stevespray
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Tommog….
You need to consider a number of factors which you appear to be over looking. I’ll try and briefly run through a few of them.
1. The leverage aspect. You imply that the SB’ers give you leverage while ‘Direct Access’ doesn't. This isn’t correct. Firstly, futures products are already, in effect, leveraged products. The current S&P 500 Futures price for Sept 04 is currently 1104. Each point of that 1104 is worth $50 based on the Emini contract. That means that one Emini (ES) S&P contract has a current value of 1104 x 50 = $55,200. However, you can by one of these contracts with just $5,000 on deposit. Therefore your leverage through direct access is considerable. Admittedly the SB’ers offer even more leverage again but this extra leverage isn’t automatically a good thing, I’ll explain more on that point presently.
2. The trading requirements (ie deposit factors / NTR’s / margin requirements what ever you want to call them) are generally set by the exchange and not by your broker. These requirements are calculated for a number of reasons. Firstly, the obvious one is simply to cover the futures exchange against customers defaulting on their contractual obligations in settling what they owe in losses. They don’t want situations where customers can not pay. This would damage the integrity of the exchange. Secondly, the exchange has a form of ‘duty of care’ to its participants. The lower the trading requirement, the quicker the cycle of possible draw down on your account. A low trading requirement basically endangers a bigger percentage of your account balance on each trade. In effect the exchange is being ethical in looking out for your interests by ensuring, that at least to some degree, you have an element of money management forced into your trading methodology.
3. SB’ers which offer very low trading requirements do so in the knowledge that they are drastically increasing your chances of failure as a long term trader especially if you bet on ‘naked’ positions (that is to say that you just open one position and gamble that the market will move one way or the other). The basis of any good trading system is Money Management (MM). If you think that you can trade for the long term without MM then I will almost guarantee you that you will lose. Most experienced traders I know will not risk more that about 2% of there total account balance on any single trade. With that in mind they simply don’t require the leverage which you are seeking. On that basis I would suggest that by seeking a big leverage you are making a BIG mistake. There are some exceptions from this where low trading requirements can be useful. I personally trade a number of options strategy which, from time to time, can leave me exposed if the market starts to trend strongly in a single direction for more than a couple of weeks. I am someone who writes Puts and Calls in certain markets. In such a situation I will seek to hedge any potential risk exposure by buying or selling a futures product which will hopefully bring my risk back to zero (ie I buy enough futures to balance the ‘in the money call’ which I have previously written). Don’t worry if you don’t follow all that. The point I’m making is that my position in the futures isn’t a ‘naked’ one, its hedged to a large degree by an outstanding option. This means that I am looking maintain hedge as cheaply as possible and therefore, as you have pointed out, the SB’ers are stronger in this area. It is also worth noting that, in the situation mentioned above, I will often let the hedge run until it expires. This is because I take the hedge on the same month future as the options. In this case the future and the option will expire at the same level (in effect). With this in mind I don’t actually pay the full spread to the SB’er because when a future expires it does so at the mid price and there for there is no need pay the spread to trade out. In essence you get the trade at exactly half the advertised spread.
4. Some, if not all, the direct access brokers offer a degree of margin on stocks anyway. Mine will allow you to use about twice what you have on deposit. I don’t recommend trading close to your limits of margin. Firstly for the reasons already mentioned and secondly because the margin factor and associated problems can become factors in your trading decisions which will result in you making poor choices under unnecessary pressure.
5. If you choose to trade with anyone who is making a parallel market then all of the pitfalls which have been outlined in previous posts will be there. The only way you can be sure that you will be treated fairly is to trade directly to the main markets. These main markets are tightly controlled in many ways. Pricing, liquidity, order book transparency, execution and NMS are all clearly regulated. In the United States this is all regulated by the SEC (Securities and Exchange Commission). In this country we have no such organisation and boy do we know it. The FSA are supposed to regulate but they also have to cover many areas of the financial industry and therefore are the proverbial ‘jack of all trades and master of none’. While this remains the case it is unlikely that any such parallel market will be regulated in the same way as the main markets and therefore the customer will always leave themselves open to abuse of some kind or another. Obviously these parallel markets have to market themselves in some way so they push the points that they feel the punter considers favourable. These are obviously ‘tax free winnings’ and ‘low trading requirements’. As I have said before, the ‘low trading requirements’ is a Trojan horse for all but the experienced dealers.
Hope this helps you further,
Steve.
PS As a footnote, I find it amazing that the spreadbetting companies suggest that ‘spreadbetting is the easy way to learn about, and get involved, with trading the worlds markets’. I would suggest that it is quite the opposite. When you first start in the business you need to me able to jump in and out of markets as cheaply as possible. No one makes any real gains while they are learning so the ‘tax free’ aspect should have no bearing. Far better to learn the basic principles of discipline etc with market spreads and cheap fees that pay huge spreads etc time. Spreadbetting is surely for the vastly experienced who can consistently make money in the ‘real markets’.
