Playing The Game of Leverage (11) - Counterparty Risk in Trading CFDs

Read? Playing The Game of Leverage (10) - Counterparty Risk in Trading CFDs

CW8888 : Nothing is new in the market! It is just new players coming into the same old Game of Capital! Capital NOT enough! How?

Higher volatility, liquidity draw younger investors into CFDs

Some CFD platform operators report explosive growth in trading volumes; pandemic may also have lifted investors' liquidity by cutting consumption

Read? Higher volatility, liquidity draw younger investors into CFDs

TRADING in contracts for difference (CFDs) is on the rise in Singapore, with increased interest from a new crop of younger investors. Higher market volatility, greater liquidity and wider availability of information are also drivers of the trend, said market players.

CFDs allow investors to speculate on future market movements of an underlying asset without having to own the asset. CFDs are available for a wide range of financial instruments including shares, currencies, indices and commodities.

Adam Reynolds, Asia-Pacific chief executive of Saxo Markets, said the brokerage has seen "very strong growth" over the past two years.

Last year in particular was "explosive", he said. Total CFD volumes for Saxo in Singapore were 3.4 times higher compared with 2019, and the number of clients trading them more than doubled.

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Similarly, Tony Lim, chief executive of IG Asia, said there was an "above-trend increase" of CFD trading on the group's platform.

The increased trading could be driven, at least partially, by higher market volatility. The CBOE Volatility Index closed at a high of 82.69 in March last year, surpassing its previous peak of 80.86 in November 2008. The Vix, as it is also known, typically reflects market expectations of volatility over the next 30 days.

"Many investors use CFDs as a way of hedging their existing portfolios through periods of short-term volatility," said a spokesperson for CMC Markets. "With the recent market volatility in the past year, there were many opportunities to take advantage of that volatility."

Telecommuting arrangements arising from Covid-19 have also provided Singaporeans with more time to "seek other investment options as well as learn to trade", CMC said.

Saxo's Mr Reynolds suggested the pandemic may also have increased investors' liquidity: "(People are) not spending money on travel as much anymore. So they have a lot more disposable income . . . which they're tending to push to the stock market."

The ease of obtaining information to inform trading may be another factor, he added.

"The dissemination of information has become much stronger over the last few years in things like the Twitter universe or via the social media information universe."

Instead of relying on research reports from banks, more investors are now doing their own research and making their own calls.

And while bank reports might be more "bland", Mr Reynolds noted that platforms such as Twitter would feature "lots of people with very interesting opinions".

While he acknowledged that some of those opinions are "wacko", he added that "in aggregate, (they) can be very useful".

One online platform that has recently emerged as a mover of markets is Reddit, where young traders exchange tips and ideas on the WallStreetBets forum.

CFD traders have a wide demographic. CMC Markets said its traders are mostly "male and above the age of 40", but there has been growing interest among those under 35.

IG's Mr Lim, too, said the bulk of its CFD traders are "middle-aged professionals" with growing interest from younger investors.

Among local traders, foreign exchange (FX), shares and indices are some of the more popular CFD instruments.

IG's Mr Lim said FX is the "traditional favourite", given Singapore's status as a "regional FX trading hub". For stocks, banks and technology stocks tend to be most popular. And among the indices, the Nasdaq 100 Index, S&P 500, and Dow Jones Industrial Average top the list.

Trading in CFDs is expected to grow here.

Said Mr Lim: "Given the increase in volatility we have seen across markets, sectors and asset classes - which is expected to sustain - the trend remains a positive one in the year ahead."

But Saxo's Mr Reynolds cautioned CFDs traders against taking on "so much leverage that you get squeezed out by attempts that move against you".

Investors trading CFDs pay only an initial margin - a percentage of the total cost of the underlying asset - to open a position. If the underlying asset moves against this open position, the investor will need to deposit additional funds to cover the losses.

"We've had such a rapid move and a consistent move up, there will be some pull-backs at some stage," Mr Reynolds said.

He noted: "You've got to be cautious about them and be prepared to hold through those sorts of environments."