The new capability, exclusive to CMC Markets, is a purpose-built addition to its next generation CMC Tracker Platform that enables clients to see the percentage of CMC Markets’ clients from around the globe that are long or short on a particular product.

The new tool can sort sentiment of all CFD clients on a particular product, or just CMC Markets’ most profitable clients.
According to Chris Fulton, Head of CMC Markets Australia & New Zealand, the new sentiment tool provides its traders free of charge with the kind of market intelligence that is fundamental in supporting trading scenarios.

“The sentiment tool delivers information that gives our clients the advantage of having ‘eyes-and-ears’ into how other traders, both locally and globally, feel about the markets.

“Successful trading is all about superior information; this new capability is another way that we are delivering useful and timely data to our clients to help them make the best use of information in their trades.

“While some traders like to go with the market and others are contrarians, everyone likes to know how others are trading.  This new feature was custom-built for our traders after we received much client feedback about how we might improve our platform,” said Mr Fulton.

The new client sentiment tool is just one of several new tools CMC Markets has added to its CFD platform recently:
Pattern Recognition Scanner – this feature was built in response to the growing technical expertise of traders, who want access to extensive and detailed charting software. 100% integrated into the trading platform, the scanner gives investors more trading ideas by automatically scanning over 120 major instruments every five minutes, to find potential technical trade set-ups across all major asset types.

Trading Community – CMC Markets has successfully merged online social communities directly with trading the market through tools such as online Chart Message Boards and innovative use of social media via the CMC Markets Blog. The Message Boards allow traders to participate in online dialogue and discussions, post and exchange charts and interact with CMC’s Market analysts.

Mobile upgrades – CMC Markets continues to invest in mobile technology and many of the upgrades to the web-based platform are also reflected in CMC Markets’ purpose-built mobile platforms. More than 62% of CMC Markets’ clients have accessed CMC Tracker via a mobile app for iPhone, iPad or Android.

Mr Fulton concluded: “Our platform is constantly evolving to provide leading technology to our traders.  This is part of CMC Markets’ ongoing commitment to helping our clients’ trade with an edge.”

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An analysis of CMC Market’s most profitable clients measured by dollar value, found that one of the most popular CFD instrument traded over the last week was the CHINA50, a share index tracking the performance of some of the largest “A” share companies traded in China.  These are companies registered in mainland China whose stocks are traded on the Shanghai and Shenzhen stock exchanges.

CMC Market’s top CFD traders also looked to Finnish company, Nokia.  Shares in Nokia have more than doubled in price from very depressed levels in mid-July as investors embraced its smartphone link up with Microsoft and many of the savvy investors have seen real upside for the company in emerging markets given its lower cost smartphone offering.

The second most profitable company CFD was Shun Tak Holdings, a Hong Kong based property investor and developer with interests in both Hong Kong and Macau. It also has interests in cleaning services, transport and travel agencies. Shun Tak’s shares rose strongly last week as part of a broad based rally in China’s market and following broker upgrades based on an improved outlook for Macau.

Ric Spooner, Chief Market Analyst, CMC Markets, commented: “Our most successful CFD traders are confident and experienced enough to look beyond the mainstream trading instruments to those offering more international exposure.”

CFD Instruments traders by CMC’s most profitable clients over the last week include:

Top 10 traded CFDs (by profitability)

1.       AUD: USD

2.       China A50

3.       Nokia

4.       US SPX 500 ( S&P 500)

5.       Gold

6.       US 30 (Dow Jones Index)

7.       UK 100 (FTSE 100)

8.       EUR: USD

9.       German 30 (DAX)

10.   Shun Tak Holdings

CMC Market’s top traders also looked to the AUD:USD currency pair to produce the best returns from the available CFD currency instruments. The currency pairs that yielded the least profit for the top traders was the USD:JPY.

Ric continued: “Major currencies and leading share indices are traditionally among the most popular trading instruments among our clients. CFDs like the AUD:USD, EUR:USD, US 30 and Gold are highly liquid markets with tight spreads and trade either around the clock or with only a small break which makes them favoured instruments for short term traders.

“The German CFD (based on the DAX index) has grown steadily in popularity amongst our Australian client base. European economies have been an increasing source of focus for international economies since concerns over a possible break-up of the Eurozone began to mount in 2010. Opening at 6pm Australian time and being active during the Australian evening, makes the German and index particularly suitable for part time traders working during the day.”

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Report 316 Review of client money handling practices in the CFD and margin FX sector (REP 316), follows a risk-based surveillance of 40 issuers of OTC CFDs and margin FX contracts.

The review focused on issuers’ client money handling and reconciliation practices. It also gathered information about the amount of client money issuers hold and how they use this money. The 40 issuers ASIC reviewed represent the overwhelming majority of market share in the sector.

ASIC identified a number of contraventions of client money rules as part of its review, including:

• 18 issuers (45%) failed to properly designate client accounts as trust accounts; and
• 11 issuers (28%) failed to pay client money into a compliant account by the next business day following receipt.

