CMC/Deal4free

[Stevoswing]

Peto, many thanks that helps me to understand, the fog is clearing a little.

To be clear, I am not trying to reclaim any losses. As you say, even if I did uncover any anomalies I'm not sure it would make any difference because CMC are perfectly entitled to set whatever prices they like. Going further down such a route seems pointless.

What I am trying to do is understand how CMC does set its prices so that I can decide whether to (1) change my strategy for setting stop levels or (2) change from CMC to another spreadbet provider or (3) change something else or (4) not change anything at all.

Looking at option (1), perhaps I should use the CMC daily cash low/high (in hours) rather than the FTSE low/high. This seems a good approximation to the alternative method of deriving fair value from the futures daily low/high.

At the moment, to set my stop level I firstly round up the FTSE daily high to the nearest integer (although now I think I should use the CMC daily high or whichever is the larger, i.e. more conservative). I then use 3 components (A+B+C). I add an entry/exit filter for breach of the high (A pts), then add half the bid-ask spread (B pts) and then add a “margin for safety” to avoid spurious stop hits (C pts) which increases with market volatility.

Perhaps I have been too tight with C in the past (I prefer it to be zero!) but it seems like a combination of using the CMC daily cash low/high and/or a slightly larger C may do the job. The downside is all my real losses will be a little larger.

 

[Stevoswing]

I'm afraid I call that a spike! Take it up with CMC / FSA.

LevII, thank you.

When I have challenged CMC the response has always been "Our chart shows your level was hit", which of course it was. When further challenged on why, the response is always along the lines "Our price is based on the underlying futures price and as such does not necessarily have to mirror the underlying market perfectly. We act as a marketmaker and as such set the applicable price, I have checked with our dealers that the level of XYZ was hit on the bid/ask and I can confirm this figure was correct. Please refer to section 6 of the Terms of business for the official statement on CMC Markets pricing."

To help me understand your experienced view, does a 1 pt breach on FTSE qualify as a spike? 2pts? Obviously 3 pts from what you say.

 

[LevII]

LevII, thank you.

When I have challenged CMC the response has always been "Our chart shows your level was hit", which of course it was. When further challenged on why, the response is always along the lines "Our price is based on the underlying futures price and as such does not necessarily have to mirror the underlying market perfectly. We act as a marketmaker and as such set the applicable price, I have checked with our dealers that the level of XYZ was hit on the bid/ask and I can confirm this figure was correct. Please refer to section 6 of the Terms of business for the official statement on CMC Markets pricing."

To help me understand your experienced view, does a 1 pt breach on FTSE qualify as a spike? 2pts? Obviously 3 pts from what you say.

You must look at the price of the relevant future ao you are comparing like with like but if the CMC price varies from that quoted on the exchange (taking account of their contractual "spread") it seems to me you have a complaint.

In my view it is a nonsense for them to term themselves a marketmaker. This is BETTING and they are bookmakers.

Some bookmakers (eg Capital Spreads) say they do not skew their spreads (ie they say they simply add a fixed spread round the market B/O) but you ought to ask CMC to tell you how precisely how they calculate the price they quote. If they tell you it may help others if you publish their reply here.

I suppose the real moral is deal on the exchanges not with bookmakers.

 

[peto]

Perhaps I have been too tight with C in the past (I prefer it to be zero!) but it seems like a combination of using the CMC daily cash low/high and/or a slightly larger C may do the job. The downside is all my real losses will be a little larger.

lol that's one of the conundrums of trading for you!

I used cmc a few years ago and found their prices to be in-step with a live futures feed I ran alongside for a while. If they weren't I would have arb'ed against them! Even using direct access it's uncanny how often the price will take out a stop left in the "obvious place" then reverse back down, and cmc are just mirroring that effect. The trick, I expect, is to do something less "obvious"!

 

[Stevoswing]

...you ought to ask CMC to tell you how precisely how they calculate the price they quote. If they tell you it may help others if you publish their reply here.

Thanks LevII, I'll ask, though I can't say I'm particularly hopeful. I will of course post any useful reply.

 

[Stevoswing]

Thanks Peto. Yes, I will be investigating moving the stop to somewhere less obvious but it will take me some time to determine the "best place" because anywhere else is inconsistent with the system concept and back-tested performance.

In the meantime I have a simple choice - learn to live with these frustating stop outs or pay a little more on every trade. Like you say, one of the many trade-off decisions that have to be made in trading.

 

[taxes]

Hi Stevoswing

CMC DO spike their spread to take out stops. They do this because in many cases they are not laying off your bet but taking a position against you. Their rules allow them to do this. I would never again put a stop on with them. When I use them I stay glued to my PC.

