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Cash Market .v. Futures?
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Cash Market .v. Futures?

  #1 (permalink)
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Cash Market .v. Futures?

Is there any advantage charting eg. the Daily Dow but day trading YM Futures? I realise that there is a contract maturity issue involved. However, has anybody or known strategy successfully involved playing one off against the other ?

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  #3 (permalink)
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Bramhall17 View Post
Is there any advantage charting eg. the Daily Dow but day trading YM Futures? I realise that there is a contract maturity issue involved. However, has anybody or known strategy successfully involved playing one off against the other ?

You cannot buy the index, so you would need to buy/sell a basket of stocks and sell/buy the future to set off the stock position. This is arbitrage trading, and to do so you would need

-> a large account to afford buying the basket of stocks
-> access to borrowing stock for securing short stock positions
-> extremely low commissions, such as available for members of the exchange

Not exactly something a retail trader can do.

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  #4 (permalink)
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Hi,

I am not really competent in these matters, but I think that indexes can be traded through CFD.
So the initial question could be rephrased by: CFD vs futures
Or this is another question!
Only the OP could tell...

Nicolas

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  #5 (permalink)
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A CFD is a private contract with a counterparty and does not represent anything. CFDs are regulated by nothing, so the counterparty - that is the company that offers the contract - can set the price anywhere. The CFD price shown for an index does not reflect the index price.

I do not trade CFDs, because

-> My money is not safe on an account of a private company, when the company defaults, I am not protected by anybody but lose all of my money.
-> The spreads are larger compared to futures markets.
-> There is no transparent market, the market is quote driven, not order driven as an exchange, I am dependent on the only one who buys from me or sells to me.

The business of the company that offers CFDs is

-> to sell and buy synthetic positions which can be hedged via a futures contract
-> to consolidate those positions and cashing in on the spread
-> to trade against the customers if necessary (adjusting the bid/ask according to open interest)

This is a retail package that appeals to customers

-> who do not have enough money to open a futures account
-> who are afraid of futures, because they do not understand them
-> who want to avoid stock exchange transaction fees

Actually the CFD market was strongly promoted by the decision of the British Government to introduce a stamp duty on stocks.

But a CFD on an index does not reflect the index, although it comes close, and it can certainly not be used for arbitraging the future.


By the way if you really make money, the counterparty will refuse to continue to offer you CFD contracts, after all they expect you to lose money. You lose, they win.

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  #6 (permalink)
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@Fat Tails ,

Thanks a lot for your message. Once more, very clear and instructive.

I have a follow-up question on something you wrote.

But, first, I would like to precise that I have never traded CFD, and do not intend to do it in a near future. So my question is just aimed at a better understanding.

You wrote:
"My money is not safe on an account of a private company, when the company defaults, I am not protected by anybody but lose all of my money."

How is this different from a futures broker?

1) As some brokers, some CFD companies (IG Markets and LMAX as far as I know, but to be checked) maintain segregated accounts for their clients. Of course, it could happen that, in case of "event", and contrary to regulation, the company actually moves money from segregated accounts to elsewhere, and money is lost.

2) However and moreover, some CFD companies (IG Markets and LMAX as far as I know, but to be checked) are subject to UK FSA regulation ( Financial Services Authority ) and are consequently affiliated to Financial Services Compensation Scheme ( FSCS > Home ), which is a "compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading we may be able to pay compensation to its customers". According to LMAX (that I am investigating as possible FOREX broker, and not CFD dealer), protection goes up to 100,000 €. I admit that I have not checked myself in the regulation. Similar regulations may exist in other countries.

Don't you think that 2), if confirmed, offers a kind of protection?

Once more, this message is not aimed at contradicting you. I know far less than you on this matter. I just would like to benefit from a follow-up answer.

Thanks,

Nicolas


Last edited by Nicolas11; May 8th, 2012 at 04:18 PM. Reason: clarification
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  #7 (permalink)
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Nicolas11 View Post
@Fat Tails ,

Thanks a lot for your message. Once more, very clear and instructive.

I have a follow-up question on something you wrote.

But, first, I would like to precise that I have never traded CFD, and do not intend to do it in a near future. So my question is just aimed at a better understanding.

You wrote:
"My money is not safe on an account of a private company, when the company defaults, I am not protected by anybody but lose all of my money."

How is this different from a futures broker?

1) As some brokers, some CFD companies (IG Markets and LMAX as far as I know, but to be checked) maintain segregated accounts for their clients. Of course, it could happen that, in case of "event", and contrary to regulation, the company actually moves money from segregated accounts to elsewhere, and money is lost.

2) However and moreover, some CFD companies (IG Markets and LMAX as far as I know, but to be checked) are subject to UK FSA regulation ( Financial Services Authority ) and are consequently affiliated to Financial Services Compensation Scheme ( FSCS > Home ), which is a "compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading we may be able to pay compensation to its customers". According to LMAX (that I am investigating as possible FOREX broker, and not CFD dealer), protection goes up to 100,000 €. I admit that I have not checked myself in the regulation. Similar regulations may exist in other countries.

Don't you think that 2), if confirmed, offers a kind of protection?

Once more, this message is not aimed at contradicting you. I know far less than you on this matter. I just would like to benefit from a follow-up answer.

Thanks,

Nicolas

@Nicolas11: Thanks for asking this question.

Indeed, I have selected my broker, because it is a British subsidiary which is registered with the FSA, and my funds are therefore protected by the Financial Services Compensation Scheme. There is a difference between deposits and investments. I think that the money on your CFD account is treated as investment, while money on a broker account should be treated as a deposit. The guarantee for deposits is GBP 85,000. The guarantee for investments is GBP 50,000.

You can check the FSA register, whether your broker or CFD dealer is registered with the FSA.

FSA Register

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  #8 (permalink)
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Thanks @Fat Tails

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