In addition, ASIC’s review identified further weaknesses, including:

• six issuers (15%) did not perform client money reconciliations on a daily basis;
• five issuers (13%) had inadequate segregation of duties in their back office; and
• 19 issuers (48%) had no formal escalation process for resolving variances in the reconciliation.

ASIC Commissioner, Greg Tanzer, said, ‘ASIC is concerned about the number of breaches of basic client money handling provisions. The client money provisions are an important safeguard to protect the interests of retail investors. We expect issuers to know and comply with their obligations under the law and to put in place effective measures and supervisory arrangements to ensure these obligations are met.

‘ASIC has taken a facilitative approach to rectifying these breaches and strengthening issuers’ client money handling and reconciliation practices to better protect client money. Issuers have been highly responsive to our concerns and addressed them in a timely manner.

‘The release of this report however, which follows guidance published in 2010, marks the end of this facilitative approach. These findings should serve as a wakeup call to CFD issuers to continually improve their compliance processes and procedures’, Mr Tanzer said.

REP 316 also contains observations about how issuers use client money, industry size and scale as well as providing insights into emerging industry trends that were identified during the review.

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Key findings of annual Investment Trends Australia Contracts for Difference (CFD) Report:

• The Australian CFD market continues to grow: 44,000 Australians traded CFDs in the 12 months to May 2012, up from 41,000 a year earlier
• Potential for an even stronger growth exists, if the economic conditions improve: Volatility and the current economic climate are among the largest barriers to further adoption
• Traders take advantage of the widening range of markets available: Overseas indices, individual overseas shares and commodities play an increasing role in the underlying instrument mix
• CFD traders go mobile: 58% of current CFD traders use a smartphone and/or tablet to trade

Traders embrace CFDs in the tough conditions for investing

44,000 Australians traded CFDs at least once in the 12 months to May 2012, 3,000 more than in the corresponding period a year earlier. This represents a faster growth rate (7%) compared with the 2010-2011 period (5%) .

The Investment Trends May 2012 Australia CFD Report is the seventh iteration of the in-depth study on the use of CFDs, based on a survey of 17,197 investors conducted in May 2012.

Senior Analyst Pawel Rokicki commented on the findings: “Against a backdrop of challenging economic conditions, the market has shown considerable resilience. Traders are adapting to the lacklustre performance of the local share market. While most Australian CFD traders graduate from domestic equity trading, they are increasingly willing to trade overseas assets and commodities – a sign that the market is maturing.”

An improvement in the economic climate would help the industry grow further

While the main focus of the report is on current traders, it also looks into the psyche of the next wave of traders—people who have not traded CFDs previously but intend to begin in the next 12 months.

Asked what stopped them from trading CFDs, four out of ten next wave traders pointed to market conditions, including 29% citing the current economic climate and 28% citing volatility levels as barriers to trading. Thirty-one percent were held back by inadequate knowledge about the product.

“Volatility is a double-edged sword for the industry. The more seasoned traders thrive on it, but there is a large group of potential traders who wait for the waters to calm, before they jump in”.

International markets beckon

International markets are becoming increasingly attractive to Australian traders. Between May 2011 and May 2012 the proportion of trades placed over international indices and shares grew from 14% to 22%. Commodities and, to a lesser extent, currencies were the other underlying assets to see a relative increase in trading volumes. Individual Australian shares gave ground. The table below shows the details.

CFD traders go mobile

Fifty-eight per cent of current CFD traders use their smartphone and/or tablet to trade and another quarter intend to start doing so.

“Based on our international experience, the English speaking countries clearly lead the way here”, said Rokicki.

“Australia now has the highest level of adoption of mobile trading platforms, closely followed by the other English-speaking: US and UK where the mobiles and tablets are also used by the majority of leveraged product traders. Europe is significantly behind with the penetration in Germany and France at about half of what we see here.”

The market continues to consolidate around the two leaders

The top two providers—IG Markets and CMC Markets—now control almost 60% of primary relationships, up from 55% in 2011.

“Both incumbents have benefited from MF Global’s exit”, commented Rokicki, “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.”

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ASIC surveillance after MF Global’s collapse has revealed a great concern within the OTC derivatives industry in that more than 30% of providers have failed to comply with client money laws. 

“After MF Global’s collapse it is disheartening to read that there are a large proportion of providers who are not complying with the most important procedure in running a company, the protection of client money,” said Andrew Merry, Managing Director, Capital CFDs. 

Section 981D of the Corporations Act states that client money held by OTC derivative licensee can be used for the purpose of meeting obligations in connection with margining, guaranteeing, securing, transferring, adjusting or settling dealings in derivatives by the licensee (including dealings on behalf of people other than the client). 

“When Capital CFDs came to Australia, we were stunned to find out that the Corporations Act allowed operators to use client funds to finance operational costs, which is clearly not in the interest of the client. We brought with us the UK practice of quarantining client monies and not using it for any operational purposes at all, including the hedging of client positions. I believe we are getting closer to having this standard applied across the industry with Treasury considering a change to the law,” said Merry.

 4 June 2012

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Since 2007, SMSFs have been allowed access to CFDs.  This change has given trustees a cost effective and efficient tool for hedging as opposed to traditional methods such as options. 