There are other platforms which stick rigidly to the underlying market quote and ALWAYS lay off your bet so they have no incentive to "Fix" the price against you. In fact, it is in their interests for us to make profits as we will then deal more often - and that is what they profit from. One or two allow you to use level 2 book access (also known as "Ladders") which show you the exact trading as it occurs. (This is what you refer to as "Screen Trading")

The fairest deal of all is with Futures at Interactive Brokers. Provided you are not US resident and avoid US shares (US Indexes CAN be traded by non USA residents for this purpose) you avoid the USA $25,000 minimum account balance rule. Admitedly you lose the tax advantage of spread betting (IF that applies to you) but if your profit improves it is worth it.

 

[LION63]

Hi Stevoswing

CMC DO spike their spread to take out stops. They do this because in many cases they are not laying off your bet but taking a position against you. Their rules allow them to do this. I would never again put a stop on with them. When I use them I stay glued to my PC.

There are other platforms which stick rigidly to the underlying market quote and ALWAYS lay off your bet so they have no incentive to "Fix" the price against you.

When it comes to the Indices (DOW, S&P, FTSE 100 and DAX), CMC do not spike their prices to take out stops. It is not a practical tactic to employ as this means that trades in the opposite direction will benefit from it and as such it will not yield any financial reward to the Company. Secondly, if you check the quotes of other spread betting firms you will find that give or take a point or two, they are the same. I would suggest that if that is the case it would involve massive collusion for them to be in line at all times. There is a tendency for people to blame others for their misfortune or errors and that is usually the case when people complain about the spread betting firms.

When it comes to the individual share prices, CMC definitely keep their prices in line with the actual share prices on the LSE allowing for their spreads. This has been the case for the last few years and I very much doubt if they are going to alter a profitable strategy.

Most traders are going to lose money even if they were offered zero spreads for various reasons, one only has to look at the overall performance of the so called 'Professionals' to realise that the only people that make money in the markets are those that do something different from the masses.

Finally, if CMC realise that they have a position on their books that has the potential to cost them a tidy sum of money they hedge or lay off part of the liability. This is very easy to do in today's financial markets and can still end up being very profitable for the Company.

 

[Jack o'Clubs]

When it comes to the Indices (DOW, S&P, FTSE 100 and DAX), CMC do not spike their prices to take out stops...

When it comes to the individual share prices, CMC definitely keep their prices in line with the actual share prices on the LSE allowing for their spreads...

During normal trading hours I don't disagree, but I've definitely seen some interesting spikes for no obvious reason in their out-of-hours quotes, when there is no market price to base their quote on. Personally I think CMC are one of the better s/b firms, but I still would not leave stops in their system.

 

[LION63]

During normal trading hours I don't disagree, but I've definitely seen some interesting spikes for no obvious reason in their out-of-hours quotes, when there is no market price to base their quote on. Personally I think CMC are one of the better s/b firms, but I still would not leave stops in their system.

I agree with you but if you compare those prices with the other firms like IG Index you will see that they are in line. I happened to mention it about a year ago that the spread betting companies do not wave a magic wand or pluck those figures out of thin air, they use a very simple ratio to arrive at those figures (which is why they tend to be in line). Any individual with a basic understanding of maths can replicate this.

You are smarter than the average trader and that is the reason you do not leave stops in what is to all intent and purpose a synthetic market.

 

[Stevoswing]

...you ought to ask CMC to tell you how precisely how they calculate the price they quote. If they tell you it may help others if you publish their reply here.

The CMC Helpdesk was very helpful in replying to my emails:

Rolling Cash prices are calculated by applying the fair value difference to the underlying futures price of the relevant index.

Fair value is the theoretical assumption of where the futures contract should be priced given things such as the current cash index level, index dividends, days to expiration and interest rates.

The following formula is used to calculate fair value:-
Cash Index Price x (1 + (Interest rate x (days to expiry / 365)) - Dividends = Fair Value
Fair Value - Cash Index Price = Fair Value Difference

Therefore:
Rolling Cash price = Futures actual price - Fair Value Difference

Currently CMC is using the Dec Q contract to generate the cash price, when this expires the March Q will be used and so on.

Since the Futures actual price is more volatile than the Cash Index Price, one can expect the Rolling Cash price to diverge at times from the Cash Index Price, especially when markets open.

