These days, small investors can no longer complain that they are treated like second-class citizens. If you want to trade like a professional, you can - thanks to the availability of contracts for difference (CFDs) and new platforms offering a cost-effective means of trading that would have been unheard of - even at an institutional level - just a few years ago.
There are now an increasing number of brokers offering these platforms. So it's more easy than ever to trade long or short (to profit from falls in share prices), avoid stamp duty, trade on margin, and trade directly with other market participants in the underlying market.
CFDs allow all of this as they are 'synthetic' derivatives - created out of other securities. They are an agreement between two parties - an investor and a provider (usually a broker) - to pay the difference between the opening price and the closing price of an underlying security (usually a share). That means, as an investor, you can profit - or lose out - from share price movements, without ever taking delivery of the actual shares. As a result, there's no stamp duty to pay. Providers also allow margin trades, which means you only have pay a 'margin' or deposit of as little as 10 per cent of the contract value. This allows you to take larger positions than you could afford to in the underlying shares - which translate into much higher profits if you invest the right way, or losses if you invest the wrong way.
Trading can be near instantaneous via the internet and, now, CFD providers are giving investors direct access to the Stock Exchange's electronically-traded market (SETs). This means investors have the ability to place orders and deal inside the existing bid-offer spread - as well as access to the SETs pre- and post-market auctions, where the trading day's best prices often occur. Other important features shared by the new CFD platforms include the ability to create several watch lists and view detailed Level 2 (L2) dealing screens. Access to Level 2 screens is also provided by sites such as www.advfn.com and www.moneyam.com. But here we review the CFD brokers that provide both access and trading facilities.
This is arguably the slickest-looking platform, making the others look somewhat rough around the edges, but this is no great surprise as GNI has had a four-year head start. All three providers are continually releasing upgraded software versions, so they're likely to incorporate some of the best features of each other's platforms. GNI has recently incorporated the ability to place stop-losses at the time of entering the trade, and redesigned the layout of the previously ambiguous deal ticket. One of GNI's clients says: "There appear to be two types of GNI client - those who have placed an order the wrong way round, and those who are still to do it."
Key features include Forum, a facility to chat with other traders and for GNI staff to publish important market information, and a comprehensive online user manual, as well as an excellent charting package, although prices are delayed by 15 minutes.
Embedded additional features include a fundamentals snapshot for each stock, and time and sales information provided by Digitallook. Additional comprehensive exclusive client research is e-mailed to clients throughout the trading day. Users get a basic news service feed, but can elect to pay extra for premium news, and likewise for a premium chart package incorporating live prices.
Access to online settlements information is easy, and account balances and margin figures are calculated and displayed in real-time within the application. Futures trading is also available, but a separate window has to be opened and accounts are not consolidated. However, a big advantage is the ability to trade a CFD or normal stock simply by making a selection from the order ticket. It is also possible to use collateral from your stock positions to fund CFD trading.
The configurable watch lists are the most advanced of all the platforms, with a comprehensive choice of fields including the uncrossing price - essential for monitoring auctions.
Unfortunately, the platform does seem to suffer from occasional problems regarding corporate actions. Trading opportunities often occur around corporate actions, and can be a focal point for dealers. While this platform was under review, the ITV merger of Granada and Carlton became effective and, on the first day of trading of the new ITV company, several GNI clients were not able to view the full market depth and relied on other competitors for that information. And on the first day of trading of one of the largest initial public offerings (IPOs) - Cambridge Silicon Radio - with a market value of £250m, the stock was not set up, and traders were not able to deal in the shares until the second day of trading.
Coverage: Comprehensive, with all UK, European and US stocks now available down to a market capitalisation of $10m or equivalent, though margin rates may be as high as 70 per cent for smaller companies.
Charges: Standard commission rates are 0.25 per cent per trade, with a minimum ticket of £25 with funding rates fixed at 300 basis points over and under Libor. In addition, touch users pay monthly fees of £59 for UK Level 2 access, £59 for live charts and £59 for a premium news service. Clients can also select to 'switch on' prices to European and US markets, ranging from £47 to £120 per market.
This is not yet as sophisticated as GNI's offering, but market coverage is comprehensive, and there are three particular features that are unique to it where it may have a competitive advantage.
First, the platform offers a competing retail service provider (RSP) option, or 'price improver' service, for quote-driven (SEAQ) stocks. This allows the user to request quotes electronically from market makers in the underlying stock, without having to use the phone or wait for a dealer to pick up the order and talk to a market maker. The trade is then booked as a CFD, and IG takes care of any stock borrowing or settlement issues associated with short-selling. Clients can also speak to IG dealers by phone for bigger orders.
