OTC Contracts For Difference (CFD) markets are generally organized along one of three models: Market Maker, Direct Market Access (DMA) or Agency Broker. Under the 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. Here prices are streamed based upon the provider’s own pricing model which typically incorporates a profit into the bid-ask spread based upon mark-ups or mark-downs.

In the case of the DMA model, the provider passes the order directly through the underlying physical market with no market maker intervention. This serves to enhance pricing transparency and the ability to receive executions inside the market spread as the provider’s compensation is typically based solely upon a commission rather than a mark-up or mark-down to the price at which the underlying was executed. In addition, the standard DMA model generally provides participants access to the underlying market’s Level 2 book so that they may view the depth of the market (i.e., the number of shares that are available at each of the available bid and ask prices) and have their CFD orders posted to the order book for other market participants to view.

IB operates under a CFD model referred to as Agency Broker which most closely approximates the DMA model in that orders are hedged directly via the underlying physical market and are afforded the benefits of transparency and potential price improvement inside the bid-ask spread. Under this model, however, participants will not see their limit orders resting upon the Level 2 book of the underlying market as such orders are held by IB and passed through only when they become marketable. This is done in order to utilize IB’s SmartRouting technology which seeks to optimize the execution price by routing the order to one of multiple eligible underlying markets (LSE, CHI-X, Turquoise, BATS or internally vs. other client orders).