In the example you gave - no the CFD provider does not take 37,000 from the client account. Instead the CFD provider uses its credit line to make the purchase of underlying shares to bring clients their DMA positions. In order to obtain the line of credit, the CFD provider is required to pay some margin to it's counterparties in exactly the same way that clients pay a margin. The margin the CFD provider is required to pay is directly as a result of client positions. i.e the larger the client positions, the more the margin requirement (exactly the same for us clients).
No doubt, the obvious reply is, well the CFD provider should have enough money of it's own. This is where the issue lies and requires understanding. Its not about having enough money, though rather the return on the money. If for example the CFD provider needed an extra $20 million to obtain the line of credit to settle trades, then the return on the $20 million needs to be considered. A bank for example cannot just use money without consideration. They would no doubt discover that they would be better off lending the $20m to someone wanting a home loan rather than operating a CFD business as they would get 7% return from the home loan as opposed to zero with a CFD business..(and hence why Commsec CFD's still use client money to hedge).
So if client's money cannot be used then the DMA model is going to cost significantly more to offset the opportunity cost to the provider. As a full time, high volume trader, that's not a cost I am willing to wear...provided of course I am happy with the model of the provider I choose.
I totally agree that regulations should be tightened, and that firms that do use client monies must have a high ratio of company money to back up positions.
I also believe regulations should be put in place to ensure not just client deposits are put in trust, but also realised profits not withdrawn, plus unrealised profits on a daily basis.
I have spoken to my provider (FP Markets) and I believe that they are working on an option where you can choose not to have your money used for hedging purposes, and will pay a higher commission for that model. That may be an attractive option for those that don't trade often.
If Treasury really wants to clean up the industry, why not look at banning Market Maker models, and insisting on ONLY a transparent DMA model.
I wonder if the current providers that offer both models (but no doubt give you the Market Maker model unless you ask otherwise), would still be happy to use their own money for overnight hedging, if all of their positions were through a DMA model? I doubt it. Not without a significant hike in costs.
