CFDs vs. Micros Eminis

Micro Eminis trade on centralized markets, so why trade CFDs when you can trade Micro Emini Futures?


Lots of traders buy and sell commodity Contracts for Difference, more popularly known as CFDs.  And they typically believe that they are trading a “futures” equivalent.  And why not? If the underlying futures go up on price, they make money. If the underlying falls, they experience loss.  But the difference, large or small, is real. And so too are the consequences. Let’s dispel the hype and get to the reality of the situation.

Ever heard of a bucket shop? It’s essentially a fake market. Here’s how it works.

Let’s suppose that you want to trade the e-mini S&P 500 futures (ES). For some reason, you are unable to trade the actual ES futures contract, so you decide instead to open an account with an over-the-counter “liquidity provider” (LP) who promises to give you the same futures “exposure” as the actual contract but with greater flexibility in lot size and lower margins.

You open an account, and for your first trade, you buy the smallest S&P 500 contract available: it moves $1.25 for each tick, or $5.00 per point.  As a buyer, your order gets filled by the LP who just sold your lot. In other words, the LP is on the other side of your trade.

The outcome of your trade is one of the following:

  • If you lose money on your trade, the LP simply takes the money out of your trading account.
  • If you made money on your trade, the LP is obligated to credit to your account.

Keep in mind that you didn’t actually possess the actual futures contract (the ES), and the LP might or might not have possessed it either.  There’s a possibility that nobody actually possessed a futures contract.  You, the trader, simply bought a “promissory contract” that the LP will either debit or credit your account.



CFD Trading Gone Bad – Example 1:

If the LP controls the entire transaction, from price quote to order fill, they can technically raise or lower the bid and ask price to make a profit:

  • You place a buy stop for the S&P 500 at, say 2840.00
  • Suppose they raise the ask to 2840.25 so when your buy stop becomes a market order, you bought it at their price.
  • Meanwhile, let’s suppose they were able to buy the ES at 2840.00.
  • The LP just bought “low” (2840.00) and sold it to you “high” at 2840.25–they arbitraged you for 0.25 points.

Now, what difference does 0.25 points make? An LP can do this all day long using automated software, and if they do it enough times, they can generate a decent profit.

In contrast to the futures market where price is transparent and driven by market participants, you run the risk of not getting filled at a fair price when trading with an LP.

CFD Trading Gone Bad – Example 2:

Let’s imagine that the broader U.S. stock market is soaring. You bought a huge CFD position on the S&P 500. But so did thousands of other clients trading with your LP.

Supposing the LP who sold the CFDs to these clients didn’t hedge their position. They’re on the other side of the trade, meaning they are “short” all of those CFD contracts.

So, if the clients are making large gains, then the LP might be losing money hand over fist. And if the LP is not “hedged” (bought ES futures contracts worth an equivalent amount of exposure),  then they owe their clients money to credit their gains. And if the gains exceed the LP’s operating capital, then the LP can lose enough money to go insolvent.

In many cases, LPs aren’t required to keep client funds segregated. This means that client funds may be used as part of the LP’s operating capital. So if they go bankrupt, their customers may lose anywhere from a portion to the entirety of their funds.


Lets take a look at the alternative: Regulated Exchanges for Futures Trading

Futures, on the other hand, are traded on a regulated exchange. Prices are transparent and market driven. Client funds are segregated. And exchanges are required to hold reserve funds to help reduce credit risk. Please do remember that there are still risks involved with futures trading, and that even properly segregated client funds may be at risk in the event of an FCM’s bankruptcy.  That said, it is our opinion that the regulations related to counterparty transparency and customer fund segregation in the futures trading industry are stricter than with CFD industry.

If you trade CFDs only because they offer smaller lots than the standard emini futures, then you might want to consider the new micro e-mini equity index contracts, which have recently been launched.

The micro e-mini futures are a smaller version of the standard emini index derivatives for the following U.S. stock indices: S&P 500, Dow Jones Industrial Average, Nasdaq 100, and Russell 2000.

Their symbols:

  • Micro Emini S&P 500 – listed as MES
  • Micro Emini Dow Jones – listed as MYM
  • Micro Emini Nasdaq 100 – listed as MNQ
  • Micro Emini Russell 2000 – M2K

How do they “tick” in terms of minimum dollar value?

The value of each MES contract is $5 times the S&P 500 index; MYM, $0.50 times the DJIA index; MNQ, $2 times the Nasdaq 100; and M2K, $5 times the Russell 2000. This means that  the MES moves $1.25 per tick (per contract);and  the MYM, MNQ, and M2K all move $0.50 per tick (per contract).

These dollar-per-tick values are as low, if not lower, than most CFD values.

But here are the differences:

  • Micro futures are traded on an exchange (not dealt to over the counter)
  • Micro futures prices are market driven, and therefore transparent and NOT subject to price manipulation by a liquidity provider
  • Micro futures are highly-regulated instruments

If you value transparency and prefer to trade in a “real” market on a regulated exchange, then micro emini futures may be the way to go. To learn more about these instruments, contact us at GFF Brokers.





Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations.  There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.