With Permission from Alan McGrath, CFD Trader's Edge:
Very important ...Please read... re potential changes to CFD Industry
There is a discussion paper currently being put before Treasury, evaluating a ban on CFD providers from using client funds for hedging purposes.
Now we all know ideally it would be great to have our client funds in individual accounts, but unfortunately without using those funds as part of the overnight financing process of the margined DMA product, the costs would go through the roof. There are fairly strict procedures in place to ensure DMA providers keep tight risk control and top up the client pool if necessary on a daily basis. I personally am happy with my providers risk model (FP Markets), and sit quite comfortably with placing my funds with them.
If this discussion paper led to legislation banning the use of client funds, things would change: it would almost certainly lead to the closing of all DMA model providers, and if some existed the costs would rise enormously we'd be basically left with a CFD industry where, if you wanted to still enjoy the low commissions the only option would be to go to a Market Maker provider...providers who profit when we lose. with few DMA providers left in the market, liquidity on the ASX would dry up even further. many traders would find profits cut significantly due to higher costs and less competition, and in many cases be forced out of trading. As you can imagine, companies using the Market Maker model are all for these changes to be put in place.
I have today made a submission to Treasury, with my thoughts on the ramifications of any changes to the current legislation, as discussed in their paper ""Handling and Use of client money in relation to over-the-counter derivatives transactions".
If you'd like to help, you can email [email protected] Submissions close on 27 Jan 2012, but I would think late submissions may be accepted as well.
I can't express how important it is for as many traders as possible to make comment. Someone on Twitter made a great suggestion...if you feel you don't have the time to write a submission yourself you could basically send a quick email stating that you have read and agreed with mine.
I'd suggest something like... firstly a single sentence introduction of yourself, and your trading experience. eg My name is Joe Bloggs, and I've been trading full time for 2 years" etc.....then something like..."I have read the submission made by Alan McGrath on 26/1/2012 and I understand and strongly agree with the comments made in that submission" ...or reworded in your own words. Don't forget to end with your name and contact details.
OK here is my submission, please read thoroughly:
Hello
My name is Alan McGrath. I have been successfully trading CFD's for a living now for almost 10 years. I also facilitate a group of over 100 like minded traders, traders who I'm sure share my concern.
I was recently made aware of your discussion paper, "Handling and Use of client money in relation to over-the-counter derivatives transactions", and felt it vitally important that I forward my thoughts.
As a trader through a Direct Market Access (DMA) model CFD provider, I understand that client monies are used for hedging purposes. I have considered and discussed the risks involved with them, and am comfortable placing my funds with them. I feel that I, like all other traders I know, am an educated enough individual to understand and accept the risks involved.
If this discussion paper led to legislation banning the use of client funds, I believe several things would change:
a) It would almost certainly lead to the closing of all DMA model providers...maybe one or two would still offer it as an option, but commission would increase substantially to cover the additional hedging requirements, not to mention the fact they'd basically have no competition in that sector of the industry. Trading is a challenging profession, but one that can hold many rewards. Increasing commission costs could mean the difference between success and failure for many traders.
b) We'd be basically left with a CFD industry where, if you wanted to still enjoy the low commissions that help allow us to survive as traders, the only option would be to go to a Market Maker provider...companies whose whole model is based on making money when their clients lose it.
In the beginning of my trading journey I used a Market Maker platform. As time went on I began to realise that the more money I made, the harder they would make it for me to make that money. This could be done by increasing the price spreads on a stock, particularly in times of high volatility, or taking longer to accept my order, and then requoting me less favourable prices.
Once a DMA model provider started operations in Australia, I switched to them, and can categorically say I would never switch back. I have no doubt that many traders would be happy to share the same experience with you. Unfortunately it is often the less experienced traders that are drawn to the Market Maker model...I know of very few full time or serious traders that would consider the Market Maker model.
It is interesting to note that your discussion paper uses the UK model as a comparison. The UK CFD industry is solely based on Market Maker providers, so I don't feel it can be considered relevant.
c) With few DMA providers left in the market, liquidity on the ASX would dry up even further, making it even more difficult to profit from trading, especially on a short term basis.
The ironic thing with this discussion paper, is that although I'm sure Treasury are looking at changes in order to protect traders, in my opinion the banning of the use of client monies by CFD providers would actually sound the death knoll for many of us that have happily and successfully traded CFD's for some time. The thought of paying significantly higher commissions, or being basically forced back to a Market Maker model is of grave concern to me, and the viability of my business of trading. What business wants to partner with a company that potentially makes money when they lose it? The conflict of interest is unacceptable.
I encourage improved regulations within the industry to protect clients, and am fully in support of the measures suggested under Section 2.8 Alternative Measures to Allow Pooling, but under no circumstances do I believe any changes should be made that would ultimately lead to the demise of the affordable, transparent DMA model we currently enjoy.
I am more than happy to discuss this matter further if you require. I am available via email or my telephone number is xx xxxxxxx. (I'd appreciate no calls during market trading hours though)
Regards
(name and address supplied)
This is a real call to arms for traders in my opinion, again I strongly encourage you to send your email.
The discussion paper in question is available here: http://www.treasury.gov.au/documents/2231/PDF/DP_Client_Monies_OTC.pdf
