Broker/Data: Multiple broker + Multiple feed (for access to specific exchanges)
Favorite Futures: European Indices, Precious Metals, Energy
Posts: 423 since Dec 2013
Thanks: 204 given,
In my experience a lot of professionals trade on CFD's on their private accounts read into that what you will. Given the higher gearing its quite attractive and easy to take a position with limited funds. (also you should let your compliance department know if you're reading this and currently working at a financial firm).
Although a word of caution as someone has said is that spreads can be higher than futures markets but not much more these days, and also that you need to pick a provider that doesn't have its own dealing desk or defines any conflict of interests to you upfront.
Also an interesting point not mentioned so far in the post is that most providers charge/pay a spread on overnight rate depending on your directional bias on your position you can be paid to hold overnight, which I find pretty neat. Of course the rates are variable though important to remember if you are going to be paying to hold overnight.
I think the issue with CFDs for the US is not the underlying products being traded but the location of the end user (trader) and the CFD provider. My understanding was that the US regulators perceive these to be equivalent to futures such as the single stock futures but they prefer the regulatory envelope for the exchange traded future over the private contract CFDs. They're also unwelcome "foreign" competition for the US futures industry. As a result US citizens cannot trade them on US underlyings. Non-US traders can trade CFDs on virtually anything the provider bank / market maker can access in the underlying market.
Another prohibition may be potential for some very undesirable US tax consequences of trading CFDs vs trading futures so a trader in any jurisdiction would have to consider that too.
Three more related questions I'd like to add:
i) Curious to know whether the legal / regulatory distinction is for: US traders (eg. a US brokerage account), or US taxpayers (eg. a tax issue), or US residents (including non-Americans living in the US). Anyone know the critical issue is?
ii) Banks and brokerage firms can trade CFDs so is the status required that of an accredited investor, or a qualified institution?
iii) Also, can US traders trade CFDs on non-US underlyings such as on developing country stocks, or palm oil?
I think trading DMA futures is fine on indices. However it's usually the MM's who are pushing the futures and offering extremely low margins(0.2%). When you hold volatile positions overnight and those positions start going against you, MM 's can dramatically change the margin requirements and force a margin call on your account. Sure you can get paid to hold overnight shorts, but from a retail perspective it's negligible in the big picture, even if you're carrying a big line.
The low margins on CFD's are very attractive, another reason they're popular with stocks is because it's the easiest way to get short. For example in Australia, you couldn't just call up your local broker and take a short line like you could in the US- there's not enough liquidity to do that, and it's not really supported on a retail level- it's more for instos( although it is possible with some brokers, it's way more efficient using CFD's and their US/ global liquidity pools). No other markets have liquidity anything like the US. Short selling is also more of a taboo among retail investors, so it's more your sophisticated investor who's interested in playing the short side. You also have retail punters who get lured into setting up an account with a MM, then 2 months later their accounts wiped out.
A few points :
- at the "best" CFD brokers, spreads will be tighter on CFDs than on the related futures. I have many friends who switched from futures to CFD and it changed their life. Some scalpers who do a lot of round-turns now earn 3 times more while they would barely survive on futures because of the costs
- in practice you will have a hard time to find a CFD who pays you for being short (or it will be non worthy rates). Read asterix notes in full. I think Dukascopy will in fact do so, next year
- CFD trading and the associated brokers, whatever their execution model, have integrity problems depending on your style of trading and how big you trade. I know it for a fact having worked fo some in the past and as a customer
Last edited by SARdynamite; July 11th, 2014 at 09:48 AM.
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