Bitcoin CFD Brokers Getting Goxed over MtGox Price Declines

Despite its ongoing fiat withdrawal problems that plagued MtGox for much of 2013, and triggered premiums for the price of bitcoins versus other exchanges, MtGox’s API has become the prime source of pricing for online brokers providing CFDs of bitcoins. Using the feed from MtGox, brokers are able to create synthetic trading products called CFDs, that track the price movements of bitcoins, with additional features such as leverage and the ability to short (more on CFDs). Among brokers providing bitcoin CFDs using MtGox feeds, include Markets.com, eToro, AvaTrade and Plus500.

If you ask firms and developers why this is the case, the answer is generally tied to the ease of using MtGox’s API for sourcing historical data which is a key component for creating charts. In addition, even after months of problems, much of the general public still equates buying bitcoins with MtGox. Case in point, Forex Magnates received an email from a technology provider just yesterday with this statement :

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The BITCOIN CFD offered by ######## platform provider is a synthetic instrument that tracks prices of trading at MtGox with, MtGox appears to have become the main source for bitcoin pricing CFD

Brokers Getting Goxed?

Brokers though are now experiencing pressure from both clients, as well as due to internal risks for continuing to use MtGox feeds. After trading at a steady premium of over $100 to other exchanges, prices of bitcoins at MtGox have collapsed to below $600 from $950 to start the month, and are currently trading $100 below BTC-e and Bitstamp. In addition, liquidity on the exchange has dried up, leading to more volatile price swings and wider spreads, as well as trading lags in their pricing engine. Causing the volatility has been a halt on all bitcoin withdrawals from MtGox as it aims to correct a technical glitch in processing transaction to third party bitcoin wallets.

For brokers, the problems at MtGox have created two main problems. First, due to the lags between trades being disseminated on MtGox’s API to actually taking place, brokers are vulnerable to arbitrage taking place against them by their clients. Secondly, the increase in spreads and volatility has increased risks for brokers, as it has become more difficult to hedge trades. In this regard, traders at brokers have voiced concerns to Forex Magnates about the future of MtGox and pro/cons of switching feeds. However, even were any brokers to migrate to pricing from another exchange, such as BTC-e, it may not occur until current CFDs expire, which for some firms doesn’t occur until the end of the month.

In addition to the internal risks, customers have also begun to request a switch from MtGox, as prices of sub $600 aren’t considered accurate compared to other exchanges trading around $700. In this regard, on eToro’s OpenBook, complaints from users triggered the broker’s CEO, Yoni Assia to respond, where he stated that, “We are currently working on a solution. More details will be provided shortly.”

(Update: eToro Switches to Bistamp feed)

Overall, the current problems brokers are experiencing are applicable to all CFDs and synthetic products, where reliable market data is necessary for creating stable pricing. Typically, brokers use multiple data sources when streaming prices from an exchange such as for the Dow Jones Futures from the CME. However, in this case, the problem has become not the feed provider, but the exchange.