DMA CFDs? Is it all above board?

[StockyGuy]

What scares me most about CFDs is the alleged hunting of stop losses. I gather that should be impossible on DMA CFDs, by definition; but am curious if any of those who use(d) them have had any concerns in this regard.

Any other negative experiences with DMA CFDs? (Apart from just making a loss lol.)

 

[Gringotts Bank]

When serious volatility hits futures markets, they set the CFD price wherever they feel like it, sometimes hundreds of points away from the underlying contract. So you can have stops hit or find yourself panic selling when there's no need. All they care about is their risk, and they will screw their clients if it means protecting themselves.

Fine for DMA stock trading.

 

[StockyGuy]

When serious volatility hits futures markets, they set the CFD price wherever they feel like it, sometimes hundreds of points away from the underlying contract. So you can have stops hit or find yourself panic selling when there's no need. All they care about is their risk, and they will screw their clients if it means protecting themselves.

Fine for DMA stock trading.

Thanks for response, sir.

Just for my understanding, your first paragraph relates purely to MM CFDs?

Maybe with DMA CFDs they might be eg heavy handed closing a highly leveraged DMA long CFD position too quickly where the stock price takes a tumble.

If you use 'em much do you find yourself still say preferring to have an alert, not a stop loss, on DMA CFD trades?

The only really bad thing about DMA CFDs, which is also shared with MM CFDS, as far as I can make out is the indignity of paying interest on your whole position, not just the leveraged amount. Oh and less choice of underlying stocks (and commodities etc). Would you add anything else significant to the downside?

 

[Gringotts Bank]

Thanks for response, sir.

Just for my understanding, your first paragraph relates purely to MM CFDs?

Maybe with DMA CFDs they might be eg heavy handed closing a highly leveraged DMA long CFD position too quickly where the stock price takes a tumble.

If you use 'em much do you find yourself still say preferring to have an alert, not a stop loss, on DMA CFD trades?

The only really bad thing about DMA CFDs, which is also shared with MM CFDS, as far as I can make out is the indignity of paying interest on your whole position, not just the leveraged amount. Oh and less choice of underlying stocks (and commodities etc). Would you add anything else significant to the downside?

Yes, MM. The bigger and more secure brokers like IG only offer MM CFDs on futures. Smaller operators may offer DMA, but I would not trust them with my money. They are often run by shifty types.

You can't trade microcaps because they're not usually offered. If you're really keen, and the stock is liquid and and you have a big enough account...then you can ask your CFD broker and they will add whatever stock you want, but that takes time and effort. If you want to short anything outside the top 200, the spread is enormous. So unless you're sure of yourself, crossing the spread is very costly.

I don't use them any more.

 

[T0BY]

what market specifically are you trying to access with a DMA CFD provider? What is the reason for wishing to incorporate a "middle man"?

 

[StockyGuy]

what market specifically are you trying to access with a DMA CFD provider? What is the reason for wishing to incorporate a "middle man"?

I want to incorporate some leverage to magnify returns for short term trading based on chart patterns.
- Options strategies are too complicated for me to properly know what I'm doing. I fear a costly learning period.
- Futures require significant capital.
- Margin loan means you broker is constantly watching what you're doing. The interest rate is typically very high.

Australia and US markets mainly. Im not doing much at the moment - trying to increase capital (the boring way - saving money from my job lol) and investigate before taking another swing at the markets.

 

[peter2]

The ignorance shown in this thread so far has stirred me into posting. By definition, ignorance is the lack of knowledge. It is not meant to be derogatory.

Market participants have always had to deal with middle-men or brokers to facilitate their dealings in the financial markets. I would rather deal directly with the exchanges and pay cents/contract than the exorbitant fees charged by brokers. This is the system we've got and until it changes we have to pay for this facility. I don't wish to use a middle-man but I have to.

I hate the whining from losers as they blame their broker for everything without ever admitting it was their own fault. If you make a deal with the devil, don't complain about it.

"Alleged stop hunting": Market prices move due to the participation of a large group of diverse participants. It's ignorant to be unaware of their activity and the roles they have in the markets. The main purpose of liquidity providers is to allow prices to move. As a short term trader I provide a small amount of liquidity every time I buy and sell. In a thin market my orders move prices as I cross the spread. Larger participants need to move prices in order to generate more activity and fill their orders. If our stop loss sell orders are within this natural price movement then they are going to get hit and triggered. Occasionally the markets become thin and this allows price to move more than normal. This is not abnormal. This is not a "stop hunt". Losers may call it one as they won't accept that their sell stop was too close.

Nice little "stop hunt" in TLG two days ago. (say the losers)

Others thought it a great opportunity to buy more.

 

[T0BY]

A few years ago now, I traded CFDs with IG. I was trading correlated financial stocks(buy one, sell the other when the spread between the two was statistically high)..
Anyway, I remember just looking at the IG charts some days and seeing these large spikes, which may have been stop runs (I don't know), but I thought about just putting on some outlier pending order in the hopes that one of these spikes get me into a position at a crazy price.

The obvious thing to do if you are concerned is cross check the chart from your CFD provider with that of the underlying stock.

 

[peter2]

At last, we get to the real problems, insufficient capital and a desire to grow this capital at a faster rate than what the market provides.

In the old days before leverage was available if you didn't have enough cash to buy a marketable parcel you couldn't. Brokers supply leverage at a cost. If you want to use this service don't complain about how much it costs. They recoup their costs by widening the spread or charging interest on the total position size. So what? That's the conditions you agree to when you sign up.

