Contract for Difference known as CFDs is when typically your broker takes the other side of your trade or routes it to a secondary market off-exchange which typically may be owned by your broker. They then charge you routing, commission and borrowing costs which typically goes straight into their pocket as they may be the other side. What they are effectively doing is providing you with a demo account with live data and no way to route your orders to the actual market, charging you for it and then taking the other side of the trade. They are commonly referred to as Bucket Shops within the industry.
Something to also note is the price they give you, a lot of the time might be their price and not the actual market price. This is very important because if you're trading against them, using their price and not the real market price and have a stop in place which they can see, it can leave you VERY VERY vulnerable.
As retail traders have such high losses (you can read our 90-90-90 article Click Here) it makes sense to take the other side of a retail traders trade rather than routing the order to the market if you're a broker. However there is a place for CFDs for professional traders using these sophisticated instruments to hedge etc but not for retail in our opinion.
CFDs are banned in the United States of America and in many countries across the world. Alongside regulators in a lot of countries that allow CFDs now looking closely at these brokerages and putting in place new legislation to try and protect retail traders from large losses. Notably and most recent was the European Unions ban on binary options and forcing CFD brokerages by law to print the retail losses on their pages clearly. Typically you will see of something to the effect of “retail traders lose 74-89% of everything they deposit with us”. What you may also see on Principle Execution brokers is “our conflict of interest … at being the counterparty to your trades”. They have also imposed laws on margin and leverage to further try and protect retail traders using these types of further.
The use of the words “Bucket Shop” isn’t a word we chose to use to get you to read this article. It was actually defined by the US supreme court in 1906.
“an establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in" Gatewood v. North Carolina, 27 S.Ct 167, 168 (1906).
Jessie Livermore the famous Speculator used to trade at bucket shops until he started to make money then the bucket shops started not allowing him to trade as he was successful and their business is built on ensuring traders lost. You might hear of similar stories online about CFD brokers closing profitable trading accounts with interesting reasons as to why, although difficult to validate.
The NCAs’ analyses of CFDs indicates that across the EU, the average retail losses per client were ranging from €1,600 to €29,000. We are now also seeing a Ban on alot of online advertising search engines and social media platforms for CFD to try and protect Retail Traders.
The best advice you will hear a lot is learn from the professionals or what the funds are doing. This is why TraderEquity is the best place to learn.
TraderEquity is a DMA (Direct Market Access) Proprietary Trading Firm, we do not offer CFD or Principle Execution and never will. Due to what we believe to be a clear conflict of interest with the trader. We make our money from taking a profit share of profitable traders profits so our interests are truly in line with the traders in them being profitable and successful.
Please Note: We can NOT accept any US or Canadian based traders, this restriction is based on their location rather than their nationality.