Financial Mail - Investors Monthly
Special mention: CFD providers
This specialist supplier obviously knows how to make a difference in low-cost, short-term leveraged trading
“CFDs are useful for shorter-term traders as they are generally cheaper to trade in and out of than normal shares
IG SA, a specialist supplier of contracts for difference (CFD), is the Top CFD Provider of the Year. Part of a global company, the group offers CFDs on 17,000 instruments worldwide. It supplements that huge range of options with four IG trading platforms as well as two thirdparty ones so clients can choose based on their specific needs.
The firm climbs up the table from fourth last year on the back of improved client ratings. It has also beefed up its offerings to clients with a trading and performance analytics programme built into its trading platform, among other new features.
Standard Online Share Trading/Stockbroker takes second place, emphasising the breadth of its strength across all product categories.
BP Bernstein, nearly 70 years old, moves into third place, having not had enough client votes in previous years to make its mark.
CFDs are 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. For example, two parties can write a CFD on MTN and then pay each other the profit implied by the movement of the reference share.
Intellidex introduced this award in 2012 when CFDs were extremely popular: they were the second-most traded instrument after equities. Their popularity waned for a while as exchange-traded funds have overtaken CFDs in trading activity, a worldwide trend. However, we notice a resurgence in CFDs with more brokers beefing up their offerings.
Satisfaction levels are assessed from CFD-trading clients’ opinions on the range of CFD products offered, the quality of their brokers’ interaction with them and the support they offer. We use those rankings, costs and our own investigations to determine scores. BP Bernstein acts as an agent for Standard Bank and Nedbank, therefore it scores highly on credit risk as well.
CFDs are useful for shorterterm traders as they are generally cheaper to trade in and out of than normal shares, but become more expensive the longer the holding period.
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 the majority of 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 become a big problem if they are not. 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 just which balance sheet was the counterparty to the CFD contracts they wrote and to explain how they segregate client money from that of the firm’s. We score brokers highly if there is a clear and substantial balance sheet standing behind the contracts and mark them down if the balance sheet is 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. Often low fees are 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.