Is there always a seller in the CFD market?
I mean when firms quote CFD prices – does it mean that they will be obliged to sell me the contract and later accept my closing position? I know when it comes to stock – this issue – called liquidity risk- is more of a subject to a country and/or jurisdiction. That said in US – nasdaq and nyse are required by law for every buyer to be a seller and for every seller to be a buyer. But in exchanges such as ASX – this isn’t the case. However, so far thinking logically in my opinion you should be able to close your CFD position at any time – why? Because in the stock market a sale looks more like that: A car costs 000: you buy the car…but what if there are no sellers and you can’t sell it to make a profit or at least get some cash back? This the problem…now in CFDs: you borrow a car that costs 000 – you decide you don’t need the car and return it to the lender…the lender SHOULD give you back the collateral you have deposited to borrow the car in terms of CFD trading.
Of course they get financing, commisions, bid ask spread…there are other nerdy dumb terms such as LIBOR, volatility, alpha,beta…bla,bla,bla – but I am asking for a real world situation to make money and not some university meditation.
Thanks!
August 15th, 2010 at 1:26 am
‘I mean when firms quote CFD prices – does it mean that they will be obliged to sell me the contract and later accept my closing position?’
Not exactly – they quote their prices for your information – but they will only be obliged to honour the position only when you have bought the contract. So if you are on the deal window and press buy and get, say a re-quote at a different price because the market has changed that’s perfectly normal.
If you buy a CFD from a quote-driven provider (i.e a market maker) you will usually always be able to close your position but if there’s no liquidity in the stock you might get a very bad deal. With direct market access you will need a matching buyer – I learnt a hard lesson last year when I bought into a stock with low liquidity using CFDs. The company issued a profit warning and the stock was going down some 8% daily on very low volume – impossible to get out without huge losses. Had to stick with it until recovery with financing charged monthly.