IG Markets, the contracts for difference division of IG Group which offers direct market access to retail clients announced Monday that it has upgraded its DMA product to include the ability for stock market traders to benefit from access to UK European equities via Chi-X and Turquoise, Europe’s leading two multilateral trading facilities (MTFs) – which compete with the London Stock Exchange for settlement of trades.

The news is remarkable as it highlights the increasing importance that alternative trading systems now represent as they gobble market share away from traditional exchanges like the London Stock Exchange, which reduces their liquidity. Launched in 2006, Chi-X has now secured up to 25% of FTSE 100 trades while 5% of FTSE 100 trades go through Turquoise. When one adds up all the trading systems the volume of transactions not flowing through the London Stock Exchange is now about 40%. The growth has been possible as such systems are typically much faster and significantly less expensive Europe’s traditional share exchanges. For instance Chi-X Europe distributes market data to clients directly and via third-party market data vendors at no cost, and trade reporting is available for a low monthly fee.

What does this mean for you?

PureDMA’s hyprid platform is now setup to search all three systems; in this case the London Stock Exchange, Chi-X and Turquoise, locate the best prices and include them in the order book you see in PureDMA. Clicking on one of these prices will route your order to the venue with the better execution. On your Level 2 screen you can either view all prices in a ‘hybrid’ format which includes all the best quotes from the different exchanges listed in one order book or you can view the single order book from any chosen exchange.

IG Markets L2 now includes trades executed on Chi-X and Turquoise

Increased possibility of getting your trade filled

The Smart Order Router is designed to route orders to the exchanges offering the better execution which may mean that stock orders may be split across multiple exchanges but the execution will still count as a single trade. If the requested price or volume is not available in the current order book and your order cannot be immediately filled, it will be directed to the primary exchange where the greatest level of liquidity is usually available.

Free live feeds

Traders who don’t want to pay the live data exchange fee from the traditional exchanges will now be able to check live prices from the free multi-lateral trading facilities. This means free live date on over 1450 European and UK shares. Moreover, should an order be placed using the free prices, and a better quote exists on a fee-liable exchange, your order will be processed at the better price, whether you are a paid subscriber or not to the main feed.

For IG Markets clients the move is great news as now they have the ability to directly interact with the order books of Chi-X and Turquoise – two alternative systems to the LSE. This means access to more liquidity on over 1450 UK and European equities and better prices on share CFDs as IG’s technology works in the background sourcing the best price, and displaying its findings on their Level 2 screen.

IG Group stated that the move is likely to benefit around 80,000 of its clients, out of a total of 133,000. The move is also beneficial to Chi-X as it provides the system with additional liquidity in a fragmented market.

‘We are delighted that IG Group is the first retail CFD provider to connect to Chi-X Europe,’ stated Hirander Misra, Chief Operating Officer of Chi-X Europe. ‘We consistently represent 25% of all trading in FTSE 100 stocks and over 15% of the leading European indices.’

‘Trading on Chi-X Europe delivers measurable price improvement and we are pleased that IG Group’s clients will now be able to trade on our MTF.’

Comments: Particularly notable is the fact that just days ago, clients at IG Markets were limited to prices offered only on the London Stock Exchange and other traditional exchanges in Europe. As a result of this latest move, clients will now be able to see greater liquidity and get even better prices when they trade with either IG Markets or IG Index. IG Group keeps innovating and with one clean sweep has just made the CFD marketplace more competitive while upping the ante for rivals in the industry.

The Irish regulator has reminded stock brokers in the country and overseas that the shorting ban on Irish bank stocks hasn’t been lifted, as a response to the heavy turbulence in financial stocks being experienced recently.

The regulator in Ireland has issued a note stressing to stock brokers to keep alert in respect of the continuing short-selling ban; which ban doesn’t allow speculators to make profits from Irish banking securities that are falling in value.

The regulator only added that the reminder was ‘a precautionary measure’. It seems that the notice was targeted especially for brokers and their compliance departments in the United Kingdom to remind them that the ban on shorting of Irish bank stocks is still in place. The notice was issued after some industry participants started querying about whether the ban is still applicable.

The shorting ban in Ireland was originally issued in September 2008 to protect banking institutions following a period of heavy volatility in the financial markets as the banking system was stressed to the limit at the height of the economic crisis. The ban has remained in place ever since, even after the UK regulator (Financial Services Authority) lifted a similar ban at the start of the year (2009).

‘The Irish Financial Regulator is concerned that all stock brokers, including those based outside of Ireland, maintain a sustained awareness of the continuing requirement to refuse to execute financial transactions with persons aiming to short-sell Irish bank shares, or to acquire short positions through instruments such as CFDs [contracts for difference] and spread bets,’ the notice said.

It appears that this is a precautionary measure and it is not believed that any significant breaches of the shorting ban have been uncovered, nor does the authority believe that the recent weakness in banking stocks have been driven by short selling.

Irish banking securities have been falling recently amid investor worries that the banks may need more capital; Bank of Ireland’s stock price has fallen by some 40 per cent since the middle of last month, while Allied Irish Banks is down about 45 per cent since the end of September. Bank stocks have also been suffering on fears that the European Union may impose stricter restructuring terms for banks receiving state assistance after the European Commission required the break-up of Dutch bank ING as a condition of its bailout.

