CFDs during flash crashes and similar events?

[didier85]

question - in the instance of the flash crash in 2010 and similar events - if you had a CFD on the Dow 30 with say CMCmarkets (as I do), and the market dropped 1000pts etc and returned back up in moments - your stop losses within that threshold, along with any other buy orders and their stop losses, would all be triggered (and you'd lose big). These assumptions are all correct - right?

Not to mention dodgy CFD providers could deny or modify certain trades in their favour, as sometimes they apparently do (eg. if you picked up something really low during the flash crash and it didn't get stopped out - riding the recovery).

If so, then the only way to protect yourself is to have massive stops (say 50% minimum of face value) and put down the required cash into the CFD account?

This is a danger I've considered recently as I've been investing (more than trading) via cfds in indexes and forex a little, and have been hoping to increase it as my preferred method given their very low cost and ease of monitoring.

Does anyone have any other insight/experience in this idea, or anything to add?

 

[cynic]

question - in the instance of the flash crash in 2010 and similar events - if you had a CFD on the Dow 30 with say CMCmarkets (as I do), and the market dropped 1000pts etc and returned back up in moments - your stop losses within that threshold, along with any other buy orders and their stop losses, would all be triggered (and you'd lose big). These assumptions are all correct - right?

Not to mention dodgy CFD providers could deny or modify certain trades in their favour, as sometimes they apparently do (eg. if you picked up something really low during the flash crash and it didn't get stopped out - riding the recovery).

If so, then the only way to protect yourself is to have massive stops (say 50% minimum of face value) and put down the required cash into the CFD account?

This is a danger I've considered recently as I've been investing (more than trading) via cfds in indexes and forex a little, and have been hoping to increase it as my preferred method given their very low cost and ease of monitoring.

Does anyone have any other insight/experience in this idea, or anything to add?

A few things to consider would be the shortcomings of stop orders and (as you've already mentioned) the ethical conduct of CFD providers.

How will you feel when your 50% stop gets triggered(hunted!?) during periods of low volume?

How will you feel when stops get filled at less favourable prices due to gaps or low volume spikes in price action?

How will you feel if your OTC CFD provider derails your strategy by quoting different prices to different clients and insisting that their conduct is perfectly legal because you'd agreed to abide by their terms and conditions when availing yourself of their products?

 

[banco]

question - in the instance of the flash crash in 2010 and similar events - if you had a CFD on the Dow 30 with say CMCmarkets (as I do), and the market dropped 1000pts etc and returned back up in moments - your stop losses within that threshold, along with any other buy orders and their stop losses, would all be triggered (and you'd lose big). These assumptions are all correct - right?

Not to mention dodgy CFD providers could deny or modify certain trades in their favour, as sometimes they apparently do (eg. if you picked up something really low during the flash crash and it didn't get stopped out - riding the recovery).

If so, then the only way to protect yourself is to have massive stops (say 50% minimum of face value) and put down the required cash into the CFD account?

This is a danger I've considered recently as I've been investing (more than trading) via cfds in indexes and forex a little, and have been hoping to increase it as my preferred method given their very low cost and ease of monitoring.

Does anyone have any other insight/experience in this idea, or anything to add?

Basing your stop loss strategy on the possibility of a flash crash seems pretty nuts to me. How much would you lose on your average trade by having a very large stop due to the possibility of a flash crash? I think the only thing you can do as far as that kind of black swan event goes is be sensible about position sizing. If in the event of a flash crash (or say a major terrorist attack on the saudi oil fields) you might lose a substantial proportion of your wealth then clearly you are trading too big.

 

[skyQuake]

question - in the instance of the flash crash in 2010 and similar events - if you had a CFD on the Dow 30 with say CMCmarkets (as I do), and the market dropped 1000pts etc and returned back up in moments - your stop losses within that threshold, along with any other buy orders and their stop losses, would all be triggered (and you'd lose big). These assumptions are all correct - right?

Not to mention dodgy CFD providers could deny or modify certain trades in their favour, as sometimes they apparently do (eg. if you picked up something really low during the flash crash and it didn't get stopped out - riding the recovery).

If so, then the only way to protect yourself is to have massive stops (say 50% minimum of face value) and put down the required cash into the CFD account?

This is a danger I've considered recently as I've been investing (more than trading) via cfds in indexes and forex a little, and have been hoping to increase it as my preferred method given their very low cost and ease of monitoring.

Does anyone have any other insight/experience in this idea, or anything to add?

If you have a tight-ish stop on u would have been fine. The market did gap down 1000 pts but rather moved (although very fast).

If you didn't have a stop though the position would have probably run into margin call, and as it crashed, you would have been forced out by the CFD provider.

