In the UK, retail traders are able to buy a "Contract for difference" with a broker. These are bets on the price of an asset and do not actually contain any underlying securities.
70-80% of retail traders lose money from trading CFDs, which has made providers overconfident in allowing people to trade things that can not actually be bought on any market, for example, the spot price of a commodity can be bet on. The issue with this is that traders can not actually buy oil at spot price and hold for a period longer than the period of the futures contract without physically buying, transporting and storing oil . OIL ETFs that attempt to match the spot price exist, however, they suffer from slippage, especially when different months contracts diverge in price.
There is usually a small difference between the different months WTI Oil futures , however these have not ever been large enough for CFD traders to profit from because of the spread and overnight holding fees.
The current oil storage crisis has created a huge divergence between the spot price and the price after coronavirus is expected to have calmed. October futures are priced at $27; June futures (the current spot price) are $14. This means that the market has already priced oil in October to be at $27, so it is most likely to nearly double in price by then. This has exposed a mistake in the way CFD brokers allow bets on commodity spot price.
Buy a spot price CFD and sell at around $27 in about half a year's time.
Are CFDs able to go below zero? If so there's a chance buying a CFD long could blow up the account like happened with CME futures.
Also, what is the likelihood that this price mismatch exists but that the whales have not already come up with a plan to shake people out who intend to use it?
What if the CFDs are the next on the chopping block to have their values go negative and force people out of the market...
JamesRkaye
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@mljones, Sorry I don't understand your points
1. Just trade a CFDs that didn't go below $0 when the spot price last went below $0, as far as I can tell none of them did. If you do find one go below $0 you would get paid instantly for getting a contract expected to gain in value, so that would be amazing and an even bigger mistake from CFD brokers.
2. What would someone trading an oil future have to gain from a CFD trader losing money? The broker is on the other side of the contract and they don't have the capital to move the oil market for 6 months for the sake of a few retail traders. CFD traders aren't in the market, CFD traders don't move the market, whales don't trade CFDs. The separation between the CFD and the market is what caused this mistake from the brokers, it is not a market price mismatch, it's a CFD contract that is not based directly on market price.
3. If the spot price goes below $0 then theoretically a CFD tracking the spot price can as well, It seems like you think there is a separation between a CFD and the price of the asset it's tracking, which is false
mljones
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@JamesRkaye, "3. If the spot price goes below $0 then theoretically a CFD tracking the spot price can as well"
That is my point, what I'm saying is that it's not at all impossible for a CFD to have its value whipsawed below zero and blow up the account of the CFD holder.
The other things in your post such as saying there is no such thing as whales in CFDs... do not make any sense. I'm not sure if you're joking? Any finite set will have a largest element. CFDs must have an effect on the underlying market, so they do move it since someone who could have hedged a position using the underlying asset instead chooses to hedge using a CFD is taking liquidity from the underlying asset's order book by comparison which means the underlying market is altered by the existence of a CFD on it.
JamesRkaye
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@mljones, Yes the CFD can possibly go below zero, you just need to have enough room on the trade to cope with that small possibility, however, it is very very rare to have a trade that is this statistically likely to make money.
I suppose you are right that investors buying CFDs will slightly reduce the price of the asset that the CFD is following compared to if they had bought the asset itself, but it's not like someone buying a CFD actually moves the market, it just prevents a move in the market which would have happened if they had bought an oil future instead. The CFD is just tracking the price of the oil futures, betting on the price does not affect the price of the futures, selling their futures would affect the price.
Also, what is the likelihood that this price mismatch exists but that the whales have not already come up with a plan to shake people out who intend to use it?
What if the CFDs are the next on the chopping block to have their values go negative and force people out of the market...