The regulatory agency in Japan (FSAJ) has announced a public consultation period running to 16 November 2009 on its proposals to restrict gearing on CFDs over certain markets. It basically proposes to limit leverage on contracts for difference which has prompted IG Group (which has recently moved to the Japanese market), to issue the following statement:

“The Financial Services Agency in Japan (”FSAJ”) have announced a short period of public consultation on proposals to limit leverage on contracts for difference (”CFDs”) over certain asset classes. They propose restricting leverage to 5 times for shares, to 10 times for equity indices and to 50 times for bonds. The public consultation will run until 16 November 2009 with any restrictions coming into force approximately one year later.

These proposals do not affect CFDs on commodities or precious metals or binary options. During the consultation period the Group will lobby the FSA directly as well as via industry channels.

Revenue in September from the products affected represented approximately 0.5% of Group revenue.”

Contracts for difference on commodities, precious metals or binary bets are not covered by the new proposals which are due to be implemented in late 2010. In itself, this development is not significant for numbers, affecting only a very small part of the overall business but it is likely to weigh on sentiment and question the long term viability of the Japanese division.

Comments: Of course, the real problem for IG and its peers would be if regulatory authorities in the UK and Australia considered similar proposals. Having said that, regulation usually takes a while to get implemented and I don’t know if CFD brokers would have enough lobbying power to block this from being applied as this would affect their profits. If the regulation had affected the big four banks’ profits it would probably have been a different story…

The FSA has taken measures against 11 brokers who it claims have used pressure sales techniques to sell penny shares to older people. The companies have been barred from from sell low value stocks until they have changed the way they conduct business and proved that they no longer represent a risk to retail investors. Meanwhile, 6 of these firms have since already gone out of business.

Elderly investors have also been urged to watch out for brokers who use high pressure sales tactics to sell high-risk investments for commission. The Financial Services Authority stated that these companies were mostly taking advantage of over-50s (some of them even in their 70s and 80s!) and badgering them on the phone without warning them how risky penny share investing is. Some of these senior people and pensioners owned shares although in some cases these were shares acquired through privatisations so they weren’t really sophisticated investors.

In a few cases stock brokers were being paid commissions to sell particular shares which were then ‘aggressively marketed to consumers regardless of whether or not it was suitable for them’. In one specific case an individual finally agreed to buy the securities after a long conversation in which she stated more than ten times that she didn’t want to buy them.

Penny shares are usually traded in pence and don’t trade on the London Stock Exchange’s main market. They trade on AIM and the Plus Quoted Market while some don’t have a listing. The fact that they are often regarded as ‘cheap’ (as they trade in pennies making them less than £1) makes them appealing to inexperienced investors. However such shares are often considered high risk investments and are difficult to trade.

Lesley Titcomb, director of the FSA’s Small Firms and Contact division said further scrutiny of penny share dealers is in the workings.

She stated that its not acceptable to have people pressurised into buying equities especially when the risks of such investments haven’t clearly been explained. Further Lesley said that such firms will not be allowed to continue operating in the market and she warned that other companies should get their house in order if they wanted to keep operating.

The FSA also warned that it would be investigating sales of contracts for differences (CFDs) which allow retail investors to speculate on share prices without having to directly own the physical shares. The FSA considers CFDs as extremely complex instruments where investors may end up losing more than their original investments.

The Financial Services Authority has urged people to question brokers as to what commission they are getting for arranging the sale and why a share makes a good investment for them. Consumers who are thinking of buying penny shares are reminded of four simple measures to help protect themselves:

- Challenge the advice a broker gives you. Ask why a particular share is suitable for your particular circumstances;

- Research and verify that advice;

- Challenge the advice a broker gives you. Ask why a particular share is suitable for your particular circumstances;

- Ask what commission the broker will get for arranging the sale.

Incidentally, last week I received a half-hearted telephone call from an investment company trying to flog me some contracts for difference haha (basically spread betting by another name).

*runs screaming in the other direction*

New disclosure rules have quietly gone into effect on the 1st June regarding disclosure of long CFDs and similar derivative products in the UK.

The use over recent years of contracts for difference has allowed corporate predators to build up control of huge chunks of shares while lurking below the radar. Such positions have not until the present time been obliged to be declared in the same way as actual holdings of shares, which must be revealed when the level of ownership rises above three per cent of a company.

However, the new regime will require investors who hold 3% or more of a company’s voting equity through either shares, CFDs, or other relevant derivatives, or an aggregation of shares, CFDs, and other relevant derivatives, to disclose their stakes. Additionally, separate disclosures are required where holdings increase or decrease above or below the 1% steps set out in the Disclosure and Transparency Rules.

This is limited to companies listed on the UK London Stock Exchange but France is also in the process of formulating disclosure requirements to enter into effect on 1 August 2009.

Thoughts: Ever since the EU Transparency Directive which came into force at the start of January 2007 many of the national European governments have worked hard at beefing up their corporate disclosure and transparency standards. Legislation requiring disclosure of synthetic holdings will be a natural progression for better transparency. However, some European countries like Italy still lag behind with disclosure rules and Italy for instance doesn’t even require quarterly reporting.

Investors who take out a stake of larger than three per cent in a company using Contracts For Difference (CFDs) are to be forced to disclose their actions in the UK.

City regulator the Financial Services Authority (FSA) is to implement the requirement in order to expose firms who take up “synthetic” positions, boosting transparency in the sector.

CFDs are a type of financial instrument used to “own” shares without the obligation of paying a type of tax known in Britain as stamp duty.

Commenting on the announcement to the Times newspaper, Sarah Bowles at Simmons & Simmons said: “This comes as a surprise.”

An anonymous executive at a “major” investment house added: “It’s a good thing. Give the FSA a tick.”

As part of its drive for greater clarity in the financial sector, the FSA announced last month that firms who took up short-selling positions in companies which were undergoing rights issues at the time would also be required to make their moves public.