Australian CFD Trading Myths Exposed

Mainstream brokers have felt threatened byCFDs since they first appeared in Australia around 2002.

Discount brokers especially werequite vocal in their initial opposition to CFDs until they realised what a tour de forceCFDs were proving to be for retail investors in accessing the market.

CFD providers wereoffering trading platforms which had functionality well in excess of anything the discount sharebrokers were (and still are) offering, and generally for free when many brokers werecharging significant amounts for similar features.

The biggest thorn in the discount brokers'sides was the cut-price brokerage charged by CFD providers: most minimum dealing ratesstart at around $10 a transaction; around half the price of Commsec's best rate andup to one-third of Etrade's.

The retail trading and investing public finally had a choice- and they flocked to CFDs.

The two main players in the early days of Australia's CFD industrywere of course CMC Markets, who held an initial dominant market share of the burgeoning market,and IG Markets, who has recently overtaken their old rival as the most used CFD providerin Australia.

Each offered an "over the counter" product where traders were trading with and(effectively in many circumstances) against their CFD provider.

This structure is a "marketmaker" model where the CFD provider defines all parameters of the trade.

History showsthat the rise of one CFD provider, and the relative fall of the other, may come downto how each dealt with this important responsibility; that is, the decision to take the other sideof the client's trade or not.

Discount share brokers were quick to realisehow lucrative the CFD market was and wanted in on the action.

But rather than join forceswith either of the CMC-IG duopoly (make no mistake, they considered it), the brokerschose to embrace an Australian Securities Exchange (ASX) "listed CFD" alternative (alsoknown as exchange traded CFDs).

The ASX had also vehemently opposed CFDs initially becausethey were market made, arguing that an exchange model would be more open and transparent.

But ironically, when the ASX realised that market markers were integral to the processof exchange traded CFDs, they ended up with a product also reliant on market makers; thepricing of the ASX's exchange traded CFDs are 100% beholden to the market makers andtheir discretion.

The ASX alternative has since languished on a relative basis and thevast majority of CFD industry experts have labelled them a poor interpretation of whatCFDs are supposed to be to investors; offering broad-based, easy and cheap access to theworld's markets.

So presently we have the ASX's exchange listed CFD market, which issupported by the large discount brokers and also anointed with ASIC approval in its latestreview, and the incumbent CFD market makers.

Remember, both models are market made.

Tradersare going to have to pay their pound of flesh to trade either way.

In fact, the market makersin the exchange traded version of CFDs mirror the exchange traded options (ETOs) marketmakers, traded on the ASX's options exchange.

Anyone who has traded ASX options will knowthat these instruments come at a price.

Exchange traded or not.

Traders should know thatthe market makers who are employed to facilitate ASX's CFDs are large banking and financialservices institutions staffed with experienced professional traders.

Retail investors aretherefore trading in direct opposition to these firms, which have an obvious and distinctadvantage.

As one would naturally expect, market makers don't work for charitable organisationsand most can be relied upon to put themselves before the retail investor.

The alternative,the common over-the-counter market made model for CFDs, has been unfairly tarnished in muchrecent commentary.

Yet the main criticisms of this model don't stand up to basic analysis.

At least one CFD provider, IG Markets, offers Guaranteed Market Prices.

Thus IG guaranteesthat for ASX listed equities their clients will always trade at the underlying marketprice.

This means that whilst you are in effect trading with a market maker, they are boundto reflect exactly the prices on the ASX.

This approach contradicts the unscrupulousmeasures claimed by most mainstream brokers and the press regarding over-the-counter offerings.

In fact, this particular market made approach is far superior to the exchange traded model,because not even ASX exchange traded CFDs can offer guaranteed market prices.

Unfortunately a mature analysis on how CFDsactually work has been missing.

Instead of rational debate, some sections of the presshave found it easier to push emotional buttons than to report the cold hard facts and educatepunters about CFDs; only a few specialised investment publications seem to bother withthe finer details of the products.

Most media has over-exaggerated the risks of CFDs, arbitrarilylabelling them "high-risk".

Yet, with a little research and a calm and objective head, thiscould not be further from the truth.

CFDs aren't evil; they're just another tradingproduct, with intrinsic opportunities and risks.

They won't evaporate your life savingsat the push of a button unless you are ignorant to their risks and good trading practice ingeneral.

There aren't any victims of CFD trading, just those who make bad trading decisionsand as a direct result, lose their money – the same scenario which causes traders and investorsto lose money on shares, options, futures, warrants and a host of other financial products.

Do your own research, be informed and get educated before trading CFDs and take responsibilityfor your own actions.

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