refined my skills.

After having spent several frustrating and expensive years trading overseas indices with one of the major cfd providers in Australia (whom I shall not name, but I'm sure you won't need more than two guesses!), I became increasingly suspicious that said broker was simply not interested in cooperating with my various efforts to implement a potentially successful trading strategy.

So a year ago I decided to try a different cfd broker.

The first broker I tried used DMA which was okay, I made a few easy profits and the market was more transparent, but the range of products with this broker was somewhat limited and required some adaptation on my part. My revised trading strategy was profitable, but a bit too slow for my temperament.

I decided that I could probably achieve a lot more with a wider range of cfd products such as those offered by an OTC cfd broker - but only if I could find one that I could trust to be ethical in their business conduct.

Six months ago, I believe that I found one.

With my current cfd broker (who uses a market maker) I now feel like I'm trading in an entirely different market.

I'm finding that I am easily able to accommodate the margin requirements of my account whilst getting a good night's sleep without fear of autoclosure of my trading positions.

I often wish I'd discovered this particular broker sooner (still better late than never!).

I have purposely neglected to mention the name of my current OTC cfd broker because I do not want to be seen to be promoting any particular broker on this forum. (I do happily recommend them to any experienced traders that I happen to meet).

The moral of this story:

Whilst a poor trader might always blame his/her broker (or the market, world events, aliens etcetera), when trading OTC cfd's in Australia it is possible that one's broker just might possibly be utilising all the powers/practices legally permissible under the wide ranging scope of their respective pds/client agreement without any regard to the welfare of the client.
In a nutshell - the OTC brokers are legally capable of "!@#$ing" their own clients trading activities in order to line their own pockets (at the client's expense) should they choose to do so!

Finding another broker has worked for me, however, I do believe that OTC cfd traders do need further protection from unethical business practices, such as those that can produce conflicts of interest (i.e. the possibility of cfd brokers betting against their own clients or cfd brokers deliberately generating unrealistic price spikes in order to justify automatic close out of client trading positions).

In relation to ASIC's concerns regarding the risks associated with cfd's, I am concerned that the greatest risk to the client may have been overlooked i.e. CFD (market maker) brokers betting against their clients rather than hedging those positions.

This in my view, would seem to present a significant conflict of interest. Particularly given that the scope of the various pds's I have read to date, allow these brokers to:

(i) deem trades not to have occurred and subsequently reverse them,
(ii) make ("invent") quotes outside of the active trading hours of the underlying markets and
(iii) immediately close out positions upon the account slipping into margin without prior reference to the client.


If there's to be further regulation of the industry, I believe that something needs to be done to limit the extent of the variance between OTC prices quoted on a "made market" and the prices of the equivalent instrument in the real market.

Re-introduction of the 24 hour margin call (as opposed to instant close out) would also be helpful in this regard.

I would happily incur larger deposit requirements and pay a slightly wider spread on my trades in recompense for an OTC broker offering their products with the aforementioned protections in place.

Regretfully, many of the advertisements that I see regarding cfd's seem to indicate that various providers are of the belief that traders only want smaller deposit requirements and tighter spreads instead of amenable,transparent trading terms.

I hope that I am not alone and that my sentiments in this regard are shared by other traders.

 

[Paulo30]

Great post.. thanks for sharing this info.

I had a similar situation about 5 years ago with a large CFD broker (Aus).. well known, and who happens to get a lot of "awards".. totally blew up my bank account due to my lack of experience and their underhanded dealings with moving spreads, pushing out margins, no credit stops etc.. really bad experience.

Only recently went back into CFDs on FX (was using Spot FX prior), and a totally different experience also with a good international broker.

On the topic of interest with CFDs on FX, yes it does get charged.. but depends on your position. The AUD is the most expensive (or best).. if you go short AUDUSD for example it could cost around $1.50 per day on a 10k mini contract. The EURUSD, GBPUSD, and others are a lot cheaper, and it really shouldn't be a consideration for trading.. (ie. around .20 or less per day per 10k contract).

However, if you hold positions for weeks (as I do) it can add up.. so it is something to keep in mind.. if you are shorting the higher interest rate currency.

Regretfully, many of the advertisements that I see regarding cfd's seem to indicate that various providers are of the belief that traders only want smaller deposit requirements and tighter spreads instead of amenable,transparent trading terms.

I hope that I am not alone and that my sentiments in this regard are shared by other traders.

 

[builder2818]

Great post.. thanks for sharing this info.

I had a similar situation about 5 years ago with a large CFD broker (Aus).. well known, and who happens to get a lot of "awards".. totally blew up my bank account due to my lack of experience and their underhanded dealings with moving spreads, pushing out margins, no credit stops etc.. really bad experience.

Only recently went back into CFDs on FX (was using Spot FX prior), and a totally different experience also with a good international broker.

On the topic of interest with CFDs on FX, yes it does get charged.. but depends on your position. The AUD is the most expensive (or best).. if you go short AUDUSD for example it could cost around $1.50 per day on a 10k mini contract. The EURUSD, GBPUSD, and others are a lot cheaper, and it really shouldn't be a consideration for trading.. (ie. around .20 or less per day per 10k contract).

However, if you hold positions for weeks (as I do) it can add up.. so it is something to keep in mind.. if you are shorting the higher interest rate currency.

That's why if you had of went long the AUD when the US dropped it's interest rates and ours kept rising post GFC you would be sitting on a nice gain not to mention the great returns from the cost of carry from the yield differential from this currency pair.