IG has elected to focus on functionality associated directly with trade execution, so there is no charting package and only a fairly basic news feed. The platform allows the user to save several views (profiles), and current balances are not calculated in a separate window but can be requested in Adobe Acrobat format from a drop-down tab. Up to 10 portfolios (watch lists) can be created, several limit minders can be set easily, and time and sales is available with associated trade codes in both the L2 screen or a separate window in more detail. There is also a live ticker that can be positioned anywhere on the screen to monitor trades as they go through the market.
Second, the platform has a tranche facility. IG has taken advantage of the iceberg facility on SETS, which allows large orders to be broken up into 'tranches'. So if you want to buy 100,000 and join the existing bid, you can split your order up into five clips of 20,000 that are displayed one at a time, so not having to show your whole hand immediately.
Finally, IG appears to be the only system that highlights your own order in a different colour in the order book for ease of reference, allowing the trader to easily track where his order is in the full market depth and how close it is to execution.
Coverage: Full UK coverage down to a market capitalisation of £20m, all US stocks capitalised above $500m and all European stocks quoted on Euronext and Deutsche Bourse.
Charges: UK Level 2 is £35 per month, though there is currently a six-week free trial. Standard commission rates are 0.25 per cent for SETS stocks, and 0.3 per cent for non-SETS stocks, with minimum tickets of £15 and £20, respectively, and financing rates are 250 basis points over and under Libor. US commission rates are 6¢ per share ($30 minimum ticket), and 0.3 per cent for European stocks (E25 minimum).
Despite appearing to target the execution-only marketplace, there is some research and analysis functionality on this platform. Research tools include:
- Signal seeker: a pure technical analysis tool
- Volatility index: scans the market and lists high volatility stocks
- Market map: details the distribution of sectors against market capitalisation
- Risk return: map analyses returns against stock volatility
In addition, further analysis and news includes a streaming AFX news feed, access to the online Reuters Bridge portal, daily commentary and overviews from Saxo Bank analysts, and a Harryhindsight login.
The Etrade platform also incorporates an economics calendar and a chat facility, which allows you to talk to an E*trade account executive, although not other traders (all clients are allocated an account executive on opening an account).
The deal ticket is somewhat more comprehensive than the other systems, with a useful disable/enable facility on the deal ticket to prevent inadvertent trades and funding rates calculated within the ticket itself. E*trade is the only platform that incorporates the ability to toggle the deal ticket between a direct access order for a fixed percentage commission, or a quote-driven order on a fixed £9.95 tariff through one consolidated account. The system also allows you to set up multiple orders in the order pad, and release these to the market on condition of the execution of other orders.
Other key features include a comprehensive charting package, including all technical analysis tools, charts supplied by Tenfore, and a fully customisable L2 screen that can be colour-coded with tolerance filters. Time and sales information has trade codes incorporated. Futures trading is available within the platform itself.
Coverage: Direct access coverage is limited to SETS and SETSmm stocks, although that is likely to be extended in the near future. The quote-driven prices (ie, risk prices) have more comprehensive coverage, including European, US and Australian stocks, although remember these are 'risk prices' rather than direct access. UK stocks priced above 150p have a minimum spread of 0.5p for stocks over 150p.
Charges: All CFD clients qualify for Power E*trade, which means free L2 to UK users and standard commission rates for direct access are 0.2 per cent (£20 minimum ticket), with funding rates at 250 basis points over and under Libor. Dealing on the quote-driven service is a flat £9.95 per trade.
All three platforms offer an impressive level of functionality and sophistication, and seem certain to appear at the top of any active trader's list of preferred dealing applications. Although the UK remains structurally more expensive to trade than the US, these three platforms appear to offer a dealing method that is cost effective enough to make full-time trading a viable solution.
Although many firms do not advertise the fact, commission levels are often negotiable based on trade size and activity, so headline rates are not always representative - don't be afraid to cut a deal. GNI Touch still takes the honours as far as overall functionality is concerned, but E*trade appears to offer a cheaper dealing solution, although coverage in the direct access platform is limited to those stocks that are traded electronically on SETS and SETSmm. IG Markets, meanwhile, has incorporated some unique features in a platform that is likely to evolve quickly over the coming months.
It seems that the overall winner would appear to be the private investor, with an enviable choice of well-designed, efficient and cost-effective dealing solutions.