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Trading ASX Listed CFDs

Discussion in 'Shares' started by icarus70, 30th Nov, 2009.

  1. icarus70

    icarus70 Member

    Joined:
    8th Nov, 2009
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    Hi All,

    In searching through the forums I've found a few threads on CFDs but as yet haven't been able to find any on ASX Listed CFDs.... So I thought I'd start one and hope that everyone puts in a little and we all might learn :)

    I have been trading on the ASX CFD Simulator - https://www.asxsmg.com.au/
    I've also gone to ASX's seminar on CFDs which was great by the way, I'd highly recommend it.

    ASX CFDs are the only type I've experienced and at this point the one type I'd trust having read about OTC and market made CFDs. Once I've done enough broker comparison I'll be setting up a real account. A couple of weeks ago I found a great article with a full write up on the top CFD brokers with tables comparing costs, support and what is available to trade... but I can't locate it now! If I find it I'll post it up.

    The main thing I see people saying with CFDs are of course that they are VERY risky. But in my opinion that risk is quite manageable if you bet small and go for small gains, i.e. only go long or short on a small number of CFDs at a time and/or think to yourself - if the market goes in the opposite direction, how much can I afford to lose from my cash account? Whatever that is, work out your trade based on that. Of course there are market anomalies such as the quite recent Dubai debt warning, which could likely cause a scare with almost any CFD holding. Apart from stop loss I don't have an answer on how to mitigate that type of risk. But again, betting small and going for small gains worked and my small simulated holdings didn't take a huge hit and recovered still at profit.

    But I digress. I'm still learning so I wanted to ask if anyone out there has had experience trading ASX CFDs and would like to share their knowledge.

    When trading the real thing, How do they compare to OTC CFDs?

    What broker do you use and why?

    Have you tried them found any criticisms?

    Is anyone else playing around with the ASX CFD simulator and wondering if they should go for the real thing?

    Or just any general comments about them?

    Thanks All.
     
  2. Tropo

    Tropo Well-Known Member

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    NSW
    Some general info is here :
    http://www.comsec.com.au/shared/pdf/otcpds.pdf
    http://www.smh.com.au/business/asic-raises-alarm-over-new-cfd-trade-risks-20090823-ev1u.html
    http://www.thebull.com.au/compare_list.php?c=CFDs

    Tate on Trading - CFDs

    When CFDs were introduced local investors took them like a duck to water (Lots of talk about ducks so far, isn’t there? - Ed). The ease with which you could go long or short most markets in the world was a godsend, as was the ability to place stops online.
    This is a little known feature of CFDs that professional traders find essential, but which your average equities broker seems to be strangely unaware of.
    I suppose if you hear the old refrain “it’s only a loss when you sell” for long enough, it eventually does your head in and you begin to believe it.

    When CFDs were introduced, the cost of money was roughly 4.25%. When the CFD providers added their margin of around 2.5% to it, the cost of holding a geared position was approximately 6.75%. Note CFD providers in their PDS (Product Disclosure Statement) will often given examples of an interest charge at 3% - a somewhat dishonest approach that persists to this day, even though the cost of money is approaching double figures.

    Based upon our funding cost of 6.75%, if you held $100,000 worth of equities for a day you would pay $18.75 in interest per day. Let’s assume you roughly had $100,000 exposure continuously for a year in which case you would pay $6843.75 in interest. If we assume that your basket of shares paid an average dividend yield of 3% then the total cost of holding this basket for a year would be $3,843.75 ($6,843.75 - $3,000 in dividends).

    A 3.8% fee for controlling $100,000 worth of product and potentially taking advantage of any move in the market seems like a good idea. Particularly if you consider that during the years of cheap credit, the market was returning 22% per annum in capital growth alone. So if your basket of stocks reflected the overall market, your portfolio would have grown to $122,000 all for the princely sum of $3,843.75 in interest costs, a portion of which may also have been tax deductible. In this instance, the decision to make use of the gearing offered by CFDs was the correct one - from both a strategic and business perspective.

