CFD Regulation around the World


CFD and the Trading Revolution

CFDs are by far very innovating financial trading instruments, for various reasons. CFDs or Contracts for Difference, allow traders of stocks, commodities and currencies to trade more cost effectively and to enjoy superior market liquidity. This is because CFDs have superior liquidity by their structure, it’s a market that follows the real market very closely in price, but at the same time it behaves as an imaginary market when the negative impacts appear, and it leaves all the negative impacts out. That’s why CFDs offer guaranteed stop loss orders, even though a stock exchange does not offer guaranteed stop loss orders, and it also allows traders to short stocks, even when stock short selling is temporarily restricted.

CFDs are mostly known for their leverage, which can be as high as 400:1, however their real benefits are price linearity and superior liquidity. And these hidden benefits are available to all retail traders, trading with up to $100 per point /cent, CFDs are not suitable for large size super-traders and institutional traders, trading at more than $100 per point / cent. So as you can see all good things do have limitations. And more specifically, liquidity benefits flow from the real market into the CFD market, but all the bad things are left out, while at the same time liquidity cannot flow in the opposite direction. Liquidity is always provided by the larger market to the smaller market.

CFDs are used today by beginners, amateur traders and veteran traders alike, the ones who make the most money through CFDs are commodity specialist traders, trading one commodity only. There are also many old fashion investors who invest in stocks, while they also trade CFDs to hedge part of the risk, or to simply profit from small market movements. Different traders use CFDs for different reasons, but they all know that there is value in CFD trading, those hidden benefits that other financial instruments cannot offer.

Some of the greatest benefits of CFDs, are often little understood, but CFDs really offer great flexibility and range of choice. And flexibility is essential for a winning strategy. The CFD trader has at least 2 huge advantages compared to a trader, say in the United States, where CFDs are banned. And sometimes, in extreme market conditions, these benefits can make all the difference between making a huge profit and missing out on all profit.

Current CFD Regulation and Future

CFD regulation keeps on updating around the world, CFDs are available to traders in Europe, parts of Asia, in Australia and in few other countries. CFDs are banned in USA, and this puts US retail traders at a huge disadvantage compared to traders who have access to CFDs. Whether the securities and exchange commission in the US will allow CFD trading in the future, remains open for debate, but there is a good chance it will happen. The United States has always been a pioneer country of financial trading, especially in the field of Options, which were invented and first introduced in the 1970s, in an effort to stabilize the markets. CFDs are aimed at retail investors and traders, it’s a small market, and not currently seen as vital to overall market stabilization, that’s why they are banned, in the same way that forex trading leverage is also limited in the US, to just 50:1, which is much lower than in other countries.

CFDs are well regulated in the EU, Cyprus and Australia, and they are popular too. Because traders in those countries have figured out the benefits of CFDs for trading various markets. Some of these traders are wise stock investors, some others are very serious and professional commodity traders. They all make CFD trades, in their own markets, which they understand best. CFDs do make retail financial trading better, for many traders, and in many ways. The regulatory bodies in the United States simply fail to see these benefits. And the industry is now so competitive, that CFD brokers really have to offer more and more, while they make less and less. Because the client comes first, and client retention is their number one priority.

Today, CFDs are very popular in the UK and in Australia, largely among stock investors and commodity traders. Slowly but steadily, some forex traders also use CFDs, and these are sophisticated forex traders seeking a market edge, not what is fashionable to use.

Commodity Trading Regulation and CFD

Commodities trading is by far the one single way, where a traders really stands a chance to make millions. Commodity traders are specialists who understand one single commodity market very well, so well that they can predict the price of that commodity with little error. Countries that allow CFD dealing, and have brokers that facilitate enhanced CFD trading, are way ahead of other countries where CFDs are banned. Because the commodity trader in those countries can use CFDs to secure a better price, to hedge sudden risk, or to make a profit. And remember that even retail traders such as these, who make millions, are still small traders compared to the non-CFD market. But these CFD traders are often the commodity producers, the farmers, or the actual traders who also trade the real thing.

Case in point:  a sugar producer who knows all about the sugar market and wants to get around some short term declining prices, so as to save their business in the near term and to protect their long term profits. CFDs allow this sugar producer to make long term and medium term trades, and to go through the low price season, without facing total risk of getting wiped out and losing their business. CFDs are risky, yes, but then again so is the sugar producing business, and when low sugar prices dominate the market, there is a huge risk of losing the business, that risk can be offset, or at least mitigated through specialized CFD trading. This is what the regulatory bodies in the United States fail to see, and how CFD trading would help actual commodity producers and traders. At this time, only Futures trading is available in the United States, but Futures pricing is different, non-linear, and not practically useful for advanced commodity trading, hedging and price protection.

