Reach 8m active traders with cTrader
Being a bit of a futures noob, something that I have glossed over a few times is the fact that US brokers are able to offer intraday margin levels that are incredibly low.
After seeing it a few times, I finally got curious and decided to look into it.
To give some examples of what I’m talking about, right now there are loads of futures brokers, like NinjaTrader, AMP Futures, or Plus500 US, who will allow you to open a position with them for less than $50.
For example, AMP Futures sets intraday margin in some smaller size contracts at $40 or $33.
Only the real deal – get access to genuine Prime of Prime services with ATFX Connect
How does this work? As noted, I am a bit of a futures noob so my assumption had always been the client has to front the margin immediately because of the CME’s requirements, basically limiting what you offer in terms of leverage. In reality the broker does not have to settle with the CME until market close.
Because of that, they can offer much higher leverage, so long as those positions are either fully margined or closed when trading stops. This is why loads of the time you’ll see these lower margins requirements listed on broker websites as ‘day trading margin’.
As you can infer from the figures listed above, the result is you can offer massive leverage so long as the client closes their position by the end of the day.
Get a Match-Trader server today
To give one example, at the time of writing, you can open a position with Plus500 US on the Micro E-mini S&P 500 with $50 as margin. At least one other broker offers lower levels than this on the same contract.
Micro E-Mini S&P 500 contracts are 5x the value of the index. At the time of writing that would be $33,793.75.
The result? you can open a position that has a notional value of $33,793.75 with margin of just $50. To put that in CFD terms, it’s leverage of almost 700:1. Damn son.
Plus500 also has an autoliquidation fee baked into the position that you have to put down as well.
Start using Centroid to manage your broker’s risk
When you open the position, the $50 is there as your margin and another $10 is kept separately in case you are liquidated.
That $10 is not based on your total position either – it’s per contract. So if you opened a position on 10 contracts with $500 margin, your liquidation fee would be $100. The point is that no matter how big your position gets, if you deposited the minimum margin required, your liquidation fee will be equivalent to 20% of the amount you put down.
AMP Futures is even more extreme than this as their per contract liquidation fee is $25. That would mean you could open a position with them where your liquidation fee is $25 per contract and your margin per contract is only $33.
Start hedging with Hantec Prime today
Liquidation terms vary between firms. For example, AMP Futures lets you draw down by 80%. Optimus Futures is less generous with 60%. Plus500’s terms are more nebulous. Their liquidation agreement shows they have the right to close your position at any point when you are below the minimum margin level.
The other way all these firms can close you out is if you haven’t posted full maintenance margin by a certain point before market close, say 15 minutes or half an hour.
What is the result of this? Firstly, you have something to attract customers, exactly like you do in the CFD space.
As you can see, leverage levels are above what you can offer in basically every tier-1 market and even some more esoteric ones, like the Bahamas and Kenya. Note that OTC FX in the US is capped at 50:1. But you could open a futures position on an FX pair with over 300:1 leverage.
Make mobile trading your competitive edge with DXtrade
Secondly, you can drive more volume and brokerage fees. Again, those don’t change just because you are putting less margin down and are typically per contract.
And the final, most important point is that you can have something akin to the margin close out you get with a CFD. As you all know, someone trading with 700:1 leverage is pretty likely to get margin called. If this is not happening here as well then I will be incredibly surprised.
Part of the reason firms may be doing this is you cannot do PFOF on futures in the US in the same way that you can with options and equities.
Give your prop firm a-book liquidity with FX-Edge
Much more likely is the fact you can make some big bucks autoliquidating people who are using massive amounts of leverage. Note that some firms could make over 20% of the client deposit just from liquidation fees and that doesn’t include other commissions they charge. AMP Futures, on one contract, could make over 75% of the client deposit value from liquidation fees alone.
Am I correct in assuming this is happening? We spoke to several futures execs and, perhaps tellingly, it was only those who no longer work in the sector who were happy to talk about it.
“I don’t think it’s a secret that several firms make more money on liquidation fees than they do on brokerage,” said one executive, who used to run a US-based FX and futures broker. “That has been going on for years as well.”
Is it deliberate? Is the goal to autoliquidate?
Friends, I’ll leave that up to you to decide.
