How safe are CFD providers from going bankrupt?

[jiggy]

Has anyone thought how safe the likes of cmc, igmarkets etc are from this credit crisis. And what would happen to your money if they went bankrupt??

 

[wayneL]

Fanstastic question... and the reason those with big accounts (or even small account where that money is really important) should think very seriously about those questions.

 

[hissho]

so if those CFD providers went belly up, one would lose all the money in their account?

a bit scary but on the other hand i wonder if the government have policies in place so that customers would get compensated in case that happened? i guess so cos i remember there is such a mechanism in the States....otherwise nobody would have confidence and trades wouldnt be facilitated well...

 

[Andy_aus]

Would they run through those kind of scenarios with the PDS? Do they hedge all their positions?

Anyway ive learnt my lessons with market makers

 

[tech/a]

I was with a provider here in Australia and was told their UK operation had gone into liquidation.
So I requested my funds be returned to my nominated account.
This was carried out immediately and within 3 days had the funds.

Ive since had a look at how I can mitigate risk to the best of my ability.

(1) I'm changing provider now and will have 3
(2) Will have small amounts of funds in each.
(3) Will have funds in excess of start up capital transferred every week into my master account.

Evidently here in Australia funds must be kept in trust at arms length from the principal.
The theory is that they remain outside of any company issues.
DMA providers are at less risk due to immediately taking positions in the underlying.

 

[tech/a]

I noticed that Radge mentioned tha IB dont have any Australian stock available for shorts as of Friday night.

If so whats that say?
Other than the physical stock isnt available.

 

[MichaelD]

DMA providers are at less risk due to immediately taking positions in the underlying.

I don't see how this would mitigate the CFD provider's risk exposure at all.

 

[prawn_86]

I would have thought that MM are safer from going belly up.

With a MM you are only buying a derivative of a share price. You dont own any underlying asset, so therefore the co doesnt either. Technically you are just buying a couple numbers here and there.

That said however, if more people won than lost they would be in trouble. I guess what they rely on comes back to a few dodgy tactics and the whole 95/5% things with only a few people being profitable

 

[Timmy]

Michael and Prawn,

I would have thought tech was right, that a DMA provider, by being fully hedged, would have less (basically no) exposure to market movements. A MM DMA provider, on the other hand, who can choose to hedge or not to hedge may find him (or her)self unhedged during a big adverse move and therefore more exposed? That would be my reasoning.

 

[Trembling Hand]

I have sent an email off to CMC to get them to answer the Q's about account protection. I remember reading something about it on their website years ago but it seems to have vanished.

As for IB they have 1 mil cash insurance and 30 mil stock insurance per account.
http://individuals.interactivebrokers.com/en/accounts/accountProtection.php?ib_entity=llc

 

[MichaelD]

DMA and MM - actual market exposure is irrelevant as their risk is that simply represented by the payment ability of the individual traders. The DMA has the added inconvenience of actually having to transact the trade, thus increasing costs to them.

If we accept that the vast bulk of CFD traders blow themselves up, then the actual risk to the CFD provider becomes the ability of the traders to pay their debts when they blow up/are margin called, not the risk of suddenly all traders being correct.

 

[korrupt_1]

I got an Newsletter email from IG Markets on the 8th March. In it they wrote:

As of 30 November 2007, on the latest published balance sheet IG Group had total assets of A$1.83 billion, no debt and own cash of A$240 million.

http://www.iggroup.com/

Large assests, no debts and +ve cash... sounds like they are going strong....

 

[tech/a]

I don't see how this would mitigate the CFD provider's risk exposure at all.

Well in a couple of years time you will.

Sorry my humour couldnt resist!!

 

[Kauri]

a new player??? maybe..

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/17/cnbet117.xml

 

[MichaelD]

DMA providers are at less risk due to immediately taking positions in the underlying.

Originally Posted by MichaelD:
I don't see how this would mitigate the CFD provider's risk exposure at all.

Well in a couple of years time you will.

Sorry my humour couldnt resist!!

So why exactly would DMA providers be at less risk?

 

[tech/a]

Michael

The risk for MM's isnt in my view from people going broke but more from the other side of the trade.
At 20:1 leverage they are exposed to the longside if enough trades are closed often enough with no underlying to liquidate and hedge.

 

[Trembling Hand]

The risk for MM's isnt in my view from people going broke but more from the other side of the trade.
At 20:1 leverage they are exposed to the longside if enough trades are closed often enough with no underlying to liquidate and hedge.

I don't think MM hedge as much as people think they do. And as CFD traders have a happy knack of being on the wrong side of nasty moves they have probably more to win than lose from adverse market moves.

 

[MichaelD]

I don't think MM hedge as much as people think they do.

I agree with this - I've seen no evidence of my MM CFD provider ever hedging my trades in the underlying market. Would be interested to know if anyone has any evidence one way or the other.

Undercapitalized traders = CFD traders = use all available leverage = take excess risk = cut profits short = let losses run = catch falling knives = guaranteed blow up.

Why hedge against losers? No hedging = no market risk.


To my mind, the two significant risks CFD providers are exposed to are;
1. Bad debtors (blown up traders)
2. No "fresh meat" (no new undercapitalized traders to blow up joining up)


2. would be the most significant risk

 

[noident]

I contacted MF Global with intention to open a CFD account.
Now I have already received a couple of calls from their rep who appears to be very, very eager to help me open an account. He's basically pushing me.
Possible signs of trouble? Opinions?

 

[Trembling Hand]

You Bet it is.

MF Global Plunges on Concern Customers Pulling Funds (Update3)

By Matthew Leising and Jeff Kearns

March 17 (Bloomberg) -- MF Global Ltd., the largest broker of exchange-traded futures and options, fell 65 percent in New York trading on speculation clients were withdrawing cash. The company said its funding was ``sufficient.''