Balneus

Australian Lefty on Politics, Governance, Science and Info Management

Come in CFD spinner

Posted by Dave Bath on 2007-11-13


While flipping channels on late-night television, I saw an ad that made my jaw drop.  Companies are looking for CFD suckers.

CFDs (Contracts For Difference) are bets on changes in price of a stock.  They are advertised as offering tens of thousands of dollars for an investment of a couple of hundred dollars, but are very risky.

The CFD is yet another perverted derivative instrument, yet another way of diverting financial activity away from the proper business of capitalism, putting funds in the hands of companies that will do something useful with it.

But the real problem is that the ads appeal to mug punters who don’t have the readies to buy proper shares, and cannot afford the risk associated with these instruments.

When you put coins in the pokies, or notes in the hands of bookies, all you stand to lose is the cash you’ve handed over.  With CFD’s, offered 100:1 odds, putting $100 in the hands of the "bookie", you’ll have to fork over $10K if the bet goes wrong.

The little guy thinks he is betting a day’s wages when he’s actually betting the house.

The whole game depends on recruiting mug punters who’ll make bad bets.  Remember, punters who only have $200 to play the market are those who are probably living hand-to-mouth, and would be ruined when the collectors arrive on the doorstep demanding $20000.

The contrast between ads for industry superannuation funds, which have rapid-fire voiceover caveats ("figuresareindicativeonly maychangeovertime talktoyourfinancialadvisor readtheprospectus") even though your funds are secured, these very risky products carry no such warnings.

They should plainly say "you can lose your shirt if you bet a button".

I’m told by a friend who plays this game successfully you need to have a good grasp of the risks, devour the Fin Review each day, keep close tabs on what happened overnight in NY and London, and sell by 10:30am.

I can’t see the mugs targetted by these ads putting in this effort: it will almost be an impluse spend – "Do I risk my house with CFDs or buy a crazy frog ringtone?"

It’s not just the punters (and their kids) who’ll get hurt.  If enough mugs get into this game, there’ll be enough losses to create entire suburbs of mortgagee sales – and push the needle into the housing bubble.

As more and more CDOs have their pretty wrapping of seeming security taken off to expose their basis of subprime loans in default, as credit becomes tighter, the long-expected correction of equity markets will create havoc to all the little guys sucked into the CFD game.  It will make the mezzazine finance scandal look like a storm in a teacup.

If the do-gooders object to the pokies in the local pub because of the social damage they can cause, they should be even more worried about the misery these ads on the television next door will create.

This is just another derivative that is invented and attracts lots of mug punters before the regulators can deal with it and set the rules for conciable conduct or protection of the most vulnerable.  The next one will be even worse.

That these instruments exist annoys me enough, but allowing them to be advertised to people that are probably half-asleep and suggestible, targetting a demographic that is probably most vulnerable, is beyond the pale.

To me, these CFD touters are more predatory, more deceptive, and will hurt more people than the infamous Nigerian bank account spammers – yet receive less attention from the authorities.

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