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CFDs 2000s vs. Bucket shops 1890s: Reminiscences of a Stock Operator

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rhmt01

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I've had experience with CFD's (and now I wouldn't touch them with my enemies money), and now after reading Reminiscences of a Stock Operator by Edwin Lefevre I find alot of similarities.

Limited Risk Accounts (with Guaranteed Stop Loss - GSL) act similarly to the type of margin used in those days, and the attitude of market makers (the crap spread etc for non DMA for getting out of a spread) in cashing in profits are the same attitude as the bucketshops of the 1890s.

I'd say things are worse now, bucketshops never charged nightly interest nor charged a fee for market data. And they did provide you a TAB type environment (with tea and coffee) to hang out in all day.

But both derive most of their income from the same source... Collecting your entire margin on a GSL when it hits the GSL limit. It is also ironic that GSL's are touted as a good thing and they charge a premium for this service!

Next thing they will try to sell is the ability to convert normal american style options to a knock out option for an extra 5%...

Does anyone see any similarities here or am I just cynical?
 
Re: CFD's 2000s vs. Bucket shops 1890s: Reminiscences of a Stock Operator

Outstanding book that by the way - pity that he (Jesse Livingstone) capped himself... One of the few books that investors MUST read in my honest opinion...
 
Re: CFD's 2000s vs. Bucket shops 1890s: Reminiscences of a Stock Operator

After reading that book I also saw some similarities... however it comes down to this: If you're long a stock that goes up, you make money. If you're short, you lose. And vice versa.

CFD providers get a very bad wrap, but they are hardly the fault if you lose a lot of money trading them.
 
Re: CFD's 2000s vs. Bucket shops 1890s: Reminiscences of a Stock Operator

I know it is not their fault if you lose your money with them but the investment method is floored (IMO).

The fact that you could lose your entire investment due to 1 bad day, and that they (the CFD providers) tout CFD's as an alternative to owning stocks/or margin lending (ie. buy and hold) has got my goat.

Margin Lending (with my experience with BT) give you 5 days for your margin call in which time it usually up again. CFD providers give you 24 hrs (if even that) to clear your margin (most of the time, they ring wanting authority to debit your credit card with the 3% or whatever commission) or you get closed out even for non GSL.

In the battle between options and CFDs, options is a much better derivative of the underlying than CFDs. Same Risk/Reward profile, without the knock out feature of the CFD. (most of the time your time decay would be less than what you are paying in overnight interest anyway - especially for the more expensive stocks, such as CSL/MBL/RIO.)

All you have to do is buy an option whose strike price is 3-10% (the CFD margin) in the money from the underlying (consider far months etc).

CSL underlying 55.00

CSL 51.5 Call Option = Synthetic Long 1000 CSL CFD
CSL 58.5 Put Option = Synthetic Short 1000 CSL CFD

(at 5% margin)
 
Re: CFD's 2000s vs. Bucket shops 1890s: Reminiscences of a Stock Operator

and with options

1. no margin calls
2. good luck trying to trade several thousand expensive stocks (CSL/RIO/MBL) especially with DMA. Options contract is a standard 1,000 (there are adjustments, but they still leave it 'around' 1,000) - not counting significant corporate actions.
 
Re: CFD's 2000s vs. Bucket shops 1890s: Reminiscences of a Stock Operator

Not everyone thinks CFD's are a waste of time...some people swear by them.
Bill McLaren reckons they're the best thing since mini skirts!
He was an options trader for many years but told me recently that he's given options away and now trades CFD's instead.

Bunyip
 
Re: CFD's 2000s vs. Bucket shops 1890s: Reminiscences of a Stock Operator

Hi Guys, not gona try and get "technically" involved here, but imo, if you trade CFD's the same way you would trade a normal share, then I can't see a problem .....from my "limited" experience" the only trouble you can get into trading CFD's is, if you use the "margin" that is available to "overstep" your position ie. Say you had $9,000 you wanted to invest in stock X at $3 (not CFD) That is 3000 shares ......... To do the same transaction via CFD (ie buy 3000 shares) you only need say 10% of capital required to buy the share outright ($900) If the share goes up or down, whether you bought it through a broker at full price, or through a CFD provider, then there is no difference ..... You win/lose a similar amount .......It is "playing" with the leverage available that can get you into trouble, not the CFD provider imo .............Thats the way I approach it anyway; mainly because my capital atm is limited .........Hope that makes sense, Cheers Barney.