    For someone running a trading business this was an effective model for its time. However, times have changed, and we need to perhaps review some of our thinking regarding credit.

    If you redo the numbers based upon the current cost of money, a slightly different picture appears. The current cost of money is 7.25% to which the CFD provider will add a margin of 2.5% bringing the total funding cost to 9.75%. In the space of a few years our funding costs have risen by some 44%, yet our dividend offset has not risen at all.
    All of a sudden the cost of doing business is looking quite expensive. So if we were to repeat our $100,000 exercise using the current cost of money, our interest cost blows out to $27.08 per day or $9885.41 for the year. Our dividend offset remains the same at an average of 3% or $3,000 so our total funding cost is $6885.41.
    Now if we add into the mix the fact that over the past two years the ASX 200 has shown effectively zero growth, we have a business model that is not as effective as it could be.

    Granted the example is simple, as the idea of trading is not to return the same as the market, but to generate a few outsized gains per year through careful trade selection and aggressive pyramiding. Despite this I think the basic philosophy of being aware of the costs that your business model incurs is valid.

    The question therefore becomes one of how do we minimize the costs of doing business whilst at the same time take advantage of the features offered by CFDs?

    There are a few ways we can do this.

    The first is to decide whether we are trading the correct instrument. As an example, consider the difference in funding cost between the ASX 200 cash contract and the cost of a forward contract.
    The difference between these two instruments is that the ASX 200 cash contract incurs an interest charge whereas the forward contract already has the interest charge calculated in the price. In many respects this is the same as the cost of carry of a futures contract.

    The question is, which one is the best instrument for you to trade? The answer lies partly in deciding what sort of trader you are and what time period you will hold the position for.
    We cannot know in advance how long we will hold a position for, as this is dictated by price action, but we can make some judgements based upon whether our system is primarily trend following in nature, or one which scalps price action by only taking small bites at a trend.

    At the close of play on Friday May 16th, the ASX 200 contract was priced at 5944 whereas the ASX 200 forward contract for June was priced at 5963. Initially this would seem like a no-brainer with most opting to buy what they thought was the cheapest contract.
    However things are not as simple as they seem. If I were to buy a $5 mini ASX 200 cash contract at 5944 I would pay $8.04 in interest per day. If I held it for 10 days I would pay $80.40. If I bought the forward contract I would pay a higher initial fee, but incur no interest charge.

    As an example consider the following trade involving the purchase of a single $5 ASX 200 contract at the above prices.

    ASX 200 Cash Contract

    Initial purchase at 5944
    Product controlled $5 x 5944 = $29,720
    Holding period 10 days
    Interest charge $80.40

    Market rises 2.5%
    Sale at 6092.6
    Sale of product $5 x 6092.6 = $30,463

    Profit before costs $30,463 - $29,720 = $743
    Profit after costs = $743 - $80.40 = $662.60

    ASX 200 June Forward Contract

    Initial purchase at 5963
    Product controlled $5 x 5963 = $29,815
    Holding period 10 days
    Interest charge $0

    Market rises 2.5%
    Sale at 6112.0
    Sale of product $5 x 6112.0 = $30,560

    Profit before costs $30,560 - $29,815.0 = $745
    Profit after costs = $745 - $0 = $745

    Profit differential between ASX 200 Cash Contract and Forward contract = $82.40

    In this instance it was actually cheaper to hold the forward contract rather than the initially cheaper cash contract.

    In trading, one of the ways we can make our business more profitable without making any changes to our system is to bring down the cost of doing business. Most traders tend to think this revolves only around looking for the cheapest brokerage, which is a somewhat short sighted and amateurish way of doing things.
    When we are dealing with geared investments we have to take into consideration the interest cost our business is incurring. We therefore have to look at ways to offset these costs. Occasionally we will achieve some offset by receiving dividends.
    At other times we will have the opportunity to go short in which case we will receive an interest payment from our CFD trading. However, we may not hold positions that generate much in the way of dividends or we may not have the opportunity to go short if such opportunities do not present themselves.

