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CFD camps divide on results

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By Reporter
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4 minute read

Investors are increasingly willing to trade overseas assets and commodities as the market matures.

The growing Australian contracts-for-difference (CFD) market continues to be dominated by overseas firms, with more international names planning to enter, thus squeezing markets and margins for smaller Australian-owned providers. Investment Trends' May 2012 Australia CFD Report showed the market grew by 7 per cent in the year - 44,000 local investors traded CFDs in the 12 months to May, up from 41,000 a year earlier.

Senior analyst Pawel Rokicki said the market continued to consolidate around the top two providers - IG Markets and CMC Markets - which now controlled almost 60 per cent of primary relationships, up from 55 per cent in 2011.

"Both incumbents have benefited from MF Global's exit, but the competition is likely to intensify in the near future, with large international players such as Saxo Bank and London Capital Group looking to make their mark in Australia," Rokicki said.

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The CFD market is served by two opposing camps: an as-yet unnamed group of three Australian-owned companies, and a group of foreign-owned firms that have formed the ironically-named Australian CFD Forum.

The foreign-owned Australian CFD Forum's members use the market-maker business model that has a spread-betting origin and which requires market-making to cover duty payable to the United Kingdom tax office, Her Majesty's Revenue & Customs. In contrast, Australian-owned companies have broking origins and use a direct market access (DMA) business model. 

Speaking for the Australian-owned providers, FP Markets head Matt Murphie welcomed the growth, but warned investors should examine the business model used by any CFD provider before choosing to invest with that firm.

Australian-owned firms using the DMA model, Murphie said, "naturally attract the larger clients, so it is not surprising that they do not rank as highly in a market share survey, however, they still play a very important role in the CFD industry". 

Joint-winner CMC Markets head Louis Cooper said CMC was "deliberately targeting active traders who understand CFDs and their up and down side characteristics".

"These are typically experienced investors, and are people who are also seeking a long-term, successful relationship with us," Cooper said.

"We're not aiming to be the largest CFD provider. We want to be the home of the active trader and I'm really pleased to see that reflected in the Investment Trends research."

Cooper, who is also chair of the Australian CFD Forum, said CMC wanted "to attract traders who understand CFDs - the highs and the lows - and who want to have a long-term, successful relationship with CMC Markets".

"To be frank, if a potential CFD investor comes to us not understanding leverage, and without a good grasp of financial markets, we don't want that person to begin trading with CMC Markets," he said.

Saxo Capital Markets (Australia) chief executive Anthony Griffin said that while the top two providers controlled 60 per cent of the primary relationships, he believed "the Saxo offering will be competitive and favoured among Australian traders".

Griffin said Saxo had a "full suite of products including CFDs, FX, futures, options and equities . trading more than 14,500 equities from 30 major exchanges worldwide".

Murphie said the "growing and maturing market" increased the need for the DMA model used by the Australian-owned providers, which "guarantees market prices to ensure that the ever-growing CFD traders receive a balanced education".

"As the market grows, investors need to be made aware of where their prices are coming from, particularly as current market conditions are moving clients away from equities and towards market-made products," he said.

"Despite current market conditions moving people away from equities towards forex and commodities, we still must be sure not to ignore DMA equities, particular when it comes to regulation, as such cycles are natural. Therefore at some point in the near future, equity CFDs will again be popular amongst retail clients."

Much of the growth, he said, had come from heavy advertising from market makers, "which is good for growth of the market, though we must make sure that we are targeting the correct profile of client who the product is appropriate for".

The prices on which clients traded affected overall return, Murphie said. "If clients are trading without guaranteed market prices, they may not be making as much money as they would be if they were trading actual market prices offered by DMA providers," he said.

"It's important that investors know what the true market price is, especially when trading Australian shares [because] paying a greater spread - as may be the case with a market maker - may reduce the overall return."

CFD camps divide on results
Investors are increasingly willing to trade overseas assets and commodities as the market matures.
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