 

[white_goodman]

question - in the instance of the flash crash in 2010 and similar events - if you had a CFD on the Dow 30 with say CMCmarkets (as I do), and the market dropped 1000pts etc and returned back up in moments - your stop losses within that threshold, along with any other buy orders and their stop losses, would all be triggered (and you'd lose big). These assumptions are all correct - right?

correct I remember when it happened the order books were so thin that your stop would be triggered sometimes with a 20-30 point spread on SPI(night session though)... I know in some markets these trades are reversed, I think you would have buckleys chance doing it on CFD though. Trading the actual market might help mitigate this

 

[skyQuake]

If you have a tight-ish stop on u would have been fine. The market didnt gap down 1000 pts but rather moved (although very fast).

If you didn't have a stop though the position would have probably run into margin call, and as it crashed, you would have been forced out by the CFD provider.

edit: derp

^ Agree, if its the o/n spi prepared to get fleeced on spreads. I believe a certain provider can widen the spread to 15pts or so at its discretion, even if there is just a 1pt spread on the futs

 

[didier85]

great responses guys, ty.

Spreads aren't really a concern, because personally I am not really trading it as much as investing via cfds (buying and holding long term - treating what I buy as fully paid for, just that I keep maybe average of 97% of the value in a bank account earning 5% interest meanwhile the -2.2% financing is paid by dividends...).

thats how I choose my exposure/position. and there are few investments less volatile than the DOW30 which is what I aim to mostly invest in (apart from when facing flash crashes...).

So what that would mean is, I might occasionally lose ~3% of my capital during any one of these events (lets say they happen every 2 years on average), which is not good, but it still gives me the opportunity encase it stays down after a drop (although that technically isnt a flash crash) to rebuy when still low/lower.

I would also have to try to avoid leaving orders open much lower down.

That makes it sound like maybe I should borrow money in USA and buy their futures in full, but I prefer the tradeability and control of the CFD platform.

Is there any better strategy?

And additionally, it would be stupid to think a CFD provider wouldn't take advantage of you if there were an event that occurred in a way that their orders couldn't be executed to sell off your contract while the physical market flashed down and up, right? or any similar freak scenario where the result is in your favour?

 

[didier85]

so no further ideas on this? thanks so far anyway

 

[georgey]

Hi d85, I trade cfd's also. 1 Dow contract is equal to about 8-10 SPX500. You could adjust yr sizing such that another crash would not affect you as much, say 2,3 or 4 spx and leave Dow until/if yr account grows to cover such an event. Of course you would have to reduce the size of other investments as well. No stops. Control your risk with size.

 

[banco]

great responses guys, ty.


And additionally, it would be stupid to think a CFD provider wouldn't take advantage of you if there were an event that occurred in a way that their orders couldn't be executed to sell off your contract while the physical market flashed down and up, right? or any similar freak scenario where the result is in your favour?

I personally don't think the major CFD providers are as dodgy as some people think. I've only used IG markets but they seem to play a pretty straight bat. If you think about it they could make plenty of money without having to do dodgy stuff with orders and they'd be asking for regulatory trouble and reputational damage if they were doing dodgy stuff.

 

[cynic]

I personally don't think the major CFD providers are as dodgy as some people think. I've only used IG markets but they seem to play a pretty straight bat. If you think about it they could make plenty of money without having to do dodgy stuff with orders and they'd be asking for regulatory trouble and reputational damage if they were doing dodgy stuff.

Do you mean to say that they'd be concerned about getting into trouble with that regulator called ASIC?

I believe that's the same regulator that's been liberally issuing AFSL's to shonky operators all over Australia for some years now.

Hadn't you noticed the numerous other threads on this forum where posters complain about having lost large sums of money after being mislead by licensed financial service providers?

Banco, I'd be interested to know if you have ever been able to achieve consistent profits from your trading activities with IG's OTC CFD's?

I'd also like your assurance that you have no relationship with IG Markets beyond that of being their client.

 

[didier85]

Thanks georgey, I usually trade in increments of 1 $1 contract, ie about $14000 face value. But cmc markets lets you trade even tiny amounts like less than 1/10th of a contract so far.

Has anyone noticed that they increased their overnight funding charge rate by 1% on Monday? I'll ask this again elsewhere, but I think it will drive me to IG markets for forex don't want to pay extra 1%pa to fund holding a USD etc contract...

They didnt change/increase the funding cost on index cfds though... yet...

 

[georgey]

Didn't know they charged for overnt forex, but they now charge for shorts where before they credited.
Their Tracker platform is horrible in the extreme compared to Marketmaker. Only advantage is having no minimum size and a Demo platform so it's great for learning, one can also easily see what financing is charged in the history part of the account. Pity they couldn't do all that with MM, one is suspicious when complaining that they trot out all the dubious 'benefits' like take profits, better stops, blah blah, which simply seem to be more traps for the unwary.

 

[banco]

Do you mean to say that they'd be concerned about getting into trouble with that regulator called ASIC?

