From a trading perspective, CFDs and futures are very similar products, both of which are offered in a variety of markets. The biggest and very important difference is the structure of the market, which brings a number of advantages for futures traders. Additionally, concerns about the structure of CFD markets are one of the main reasons CFD trading is not available in the United States.
When trading CFDs, you are trading against a single participant, your broker. They only determine what price an asset should be bought or sold at, which means you may not get the best price.
When trading futures, you are trading on a centralized exchange where often thousands of participants try to buy and sell at the most aggressive prices possible. This is a huge benefit for the trader as this competition literally ensures that you are buying or selling at the best possible price.
Another benefit of futures trading is market transparency.
In the world of CFDs, there is no reasonable way to gauge supply and demand. A trader has no view of a broker’s inventory (i.e. how many contracts are they willing to buy or sell at a given price?).
When it comes to 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 any price level. This market transparency provides the futures trader with very important information. Is the market generally salable? Is there a lot more depth on the buy side? This is important information to help you make informed trading decisions.
In addition, futures traders have insight into what has already happened in terms of volume. This enables market participants to examine previous market actions from a price and volume perspective. For example, when the market last approached Level X, how did the volume trend compare to the presentation of the current market book?
When trading CFDs against a broker, a broker knows all about the trade you are placing as you place it. You know your account, your balance, whether you are opening or closing a position and where your stops are set. In addition, they have this information not just for your account, but for every account with the company. This information gives them a tremendous advantage when we look at our first point: it is you who set the price.
With futures, your broker is there to facilitate trading and to pass your order on to the regulated exchange. Once they pass your trade on to the exchange, no other participant has any information other than the price and number of contracts you want to buy or sell. This anonymity makes a significant contribution to ensuring an orderly and fair playing field in the world of futures.
No matter what market you are in, the company you entrust your money with should be regulated.
Depending on where you live or your jurisdiction, CFDs may or may not be highly regulated. CFDs are not allowed to be offered in the USA. The UK, Europe and Australia have regulations but they vary from place to place and may not be uniform. In some areas brokers are either very weakly regulated or not at all regulated. Always research.
Both futures exchanges and futures exchanges such as Eurex and the CME Group have some of the highest and most uniform regulatory standards in the world. This supervision is intended to offer market participants the safest and fairest possible environment. This regulation is designed to protect not just trading venues, but every aspect of your account, including the way your funds are held.
Get started with NinjaTrader
NinjaTrader supports more than 500,000 traders worldwide with a powerful and easy-to-use trading platform, discount futures brokerage and world class support. NinjaTrader can be used at any time for free for advanced charting and strategy backtesting via an immersive trading simulator.
Download NinjaTrader’s award-winning trading platform and start a free trading demo with real-time market data today!