    Another way to mitigate these costs is to utilise a different form of derivative such as an option. An option contract on the ASX 200 allows us to control a large amount of product for a small initial outlay.
    The drawback is that the initial outlay may be higher than if we were using a margined contract such as a CFD. However this is offset by being able to control more product.

    We can also make simple adjustments in where our cash in kept. For some reason, which I don't understand, traders tend to keep high unused balances in their CFD accounts. Traditionally these funds attract no interest so they are simply wasted.
    To opt for this strategy is a poor business decision. Instead these funds should be kept in a high interest cash management trust where the interest they receive can help offset the interest costs incurred in trading CFDs.

    A trading business usually has few costs. However, the costs that we do incur can have a dramatic impact upon the performance of our account. By making simple decisions we can alter the profitability of our trading system without actually changing the underlying system.
    All you need to do is to start thinking of your trading in terms of being a business and not a recreational activity.

    - Chris Tate
     
  3. luckystrike

    luckystrike New Member

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    london
    the problem with ASX CFDs is that they lack liquidity so I woudn't go near them... as for the market maker debate - there are good and bad points but I were you I would go direct market access

    here's a comparison of the three main providers

    Compare CFD Brokers

    note: from experience I can say that execution and platform is more important than tight spreads.
     
  4. icarus70

    icarus70 Member

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    Location:
    Sydney, NSW
    Wow Tropo,
    Quite a volume of info there, much of it I think I'll need more understanding of CFDs before I could use fully.
    Also, in my simulated trades I am only trading amounts of 300-350 CFDs mostly in Mac Bank or Comm Bank, as I don't want to lose more than that should the stock drop but by one or two dollars. So the amounts you're talking about are massive in comparison!

    So next question - Does anyone know of a CFD simulator that deals in direct market access CFDs?
    It would be good to practice with multiple types before trying the real thing.

    Also Luckystrike, this question may be showing my inexperience but how does one tell how much liquidity is contained within a CFD or market? Is there a unit measure for this or is it calculated from graphs?

    Anyone else with some input on what they use for trading?

    Thanks guys.
     
  5. luckystrike

    luckystrike New Member

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    london
    So next question - Does anyone know of a CFD simulator that deals in direct market access CFDs?

    IG Markets offer one.


    Also Luckystrike, this question may be showing my inexperience but how does one tell how much liquidity is contained within a CFD or market? Is there a unit measure for this or is it calculated from graphs?

    Look at the daily traded volumes

    For instance this share here: Playtech (PTEC: LON) is reasonably (although not a lot) liquid - Barclays (BARC: LON) on the other hand is much, much more liquid. For blue chip stocks the volume would typically be in millions - the bigger the daily volumes traded the more liquid the stock. In practice if you are viewing Level 2 for a very liquid stocks you would be seeing constant trades being executed continually every minute. Also, bigger cap stocks (blue chips stocks) like FTSE 100 shares are usually much more liquid than secondary stocks like FTSE 350 stocks since the biggies are traded by institutions.

    Historical prices for PTEC (Playtech Limited) - Google Finance
     
    Last edited by a moderator: 7th Dec, 2009
  6. icarus70

    icarus70 Member

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    Location:
    Sydney, NSW
    Thanks Luckystrike.

    Your explanation made a lot more sense than some of the other definitions I've found on the web.

    Will be checking out IG Markets tonight. And I was initially thinking I would never try trading on overseas markets but there's some obvious advantages to it.

    By the way for anyone interested, I found the article comparing CFD brokers I mentioned before:
    http://www.canstar.com.au/images/star_ratings_reports/contract-for-difference-sep-09.pdf
    Worth looking through.
     
  7. johk

    johk Member

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    brisbane