How to Choose a CFD Broker

April 3, 2013

in Investing

By Alvin Chow (guest contributor)

In recent years, there has been a proliferation of Contracts For Difference (CFDs) brokers in Singapore. This financial instrument started in the UK many years ago before it caught on in other countries.

The main advantage of trading CFD is that it allows the trader to short sell a counter with ease. Without CFD, the trader would have to borrow stocks to short, which depends on the supply. In other words, someone needs to hold the stock and be willing to lend to this trader, so that the trader can sell and buy back later to return to the owner. There are relatively few CFD brokers in Singapore.  If you are interested in using a CFD broker, these are the aspects you must look out for:

Market Maker or Direct Market Access?

Unlike what many people believe, it is not all about commission. There are two types of brokers: Market Maker (MM) and Direct Market Access (DMA). MMs usually charge cheaper commissions but earn additional money through the spread between bid and ask prices.

For example, the real bid/ask price can be 1.01/0.99 but the MM can state her bid/ask at 1.02/0.98. Hence, you tend to lose more if you trade a bigger contract. DMAs follow the actual bid/ask price quoted in the exchange and they surface your CFD orders on the exchange. Thus, your orders would contribute to the volume in the market. Since they do not really earn from the bid/ask spread, they charge a higher commission. MMs may therefore not be as cheap as the commission suggests. It is important to find out more about the spread.

From what I know, SaxoCapital and Kim Eng are DMAs. IGmarkets and POEMS have both options: DMA or MM. CMC Markets and CityIndex are MMs. I used CMC Markets in the past, and the commission is S$15 for Singapore stocks.

Range of Counters

Find out the number of counters available in the particular market you want to trade. Some brokers offer more than others. This information can usually be found on their websites. One thing to note is that not all the counters in the list are available for shorting. You would have to ask the broker separately for this information. The brokers that have offices in Singapore usually have a good range of counters for Singapore stocks.

Data Charges

DMAs usually charge data fees. This is because they pull live data from the exchanges and it is the latter that charges for the data. It is just a matter of transferring the cost to the user. MMs do not charge data fees. You should find out if there are any fee waivers.

Funding

How you would fund your account? Bank transfer? Does your broker have Electronic Payment System (EPS)?

Try to use the same bank with your broker for the transaction so that your account can be credited within the same day. It would take about three working days to transfer to a different bank. EPS is the most secure and fastest way, but only local brokers offer this service.

Besides the procedures, you must also know the minimum amount of capital you need to put in to open an account. Most brokers require a minimum of S$1,000 (CMC Markets).

Withdrawal

This is often overlooked but it is important. We want to get our money out with ease and as fast as possible. You need to understand the withdrawal procedure and the time taken to complete the transaction.

Some brokers require you to complete a form and fax it over. Some do it through email correspondence. Some do it through online submission. Some take three to five working days.

MAS Regulated

Look for brokers that are MAS regulated. Usually those that have a local office are MAS regulated, but it is up to you to confirm. The reason why MAS regulated brokers are important is because they have to put your capital in a trust handled by a third party bank. This is to ensure that in the event the broker collapses, the debtors cannot come for your money with the broker as they are held in a trust.

Available Order Types

Different traders use different order types. For me, I must be able to use stop orders, or it is a no deal.  Some traders require One Cancel the Other (OCO), Trailing Stops, Contingent Orders, etc. You know what you need so ask if the broker has the facilities.

Interest

CFDs are leveraged instruments and you would be charged for interest when you take leverage. The interest rate does not really differ much between the brokers, but it is still good to find out more.

Platform Type

Different brokers offer different platforms. I find that web platforms are the best as you can trade anywhere with a computer that has an Internet connection.

Some offer desktop platforms where you have to install the computer in order to place trades. Some even offer a mobile platform so that you can trade on the go with your web-enabled phones.

CMC Markets offers a desktop platform. If I am not mistaken, POEMS and Saxo offer all three platforms.

Others

When you trade for a while, you would start to realize some peculiar things about your broker. I shall share some of my experiences.

Some brokers do not let you place CFD trades outside trading hours. This is very important to me as I usually place trades after work. Not being able to do so is as good as telling me not to trade.

CMC Markets, for a period of time, forbade traders to use stop loss in the Hong Kong market. They did not explain why and did not say when the ban would be lifted. This is why I left this broker.

I hope with the article you are now able to choose a broker that suits you.

 

By guest contributor Alvin Chow, who blogs at Big Fat Purse, a Singapore personal finance blog.

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