Australian ASX CFDs

What's a Contract for difference?
A CFD (Contract for Difference) is an agreement between a buyer and a seller to swap the difference in value of a particular instrument between when the contract is opened and when it's closed. The difference is set by reference to an underlying instrument which is generally a stock, index, foreign exchange rate or commodity and the period over which the CFD is held.

CFDs are leveraged financial products. This means that you will be fully exposed to price movements of the underlying instrument without having to pay the full price for that instrument. Leverage means that CFDs offer the possibility to generate a higher return from a lower initial cost than investing directly in the underlying security.

Leverage, however, usually entails more risks than a direct investment in the underlying stock. It is important to understand that this effect may work against as well as for traders. Using leverage can lead to large losses and also large gains.

Benefits of trading CFDs
CFDs have been used by professional investors for over twenty years and emerged initially as an over-the-counter (OTC) product. CFD related dealing and hedging is one of the fastest developing areas in the Australian and European derivatives markets. This popularity has arisen as a result of the following main features:

Leverage
CFDs enable you to attain full exposure to a stock, commodity, FX cross or index for a portion of the price of buying the underlying. CFDs call for only a small initial margin to secure a position.

The capability to go ‘short’
CFDs permit traders to take advantage of falls in prices. This means that traders can profit whilst prices are going down, not just up. CFDs are thus an exceptional investing and hedging instrument.

Ease
Non-expiry: Most CFDs do not have an expiry. They are perpetual in nature. For CFDs that do not expire, the only way to close a trade is to trade the opposite side of the position.

The CFD mirrors the value of the underlying: Unlike other kinds of derivatives (i.e. options and futures), cash flows such as carry costs and dividends are not reflected in the price of a CFD. Rather, cash flows are paid whilst the trade is open, allowing CFD prices to track the underlying instrument rather than trade at a discount or premium, as can be the case in other types of derivatives.

Advantages of ASX Listed CFDs
Market Independence
ASX is required in accordance with the Corporations Act to guarantee that its markets are fair, orderly and transparent. ASX ensures a sound operational and front-line regulatory environment for its exchange-traded markets and clearing and settlement facilities, providing effective systems and infrastructure together with services intended to maintain and improve the integrity, efficiency and effectiveness of its trading, clearing and settlement facilities. For the ASX Listed CFD trader, this means being able to participate in the market with confidence.

As the predominant market operator, ASX is independent of the parties with whom you are receiving recommendations and dealing through enabling it to act fairly and independently. This separation of responsibility between provider and exchange also offers customers with choice as to whom they wish to execute their business through.

Having a central market also means there is one standard contract specification for all ASX Listed Contracts for difference, not a different product based on who you execute through. It’s a fundamentally superior CFD market.

Transparency
Transparency is a key ingredient in a well informed market. ASX reports on all ASX Listed CFDs transacted, open positions, bid, offers and their volumes. In fact, all the market information you are used to seeing from the ASX. This means a better informed market.

ASX Listed CFDs are traded in the same way as any other ASX traded contracts:
1. All prices are formed in a completely transparent way in the ASX’s CFD central market order book. Each trader’s order is pooled in the ASX Listed CFD central market order book with those from other market participants, including market makers, and becomes an integral part of the price discovery process.
2. All trades are executed on a strict price/time priority. Price/time priority means the first person to enter the best price is traded against first. This results in every person in the central market order book being dealt with equally and consistently, no matter how big or small a trader you are.
3. Importantly, whilst prices are transparent, the individual trader remains nameless, which minimizes market impact expenses (especially those related to other people recognizing an individual’s trading patterns and trading ahead of him/her).
4. Anybody can place into the market a better bid or offer, as is the case in all exchange based markets. No-one is required to accept the price obtainable in the market. However, once an order is executed, you are committed to settle the trade. All prices in the market are firm in the volume indicated.
5. The ASX Listed CFD central market order book incorporates orders from market makers. Their actions help ensure the ASX Listed CFD market has competitive prices and deep liquidity.

Risk Management
ASX Listed Contracts for difference operate in a centrally cleared marketplace. The Clearing House offers central counter party clearing for the ASX Listed CFD market. This involves the Clearing House managing risks to guarantee that the interests of its Members and individuals are protected and that the integrity of the marketplace is maintained.

Through a method called novation, the Clearing House becomes the principal to all trades and liable to perform against all contracts to which it is a party and effectively ‘guarantees’ performance to other Clearing Participants. Novation and thus the clearing guarantee become effective on registration of the agreement between a buyer and seller.

This exposure is then managed and the clearing undertaking implemented in a number of ways. First of all this is often achieved by the collection of the various margins. The collection of these moneys protects against severe price changes and prevents participants from accumulating sizable unpaid losses that could possibly impact on the financial position of other market users. This is a major element that differentiates exchange-traded markets from over-the-counter (OTC) markets, where such a strict margining regime is not in place.

The ASX Listed CFD market also has access to the Clearing Guarantee Fund meant for use in the event of default of one or more Clearing Members.

Dealing in the ASX Listed Contract for difference Market
When trading ASX Listed CFDs, your order is entered directly via a market member into the ASX Listed Contract for difference central market order book. This order book is accessible for the market to see. All orders are filled on a strict price/time priority. This means that the initial order with the best bid or offer price is always executed first. Dealing in the ASX Listed CFD central market order book also ensures “customer instructions” are always given precedence over a broker’s “house orders”.

In contrast, customers executing CFDs through an OTC provider, do not have their orders in the ASX Listed CFD central market order book. Customer orders are transacted with the OTC CFD counterparty (typically described as a CFD Provider). The customer’s order is not protected by the ASX’s price/time precedence or client order priority rules.

Article Source: http://gamblingarticlessite.com

John Masterton is a professional CFD trader trading with Australia's largest and most popular CFD provider, IC Markets. John has published a number of articles on CFD education including guides and ebooks which you can download for free.

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