A Shift from CFDs to Futures: A Hype or a Viable Option?

Regulations around the contracts for differences (CFDs) push traders and brokers towards alternative instruments, like futures and options. As much as over 50 percent of European retail brokers would look to offer futures and options instead of retail over-the-counter (OTC) instruments, such as CFDs, a survey by Acuiti revealed. Furthermore, the recent disruption in the prop trading industry has led to the launch of futures prop trading platforms.

Among the respondents of the survey, 77 percent of the European retail brokers would like to expand into other regions amid widespread restrictions to come into force across the continent, while 69 percent would seek to expand into the institutional markets.

Regulations on CFDs Impacting the Industry

Europe is the hotbed of retail OTC instruments like CFDs. However, the European Securities and Markets Authority brought heavy restrictions on the industry in August 2018, limiting the leverage offered to retail clients.

Meanwhile, many local regulators in Europe already have their own set of rules when it comes to the retail offering of OTC instruments. France already has heavy restrictions in place for the promotion of FX and CFDs, while Spain became the latest to introduce restrictions last year on instruments aimed at retail investors. It banned the promotion and distribution of CFDs and restricted leverage on other instruments.

“Those who have preferred to trade CFDs have continued to trade CFDs - the regulatory push in some jurisdictions has not pushed clients trading CFDs into trading futures instead,” Saxo’s Asia Pacific Head of Trading and Investing, Mahesh Sethuraman, told Finance Magnates. He added: “In terms of number of clients, there's no sign at the moment that Saxo clients around the world are leaving CFD trading to trade futures.”

“But these are still early days, and we expect futures exchanges to create more micro futures contracts without a compromise on liquidity, which will facilitate a greater adoption of futures by retail investors.”

However, CFDs brokers have struggled to penetrate the United States market.

Prop Trading - A Loophole to trade CFDs in the US

CFDs are banned in the US. Although retail FX is allowed, it's heavily regulated, and only a handful of players operate there.

That does not mean US traders are not trading CFDs, enter prop trading. Although the offerings of prop trading firms cannot be compared with retail brokers, they still provide a simulated environment to traders in the US to get their hands on CFDs instruments. And, if a trader passes the evaluation checks and gets a funded account (with simulated money in most cases), they will receive a profit share.

However, the prop trading companies operating in the US received a massive blow recently as MetaQuotes, the developer of MetaTrader, allegedly cracked down on the industry. Brokers grey-labeling their MetaTrader licenses to prop trading firms were allegedly told to stop their offerings or risk losing their MetaTrader license.

Prop trading firms are now migrating to MetaTrader alternatives.

We recognize that US based traders need a viable alternative in futures

The team has begun working on a new futures plan similar to FX evals

We hope those trading FX use this as a bridge into what we are trying to accomplish at MyFundedFutures

— Matt (@MattLeech) February 26, 2024

A Shift to Future Prop Trading

However, many influencers and self-proclaimed traders on social media are pointing out the necessary move from CFDs to futures.

As a US based CFD/FX trader I have growing concerns about my ability to trade CFDs in the future - regardless of if it’s through prop or not.

As always, the metaphorical “they” will “keep us safe” in our “best interests.”

How many of my followers are trading prop futures or…

— relentlessADD (@relentlessADD) January 10, 2024

“This tendency is probably true for the US market and maybe Europe as European traders love CFDs and are also likely to consider futures, but overall, I don't think the shift is that significant,” Anya Aratovskaya, an FX Consultant, explained to Finance Magnates.

Meanwhile, many futures prop trading firms are promoting their services amid the recent disruption in the US prop trading industry. When it comes to futures, the model is different from other OTC instruments. Futures trading is very centralized.

“Futures 'props' get price feeds from exchanges, making it close to impossible to manipulate them, unlike MT4/MT5 price feeds. This results in less abuse of spreads for sure,” Aratovskaya said.

While Futures trading brings many advantages over FX and CFDs, there are many challenges too for traders, brokers, and prop trading alike.

Since a lot of US traders are moving to Futures from FX, I would like to make this thread educating how trailing drawdown isn't as bad as you may think IF DONE CORRECTLY

DISCLAIMER - I am not sponsored, affiliated, or endorsing any singular prop firm and get $0 sharing this. I… pic.twitter.com/yth0F5jb2n

— Austin Clark (@Austin_Clark_YT) February 23, 2024

“Trading futures is more challenging compared to FX, and 'prop firms' ensure that the drawdown structure (intraday trailing drawdown based on open positions rules at some firms - head shaking - just makes me smirk) makes it even harder. Not to mention, futures offer less flexibility in position sizing,” added Aratovskaya.

“Regarding price feeds/data feeds: futures 'prop' often include level 1 data in the price, and traders often have to pay for level 2 data (another way of making money by marking it up). A subscription to Level 2 data is necessary for heatmaps, for example, which are a must-have for sophisticated traders.”