PS Rem. of a Stock Operator was a great read ....couldn't put it down
 
Re: CFD's 2000s vs. Bucket shops 1890s: Reminiscences of a Stock Operator

The 10% you pay is just the initial margin... Mark to market as well as interest comes outside of that 10%. (or whatever the margin for that share is)

So...

initial margin: 3000 XYZ x $3 x 10% = $900

first night interest (most charge interest on the entire amount): $9000 x 7.5% (+1.5% is common) / 365 = $1.84 (assume $2)

lets assume a 5% drop on the second day:

$3 -> $2.85:
mark to market loss: 15c x 3000 = $450
interest: $2
cash remaining: $900 - $452 = $448
remember 10% margin is required to maintain the position; so
margin required: $855 so margin call of $855 - $448 = $407
So a 5% drop on the second day requires you to put up an extra $407.

ouch...

So yes you only need 10% (or whatever) to open the position, however once you have an open position you must maintain it to keep it.

I pity all those who were long RIO/BHP with CFDs a few weeks ago.
 
Re: CFD's 2000s vs. Bucket shops 1890s: Reminiscences of a Stock Operator

rhmt01 said:
The 10% you pay is just the initial margin... Mark to market as well as interest comes outside of that 10%. (or whatever the margin for that share is)

So...

initial margin: 3000 XYZ x $3 x 10% = $900

first night interest (most charge interest on the entire amount): $9000 x 7.5% (+1.5% is common) / 365 = $1.84 (assume $2)

lets assume a 5% drop on the second day:

$3 -> $2.85:
mark to market loss: 15c x 3000 = $450
interest: $2
cash remaining: $900 - $452 = $448
remember 10% margin is required to maintain the position; so
margin required: $855 so margin call of $855 - $448 = $407
So a 5% drop on the second day requires you to put up an extra $407.

ouch...

So yes you only need 10% (or whatever) to open the position, however once you have an open position you must maintain it to keep it.

I pity all those who were long RIO/BHP with CFDs a few weeks ago.
Click to expand...


Hi rhmt01, I appreciate what you are saying, and don't dispute it ........... my only comment would be, if the sp dropped say 5% on the second day, the position would probably have been stop/ lossed out, (regardless of whether we bought via CFD or broker (Full amount) ........ so paying 1-2 days interest of say $ 2 per day would have been inconsequential ....And we have to consider,that to hold the initial "position" on CFD we only require say 10% of what it would have needed to hold the position (normally) had we bought the same amount of stock outright .............. if we had bought the stock via broker, and it dropped 5% overnight , are we in a better position than if we had bought via CFD ?? (ie we are still down 5% ) I don't think so, but I am open to opinion, cause I may be missing something, All the best Barney.
 
Re: CFD's 2000s vs. Bucket shops 1890s: Reminiscences of a Stock Operator

Yep thats my point. My contention is that shares should be a long term proposition. When you invest in a share, you expect them to "trend" in an upward direction over a period of time.

Yes there will be some down days as much as there will be up days, but in the medium to long term you expect the share price to grow.

If you owned the shares (or options or warrants), you have the "choice" to hold them for the next day or the day after that (months with options and warrants, indefinitely with shares) without having to put in another cent.

With CFDs you are forced to deal with the consequences of the drop there and then, choosing either to exit the position at a loss, or having to fund the position further. Emotionally and practically, this is very different to share ownership.

I have seen people literally ride an emotional rollercoster with CFDs, cheering on a share like race horse and swearing at it when it goes down. You are betting on continous short term rises, when in reality over the short term a share price shows a near random pattern. Short of having inside information, you could not for say for certain that "tommorrow will be an up day"... But that is essentially the bet you have made.

I haven't seen anyone who owns a well balanced, well thought out portfolio do such a thing.
 
