CFD Criticism

There are voices of financial regulators and commentators who are worried about how CFD providers market the CFDs, especially to inexperienced, new traders. There is an aggressive advertising of potential gains without additional explanations about the risks involved. Those financial regulators who deal with CFDs took attitude and requested for all presentations of CFDS to mention the risk warnings, no matter where they are advertised: Internet, the opening of new accounts, advertisements. In the United Kingdom, for example, it is ruled that CFD providers should asses each new client whether they are suitable for CFDs or not, based on the experience they have. All new clients are to be informed through a document about the risks involved. The general template for the warning is provided by the FSA. ASIC, the financial regulator in Australia, suggests on the trader information site that CFDs trading is actually riskier than gambling in the casino or on horses. Only individuals with extensive trading experience should carry out CFD tradings, especially on volatile markets and only those who can really afford losses, which are imminent in any trading system.

There has also been implied that CFD trading involves more loss than even gambling. However, there were no statistics issued to support this concern or prove an average return on CFD trading. CFD providers don’t make public such information, but there are underlying instruments which are publicly available to help establish CFD prices. These show that traders are in advantage as CFD is calculated as difference in the underlying prices.

Another concern about CFDs refers to not being transparent enough as in over the counter trades, plus the lack of a standard contract. Starting from this point, there are some who believe that traders may be exploited by CFD providers. Trading forums are full of comments on this topic, especially regarding executing stops rules and the positions liquidation in margin call. On the other hand, such reactions may be caused by the inability of traders who have lost to assume the blame, so they may be looking for external factors to blame for their loss, such as the exploitation of CFD providers. In Australia, Australian Securities Exchange along with some CFD providers used this arguments in supporting their offer of CFDs and DMA products. Their arguments point out the reduction of the risk. The counter argument shows that with more than 20 CFD providers only in the United Kingdom, the competition within the industry is very high, so traders have a large option range to choose from, may they be failed by some providers.

Others bring critics to CFD brokers who are not willing to give any information to their clients about the psychological elements involved. Fear of losing is a factor to consider which may lead to either losing positions or neutral positions. The passing from demo accounts to the live market reality is what triggers this reaction. This is not something brokers would draw attention to.

Another subject of criticism concerning CFD providers is the possible conflict of interest in defining CFD trading terms.

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