CMC Stop Spikes and Why Most Traders Lose Money

Q. 'CMC DO spike their spread to take out stops. They do this because in many cases they are not laying off your bet but taking a position against you.'

Their rules allow them to do this. I would never again put a stop on with them. When I use them I stay glued to my PC.

A: First it is important to understand that CMC Markets (we review CMC here) is a market maker and as such sets the applicable price - this means that their "price does not necessarily have to mirror the underlying market perfectly. They act as a marketmaker and as such set the applicable price." (Quote from their Helpdesk).

When it comes to the Indices (DOW, S&P, FTSE 100 and DAX), CMC do not spike their prices to take out stops. It is not a practical tactic to employ as this means that trades in the opposite direction will benefit from it and as such it will not yield any financial reward to the Company. Secondly, if you check the quotes of other spread betting firms you will find that give or take a point or two, they are the same. I would suggest that if that is the case it would involve massive collusion for them to be in line at all times. There is a tendency for people to blame others for their misfortune or errors and that is usually the case when people complain about the spread betting firms.

When it comes to the individual share prices, CMC definitely keep their prices in line with the actual share prices on the LSE allowing for their spreads. This has been the case for the last few years and I very much doubt if they are going to alter a profitable strategy.

Most traders are going to lose money even if they were offered zero spreads for various reasons, one only has to look at the overall performance of the so called 'Professionals' to realize that the only people that make money in the markets are those that do something different from the masses.

Personally I think CMC are one of the better spread betting firms, but I still would not leave stops in their system during out-of-hours in what is to all intent and purpose a synthetic market.

One additional tip with CMC is always watch the US markets when the FTSE has closed, they will move their price on a set ratio basis and only adjust it before the market open in the morning. Once you get good at it you will find it very profitable.

How does this method work? - If one were to take a base figure (at any given time) for the DOW of say 10,000 and the FTSE of say 5,500; when the DOW moves by 80 points after the FTSE has closed CMC would generally speaking quote the FTSE's move of somewhere in the region of 40 to 48 points (and this applies to all spreadbetting companies). What one is then looking for is a quote that is not within this range, if it is above the range and the DOW starts trending down, the FTSE is sold and if it is below the range and the DOW continues rising the FTSE is bought. Whilst their method or mathematical formulae may be complex, my simple and crude method obtains the same answer(s) and is extremely profitable.

The FTSE level is obtained by simply dividing the level of the DOW at the FTSE close by the closing level of the FTSE and multiplying this by the movement in the DOW from that time. I hasten to add that I no longer use the method as the markets are volatile enough, in the past it was unusual for the FTSE to move 50 points in a trading session. In order to do the same thing again, one would have to rebase the DOW and the FTSE over a period of say 3 months. Methods like this are not for those that seek to become millionaires overnight but for those that are quite happy to make regular and profitable trades on a consistent basis.

Finally, if CMC realise that they have a position on their books that has the potential to cost them a tidy sum of money they hedge or lay off part of the liability. This is very easy to do in today's financial markets and can still end up being very profitable for the Company.

CMC does have advantages for traders and you'll find that the tightest spreads are with CMC for equities. Unlike the others, who offer a fixed additional spread, CMC's spread depends on the liquidity at the time. Their worst spread is worse that all the others, but generally their spreads are quite competitive.

Q. But then what about that spike I saw in the daily FTSE rolling bet compared to the cash index market!?

A: We asked this question to Simon from Capital Spreads -:

The FTSE rolling bet (for instance) does not exist. You cannot buy or sell 'the FTSE 100' in 1 point wide. And the price is therefore derived from the Futures markets. The FTSE index value is only calculated by the exchanges once every 15 seconds. At any moment why not actually sit and count how many price changes the futures market in the FTSE makes in 15 secs. It could easily move up 5 points and back down 10 meaning that 'the exchange' would show a five point move lower from one print to the next but the SB company would show a price move of up 5 before falling 10. The fact that the 'exchange' does not show the price move does not mean that it did not happen.