Re: CFD's 2000s vs Bucket shops 1890s: Reminiscences of a Stock Operator

I personally would only dispose of a dropping share due to fundamental problems with the company, such as poor profit results or poor industry outlook.

But alot of CFD traders would dispose of a share because it is having a bad day or bad week share price wise, without any fundamental reasoning behind it but because they do not wanting to fund their position further.

This is akin to ripping up your TAB ticket when your dog is slow out of the box with the whole race to go at the greyhounds. You wouldn't do that there, why do it here?
 
Re: CFD's 2000s vs Bucket shops 1890s: Reminiscences of a Stock Operator

I have to disagree with your assessment of CFDs, rhmt01.

Firstly, I'll concede that trading with CFDs can be a minefield because of the leverage. They're designed to efficiently extract money from mug punters.

Using them at maximum leverage is a guaranteed recipe for blowing up your account.

The way to use CFDs successfully, even for long term trend trading, is to use them to allow you to increase your portfolio HEAT without exceeding pre-determined risk and drawdown limits.

As an example, if you have a system which has a 12% maximum drawdown, you could leverage this with CFDs up to x4 so long as you could handle a 48% drawdown. The opposite side of the equation is that it would increase profits x4 less interest expenses (minor).

You need to have sufficient funds deposited in the CFD account to cover the total risk you are taking at any given time, and you must use a stop (not necessarily in-market or a GSLO).

A margin call should NEVER occur in a CFD account if traded correctly. Trading correctly with CFDs requires strict and complete attention to risk control above all else.

btw, CFDs are not suited to value investing due to the margin calls this style of investing would incur.
 
Re: CFD's 2000s vs Bucket shops 1890s: Reminiscences of a Stock Operator

rhmt01 said:
I personally would only dispose of a dropping share due to fundamental problems with the company, such as poor profit results or poor industry outlook.

But alot of CFD traders would dispose of a share because it is having a bad day or bad week share price wise, without any fundamental reasoning behind it but because they do not wanting to fund their position further.

This is akin to ripping up your TAB ticket when your dog is slow out of the box with the whole race to go at the greyhounds. You wouldn't do that there, why do it here?
Click to expand...

HI THERE rhmt01
I THINK YOU MIGHT BE PARTLY ANSWERING YOUR QUERY . I BELIEVE YOU WILL FIND THAT THERE ARE FEW WHO TRADE CFDs USING FUNNYMENTALS, I MAY BE WRONG! BUT I THINK THAT TRADING LEVERAGED INSTRUMENTS REQUIRES TECHNICAL ANALYSIS,WELL THOUGHT OUT STOP LOSSES GOOD MONEY MANAGMENT A REPEATABLE TRADING PLAN AND THE B#$%S TO STEP BACK UP TO THE PLATE IF ALL THAT BALANCES YOUR MARGIN CALLS WILL BE FEW AND OF LITTLE CONSEQUENCE.I TRADE PRIMARILY FUTURES AND HAVE DONE FOR MANY YEARS AND I THINK THE CFD GAME SHOULD BE PLAYED SIMILARLY
I KNOW OF PEOPLE WHO HAVE SHARE CERTIFICATES FOR "FUNDAMENTALLY" SOUND COMPANIES IN THEIR BOTTOM DRAW THAT ARE ONLY GOOD TO BE SENT TO THE PUREX FACTORY FOR ROLLING ON A CARDBOARD TUBE, BUT I ALSO KNOW PEOPLE WHO ARE DOING VERY WELL TRADING CFDs USING TECHNICAL ANALYSIS
GOOD TRADING
BM
MY :2twocents
 
Re: CFD's 2000s vs Bucket shops 1890s: Reminiscences of a Stock Operator

CFDs are obviously disliked on the forum, but I'd have to agree with Michael.

I like the fact with a small acount they can be used to build capital easier with a short term system because of lower commissions. ie $4k parcel of shares=$30 to buy, $30 to sell. Total=$60... CFDs 0.1% ie $4 total.

If used with a system designed with positive expectancy and money management a ($56 - interest) saving can be quite useful.
 
Re: CFD's 2000s vs Bucket shops 1890s: Reminiscences of a Stock Operator

bowser said:
CFDs are obviously disliked on the forum, but I'd have to agree with Michael.

