5 ms·

Could you outline why you think CFD is a scam?

by nmca 5y ago

nullc 5y ago
There are three layers to it: (1) CFD isn't an investment, it's just a side bet on the price of something else. It distorts the market for the underlying (by providing a highly uncontrolled supply of it) at the expense of creating tail risk (e.g. CFD house is fine for years and then poof everyone's money is gone). The damage from this doesn't apply to just CFD participants but potentially the market as a whole. (2) The particular mechanism of CFDs make them extremely ripe for fraud. CFD contracts are against the house so the house has an inherent conflict of interest with their customers. The CFD house can crunch the numbers, blow some money on the real market (or whatever subset contributes to their index price) to dip the price and wipe out a particular set of customers. Sometimes the index prices are based just on bid/ask -- there doesn't even need to be a real trade at the price. Manipulation is hard to detect, and the whole setup where the house is betting against you is unlike the normal situation for investments. It's even the case that CFD operators-- in the rare case where they detect a customer that appears to actually have positive returns, maybe due to insider info-- will start passing their orders through to another platform, and even riding along/front running them! (3) Specific CFD products usually have unreasonable terms such as absurd leverage where market volatility almost guarantees the customer will be wreaked. In theory some of this risk could be regulated out, but one can always construct a new product. So I think sure, you could have an honest CFD house with good controls and products with well shaped risked, and so on... and mitigate a lot of the problems but the incentives are all wrong. And worse, because much (though not all) of the CFD appeal is essentially to a gambling market, the customers actually want the highly volitional highly risky options, they want platforms that will be cheap until they implode, and so on. So in the long run, you shouldn't expect CFD operations to end well. Other products like ordinary options, or just regulated margin, let you make more complex trades without creating the bad incentives or market risks.

Could you outline why you think CFD is a scam?

by nmca 5y ago

Could you outline why you think CFD is a scam?

There are three layers to it: (1) CFD isn't an investment, it's just a side bet on the price of something else. It distorts the market for the underlying (by providing a highly uncontrolled supply of it) at the expense of creating tail risk (e.g. CFD house is fine for years and then poof everyone's money is gone). The damage from this doesn't apply to just CFD participants but potentially the market as a whole. (2) The particular mechanism of CFDs make them extremely ripe for fraud. CFD contracts are against the house so the house has an inherent conflict of interest with their customers. The CFD house can crunch the numbers, blow some money on the real market (or whatever subset contributes to their index price) to dip the price and wipe out a particular set of customers. Sometimes the index prices are based just on bid/ask -- there doesn't even need to be a real trade at the price. Manipulation is hard to detect, and the whole setup where the house is betting against you is unlike the normal situation for investments. It's even the case that CFD operators-- in the rare case where they detect a customer that appears to actually have positive returns, maybe due to insider info-- will start passing their orders through to another platform, and even riding along/front running them! (3) Specific CFD products usually have unreasonable terms such as absurd leverage where market volatility almost guarantees the customer will be wreaked. In theory some of this risk could be regulated out, but one can always construct a new product. So I think sure, you could have an honest CFD house with good controls and products with well shaped risked, and so on... and mitigate a lot of the problems but the incentives are all wrong. And worse, because much (though not all) of the CFD appeal is essentially to a gambling market, the customers actually want the highly volitional highly risky options, they want platforms that will be cheap until they implode, and so on. So in the long run, you shouldn't expect CFD operations to end well. Other products like ordinary options, or just regulated margin, let you make more complex trades without creating the bad incentives or market risks.