This article will provide some history on the ever-changing landscape for Contracts for Difference (CFDs) and will seek to make several predictions on how we expect the landscape to unfold going forward into the next ten years. We will then finish with how our broker, TMGM fits in with the model of a broker that was created specifically for client needs.
We begin with a history of the industry, where it came from, and how it grew, delve into regulatory change and acceptance then investigate how client desire has changed and how it may evolve in the product of the future.
History of Contracts for Difference
Contracts for difference started in the mid-1970s as a wholesale-only product to be traded between investment banks and ultra-high net worth individuals. This was largely as a result of demand being for off-exchange products where the transaction fees would be lower. In the early days, these products were very similar to swaps, but had fixed contract specifications.
Having fixed contract specifications made it easier for the investment banks to both quote them and manage their risk.
In the late 1990s, “spread betting” became popular in the U.K. and product expansion saw the offering companies move to add financial products to their product suite, particularly gold. These were traded largely on proprietary platforms until Meta Quotes (MQ) began operation in the year 2000.
The advent of one third-party platform to emerge saw the space become more competitive as customers who used MQ became more demanding with their requirements and were much easier able to move their business from broker to broker, as the platform they used was the same.
This saw CFD providers seek to expand offshore to increase their revenues, with Australia being the first port of call. This made sense for the providers as Australia and the U.K. have a common language and the regulatory environment was very similar.
Offshore Expansion and Regulation
Around this time, the Australian Securities and Investments Commission (A.S.I.C., Australia) and the Financial Conduct Authority (F.C.A., U.K.) began the regulate these products. Until then CFDs were largely unregulated and the big brand brokers had the lion’s share of business due to their brand strength.
After regulation came into effect, clients were most often concerned about whether a broker was regulated. This became the predominant requirement from a client’s perspective. The first question a client would usually ask is “do you hold A.S.I.C. or F.C.A. regulation.”
As regulation became more common and more regulated brokers came into the space, clients still saw regulation as a must-have, and to this day, largely prefer A.S.I.C. and F.C.A. regulation over other jurisdictions, such as TMGM. Demands then seemed to change, virtually overnight, with clients asking about the spread.
The question about spread is an interesting one, as “how tight are your spreads” doesn’t really answer the question. Spreads can vary during the global session, with spreads being at their tightest during London time, with London still being the most liquid centre for foreign exchange in the world, followed by New York.
Spreads can vary greatly between early Asia, European time, and late New York time. Add to this that brokers will charge a commission on E.C.N. clients as well. But before we delve into this, lets explain the meaning of E.C.N.
But also consider that spread is not the only cost of trading. Many types of trading accounts also include commissions and swaps.
When considering the entirety of the cost of trading, TMGM has some of the lowest-cost products on the market. Additionally, our suite of Liquidity Providers are based around the world, ensuring that our spreads are as tight as possible 24 hours a day.
The current Product
All this information is fairly well known in the market and has provided a largely homogeneous product. Brokers are all generally using the same Liquidity Providers, which means that spreads have come in to a market standard level, while clients being careful about their swap fees has seen a reduction in the incidence of brokers marking up swaps.
Commissions seem to have settled in at around the $7 level, which is now also very common for brokers around the world.
Additionally, client portability has seen MT4 become the dominant platform, but reports being that more than 97% of funded CFD accounts are being held on that platform.
So, what we have in CFDs are many brokers providing largely the same product, with similar spreads, commissions and swaps.
Where brokers tend to stand out in the current market is on service. In terms of service, TMGM has made a strong and large investment in systems and staff to provide the best service humanly possible. This is shown in our 24/7 client support in ten different languages. And when we talk about languages, we are talking native speakers, not people using Google Translate.
TMGM is a broking company built by traders for traders. As such, we have sought to “tick off” as many boxes as possible with our company and our product.
Founded in 2013, TMGM began its existence as TradeMax. This is also the year that TMGM acquired its ASIC license.
In 2017, TMGM formed its Wealth Management Group. Since 2018, TMGM has been opening local offices, first expanding within Australia, then overseas in order to provide a more bespoke level of service to our clients.
TMGM is known within the market and with our clients specifically for providing a high level of individualized service. We treat each client as an individual and each client has their own client support representative, who specifically acts to support the client within our business.
We provide 24/7client service in ten major languages, and we are always seeking to expand our offering and service. With a 4.8 “excellent” score on Trust Pilot, we think the proof of our product and service is obvious to all and on public record.
With a broad range of product that includes foreign exchange, Commodity, Equity Index and Crypto Contracts for Difference, we also provide more than twelve thousand share and ETF CFDs on MT4, MT5 and the Iress platforms.