CFD trading is amazing because it allows the trader to see the inner workings of a commodity and how it relates to the forex market, since all commodities will relate to some currency or currency pair, in one way or another. And all trading can be done through a single CFD account! CFD trading can be explored all through a single account, even by curious beginners, as long as they know what they are doing. In any other case, such as when Futures or spot markets are chosen as the way to trade, the trader will need multiple different brokers and accounts to have all these different markets available. Which is likely to confuse them, rather than help them. A single CFD trading account, provided by a regulated CFD broker, is all you will ever need, for most trading strategies.

The Future of CFD Regulation

CFD regulation is likely to improve further in the future, because it benefits the retail trader, and because CFDs are well adapted in the UK where they were originally introduced in the 1990s. All countries that are serious about modern financial trading will follow the example of the UK, and the way the FCA (Financial Conduct Authority) paves the way forward, in terms of regulation, fees, tax issues and overall classification of CFDs.

Limitation on leverage may change from time to time, and there may be changes as to how much leverage CFD traders can have, in any given market. Traders need to realize that in most cases, they don’t really need more than 100:1 leverage, and even though in some countries up to 400:1 leverage is available, it’s because CFD brokers are allowed to offer this much, but traders don’t need to go this far. Only specialist traders should use ultra high leverage, if ever needed, in all other cases you can still make millions with 100:1 or even 50:1. The only exception to the leverage rule, is when one does Carry forex trading, where they want to profit from the interest rate differentials using various CFD brokers, in that case, the higher the leverage offered, the more exposure they gain to the market, and the more they will profit. This is the only case where high leverage is actually necessary. This is also the rare occasion where the trader may need more than one CFD broker, in order to choose the optimal interest rates offered, since different brokers offer different interest rate charges/credits, for trades held in various markets. And it is a strategy which can get very complicated, but it is one that can be fully, 100% implemented on CFD brokers and nothing else. And it can generate up to $300 per day, on a $50,000 total investment. There’s no better broker to use for a Carry trade strategy, than a CFD broker.

CFD regulation has nothing against speculative trading or Carry forex trading, all kinds of trading strategies come with inherent risks, and there is no easy way to make millions. A profitable strategy will either require too many hours of devotion and live trading, or some very difficult theoretical work, where market risk is cleverly filtered out. If you can do either one of these things, CFDs will allow you to make millions, and CFD regulation will be on your side.

CFD regulation is implemented in order to ensure that CFD brokers compete against each other, so as to act in their clients’ best interests, and to provide liquidity to the small retail traders. Licensed and regulated CFD brokers will follow the required guidelines and have to conform to local laws. This is done in order to also ensure that clients’ money is safe, and kept safe, up to a certain amount, even in the event where the broker goes out of business, and to also prevent money laundering practices by criminals posing as CFD traders.

CFD regulation is still no perfect, but it’s good enough to detect criminals and money laundering practices and to keep them out of the market. Whereas in places such as casinos, criminals are known to launder money many years now, unobstructed, and regulation is so poor that no law is in place to stop these criminals. The CFD market is serious and looks after its clients, hence no criminal practices are tolerated. Moreover, CFD trading is a serious task, and has nothing to do with poorly regulated casinos and gambling places. Remember that CFD trading is actually connected to the real financial markets out there, and it has to do with real trading assets, not some kind of closed system where clients have to lose in order for the service provider to stay in business. Regulated CFD brokers can stay in business even if all clients win money, time after time, they have the way to offset market risk, through cleverly designed algorithms, so their market exposure never becomes one-sided. This is one more reason why properly regulated CFD brokers can be trusted, and why regulation is so vital.

All in all, CFD regulation will only get better in the future, and traders can expect more competitive brokerage services and better brokers. Markets will remain as risky as ever, but to the specialist trader who knows what they are doing, CFD trading will always be one step ahead of other financial instruments. Moreover, new risk management computer algorithms will improve as well, enabling CFD brokers to handle market exposure even better, and this means no conflict of interests, you will be able to win at your trading, again and again, and it will make no difference to your CFD broker. This is little understood by many traders, who think that their broker is acting against them, but in reality there’s no such thing, brokers want to keep their clients.

Video CFD Market Regulation