From a trading perspective, CFD’s and futures are very similar products both of which are offered on a wide array of markets. The biggest, and very important difference, is the structure of the market which results in a number of advantages for futures traders. Additionally, concerns resulting from the structure of CFD markets is one of the primary reasons CFD trading is unavailable in the United States.
When trading CFD’s, you are trading against a single participant, your broker. They are the ones solely determining at what price an asset should be bought or sold which means you may not be getting the best price.
When trading futures, you are trading on a centralized exchange where there are often thousands of participants trying to buy and sell at the most aggressive pricing possible. This is a huge benefit to the trader as this competition literally ensures you are buying or selling at the best possible price.
Another benefit to trading futures is market transparency.
In the world of CFD’s, there is no reasonable way to gauge supply and demand. A trader does not have visibility into the inventory a broker may have (i.e., how many contracts are they willing to buy or sell at any given price?).
When trading futures, it is literally an open book. Traders have the ability to see the depth of the market and the size available at virtually every price level. This market transparency provides the futures trader with very important information. Is the market overall sized to sell? Is there a lot more depth on the buy side? This is critical information in order to make informed trading decisions.
Additionally, futures traders have visibility into what has already happened in the form of volume. This allows market participants to study previous market action from a price and volume perspective. For example, when the market was last approaching level X, what did the volume trend look like compared to how the current market book is displayed?
When trading CFD’s against a broker, a broker knows everything about the trade you are placing as you place it. They know your account, your balance, whether you are opening or closing a position and where your stops are set. Additionally, they have this information not just your account, but for every account at the firm. This information gives them a tremendous edge if we consider our first point: they are the ones deciding the price.
With futures, your broker is there to facilitate the trade and pass your order onto the regulated exchange. Once they pass your trade onto the exchange, no other participant has any information other than price and the number of contracts you wish to buy or sell. This anonymity goes a long way in keeping an orderly and fair playing field in the world of futures.
No matter what market you trade, the firm you are trusting with your money should be regulated.
Depending on where you live, or your jurisdiction, CFD’s may or may not be highly regulated. In the United States, CFD’s are banned from being offered. In the UK, Europe and Australia, regulation exists however it varies from place to place & may not be consistent. In some areas, brokers are either very lightly regulated or not regulated at all. Always do your research.
Both futures brokerages and futures exchanges such as Eurex and CME Group have some of the highest and most consistent regulatory standards globally. This oversight is meant to provide the most secure and fair environment possible for market participants. Not only does this regulation act to protect the trading venues, but every aspect of your account, including how your funds are held.
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