”If an SMSF holds 2,500 ANZ shares then an options hedging strategy would require 25 separate options contracts to be written (options over Australian shares are written in 100-share contracts). 

“Whereas, a single CFD trade could protect the ANZ shares on the downside, which is essential during market downturns such as recently when ANZ fell just over 12.5% in 13 days.  Instead of being exposed to a 12.5% drop in ANZ, an SMSF investor positioned via hedging, could have positioned themselves to limit that downside for minimal outlay. This explains the growth of CFD trading by SMSF’s trustees to ‘short’ their own portfolios to protect the value of the core portfolio in case of a market slide,” said Ashley Jessen, Head Sales Trader, Capital CFDs.

However, most CFD providers do not recommend SMSF trustees use their portfolio for principal trading or speculation via derivatives.  As opposed to using CFDs to speculate, smart investors can use them for risk protection measures and to reduce exposure to local stocks that have since fallen out of favour in the market. 

“Experienced investors who understand leverage and who are looking to use CFDs for risk protection are well advised to consider this technique further. Eurozone announcements that spook investors and drive markets down are all too common nowadays, so investors need to consider all the tools available to limit their downside and lock in profits” said Mr Jessen.

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Instead, consistently successful traders have a rock solid foundation that has been tailored to their own personal time frame and risk tolerance, thus removing the luck factor.

“The balance between winning and failing with CFD trading generally comes down to going into a position with a clear strategy, clearly defined exit points and strong money management systems. Only then will you get close to achieving your financial objectives and goals,” said Ashley Jessen, Capital CFDs.

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This is followed by (in order of most-traded):

• EUR/USD
• Gold
• Germany’s Dax 30 Index
• Australia’s 200 index

With over 2,500 products at trader’s disposal, Capital CFDs found that experienced and new traders alike seem to focus on currencies, commodities and indices as this is where the volatility is.

The greatest advantage among trading CFDs across the major Forex pairs, indices and commodities is free brokerage and access to extremely tight, fixed spreads.

“Traders using Capital CFDs in the 1st quarter of 2012, maintained their wide-eyed interest in trading currencies with 33% focused on the Aussie dollar and 16% jumping on board the Euro to hunt for volatility and short term gains.”

“Gold continued its relentless surge of volatility following Ben Bernanke offering grim hope of QE3 forcing Gold and other commodities to take a sharp nosedive,” said Ashley Jessen, Head of Sales Trading, Capital CFDs.

What to expect in 2nd quarter 2012?
“Moving forward, the focus for Capital CFD traders should continue to support a strong upside for US-based indices, more volatility from precious metals but a lack of trending opportunities.”

“We expect that there will be a steady grinding uptrend for the local Aussie index. It will be critical to keep a close eye on overhead resistance levels across all indices as they continue to show overbought levels following their incredibly bubbly start to 2012,” said Mr Jessen.

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“The Forum’s Client Money Standard prevents member firms from using client funds for any reason, thereby offering the client the highest level of protection. To my knowledge this standard is the safest client money protection model that is available anywhere,” said Andrew Merry, Managing Director, Capital CFDs. 

“After the collapse of MF Global  any financial industry participants dealing with the public must have excellent safety settings in place for their money and, furthermore, be able to show that this process is transparent to the investor,” said Mr Merry. 

Under current legislation a provider is able to use client money to fund the operational costs of the business which is clearly not in the best interest of the client. The recent failings of MF Global and Sonray Capital have highlighted the lack of protection that the Corporations Act affords to client money. 

A key standard of the Australian CFD Forum prevents a member firm from using client money, whether it be cash or unrealised profit, for hedging or any other reason.

“To participate in the CFD Forum each member firm must comply with each of the 16 standards without exception. This provides transparency to investors and assurance that the members firms are following best practice across the board,” said Mr Merry.

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The guidance also covers margin foreign exchange contracts.

In Australia, most CFDs are issued as over-the-counter (OTC) products, making them increasingly accessible and popular with retail investors. But CFDs are a high-risk financial product and their complexity means they are unlikely to meet the investment needs of many retail investors.

ASIC Chairman Greg Medcraft said action was needed to ensure people considering CFDs are aware of the downside as well as the upside.

‘CFDs are extremely risky financial products. Most investors don’t understand that complexity and they don’t get independent financial advice. That means we need CFD issuers to do a much better job of spelling out to investors the risks as well as the rewards of these complex products,’ Mr Medcraft says.

‘ASIC’s number one priority is ensuring investors and financial consumers are confident and informed. We want issuers to work harder to ensure people investing in CFDs better understand what they are getting into – before they start trading.’

Regulatory Guide 227 Over-the-counter contracts for difference: Improving disclosure for retail investors (RG 227) outlines seven benchmarks which aim to help investors understand the risks and benefits of OTC CFDs. Issuers must address these benchmarks in product disclosure statements (PDSs) from 31 March 2012.

ASIC has previously released an investor guide—Thinking of trading contracts for difference (CFDs)? to help investors understand the benchmarking information in disclosure documents. This guide has general information about CFD operation and risks and indicates what investors should look for when reading PDSs. This will be updated to explain the benchmarks when they become effective from 31 March 2012.

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