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CFDs and online share trading

You may have noticed of late that some contract for difference providers are now appearing in lists and reviews of online brokers, including in the pages of our magazine and website.

It’s fair to say, though, that sellers of contracts for difference or CFDs are not part of the mainstream online broking community. They occupy a market niche. Their products are highly leveraged derivative instruments that increase or decrease in value based on a reference asset, which can be just about anything. That leverage and flexibility – including the ability to bet on that prices will go down rather than up – is what makes them attractive for sophisticated traders, and less so for more traditional long-term investors.

Sensible prices

That makes it odd that these purveyors of off-market financial products are being mentioned in the same breath as the more traditional online brokers. Their low-price offers look pretty good, too, even more so after one of the original discount online brokers, Bell Direct, recently raised its brokerage to something more in line with the big names.

So what’s the deal? Is trading shares online via a CFD provider kosher? Is there any real difference? That’s what a reader asked me the other day, so let’s take a look at the three CFD providers I found which are also spruiking online share trading: CMC Markets, FP Markets, and Saxo Capital Markets.

Making it official

CMC is the only one of the three CFD providers that is a “participant” of the Australian Securities Exchange, which means it’s also the only one that can call itself a stockbroker and officially offer “online broking” to customers.

There are a couple of reasons why a company might want to become an ASX participant, and one reason why you might want them to be:

■ To gain the ability to call themselves a stockbroker – a nice marketing tool;

■ To get direct access to the ASX rather than going through a third party; and

■ Clients of ASX market participants (that’s you) may gain access to the National Guarantee Fund (or the NGF).

On that last point, the NGF is a “compensation fund that is available to meet valid claims arising from dealings with dealers, in the circumstances set out in the legislation”, as you can read on the Securities Exchanges Guarantee Corporation’s website.

Front of mind

The NGF, for example, “provides for compensation for loss that results if a dealer becomes insolvent and fails to meet its obligations”. And that should be front of mind for many CFD traders after the failure of MF Global. (You can see the full list of ASX participants – including institutional and retail brokers – at asxonline.com.)

As you can see from the table below, only CMC Markets is an ASX participant, so how do the other two, Saxo and FP Markets, offer share-trading services? They enlist the services of a third-party provider that is an ASX participant.

FP Markets, for example, uses HUB24 Custodial Services (look them up at investorfirst.com.au) or UBS Securities – both ASX market participants – for its online share trading services.

It’s not unusual: E*Trade, the international online broker, often “white labels” its services to major banks and other big financial institutions that want to offer the service but perhaps don’t believe it’s worth the cost of developing their own products.

The international share-trading offers from the big local online brokers, such as CommSec, are also offered through a third party that is a participant of the relevant overseas market or markets.

Cheap and cheerful

CMC Markets is the cheapest of the three providers we’re looking at, as a quick glance at the table will show. Indeed, they are just about the cheapest out there – the only provider that trumps them on price is Interactive Brokers, an international discount broker that is also a member of a plethora of international exchanges and charges a measly $6 or 0.08 per cent (whichever is more) to buy or sell Aussie equities.

Which brings us to Saxo Capital Markets. Saxo offers access to 29 global exchanges, including shares, bonds, and exchange-traded futures and options. When you place a trade they act as your “agent” and “instruct market participants who will enter into trades on the exchange, in accordance with your orders”.

In real time

To get and then trade using real-time (rather than delayed) data in a particular market you’ll need to subscribe to that exchange. But it won’t break the bank and if you’re serious about day trading on an offshore exchange, it is a must.

For real-time prices on the Nasdaq or NYSE, for instance, you’ll pay a paltry $US1 a month – not a bad deal compared with our local exchange, which charges a monthly fee of $37.50 which, granted, includes market depth data.

I haven’t had a chance to test-drive these offerings, but on face value it appears even people who simply want to buy and sell shares could do so using one of these three CFD providers.

CMC MarketsYes0.1% of trade value with a minimum fee of $9.90
CMC Markets Yes 0.1% of trade value with a minimum fee of $9.90
FP Markets No 0.11% of trade value with a minimum fee of $14.95 Place trades over the phone at no extra charge
Saxo Capital Markets No 0.1% of trade value with a minimum fee of $15 Ability to trade global shares across 29 major exchanges
Source: Financial Review Smart Investor

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