You’d think that battered equity markets would spell bad news for brokers, but anyone dealing Direct Market Access (DMA) CFDs is having a field day.
Indeed, the rising popularity of DMA prompted IG Markets to launch a new CFD dealing platform based on the DMA model.
The browser-based technology offers direct exposure to price variations, and CFD traders can gauge market direction by comparing queues of buy and sell orders. Prior to rolling out its DMA technology just days ago, IG Markets guaranteed market pricing on CFDs, but the new dealing platform called PureDMA lets traders view buyer and seller depth.
IG Markets director David Skilton claims introducing PureDMA within a platform that offers foreign exchange, indices and commodities is most likely a world first. PureDMA is akin to a one stop shop, he says.
Skilton says: “Prior to PureDMA, we guaranteed market pricing on CFD bids and offers, but were unable to offer access to the numbers of buyers and sellers. We wanted to give our clients the same depth that institutions and fund managers have and DMA enables us to do that. As it’s browser-based, clients can trade CFDs from the hotel or Qantas lounge provided they have an internet connection.”
Market research is often a driver of new product innovation and so it’s the case with IG Markets. A significant factor behind traders switching CFD providers was a lack of market pricing transparency, according to research conducted by Investment Trends.
The research was not lost on IG Markets chief executive Tamas Szabo, noting pricing transparency in the Australian CFD market is a growing necessity fuelled by trader demand. Szabo says: “By having direct access to market pricing and being able to see this pricing on a screen trading platform, traders will have greater confidence not only in their platform provider, but in the market itself.”
And several CFD providers have reported strong trading growth in the past 12 months in what was already a steadily climbing market.
Contracts for Difference are leveraged instruments traded under an agreement to exchange the price difference in an underlying asset between opening the CFD and closing the position. As a leveraged product – the risk is – profits and losses can be greatly and quickly magnified for a small up-front outlay. IG Markets warns that CFDs are a geared product that can result in losses that exceed an initial deposit.
Skilton put IG Markets 47 per cent increase in sales turnover and a 65 per cent rise in new accounts during the past 12 months partially down to a loss of confidence in equity markets and fund managers.
“Investors are fed up with losing money in managed equity funds,” Skilton says. “The best performing equity fund lost 34 per cent last year. Investors are reading their returns on sharemarket statements and saying, ‘I can do better than this’. On top of losing capital, investors are stuck with paying expensive management and administration fees.”
Skilton’s view is investors are increasingly moving out of battered equity markets and trading CFDs on movements in underlying indices. In October last year, The IG Markets Group, across eight countries, did a record 5.1 million trades for the month, Skilton says.
CFD provider First Prudential Markets says CFD trading is growing as traders take advantage of leverage to speculate on share price and index movements, and to hedge underlying equity portfolios by taking long or short positions.
FP Markets senior dealer Matthew Press says low transaction costs make CFDs appealing as a leveraged instrument. And, unlike taking an options position, there is no time decay when trading CFDs. Press says traders reluctant to crystallise equity losses are taking CFD positions on the underlying equity to reduce average costs. “This is a common strategy,” he says.
Press says FP Markets has been offering the benefits of a DMA platform for three years by utilising Iress Market Technology. Press, like Skilton, emphasises the importance of price transparency to traders through DMA capability. There is no synthetic pricing under DMA, as there is no intervention from CFD providers.
Press says FP’s trading platform, using webIress, enables multi-product trading from a single log-on. This provides flexibility and saves time as clients do not have to log in and out of separate products, such as equities and CFDs, and personal superannuation accounts.
Paul Ash, a CFD consultant and trading educator, says brokers offering DMA put their clients at a distinct trading advantage. Ash, of TCT Australia, says CFD traders without DMA access are at the mercy of their provider’s spread that does not necessarily mirror market pricing on underlying products. CFD providers are entitled to manufacture their own spreads, providing the terms and conditions are disclosed in company trading documents. Ash says the price of an underlying security may have to move further if a CFD provider widens the price spread to its advantage.
Ash says: “Most CFD brokers are market makers, giving them enormous power of spread control, which they use to create large profits for themselves. DMA allows the trader to become a price maker instead of a price taker in seeking fairer pricing by way of tighter bid/ask spreads.”
Ash uses an example of a company priced on the ASX at $18 to highlight the difference between DMA and market makers. Say, a CFD broker offering DMA access has a buyer at $17.98 and a seller at $18.02. A trader has the advantage of offering to buy or sell at $18.01. On the other hand, a CFD market maker may have a spread of $17.95/$18.05, so the trader can only buy at $18.05 and sell at $17.95. Therefore, the trader needs a larger move to be profitable. A market maker earning 5c on every CFD purchased will make $50 on a position of 1000 shares. Commission could take a trader’s cost to $60.
IG Markets, in launching DMA, says traders can review the day’s history – the highs and the lows – in relation to the current price. DMA also enables participation in buoyant opening and closing auctions. PureDMA is offered free to existing IG Markets clients who hold a minimum account balance of $5000.