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Thursday, 12 June 2008

Money for nothing, and FX for free

DW and I attended a free CFD trading seminar provided by CityIndex this evening. It was held at the Sofitel Wentworth hotel this evening, and attendees received a bonus $250 match if they opened an account and fund it within a week of the seminar. Those who applied for an account then and there also got a free one year subscription to Wealth Creation magazine (I think that's the title). Since we are already trading CFDs with CMCMarkets, and weren't entirely happy with CMC Markets trading platform, it seemed like a good idea to apply for accounts on the spot. DW and I have our own trading accounts, so we each applied for a CityIndex account. Hopefully this will mean we get $250 each credited to our new account. You have to put at least $100 into a new account, and the offer is a dollar-for-dollar match up to a maximum of $250.

The CityIndex trading platform looks pretty cool, and has a few nice features that CMC Markets doesn't provide. It allows you to set stop and limit prices in the same screen that you setup an order, rather than having to do a trade first and then create a stop, limit or both (OCO) order subsequently (which is they way it's done using the CMC platform). The CityIndex platform is web-browser (IE) based, so you can login and trade on your account from any PC. The CMC Market platform is a java application that has to be downloaded and installed on each PC you want to use for trading. This also makes the CityIndex platform easier to update, and it seems more 'modern' overall. Another nice feature is that you can edit existing stop/limit orders (eg. reset the stops as a trend continues). This is a lot more cumbersome with the CMC Markets app, which requires you to cancel an order and then create a new one if you wish to change to settings.

One disadvantage with CityIndex CFD trading is that the buy/sell spread for FX trades is 3 pips - compared to only 2 pips with CMC Markets. However, CMC acts as a market maker, and does not have to set prices that exactly match the physical market price, which could end up costing more than the 1 pip difference per trade. At the seminar we were told that they may soon be reducing their FX buy/sell spread to 2 pips at some stage. There is also a software enhancement in development to provide dynamic stop/limit orders (where you can have the setting automatically change as the trend continues, but remain at their maximum values during any reversals).

CityIndex doesn't charge any extra fee for trading stock and index CFDs (CMC Markets charges a fixed $40 fee per month for accessing the Au stock market data), so I may use my CityIndex account to also trade the Australian ASX200 index. It would have been nice to have had this setup last year - I could have sold the index when my Index Put Options expired, and therefore been 'insured' against a large part of the losses suffered by my Australian stock portfolio this year. A case of saving $40 per month ending up costing me tens of thousands of dollars!

CityIndex should be in touch with us tomorrow to provide the remaining details required to open our accounts, and we should be able to fund the account with $250 and start trading in a few days. I'm not sure if I'll switch my forex trading from CMC Markets to CityIndex, or just use the new account for stock and index trading. I may replace my expensive Comsec/Pershing account with CFD trading for my US stock positions - now that I'm no longer trading small-cap stocks selected using the "Little Book that Beats the Market" method, and sticking to large-cap stocks such as Microsoft and Berkshire I should be able to access them via CFD trading. I still need to check into the full details of the cost of using CFDs for holding long term positions. The nominal interest rate with CityIndex (2$ above the reserve bank overnight cash rate for borrowing (going long)) appears to be comparable to the current cost of funds used in my Comsec/Pershing account. However, the interest is charged on the full position value (not just the 'borrowed' amount). Since CFD trading uses a margin (your funds) of around 3%-10% of the position, this will mean a slight increase in the effect cost of the 'loan'. Also, with interest being charged daily on positions held open overnight, there may be extra costs due to rounding of the interest charged each day.

Anyhow, I never quite worked out the real interest rate applied when I held positions open with CMC Markets overnight - although
they also quoted an interest rate a couple of percent above the overnight cash rate, in practice the rollover charge when I kept positions open several days seemed to always be a fixed fractional number of pips, rather than an interest charge based on the current cash rate. I'll probably have to make a small test trade with CityIndex and keep it open for several days before I can be certain how interest is really calculated and charged.

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1 comment:

mOOm said...

I'm happy so far with the CityIndex platform. As I mentioned before, the big problem with using CFDs for long-term positions is that there is no long-term discounted tax rate for derivatives like CFDs whereas there is for assets like shares and funds. And in Aus you lose the franking credits too.