Is this fair? I don't think so

[BigDeal]

There are lots of instruments which use leverage. I realised something a while back, which I think is unfair, but didn't affect me at the time because I used instruments or traded in such a way that I was unaffected. However I think this is an issue for many traders

Lets take an example of a retail trader who trades indices via a spreadbet.

Under current UK regulation, the margin (AKA deposit) to open a leveraged indices trade is 5%. (It's 20% on shares, and varies on other instruments) The spreadbet co. (SB) then effectively lends you the additional 95% to open the trade.

However they charge the overnight fee on 100% of the trade value, whereas I think it should be 95% in my example.

The answers from the SBs I've queried this with so far state that the 'deposit' does not contribute to the trade, but by having that money there means they will lend you the money.

This is what it says on the IG site:

When placing a spread bet or CFD, you’re using leverage. This means you are effectively being lent the money required to open your position, outside the initial deposit you’ve paid. To keep your position open after 10pm (UK time), an interest adjustment will be made to your account to reflect the cost of funding your position overnight (my italics) ; I read that as they are lending 95%, but it is ambiguous and could be interpreted differently, but I still think it's wrong.

I don't think this is fair. What do you think?

I'm quite prepared to take this up with the regulator, but would like some opinions on this in case I'm wasting my time.

 

[Riddler]

If my CFD provider told me this I'd say it's perfectly fine and they're correct in saying that your deposit isn't used to open the position. I don't know about SB though, I thought that no shares were bought or sold during a transaction and so if that's true I don't see why they wouldn't exclude your used margin portion from the swap fees. My reading of the paragraph you've quoted is also that they are advancing you 95% and so I would expect swap to be applied to that portion only.

However, there has to be a cost of doing business, they're not a charity so if they charge on the total amount then I wouldn't be too aggrieved. If your position TPs you'll collect the profit on the 95% and the 5% portions of the trade, not just the 5% and your only charges will be the swap, not too bad if you ask me.

 

[IlIlIlIlI]

The margin is and can only be used to cover your losses or drawdown of an open position.
The margin blocks a certain amount of your capital.
The money left is the free margin you can use for other trades.

If the market runs against your positions, you can run into a negative free margin - depending on your broker it can be -50% or -75% of the margin used - before your open positions are closed automatically by a margin call. They have also take slippage into account for that calculation.

That's why this statement ...

The spreadbet co. (SB) then effectively lends you the additional 95% to open the trade.

... unfortunately is not true, they have to lend 100% of your postion value.
You pay interest for the full contract.

In reality money is only lended on long positons, on short positions you receive money against an obligation to buy the index back anytime.

 

[in4abuck]

If you're looking for fair, you're definitely in the wrong business.