Not enough stocks to short? Seriously? If you can't make money shorting the top 200 most liquid stocks why complain that you can't short others outside their lists.

If you think that trading profitably is hard, then you're right. If you think that the odds are stacked against you, then you're right. If you think something is impossible, then you're right.

 

[StockyGuy]

At last, we get to the real problems, insufficient capital and a desire to grow this capital at a faster rate than what the market provides.

In the old days before leverage was available if you didn't have enough cash to buy a marketable parcel you couldn't. Brokers supply leverage at a cost. If you want to use this service don't complain about how much it costs. They recoup their costs by widening the spread or charging interest on the total position size. So what? That's the conditions you agree to when you sign up.

Not enough stocks to short? Seriously? If you can't make money shorting the top 200 most liquid stocks why complain that you can't short others outside their lists.

If you think that trading profitably is hard, then you're right. If you think that the odds are stacked against you, then you're right. If you think something is impossible, then you're right.

Thanks, Peter. Don't get me wrong I won't be trading with minuscule capital again, but certainly my approach may be different from some here. I'm a humble debt free home owner, yet there are some genuine liquid asset millionaires on this board who can trade very safely with no leverage and still get worthwhile results. For me, at my capital level, having the availability of doubling my position size with CFDs is worthy of consideration. But I have no CFD account currently, nor ever have.

I gather double position size with CFD would not put me at so much higher percentage interest than a margin loan, even though I'm paying interest on my own capital with the CFD. Yet with CFDs you are in much more control than a margin loan. At your own peril you can also use much more leverage with a CFD IF you get that feeling everything mystically aligns (yes I know probably better to ignore these feelings!).

I've always been dubious of the stop hunting stories but I've read of it MANY times around the traps. For a "backyard" unscrupulous smaller operator the opportunity must be deliciously attractive at times. Some idea of a high level functionary at a CFD company cackling with delight as he presses the down arrow on his keyboard causing a particular last stock price to be several ticks below what it is on the ASX feed, thereby capturing 100s of Ks from customer stop losses being triggered comes to mind. It seems it would not be technically hard.

But Id be surprised if the big MMs would do it these days. They have enough of an edge from people's unsafe money management - risking way too much on a trade, letting losing trades run, taking profits too quickly yada yada yada.

 

[Knobby22]

I prefer actually borrowing the money. It concentrates the mind and is cheaper (as long as you have housing equity).
Not as flexible sure, but at least it is totally real

 

[Triple B]

I have traded ASX with both DMA anf MM brokers.
DMA was with FP Markets and MM was with Trade Direct 365
I still have both accounts but am concentrating on developing an algo on FX at the moment.
My Fx account is a ECN acc with FP Markets.
DMA account is the way to go if you are concerned with stop hunt with MM. Never had a dodgy trade movement with either broker . The main advantage with the Mm broker is the $5min trade cost .
DMA broker was $10 min. Also with the MM Broker you can use your margin as your loss money .
this is with a guaranteed stop loss. Without a GSL you can use 120% of margin as a loss buffer as long as a SL is in place.
With DMA your losses come out of your account before the margin is touched.
So with MM you need less$ in your acc for the same notional amount traded.

eg DMA . BHP buy at 20x Margin 100 shares @$35.00 . notional $ = $3500 , margin required $175.00 . Risk you determin is $100 so you need $275.00 to make the trade.

MM (td365) BHP Buy at 20 x Margin 100 shares @$35 . Notional $= $3500 . margin required with a GSL , with your risk determined at $100 is $100. so cost to make trade is $100.
with standard SL risk $100 required margin is $120 to provide for slippage.
With no SL margin required is 5% or $175 , to enter trade

Both Brokers are around 5% PA financing cost on whole notional amount. Thats cheap borrowed $$.
As you can see for us very small players MM give s most bang for bucks but is also more of a risk of broker manipulation. It should be noted that MM can also hedge on the Market . MM generally have a max Risk they will take before hedging . i imagine with a proven profitable customer they will hedge all trades and just collect the commissions ( ie the "A" bookers)
Hope this helps .

 

[StockyGuy]

Both Brokers are around 5% PA financing cost on whole notional amount. Thats cheap borrowed $$.

It certainly is. Margin loans being typically above 7% these days. With the CFD it's effectively cheaper the more you leverage also. IF you had a solid CFD broker that did not charge you interest on your own funds, just the borrowed funds, you'd have it all!

Thanks muchly for that Triple B; always good to get a "from the trenches" type of report

 

[StockyGuy]

Hmmm I must be missing something here. This IG set up seems too advantageous to the trader. Please tell me where the catch is...

Just reading their site https://www.ig.com/au/share-trading-collateral , with IG you can link an IG share trading platform with IG CFD account, with the former being collateral to the latter. It says you can "Use up to 95% of the value of your shares as collateral." In other words I can generally just trade in the normal platform, only using the CFD platform when due to capital limitations I can no longer take further positions on the share trading platform.

While it does not allow 100% value to be used as collateral, this allows me to not have to pay overnight interest on my own money on all long (and some short) positions, as you do with a CFD trade. They also say "Importantly, you can only use your shareholdings to cover the initial margin on your CFDs. Any running losses will need to be covered by the available cash in your margined account." So some cash in CFD platform must exist but not much if using tight guarantee stops anyway.

It seems complicated and I might be missing something. Complexity tends to hide a serious downside.

Has anyone used this Collateral Service?