 

[Stevoswing]

In summary, this is where I have got to since I posted my first request for help at the weekend:

I did not know how the rolling cash price for an equity index was derived from the futures price. Futures are more volatile than the cash index and so it should be no surprise that the rolling cash price can diverge from the underlying cash index price, especially at the open, daily extremes (high/low) and in fast markets. The stops that I previously placed above (below) the swing high (low) on the daily chart of the underlying cash index will now be set according to the swing high (low) of the CMC in-hours rolling cash chart (or the cash index if that level is further away). Ideally these stops would be mental stops but the constraints arising from my day job mean that most of the time I will have to use automatic stops.

There are two main types of spreadbet providers – those that do not lay off the bets placed but take a position against them, e.g. CMC, or those that lay off all bets placed, e.g. Capital Spreads. One might expect the former group to be more likely to run stops but there is no evidence that this would be profitable for such companies in the long run. If a customer does find evidence of an invalid spike, then ultimately there is recourse to the regulator but don’t expect a favourable outcome because spreadbet providers can set whatever price they like.

There is no need for me to change from CMC. I find their MarketMaster software excellent, I find the dealers efficient, I have never had any dealing errors and my (not guaranteed) stop entry and exit orders on indices have always been filled without slippage. Spread-betting provides low cost entry for a relative newcomer like myself to build trading experience, but the bottom line is that spread-betting is a synthetic market and trading futures directly is the purer vehicle.

Thank you to everyone who has taken the time and trouble to offer their insights. If anyone thinks I’ve got something completely wrong in the summary above I would appreciate their comments.

 

[LION63]

Steveoswing,

Glad to know that you have benefitted from the responses obtained, I am sure that your trading will be better for it even if it is just a marginal improvement, it will make a difference to the bottom line. One additional tip with CMC is always watch the US markets when the FTSE has closed, they will move their price on a set ratio basis and only adjust it before the market open in the morning.

Once you get good at it you will find it very profitable.

 

[LevII]

I knew I had been here before, have a look at this http://www.trade2win.com/boards/showpost.php?p=161864&postcount=1287

 

[Stevoswing]

Steveoswing,

...One additional tip with CMC is always watch the US markets when the FTSE has closed, they will move their price on a set ratio basis and only adjust it before the market open in the morning.

Once you get good at it you will find it very profitable.

Thank you Lion63. If the slight change saves a few unnecessary losses if will definitely help the bottom line. More importantly, I already feel more relaxed because I have a much better understanding of what is going on.

And just as I was about to sign off, your tip has piqued my interest. I realise that the formula I provided earlier for how CMC calculates its rolling cash price is only applicable during market hours. For the FTSE I assume the rolling cash price from 16:30 to 21:00 is derived by applying the same formula but using US indices futures and cash prices, probably with contributions from the S&P 500, Dow and Nasdaq 100 (somehow weighted to mimic the FTSE composition?). Then when the US markets close I guess the formula tracks Asian indices futures and cash until the FTSE futures open again the next morning, which I believe is (30 minutes?) before the FTSE open. As you can tell, I don’t know precisely what is done.

Whatever method they use is an approximation, so was your final comment intended to indicate that one can profitably take advantage of any mispricing immediately before and after the open? That is, a sort of pre-opening strategy rather than a typical opening price principle or opening range breakout strategy? I did notice one Monday morning when the FTSE price gapped instantaneously down 20 pts as 07:59 ticked to 08:00. Or am I barking up the wrong tree?

 

[LION63]

For the FTSE I assume the rolling cash price from 16:30 to 21:00 is derived by applying the same formula but using US indices futures and cash prices, probably with contributions from the S&P 500, Dow and Nasdaq 100 (somehow weighted to mimic the FTSE composition?). Then when the US markets close I guess the formula tracks Asian indices futures and cash until the FTSE futures open again the next morning, which I believe is (30 minutes?) before the FTSE open.

Whatever method they use is an approximation, so was your final comment intended to indicate that one can profitably take advantage of any mispricing immediately before and after the open? That is, a sort of pre-opening strategy rather than a typical opening price principle or opening range breakout strategy? I did notice one Monday morning when the FTSE price gapped instantaneously down 20 pts as 07:59 ticked to 08:00. Or am I barking up the wrong tree?

You are on the right track but it is much simpler than that - It is based on the movement in the DOW unless something major happens in the NASDAQ. Generally speaking you can discount the S&P and NASDAQ. The Asian indices are very erratic and I have not found any real correlation in their pricing relative to these.

The main timeframe to safely extract a reasonable amount of profit tends to be between 6pm and 3am, I prefer not to wait for the London opening as one is thus exposed to the action of the big market hitters (on Tuesday evenings CMC will deduct X amount of points multiplied by your stake for ex-dividends at 10pm - this is another factor to be aware of). One important factor to consider is that this is only for those looking to obtain between 5 - 20 points per trade; definitely not for the greedy. If you are prepared to take on extra risk, it can be done with the DAX from 5pm to 9pm, the downside of this one is that if you get it wrong YOU ARE IN A WORLD OF PAIN and can find yourself out by 50 points when the market opens.

