Overview of CFD Market Models

OTC Contracts For Difference (CFD) markets are generally organized along one of three models: Direct Market Access (DMA), Agency Broker, or the Market Maker model.

IB operates the DMA model, the most transparent of the three. In this model the provider hedges the CFD order immediately in the underlying physical market, and the CFD is executed at the price of the hedge. This serves to enhance pricing transparency and the provider's compensation is typically based solely upon a commission rather than a mark-up or mark-down.

With the DMA model, professionally-oriented IB customers have the ability to add quotes to the exchange book, in the same way they would trading stocks. Because IB matches all CFD orders immediately with a hedge-order, a non-marketable CFD order will create a matching non-marketable order for the underlying share on the exchange. Clients can view "their order" on the level 2 book.

In addition, all orders, whether marketable or not, benefit from IB's SmartRouting technology which ensures best execution by routing the order to one of several underlying markets (LSE, CHI-X, Turquoise, BATS, or internally vs. other client orders).

The Agency Broker model closely resembles the DMA model in that orders are hedged directly via the underlying physical market. Under this model, however, participants will not see their limit orders on the exchange as such orders are held by the provider and passed through only when they become marketable.

By contrast, under the traditional Market Maker model the CFD provider takes all orders into its book, and maintains discretion as to how the trade is hedged or offset, using options, warrants, futures, or directly through the underlying market. The provider often markets the offering as commission-free. Here prices are streamed based on the provider's own pricing model which incorporates a profit into the bid-ask spread. This model is often associated with widening spreads in turbulent markets, as well as the possibility of re-quotes.

 

Feedback

Please provide feedback on this information

Please note that while we read and take into consideration all feedback, we are not able to respond directly to comments or questions submitted through this forum. Should you have an inquiry or require assistance, please contact Customer Service.