Categorized | CFD trading

How is Contracts for Difference(CFD) being priced?

The difference between buying shares on the stock market and buying a CFD is that the CFD provider is the counter party. Most CFD providers would then seek to hedge their CFD transactions on the underlying cash market.

So for an example, if a client was to submit an order to buy 5000 CFD in Capitaland, then the CFD provider would simultaneously buy 500 shares of Capitaland on the market. Since the CFD provider is hedging the transaction, it would also means that any price improvement can be passed to the client which will in turn by paying the best possible price.

Traders need transparent pricing that tracks the cash market without time delay. If the CFD provider is willing to adopt the broker model where it will always hedge against and also charging the true underlying market price, there will be little conflict of interest between the trader and the provider although they are counter party to each other.

With this kind of approach the CFD provider makes its revenue from the overnight financing charge and also by taking commission on each transaction. The amount varies slightly between providers and will typically range from 0.15% to 0.25% of the contract value. This will apply to both the opening and the closing trades, making a 0.3% to 0.5% charge for the two-way trip.

The alternative adopted by those who charge no or low commission is to add a mark-up to the cash market bid-offer spread. This can work out good value, depending on how competitive the quote is, but has the effect of making the pricing less transparent. Most CFD providers in singapore has chosen to adopt the spread as a revenue structure. The problem with this structure is the liquidity curb that would lead to trading delays.

Sophisticated traders who are unhappy with these restrictions can actually chose to sign up with one of the growing number of providers who are offering a direct market access (DMA) service. This technology virtually allows clients to execute directly into the Stock Exchange’s electronic order book. As a result, they can access the greater liquidity of the main market and can choose to enter their order at whatever price they wish.

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Symbol Bid Ask Spread
EURUSD 1.17900 1.17920 2
GBPUSD 1.33470 1.33500 3
USDCAD 1.28510 1.28540 3
USDJPY 113.460 113.480 2
USDCHF 0.99060 0.99090 3
AUDUSD 0.75320 0.75350 3
NZDUSD 0.69120 0.69170 5
EURGBP 0.88310 0.88340 3
EURCHF 1.16810 1.16840 3
EURJPY 133.780 133.810 3
AUDJPY 85.460 85.510 5
GBPJPY 151.440 151.500 6
XAUUSD 1243.95 1244.35 40
XAGUSD 15.724 15.774 5