 

[Stevoswing]

Lion63, thanks for explaining. I'll muse on your comments.

 

[Stevoswing]

You are on the right track but it is much simpler than that - It is based on the movement in the DOW unless something major happens in the NASDAQ. Generally speaking you can discount the S&P and NASDAQ. The Asian indices are very erratic and I have not found any real correlation in their pricing relative to these.

Lion63

I asked CMC how the FTSE out of hours price is calculated and they said:

"After the UK markets close, the changes in the UK100 price will be due to the changes in ADR prices. There are 42 ADRs, a list of which is attached.

American Depository Receipts
Amvescap 5%
Anglo American 3%
Arm Holdings 5%
Astrazeneca 3%
B Sky B 5%
Barclays 3%
BG Group 3%
BOC 5%
BP 3%
British Airways 5%
British American Tobacco 3%
BT Group 3%
Bunzl plc 5%
Cable & Wireless 5%
Cadburys Schweppes 3%
Diageo 3%
Gallaher 5%
Glaxosmithkline 3%
Hanson 5%
HSBC Holdings 3%
ICI 5%
Imperial Tobacco 3%
International Power 5%
Lloyds TSB 3%
National Grid 3%
O2 3%
Pearson 5%
Prudential 3%
Reed Elsevier Plc 5%
Reuters 5%
Rexam plc 5%
Rio Tinto 3%
Royal & Sun Alliance 5%
Scottish Power 5%
Shire Pharmaceuticals Group 5%
Smith & Nephew 5%
Tomkins 5%
Unilever 3%
United Utilities 5%
Vodafone 3%
Wolseley 5%
WPP Group Plc 5%

As you can see from charts, there will not be much activity in the UK100 price after the US markets close and you are right to think that they will follow the Asian markets and show a real effect in the case of major news coming."

So it is not quite as simple as I thought you meant in that the FTSE rolling cash price after 16:30 does not track the Dow rolling cash until 21:00, e.g. a 10 pt rise on the Dow does not result in a rise on the FTSE of 10 pts x (FTSE level / Dow level).

There must be some processing of the 42 ADRs to derive an approximation of the FTSE because 58 stocks are missing, including RDS, RBS and HBOS from the big 9.

Is this how you see it?

 

[LION63]

Steveoswing,

Whilst what they told you is of some relevance, you must take it with a pinch of salt. They are not going to tell you the real way that they calculate it otherwise it would be very simple for people to make a mint after hours. How do they account for the pricing of the FTSE after the American markets have closed? By that time the ADRS have also closed so it is impossible to base the index on these prices.

You are on the right track and if you follow the indices for a couple of weeks you will come up with the answer, it is much simpler than you think. It would help if you were able to overlay the two charts in real time or watch them side by side. Once you have established the means/method that they use it will be become easy for you to profit from what you would then deem pricing anomalies or unrealistic relative levels from the close of the UK markets.

 

[Stevoswing]

Whilst what they told you is of some relevance, you must take it with a pinch of salt. They are not going to tell you the real way that they calculate it otherwise it would be very simple for people to make a mint after hours. How do they account for the pricing of the FTSE after the American markets have closed? By that time the ADRS have also closed so it is impossible to base the index on these prices.

Lion63, thanks for the guidance.

In principle I assume CMC has different formula for calculating the FTSE rolling cash price depending on the time of day:

1) 08:00 to 16:30 - they use the fair value difference formula I reported in an earlier post

2) 16:30 to 21:00 - they said they use the ADRs but if I understand you correctly you say they simply track the Dow based on the ratio of the FTSE price to the Dow price at the FTSE close; either way, they undoubtedly use a formula tracking the US market/s

3) 21:00 to 08:00 - they use some formula related to Asian markets but the correlation is weak because most nights the FTSE price doesn't seem to vary too much

I'm obviously not the first person to think about this. Do you know if the answer is published anywhere, it doesn't really strike me as particularly sensitive?

...Once you have established the means/method that they use it will be become easy for you to profit from what you would then deem pricing anomalies or unrealistic relative levels from the close of the UK markets.

My initial thought was that if, for example, the FTSE simply tracked the Dow, then it is not particularly helpful to know that because you're no better off than trading the Dow directly. In fact you're worse off because the FTSE spread out of UK hours is larger than the Dow spread in US hours. However, you appear to indicate that one can profit on the basis of making a value judgement. Please correct me if I am way off beam.