I like the fact with a small acount they can be used to build capital easier with a short term system because of lower commissions. ie $4k parcel of shares=$30 to buy, $30 to sell. Total=$60... CFDs 0.1% ie $4 total.

If used with a system designed with positive expectancy and money management a ($56 - interest) saving can be quite useful.
Click to expand...

Hi Bowser, re the 0.1%, does your provider have a minimum charge? Mine does ($10 I think .... could be $12), regardless of whether you only buy a small parcel of shares.
Cheers , Barney PS I use Green CFD
 
Re: CFD's 2000s vs Bucket shops 1890s: Reminiscences of a Stock Operator

If you don't appreciate the difference in prices you are quoted when trading with each of the following:

1. cfd's with GSL,
2. cfd with .1% marketmaker,
3. DMA cfd,
4. options.

then I don't think the derivative market is for you.

You should be able to state the cost difference and risks involved in each of these instruments before getting involved with them.

(should include margin lending as well really)
 
Re: CFD's 2000s vs Bucket shops 1890s: Reminiscences of a Stock Operator

rhmt01 said:
I personally would only dispose of a dropping share due to fundamental problems with the company, such as poor profit results or poor industry outlook.

But alot of CFD traders would dispose of a share because it is having a bad day or bad week share price wise, without any fundamental reasoning behind it but because they do not wanting to fund their position further.

This is akin to ripping up your TAB ticket when your dog is slow out of the box with the whole race to go at the greyhounds. You wouldn't do that there, why do it here?
Click to expand...

You don't seem to appreciate the differences between trading and long term investment. Nor do you seem to understand why one approach is well suited to CFD's, while the other is not.
Furthermore, your comment about traders quitting a trade because the stock has a bad day or a bad week, shows that you have little idea of how the pros operate. Sure there are traders who might bail out for these reasons, but I doubt if they make much money.
In trading, the big money is in the big trends. A short term retracement such as a day or a few days or a week of retreating prices, is of little concern to a trend-riding trader, providing the uptrend remains intact. In fact he likes to see these retracements because firstly, they give him opportunities to pyramid his position, and secondly, they tend to set up the next upward surge in price action.

If you're going to stick with a stock irrespective of its price action, as long as you consider the fundamentals are sound, if you're not going to get out even if the trend changes direction and starts going against you, if you're going to leverage to the hilt with CFD's but not have a contingency plan in place if your stock doesn't cooperate, then you'll certainly come unstuck quick and lively with CFD's.
However, I'd suggest that the above scenario can also bring you undone with bought options, even long dated options, due to the effects of time decay.

However, if you're a competent trader with the ability to recognise trends early, get a timely entry into them, ride them while they continue strongly in your favour, trail your stop loss progressively higher to lock in increasing amounts of profit, get out if the trend turns against you, and if you have the sense not to go berserk with the leverage, then CFD's can be an excellent vehicle for this style of trading.

Bunyip
 
Re: CFD's 2000s vs Bucket shops 1890s: Reminiscences of a Stock Operator

I like the comparsion of CFDs to the bucket shops of the olden days.

People go belly up with CFDs because they have a crack at them before they have profited from physical share trading, consistently, for years and years. Quite frankly these people deserve to lose their money.

Nothing beats mini skirts

Rex
 
Re: CFD's 2000s vs Bucket shops 1890s: Reminiscences of a Stock Operator

barney said:
Hi Bowser, re the 0.1%, does your provider have a minimum charge? Mine does ($10 I think .... could be $12), regardless of whether you only buy a small parcel of shares.
Cheers , Barney PS I use Green CFD
Click to expand...

No, I quite often buy $4k worth of contracts because of money management rules and commission is $4. (igmarkets)
 
Re: CFD's 2000s vs Bucket shops 1890s: Reminiscences of a Stock Operator

bowser said:
No, I quite often buy $4k worth of contracts because of money management rules and commission is $4. (igmarkets)
Click to expand...


Thats interesting Thanks Bowser, I'll have to look into IG ..... That extra few dollars each trade would give a lot more flexibility when setting up a position Cheers , Barney.
 
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