You need to consider a number of factors which you appear to be over looking. I’ll try and briefly run through a few of them.
1. The leverage aspect. You imply that the SB’ers give you leverage while ‘Direct Access’ doesn't. This isn’t correct. Firstly, futures products are already, in effect, leveraged products. The current S&P 500 Futures price for Sept 04 is currently 1104. Each point of that 1104 is worth $50 based on the Emini contract. That means that one Emini (ES) S&P contract has a current value of 1104 x 50 = $55,200. However, you can by one of these contracts with just $5,000 on deposit. Therefore your leverage through direct access is considerable. Admittedly the SB’ers offer even more leverage again but this extra leverage isn’t automatically a good thing, I’ll explain more on that point presently.
2. The trading requirements (ie deposit factors / NTR’s / margin requirements what ever you want to call them) are generally set by the exchange and not by your broker. These requirements are calculated for a number of reasons. Firstly, the obvious one is simply to cover the futures exchange against customers defaulting on their contractual obligations in settling what they owe in losses. They don’t want situations where customers can not pay. This would damage the integrity of the exchange. Secondly, the exchange has a form of ‘duty of care’ to its participants. The lower the trading requirement, the quicker the cycle of possible draw down on your account. A low trading requirement basically endangers a bigger percentage of your account balance on each trade. In effect the exchange is being ethical in looking out for your interests by ensuring, that at least to some degree, you have an element of money management forced into your trading methodology.
3. SB’ers which offer very low trading requirements do so in the knowledge that they are drastically increasing your chances of failure as a long term trader especially if you bet on ‘naked’ positions (that is to say that you just open one position and gamble that the market will move one way or the other). The basis of any good trading system is Money Management (MM). If you think that you can trade for the long term without MM then I will almost guarantee you that you will lose. Most experienced traders I know will not risk more that about 2% of there total account balance on any single trade. With that in mind they simply don’t require the leverage which you are seeking. On that basis I would suggest that by seeking a big leverage you are making a BIG mistake. There are some exceptions from this where low trading requirements can be useful. I personally trade a number of options strategy which, from time to time, can leave me exposed if the market starts to trend strongly in a single direction for more than a couple of weeks. I am someone who writes Puts and Calls in certain markets. In such a situation I will seek to hedge any potential risk exposure by buying or selling a futures product which will hopefully bring my risk back to zero (ie I buy enough futures to balance the ‘in the money call’ which I have previously written). Don’t worry if you don’t follow all that. The point I’m making is that my position in the futures isn’t a ‘naked’ one, its hedged to a large degree by an outstanding option. This means that I am looking maintain hedge as cheaply as possible and therefore, as you have pointed out, the SB’ers are stronger in this area. It is also worth noting that, in the situation mentioned above, I will often let the hedge run until it expires. This is because I take the hedge on the same month future as the options. In this case the future and the option will expire at the same level (in effect). With this in mind I don’t actually pay the full spread to the SB’er because when a future expires it does so at the mid price and there for there is no need pay the spread to trade out. In essence you get the trade at exactly half the advertised spread.
4. Some, if not all, the direct access brokers offer a degree of margin on stocks anyway. Mine will allow you to use about twice what you have on deposit. I don’t recommend trading close to your limits of margin. Firstly for the reasons already mentioned and secondly because the margin factor and associated problems can become factors in your trading decisions which will result in you making poor choices under unnecessary pressure.
5. If you choose to trade with anyone who is making a parallel market then all of the pitfalls which have been outlined in previous posts will be there. The only way you can be sure that you will be treated fairly is to trade directly to the main markets. These main markets are tightly controlled in many ways. Pricing, liquidity, order book transparency, execution and NMS are all clearly regulated. In the United States this is all regulated by the SEC (Securities and Exchange Commission). In this country we have no such organisation and boy do we know it. The FSA are supposed to regulate but they also have to cover many areas of the financial industry and therefore are the proverbial ‘jack of all trades and master of none’. While this remains the case it is unlikely that any such parallel market will be regulated in the same way as the main markets and therefore the customer will always leave themselves open to abuse of some kind or another. Obviously these parallel markets have to market themselves in some way so they push the points that they feel the punter considers favourable. These are obviously ‘tax free winnings’ and ‘low trading requirements’. As I have said before, the ‘low trading requirements’ is a Trojan horse for all but the experienced dealers.
Hope this helps you further,
Steve.
PS As a footnote, I find it amazing that the spreadbetting companies suggest that ‘spreadbetting is the easy way to learn about, and get involved, with trading the worlds markets’. I would suggest that it is quite the opposite. When you first start in the business you need to me able to jump in and out of markets as cheaply as possible. No one makes any real gains while they are learning so the ‘tax free’ aspect should have no bearing. Far better to learn the basic principles of discipline etc with market spreads and cheap fees that pay huge spreads etc time. Spreadbetting is surely for the vastly experienced who can consistently make money in the ‘real markets’.
