What happens to your CFD trade if the stock that you’ve gone long or short gets suspended from trading or worse, goes under?
In the Australian Securities Exchange (ASX), listed companies can either voluntarily or be ordered by the exchange, to have their securities placed in to a status where trading is restricted. This status is often initiated as a “Trading Halt” which is typically a period of up to five trading days and can be extended to “Suspension” for a potentially indefinite time period.
Listed companies may request a halt or suspension as a result of a potential price sensitive announcement or an event that may cause a significant share price movement. The ASX, in accordance with its role as the market supervisor may request a temporary halt to trades to ensure an orderly market for a particular security is maintained should trading activity be irregular.
How does a trading halt or suspension in the ASX affect a CFD Position?
A key feature of trading CFDs is that despite not taking ownership of the physical shares in the ASX; the price movement or any corporate actions are mirrored in the CFD.
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A CFD trader holding a position in a security that goes into suspension should investigate the event or announcement that has triggered the change in status as this will be reflected in the CFD. The exchange or the company themselves will often refer to a time frame for this period which could be short term such as intra day or indefinite period where a security may cease trading.
When a security is suspended or in trading halt it cannot be traded in the ASX. This is also the case for the CFD, which will be restricted by CFD providers. A CFD trader, like a share trader will be unable to open new CFDs in the particular security and also restricted from closing an open position. Should a CFD trader or sharetrader hold an existing position, this will remain open until the trading halt or suspension is lifted. CFD traders should be aware that financing charges on long positions apply should a position be held overnight. Short position holders will receive interest during the period of a suspension.
The effects on the price of a CFD position and an Equity position are also identical; There are 3 outcomes once the suspension of trading is lifted; A positive, negative and neutral result.
A company may enter suspension pending the release of a positive announcement. For example a company may have received a take over offer at a substantial premium to the last traded price before the period of suspension. For a CFD trader long before the suspension, the result should be a large profit, should the position have been a short CFD trade, the takeover would lead to a loss on the CFD trade.
Alternatively, a stock may enter suspension in advance of a negative release to the market. One such example could be a stock that has entered a suspension due to the company issuing a profit downgrade. For CFD traders that are short, this could be a favorable return as it could be reasonably expected that the share price will decrease substantially favoring the short CFD position.
Should a security return to trading with little or no change to the shareprice a neutral outcome has resulted in little change for a sharetrader where a CFD trader may have incurred or received interest for the overnight periods that the position has been open.
There are circumstances, particularly during economic downturns that listed companies experience significant stress and may become externally administered. In extreme circumstances companies may fail and cease to be quoted on the ASX. In these situations shareholders and long CFD holders may experience the loss of the full value of the shares as the companies may become worthless and CFD positions may be closed out at zero price.
Should a security cease to trade or be suspended for 5 consecutive business days or longer a CFD position may be closed at an appropriate price by a CFD provider after taking in to consideration a number of factors including the last traded price of the underlying security. Short CFD traders enjoy the same result but potentially an opposite payoff. Hypothetically, should a security cease to trade a short CFD seller can earn the maximum return, the full value of the shares sold short or the price the position is closed as determined by the CFD provider.
By Matt Press, Head of Sales, FP Markets
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