Special mention: CFD providers
After assessing client satisfaction, costs and credit risk, 28E Capital comes out tops
For five years, Top Stockbrokers has provided a ranking of the best providers of contracts for difference (CFDs), a type of derivative that allows for low-cost, short-term leveraged trading. CFDs are a contract between two parties where one pays the other profits depending on the movement of a reference asset. So, for example, two parties can write a CFD on MTN, then pay each other the profit implied by the movement of the reference share.
When we introduced this award in 2012, CFDs were extremely popular: they were the second-most traded instrument after equities. However, their popularity has waned, and this year exchange traded funds overtook CFDs in trading activity. This is a worldwide trend.
CFDs are useful for shorterterm traders as they are generally cheaper to trade in and out of than normal shares, but they become more expensive the longer the holding period.
Determining the best CFD providers is a fraught conceptual problem — there are many issues that are important. Ideally we would assess three things: client satisfaction, costs and credit risk. This last measure, though, is very difficult. Many firms write CFDs off the balance sheet of bigger prime brokers and are therefore much less of a credit risk than it appears from the size of the broker itself.
CFDs can now be traded on the JSE, which eliminates the credit risk as it guarantees settlement, or “over the counter” between the broker and client. The latter type has been going for longer and still makes up most CFD trades.
CFDs imply credit risk because brokers can end up owing traders money if the underlying asset prices change. That should be no problem for brokers who are managing their risk correctly, but can
Client satisfaction can be assessed from CFD-trading clients’ opinions on the quality of their brokers’ interactions with them
become a big problem if they are not. Dealstream, a broker that collapsed owing clients money in 2008, is the oft-cited example. While we assess this risk as comprehensively as possible, without conducting a full systems audit it remains very difficult to do.
We asked brokers to identify which balance sheet was the counterparty to the CFD contracts they wrote and explain how they segregate client money from that of the firm. We scored brokers highly if there was a clear and substantial balance sheet standing behind the contracts, and marked them down if the balance sheet was small or hard to assess.
It is also important to clients that CFD trading facilities are easy to use and costs are low. Costs can be assessed directly but have two sources: the charges for CFD transactions and the implied leverage in transactions. Low fees are often paid for by charging high interest rates for leverage, or paying low interest rates for short exposures. We measured the difference between these, which is known as the spread.
Client satisfaction can be assessed from CFD-trading clients’ opinions on the quality of their brokers’ interactions with them and the support they offered. We used those rankings, costs and our own investigations to determine scores.
28E Capital is the Top CFD Provider for 2017. It scored well across all categories — client ratings, costs and credit risk, as its CFDs are backed by Standard Bank. IG placed second, though it ranks first for online trading overall.