The consumer-facing online trading industry has long seen its reputation suffer bruising as a result of rogue operators and unethical practises, proven or otherwise. Most retail-facing CFDs brokers take the opposite side of the trade and while price quotes roughly mirror the underlying market they can differ slightly and usually have larger spreads. While market makers operating according best practise should be hedging their client positions and not have an interest in the end result, the reality is that many take the opposite side of the trade themselves. This means they can often have a direct financial interest in their client’s trade losing, which inherently raises doubts around transparency and objectivity. The potential for conflict of interests inherent in this market maker model has, unfortunately, led to suspicions of widespread abuse on the part of brokers offering CFDs trading platforms. There is also enough evidence that these suspicions can have legitimate grounds often enough to lead to a damaging breakdown in trust. Blockchain applications are, by nature, designed to solve the potential for a centralised authority abusing the trust placed in them. And one of CoinDummies’ favourite ICOs of 2017, offers an alternative Blockchain-based trading platform that removes the requirement for a market maker to take the other side of CFDs positions. Spectre.ai is a Blockchain based Smart CFDs, Forex and Digital Options platform built on the Ethereum platform. Unlike the centralised market maker model, there is no broker interest involved in the outcome of trades. In most cases the decentralised system automatically matches inverse trader positions with each other. So if Trader A has a long position on EUR/USD, the other side of their trade will be taken by Trader B with a short position on EUR/USD. Of course, this isn’t always possible. There isn’t always an approximate match between the number and value of long and short positions on the same underlying asset. That’s where Spectre.ai’s ICO comes in. The sale of the tokens last year raised the capital for a decentralised liquidity pool. So when there isn’t a match in long and short positions on the platform the liquidity pool picks up the slack and takes the other side of the trade. But no one owns this liquidity pool so there is no vested interest. The platform, and token holders, split the spread or commission charged on each trade. So the only incentive is for as many trades as possible to be transacted over Spectre.ai.
Don’t DMA CFDs Brokers Already Solve The Same Problem?
DMA CFDs brokers are ‘hands free’ intermediaries who simply offer an interface between the trader and markets. DMA stands for Direct Market Access and in CFDs brokerage means all a broker does is facilitate their clients’ positions being passed through to the main market or the order book of an exchange. It also means traders access the best underlying market prices and full-market liquidity depth. Their business model is based on volume and they have no interest in whether a trader finishes in or out of the money on any individual trade. If a DMA broker has an interest it’s that their trader clients do as well as possible so they trade more frequently or with larger positions.
Transparency Comes at a Price
However, for beginner traders, or those with smaller accounts, there are also disadvantages to the DMA model. The problem with the DMA brokerage model is that brokers usually demand much higher minimum deposits to open an account. $/€/£1000 is usually the minimum starting point to access a DMA service, up to as high as $/€/£5000. Also, when trading DMA, traders are trading with the professional underlying market so cannot deal in the kind of mini or micro contracts that market makers often offer to make trading more accessible to small retail account holders. For example, a single forex CFD for EUR/USD is equal to buying $100,000. Every point movement is equal to $10. Because leverage is used, the full $100,000 does not have to put up to open the trade but positions still require a far higher margin requirement than if trading mini or micro CFDs. This is the primary reason why the vast majority of new traders opt for market makers. They can gain trading experience without having to put too much cash on the line. Market makers make a large portion of their revenue from taking the opposite side to the trades of inexperienced traders, safe in the knowledge they are almost certain to lose more than they win. While this doesn’t necessarily mean they are all involved in skulduggery, it’s not usually necessary, it does lead to the less than ideal scenario that the client’s loss is the broker’s gain.
Decentralised Blockchain Trading Platform: Transparency and Cost Flexibility
Spectre.ai offers the best of both worlds. Because the DMA is to an internal market rather than the professional markets, very low value trading positions can still be taken. There’s also no deposit requirement whatsoever. Traders can link their cryptocurrency wallet to Spectre.ai and only the value of the position taken and margin requirement is pulled from it. Since its ICO last year and start of live operations this ‘best of both worlds’ model is helping Spectre.ai gain significant traction and, we’re happy to say, validating our faith in the ICO. The Spectre.ai tokens sold via the original ICO now trade over cryptocurrency exchanges and can be used to fund trading positions, access additional services on the platform such as live support and preferential rates and earn a share of the platform’s profits. A true example of how the decentralised trust protocol of Blockchain has been harnessed to solve the transparency issues of a traditional centralised system while adding cost efficiencies.