shorters, page-8

My understanding of CFD shorts is as follows .....

It is true that all CFD shorts have to cover, but not all CFD short covering affects the market.

There are two types of CFD providers, Direct Market Access (DMA) and Market Makers (MM).

CFD shorts through DMA brokers are included in the ASX figures, because these orders are placed in the market. It is only MM shorts are not included because MM’s are not real brokers and their client orders are not placed in the market.

eTrade is an example of a DMA broker, which means all orders (long and short) are actually placed in the market. So eTrade carries no risk if the market rises or falls. So these trades are reported and traders who deal with DMA brokers affect the market when they open and close their positions.

But Market Makers are an entirely different ball game. They simply take bets with their clients, and the buying and selling “orders” are not placed in the market.

CMC Markets is an example of a Market Maker, which means they accept buying and selling “orders”, but are not required to place them into the market.

Market Makers take the “other side” of their client orders. So, in addition to the commission and interest charged, they also make money when their clients loose. Market Makers have a lot in common with the "bucket shops" that were outlawed in the US after the 1929 crash. That is why CFD’s are currently banned in the US.

Market Makers will only place actual orders in the market if they believe it is necessary to manage their risk. For example, if a MM receives buy "orders" for a total of 500,000 OXR and also "orders" to sell 500,000 OXR, they will do nothing because they have no risk. In this situation, NONE of these "orders" will ever reach the market. So, in this example, traders shorting or buying to cover their shorts will have zero effect on the OXR price.

If, on the other hand, a MM has received buy orders for only 100,000 OXR and sell orders for 500,000 OXR, they are at risk if the market falls because they have taken the bet with short sellers. So in this instance, they may place actual sell orders to hedge their exposure. But they don't have to. They can do nothing (take full risk) or do other things to limit their risk, such as writing OXR call options or buying OXR put options. Based on their overall market exposure, the may also choose to manage their risk with SPI futures or even put warrants.

I guess the bottom line is that DMA CFD shorts are reported to the ASX, while CFD shorts placed with MM’s are not reported. Shorts sellers who deal with DMA’s will affect the market when they cover. MM shorts won’t affect the market.

Cheers

ST