How does an ECN oil CFD possibly work? Who is the counter party?

kingneil

Newbie
5 0
I want to talk about oil CFD trading with an ECN account. I want to ask who is possibly the counter party with this?

With a market maker model, it's easy. Your broker is the counter party, and wins whenever you lose, so it's a direct conflict of interest. Occasionally a savvy trader will come in and make a smart trade, which probably takes years to gradually profit over time.

But marker makers know that 80% of their traders are idiots and will lose £1,000s within almost no time, and that's how they pay out the people who occasionally win.

But ECN brokers are different and will put your trades directly through to the markets. They only profit by taking a commission and an overnight interest.

So I want to know with ECN oil trading, who can possibly be the counter party, seeing as there is no one who actually has physical barrels of oil lying around?

I read articles where some traders were literally buying entire ships and storing physical barrels of oil on them. Why would they do that instead of just trading oil CFDs...?

A broker called FXOpen claims to have an ECN account for CFDs, including oil, which makes no sense to me.

https://www.fxopen.co.uk/business-model/

"All accounts at FXOpen UK are ECN or STP accounts and use the ECN model.

The ECN model gives traders access to the Interbank market where the counterparty to your trade is a liquidity provider such as a bank or fund, or another trader.

There is no intervention from FXOpen, no dealing desk and no requotes."


---

So you are directly trading with another trader or a liquidity provider..

But what does that even mean?

Oil, for example, is a really simple market, in terms of when you should buy, because the lows and highs are clearly defined, unlike shares where you really have no idea what the low and high is.

When oil hit as low as $30 a few years ago, $30 is way below the price needed to extract oil profitably.

And if oil were to stay this low, they were talking about Saudi Arabia literally going bankrupt in 3 years.

And OPEC is essentially controlled by Saudi Arabia and others, and has the power to step in and raise prices by reducing supply.

So when oil hits $30, it's extremely obvious that you would take out a long position with a CFD provider.

Now why would anyone possibly take a counter position to this?

Who would be the counterparty here?

It makes no sense to me.

Who would be selling me oil at $30? Why would they do such a thing?

It seems like surely everyone at this price would be a buyer, and therefore push the price up massively, and then how could the price even stay this low for any reasonable period of time?

If I were to put in a really big bet, like £1 million on 1:1 leverage, I would make £1 million in profit if oil doubled from $30 to $60, and who would possibly be paying me this with £1 million......?

Thanks
 

FancyBanksy

Newbie
1 0
BUMP.

Old thread but I am very curious about this topic also. However, I'd also like to know if this is the same in the FOREX market.
 

mrjixies

Newbie
1 0
Very interesting question I would like to know as well? Because like you said with an ECN there has to be a counterparty?
 

tomorton

Legendary member
8,403 1,338
Actually I had a look at their details and they're effectively outsourcing the CFD liability to bigger financial players. So instead of matching your CFD to another individual CFD in the market they are sending your CFD in a batch to a big bank who then may or may not match it off. I'm not convinced that is true ECN but the effect is the same.

Be aware that when the firm says "Furthermore, if you’re a UK resident, there’s no stamp duty to pay" on the CFD account, this isn't a real advantage over other types of forex trading as no forex trading in the UK is subject to Stamp Duty (Stamp Duty applies if you buy and sell shares) but your CFD account will be subject to Capital Gains Tax.

A forex spreadbetting account is exempt from CGT (and Stamp Duty obviously) but FXOpen don't offer SB, which is maybe why they muddy the waters by talking about Stamp Duty.

Also in Safety Of Funds they don't mention protection from negative account balance - protection against unexpected price movements which could leave you owing more to the firm than your account has ever contained. Its odd they do not mention this and might be worth checking but I'm sure it will be OK.
 
 
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