BROKER REVIEW: ETX CAPITAL’s Delta Instruments

By Tom Hougaard

14th August 2018

Introduction

ETX Capital have introduced a new product called Delta 1. The product may seem a little confusing at first, but, with a little guidance and information, they are easy to understand and easy to trade.

ETX Capital as well as all other brokers in the Euro Zone are governed by ESMA, the European regulator created to promote financial stability within the eurozone. On the 1st august 2018 ESMA enforced new rules on the available margin for retail clients.

The new margin rules meant that retail traders had significantly less margin at their disposal than before. The Delta 1 product was borne out of the need to legally provide an optimization of the available margin.

 

What is a Delta 1?

ETX Capital describes their Delta products as an option without any of the option elements. I think I would describe Delta’s as a Turbo instrument. An example of a Turbo could be when you buy say Vodafone shares, but it is now called a Vodafone Turbo. The difference is that when Vodafone increases in value by 1%, your Turbo increases by say 2% or 3%, depending on the Turbo “strength”.

The important thing to remember is that the Delta products move in sync with the underlying instrument. So, for example a DAX Delta 1 product will rise and fall exactly in line with what the normal DAX index is doing.

 

What is the point of Delta products?

To put it simply and bluntly, you get more “product” for your money. You see, the Delta product shaves off some of the price of the underlying instrument. This means that you get a product with a lower “value”. Your margin requirement when you trade is a function your stake size and the value of the product.

If you shave some of the value of the instrument, you can buy or sell short more of the product. Let me illustrate this with a fictitious example on an index.

 

Fictitious Example

The index XYZ is trading at 100,000.

You want to trade it in 1 per point. The margin requirement is 5%. You need to have at least 5,000 on your account as margin collateral to execute this bet.

Now imagine the same index, except now it is called Delta XYZ. It is the same index, and it moves in the same way, but now the index has been divided by 10. So the value of the Delta XYZ is now 10,000.

You want to trade it in 1 per point. The margin requirement is 5%. Now you only need to have 500 on your account as margin collateral to execute the bet.

Is the product the same? Yes. For every point the XYZ rises or falls, the Delta XYZ will rise or fall with an identical amount too. If XYZ rise 100 points, then the Delta XYZ will rise with 100 points.

 

Practical Example

To the left you have the trading ticket for a Dax Delta product.

To the right you have the normal DAX index.

The word “Delta” is an expression that ETX Capital has taken from option pricing terminology.  It describes the ratio of change in the price of the underlying asset.

ETX Capital’s Delta products all have a Delta value of 1. It simply means that if the underlying product moves up or down by 1 point, the Delta product will follow EXACTLY.

So ETX has essentially taken an instrument like the DAX and expressed it as an option to create a Delta Dax. On the trading ticket to the left below, the “Germany 30 Delta ONE” (The DAX index) is priced as a “7400 strike price”.

It means that ETX has subtracted 7400 from the normal Dax index to get the Delta 1 price. Why is that a clever thing to do?

Look at the margin requirement on the trading tickets. The Delta 1 DAX requires 251 in margin, while the normal DAX requires 621 in margin.

 

DELTA ONE trading ticket next to a normal trading ticket in the Dax index. Notice the significantly smaller margin requirement for the Delta product.

 

The clever people at ETX Capital have essentially created an option that has no time decay, no implied volatility adjustments or any of the other components in an option. You are essentially trading an option as if it was a normal product, but the price has been reduced significantly in order to free up margin requirements.

 

What about the risk?

Delta products are risky because they are margined trades. However, they are “point for point” no riskier than its underlying counterpart.

Let me give you an example and let’s stick to the Dax index.

If you trade the prices on the trading ticket above, and you trade say £1 a point, and the DAX rallies 100 points, you are going to make or lose the same amount of money, no matter what product you have selected.

Where Delta products are different, is that you can increase your exposure because the margin requirements in the Delta’s are less.

 

Strike Price

What is the strike price, and its relation to the underlying price? The strike price below is 7,400. It means that the Delta One product is trading as follows:

“Current DAX price” minus “Strike Price” = Delta One price

What happens if for some reason the DAX DELTA ONE in the example below moves down to zero. It would mean that the underlying DAX had fallen significantly. I called ETX Capital and asked what would happen. The answer is that you get stopped out. Simple as that.

So, you if you bought 5011, the maximum you could lose is 5011 points.

However, this is where the new ESMA rules also protect you. You cannot go into negative balance. It is simply legally impossible as a retail client. Additionally, you also have the new 50% close-out rule which means that if you are losing more than 50% of your account balance, the brokerage system will begin to systematically reduce your positions.

Say you shorted it at 5010.50 and the DAX took a huge tumble. By the time the Delta DAX reached zero, you would get closed out at zero (for a nice profit). ETX Capital would then immediately re-create a similar Delta product to trade.

Let’s say you BUY the Delta DAX at 5011.50, and you are worried what happens when the DAX Delta One reached the strike price of 7400. Nothing. The strike price is a reference to the underlying market.

I took a screenshot of the Dow Jones Index Delta next to the normal Dow Jones index. The chart shows that they move 100% in unison.

 

 

5% Margin and ESMA

What ETX Capital has created is 100% legal and compliant. They have created a product that has a 5% margin, but still follows the underlying market, but they have shaved off some of the price of the underlying market.

This means that ETX Capital clients have more margin availability than before. Before they had to cough up 621 points as margin collateral, but now they only have to cough up 251 points.

For someone who trade the DAX in £10 a point, it means that instead of having to have £6,210 in collateral, you now only need £2,510 in collateral.

Now that is a tangible improvement.

 

Delta for everyone?

No, ETX Capital will only offer this product to people who understand the risk of margin. I don’t know what their assessment criteria are. You will have to ask them yourself. It is my understanding though that anyone who has been a client of ETX Capital on a normal Trader Pro account will have access to Delta products.

 

Delta Product Range

What products can you trade?

Indices:                Wall Street, SP500, NASDAQ, DAX, FTSE, NIKKEI

FX:                          AUD, EUR, JPY, GBP, USD (I counted 14 FX pairs you can trade Delta’s on)

Commodities:    Brent, Nymex, Gold, Platinum, Palladium

 

Conclusion

ETX Capital has found a way to legally and responsibly allow clients to increase their margin exposure somewhat – in selected popular products. This is not available in shares, for example.

The products are easy to understand, and they are transparent and fair.

If you have any questions, please direct them to tom@tomhougaard.dk

 

One thought on “BROKER REVIEW: ETX CAPITAL’s Delta Instruments

  1. Thanks Tom most helpful with your with understanding of brokers
    and new margin rules, can not thank you enough for sharing
    always check and read your post emails
    thanks again hope you are trading well

Comments are closed.