No doubt somebody would claim that this was a 'spike' BUT IT ISN'T. It is a legitimate price action move. A spike is a print from an exchange that is later removed from the exchange records. We had a big one about three years ago on the dow futures.

Q. Do spread betting providers manipulate the stops to get hit?

A: This is probably the second biggest fear that people have about spread betting, with the first being "getting thrown off for being too profitable". I hope I have convinced one or two people that this reason is nonsense unless one is scalping.

But getting back to the price manipulation issue. It does happen, but not as much as people think. In a rolling daily bet, which is by far the most popular, the price tracks pretty well to underlying. I have spent many hours comparing real-time spot forex to spread betting prices and they track exactly. Only time they may differ is in a MAJOR spike in underlying, when they can delay and sometimes get ahead of the spike. In general though, the prices are really quite good.

They can be a bit worse for futures prices though, because people are less able to track the underlying. But, they don't really manipulate prices much anymore because they can't really get away with it. They lose customers every time they do it, so it's not worth it. They may move their quote by 1 or 2 pips to knock out a load of stops at a round number, but really nothing serious.

Overall in my opinion, the advantages outweigh the costs!!

Q. The FTSE 100 spiked massively when the Dow suddenly wiped 1000 points from the market and my spreadbet was closed out!

I was wondering if you would be able to advise me with a recent problem with IG Index. On the 30th April I decided to go long on the FTSE 100 with a stop loss of 100 pips, as the trading days went by I was adjusting my stop loss so that I wouldn't get closed out due to the volatility in the market during those days. The horrible thing is that on the 6th May I got closed out at 5089 with a total loss of £9,116.00. This was the day the Dow suddenly wiped 1000 points from the market and the Footsie obviously followed through.

So far, I have heard that this was due to an error in the States and this is why the market lost so many points on the day. I just wanted to find out if: If there was an error where do I stand with IG Index?

A: That's quite a heck of a hit and I doubt you're alone - really sorry to hear about your large loss. A harsh lesson, but as you now know, trading indices is brutal. It would be interesting to find out from IG how many people were short the FTSE when the "fat finger" occurred, which in theory would have meant some people making a large amount of money.

Afraid I think you have to take the loss on the chin here - another spreadbetting firm could have taken you out way lower than that as I believe when the Dow spiked down the FTSE was trading at 4300! The sharp drop wasn't IGs fault it merely reflected the fall on the DOW which appears to have been caused by a load of electronic selling following a human input error. I think it falls into the 'C'est la vie' category unfortunately. Some stocks went down by 30% or more. Sorry about your loss but having visited IG there wasn't some evil guy there deliberately taking you out - the computer will have matched your stop against their price. Indeed I think if you had been with a less reputable company you might have lost a great deal more...

The reason that IG Index will not compensate is that you were trading a market in which for every loser there is a winner and IG along with all other brokers have to pay the winners from the losers money. In this case the winners were those who were trading short intraday with a fairly tight trailing stop. Thousands if not millions of traders both private and institutional trade by this method with fairly simple programs which can be readily purchased on-line from the likes of MetaTrader and Tradestation. These programs can be used through lightning fast platforms. Many traders would have had their trailing stop bank their profits just a few pips from the bottom of the low spike. Whilst you and many others lost, others made a killing at your expense by being more sophisticated.

Might you have been less exposed if you had a guaranteed stop? The problem with index trades that are not guaranteed (costs a bit more to buy guaranteed) is that your stop triggers a close out but as seconds tick away its at a price that you would not have countenanced.

P.S. BTW it seems that a common psychological pattern after your experience is to try too hard to win the money back by taking too much risk and adding to losses. From what I've read and my own early experiences of a big loss it's time to sit out of the markets until you have written a business plan style set of trading rules covering money management and risk management. All the best for the future.

 ...Continues here - Questions on Consistent Success and Potholes to Avoid

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