I believe that's the same regulator that's been liberally issuing AFSL's to shonky operators all over Australia for some years now.

Hadn't you noticed the numerous other threads on this forum where posters complain about having lost large sums of money after being mislead by licensed financial service providers?

Banco, I'd be interested to know if you have ever been able to achieve consistent profits from your trading activities with IG's OTC CFD's?

I'd also like your assurance that you have no relationship with IG Markets beyond that of being their client.

I'm far from ASIC"s biggest fan but I don't think they are quite as toothless as you think. It's no secret that CFD's are under the regulatory microscope and in terms of risk/reward why would they open themselves up to regulatory action if they can do well playing it straight?

Yes I've noticed those threads. Frankly they mainly seem to involve investing with some conman on the gold coast. Not exactly shocking that those kinds of arrangements turn pear shape. As I've said on here a few times a financial firm been located on the gold coast is a very bad sign.

I finished up around 17& last year solely trading asx cfds (not dma) last year on IG markets and I'm up substantially this year (admittedly we are in a ball market). They may well do dodgy things with forex and indices but the prices on the asx cfds seem to track the underlying market.

I have no affiliation with IG markets.

 

[cynic]

I'm far from ASIC"s biggest fan but I don't think they are quite as toothless as you think. It's no secret that CFD's are under the regulatory microscope and in terms of risk/reward why would they open themselves up to regulatory action if they can do well playing it straight?

Yes I've noticed those threads. Frankly they mainly seem to involve investing with some conman on the gold coast. Not exactly shocking that those kinds of arrangements turn pear shape. As I've said on here a few times a financial firm been located on the gold coast is a very bad sign.

I finished up around 17& last year solely trading asx cfds (not dma) last year on IG markets and I'm up substantially this year (admittedly we are in a ball market). They may well do dodgy things with forex and indices but the prices on the asx cfds seem to track the underlying market.

I have no affiliation with IG markets.

Thanks for clarifying that for me Banco.

The fact that you're trading different instruments to myself may provide some explanation for our differing viewpoints, so please accept my apologies for the bluntness of my response to your earlier post.

During my years of trading index futures cfd's, my trading strategies were regularly derailed by autoclosure of open trades despite my repeated and concerted efforts to accommodate the rigid margin policies of that particular (major) CFD provider. Upon (finally) trying another provider, I was delighted to discover that my trading results improved dramatically. I was now able to more easily and confidently generate profits most of the time and actually fearlessly attend to life's other necessities (eg. exercise, shopping, sleep etc.) without fear of my positions being autoclosed in my absence. Some might argue that this turnaround in fortunes was just pure coincidence, however, I am simply not that naive.

As for ASIC, all I've seen from them (thus far) are derogatory opinions regarding the sophistry of cfd traders and some rather tepid "if not, why not?" disclosure benchmarks.
I'm sure that all Australian retail traders will sleep so much better at night now that they know that ASIC is committed to ensuring that any ethically challenged financial services provider is now required to make fuller disclosure of the nefarious business practices by which they intend to fleece their prospective clients.

In fairness to ASIC, I did find a few paragraphs within one of their publications that I could (at least partially) agree with. The following excerpts indicate an awareness of some of the issues that OTC CFD traders are likely to encounter:

...
Market maker CFD providers may also hedge the CFDs they offer, but these arrangements are generally less transparent than for direct market access providers. Market makers may not hedge all the CFD trades you place, and so may directly benefit if you lose on your trade.
...
While it might seem good to be able to trade whenever you want, there are additional risks involved if the CFD provider lets you trade when the market is closed. When the underlying market is closed, you can’t check how CFD prices compare to market prices, which could result in price distortions.
...
CFD providers will also usually set a ‘liquidation’ level on your CFD trading account. This is the level at which any open CFD trades will be closed if you do not have enough money in your account to cover adverse movements on your trades...

The full document may be found here:
https://www.moneysmart.gov.au/media/173820/thinking-of-trading-in-contracts-for-difference-cfds.pdf

Although I've yet to read this document in it's entirety, I've already encountered several statements that convey an incomplete, misleading or erroneous impression of OTC CFD products offered in Australia. This leads me to suspect that ASIC is currently too "unsophisticated" to fully appreciate the extent to which "conflict of interest" issues have permeated the industry.

From the aforesaid, I think my concerns regarding the integrity of the OTC CFD industry and ASIC's inefficacy can be readily understood.

In summary, buyer beware and please don't depend on ASIC. (Unless of course you're willing to join the multitudes of other Australians whom are slowly realising that the growing hole in their bank account may have more to do with their OTC CFD provider's actions than they were previously aware.)

 

[cynic]

Upon observing a recent post enquiring about DMA versus Market Maker CFD's, I decided that this would be an opportune time to bump this thread.