And proving the depth of our liquidity, we have no limitations on scalping and E.A. traders, unclike some other brokers.
The last ten years
The last ten years or so has seen regulators, again largely A.S.I.C. and the F.C.A. seek to push non resident clients out from under their regulatory umbrella, which has prompted brokers to open new businesses in lightly regulated jurisdictions, or unregulated jurisdictions.
This has been brought out in the opening of Vanuatu and Saint Vincent based entities.
Which means for most clients, the offering is an unregulated entity, with tight spreads, low swaps and mainly Risk book housing.
The next ten years
Where we stand now is a largely commoditised product. Clients will largely trade with the broker that they have the best relationship with, because rightly or wrongly, this leads them to believe that their funds are safe.
We think that over the next ten years there will be two major developments in C.F.D. trading.
Firstly, we believe that a shake up in instruments is imminent. Secondly, we believe a global body will come in and underwrite the protection of client funds.
Recently, some C.F.D. brokers have been “tinkering” with adding individual stock C.F.D.’s to their product suite. This has largely gone down poorly as the few brokers that have a decent product range are only offering them on MT5. Brokers are using MT5 rather than MT4 as MT5 allows more products on it.
Clients don’t seem interested in taking up MT5, which has made the move into direct equity CFDs largely a non-starter. The main reason for this is that the automatic trading language on MT5 is different to that of MT4.
Automatic trading (also known as algos or forex robots) are software that a client can place on their platform to find, execute and manage trades. Research shows that as much as 30% of retail CFD trading is done via these robots.
The problem is that human beings are inherently lazy and largely uninterested in recoding these to suit MT5.
Fixed Interest Funds, Property Funds and ETFs
We think the expansion will be into Fixed Interest products and ETFs.
With interest rates recently at historical lows and most recently rising, Fixed Interest products such as bonds and bond funds will become more interesting as interest rates rise. As this occurs, the first brokers will start to add bond products to their product suite. And by adding several major bonds to the offering, this in itself won’t take up too much in the way of MT4 real estate.
Additionally, with interest rates on the rise, this should cause more volatility in property prices globally, which would make property funds another product expansion that makes sense. The same too for ETFs.
Having the ability to trade major currency pairs, major stock indexes and major bond and property funds in the one platform will allow C.F.D. brokers to compete with the likes of Interactive Brokers and Saxo, with significantly higher leverage. The higher leverage will appeal more to the self-led trader or investor.
We feel a platform with the top 20 currency pairs, and ten to fifteen each of Stock Indexes, Bonds, Property Funds and various ETFs would be a market killer. And as most of these products will have to be held internally for risk, there would be no commissions or swaps.
Client Fund Protection
With the major regulators being clear that they do not want non residents to be onboarded to their licenses, the last few years has seen a significant number of brokers move to unregulated jurisdictions.
This means that despite a broker holding a well-regarded license in Australia or the UK, clients away from these jurisdictions are being onboarded to an entity where they have no real rights. We believe that this might lead to a global form of regulation.
How this would work would be an independent group would form and have brokers as members. The members would contribute yearly fees and these fees would be used to buy a relatively large insurance policy which would underwrite the risk of a broker not returning money to clients.
Brokers would need to sign onto a Code of Conduct or a Charter that may look like this:
· An entity within the group holds an A.F.S.L. or F.C.A. license
· We will open accounts globally based on AMT/CTF best practice
· We will have a published (on website) best execution policy
· All clients across all jurisdictions will be treated equally
· All withdrawal requests will be processed within 24 hours
· All client correspondence will be replied to within 48 hours
Broker dues would be used to fund an insurance policy in case of a black swan event that destroys a broker, while a sinking fund could be formed for brokers that are delaying withdrawals.
If a broker has been flagged as being more than five days late on a client withdrawal three times within a calendar year, they would have their rating lowered.
This organisation could be called the CFD Brokers Association.
So, there you have it. A short background history of the CFD industry, and several ideas for where the industry might go.
One thing is for sure however, with brokers reporting new record turnovers nearly monthly, this industry is not going away any time soon.
Ever since the days of pit trading in London and Chicago, the broker/client relationship has always been about trust. While we can dazzle you with our huge product offering and technological advances, instead we are going to ask you to trust us.
Trust at TMGM means an “Excellent” rating in Trust Pilot, and 24/7 customer support in ten different languages. Trust in our regulatory environment and in our tier one banking relationships. Trust that in the unlikely event that you ever have a problem, question or concern about us, you will speak with a real person.