Why Trade ASX CFDs

What is a CFD?
A CFD (Contract for Difference) is an arrangement between a buyer and a seller to swap the difference in value of a particular instrument between when the contract is opened and when it’s closed. The difference is set by reference to an underlying instrument which is generally a share, index, foreign exchange rate or commodity and the period over which the Contract for difference is held.

CFDs are geared financial products. This means that you will be fully exposed to price actions of the underlying instrument without having to pay the full price for that instrument. Leverage means that CFDs offer the possibility to generate a higher return from a lower initial outlay than investing directly in the underlying share.

Leverage, however, typically entails more dangers than a direct investment in the underlying instrument. It is important to understand that this effect may work against as well as for traders. Using leverage often leads to large losses as well as large gains.

Benefits of dealing in CFDs
CFDs have been used by professional investors for over twenty years and emerged initially as an over-the-counter (OTC) product. CFD related dealing and hedging is one of the fastest growing areas in the Australian and European derivatives markets. This attraction has arisen as a result of the following main features:

Leverage
CFDs allow you to obtain full exposure to a share, commodity, FX cross or index for a fraction of the price of buying the underlying. CFDs call for only a small initial margin to secure a position.

The ability to go ‘short’
CFDs permit investors to take advantage of falls in prices. This means that traders can benefit whilst prices are going down, not just up. CFDs are thus an exceptional trading and hedging instrument.

Ease
Non-expiry: The majority of Contracts for difference do not have an expiry. They are perpetual in nature. For CFDs that do not expire, the only way to close a position is to trade the opposite side of the position.

The CFD mirrors the value of the underlying: Unlike other kinds of derivatives (i.e. options and futures), cash flows such as carry costs and dividends are not reflected in the price of a CFD. Instead, cash flows are paid whilst the position is open, enabling CFD prices to track the underlying instrument rather than trade at a discount or premium, as can be the case in other types of derivatives.

Advantages of ASX Listed CFDs
Market Independence
ASX is obliged under the Corporations Act to ensure that its markets are fair, orderly and transparent. ASX ensures a sound operational and front-line regulatory environment for its exchange-traded markets and clearing and settlement services, providing effective systems and infrastructure together with services intended to preserve and improve the integrity, proficiency and effectiveness of its trading, clearing and settlement facilities. For the ASX Listed Contract for difference trader, this means being able to participate in the market with assurance.

As the predominant market operator, ASX is independent of the parties with whom you are receiving advice and dealing through enabling it to act fairly and independently. This separation of accountability between provider and exchange also offers customers with choice as to whom they wish to effect their business through.

Having a central market also means there is one typical contract specification for all ASX Listed CFDs, not a different product based on who you execute through. It’s a fundamentally better CFD market.

Transparency
Transparency is a major ingredient in a well informed market. ASX reports on all ASX Listed CFDs transacted, open positions, bid, offers and their volumes. In fact, all the market information you are used to seeing from the ASX. This means a better informed market.

ASX Listed CFDs are traded in the same way as any other ASX traded contracts:
1. All prices are formed in a completely transparent method in the ASX’s CFD central market order book. Each trader’s order is combined in the ASX Listed CFD central market order book with those from other market members, including market makers, and becomes an essential part of the price discovery process.
2. All deals are filled on a strict price/time priority. Price/time priority means the first person to enter the best price is traded against first. This results in each person in the central market order book being dealt with fairly and consistently, no matter how big or small a trader you are.
3. Importantly, while prices are transparent, the individual trader remains nameless, which minimizes market impact expenses (especially those related to other people recognizing an individual’s trading patterns and trading in front of him/her).
4. Any person can place into the market a better bid or offer, as is the case in all exchange based markets. No-one is forced to agree to the price obtainable in the market. However, once an order is filled, you are committed to settle the trade. All prices in the market are firm in the volume indicated.
5. The ASX Listed Contract for difference central market order book incorporates orders from market makers. Their activities help make sure the ASX Listed CFD market has competitive prices and deep liquidity.

Risk Management
ASX Listed Contracts for difference operate in a centrally cleared marketplace. The Clearing House provides central counter party clearing for the ASX Listed CFD market. This involves the Clearing House managing risks to ensure that the interests of its Members and clients are protected and that the integrity of the marketplace is maintained.

Through a procedure referred to as novation, the Clearing House becomes the principal to all trades and legally responsible to perform against all contracts to which it is a party and effectively ‘guarantees’ performance to other Clearing Participants. Novation and thus the clearing guarantee become effective on registration of the contract between a buyer and seller.

This exposure is then managed and the clearing guarantee put in place in a number of ways. Firstly this is often accomplished by the collection of the various margins. The collection of these moneys protects against extreme price movements and prevents participants from accumulating large unpaid losses that could potentially impact on the financial position of any other market users. This is a key element that differentiates exchange-traded markets from over-the-counter (OTC) markets, where such a strict margining regime is not in place.

The ASX Listed CFD market also has access to the Clearing Guarantee Fund intended for use in the event of failure of one or more Clearing Members.

Transacting in the ASX Listed Contract for difference Market
When trading ASX Listed CFDs, your order is entered directly via a participant into the ASX Listed CFD central market order book. This order book is available for the market to see. All orders are filled on a strict price/time priority. This means that the initial order with the best bid or offer price is always executed first. Trading in the ASX Listed CFD central market order book also ensures “customer instructions” are always given priority over a broker’s “house orders”.

In contrast, customers trading Contracts for difference using an OTC provider, do not have their orders in the ASX Listed CFD central market order book. These orders are transacted with the OTC CFD counterparty (generally described as a CFD Provider). The customer’s order is not protected by the ASX’s price/time precedence or customer order precedence rules.

To find out more about listed ASX CFDs you ought to download and read this CFD education which explains ASX contracts for difference in detail including how they are margined, priced, cleared and how you can go about finding a broker that is able to offer you the world’s first exchange listed CFD contract.