CFD Pricing: Daily Cash and Daily Futures


Q.: How are CFDs priced?

A: CFD providers should let you know how they formulate their CFD prices. DMA providers mirror the price of the underlying asset (direct market access providers). Market makers usually add an extra amount ('spread') to the underlying market price. The spread may be fixed or may vary.

Most providers (especially those providing Direct Market Access) price their equity CFDs direct from the underlying shares and then charge commission on the transaction. This means investors trading in normal market size or less will be quoted the best bid and offer available at the time. This also means that equity CFDs are generally priced in line with the underlying shares and the only cost on top of the commission is an overnight financing charge on long positions held open overnight. Normally this will be based on an annual rate of around 2% over LIBOR. Index and FX CFDs are priced slightly differently, with no commission but a little extra added to the underlying spread. Some market makers also use this model (i.e. adding a little extra to the market spread) to price share CFDs.

The pricing of CFD providers who use the direct market access model is more transparent, but they may offer a more limited range of CFDs. CFD providers who determine their own prices generally offer more CFDs, but you need to consider the impact of wider spreads and the possibility of re-quoted prices on your trading profits.

 

Q.: What factors determine the bid-offer spread?

A: The spread is the difference between the price at which you can buy a contract for difference and the price at which you can sell the CFD. It is sometimes referred to as the 'spread' or the 'dealing spread'. The spread is a way for providers to charge a commission and obviously the more narrow the bid-offer spread, the better the deal is for the investor. The difference between the bid-offer spread varies by instrument but generally it is dependent on -:

  • the volatility of the financial instrument
  • the liquidity of the financial instrument
  • the amount of freely traded shares that exist for the relevant financial instrument

For instance:

The underlying instrument for a Yahoo CFD is one share of Yahoo (YHOO) stock. If Yahoo stock is trading at 14.72/14.73 per share, then the bid-offer price quoted would be based on this underlying quote (plus a spread). For example: 14.71/14.74. The lower figure (14.71) is the sell price and the higher figure (14.74) is the buy price implying that you can sell Yahoo at 14.71 and buy it at 14.74.

The size of the spread represents how much the market must move in your predicted direction before you begin to make a trading profit. For example, if you buy 100 Yahoo CFDs at a 0.03 spread, your trade will begin at a US$3.00 loss.

Q.: Is the FTSE 100/Dow Jones Index quotes linked to the actual index or are they based on the futures market?


I have just started trading and unsure about the prices CFD providers offer for the FTSE 100 and Dow Jones index. Are these prices linked to the actual index or are they based on the futures market?'

And yet most 'real' traders say spread betting isn't investing, it's just a form of gambling, however CFDs are taken as a standard (albeit high risk) investment tool. Even the big guys invest millions in CFDs and yet wouldn't touch a spread bet?

Why is this so when they are very similar investment tools? Why is it that many would say that spread betting is a mugs game but CFDs are ok.

A: Your question depends on what CFD provider you are using, the majority of brokers have two CFD index contracts the first will be based on the cash and the second should be a quarterly contract related to the underlying futures price. If your provider only offers one then it's usually priced as close to the cash market as possible but may have leanings towards the futures price as that's where the providers have to hedge to cover their positions. In conclusion it's worth keeping an eye on the actual underlying exchanges and most brokers can give you that level either online or by a quick phone call and by doing this you can see where the CFD prices are leaning.

Q.: I've been day trading the FTSE 100 index for the last few weeks and noticed that generally the IG quote is above the actual price?

A: CFD providers do not use the 'cash' price to return their quotes. What you see on your charting software is the actual market cash price which is traded during the day and closes at 4.30 or 9.30 for US.

CFD brokers use the futures to base their quotes, futures trades 24 hours a day and this is why the quotes are different from the cash prices that you see on your charts. This is also why the spreads vary each day, you will tend to see that the spreads widen after the cash market has closed and then resume a normal level once the markets re-open.

Q.: Why do the prices on the AUS 200 CFD move differently to the SPI?

A: This is because what you are actually trading is the 'fair price' of the SPI. The AUD200 Cash price is priced from the most liquid underlying future contract (typically the front month) with the fair value being the difference between the two prices. This calculation takes a number of factors into consideration such as future interest rates, any upcoming dividend payments...etc.

Take the following hypothetical example...

Suppose the AUS200Z8 index is trading at 3556/60, and the fair value is 60. What the provider does is to take the mid-point [3558.0] and factor the quote for fair value, yielding a cash index mid-point price of 3552.0. Then the broker purely add an index point either side to generate the 2 point spread resulting in a .AUS200 price of 3551.0/3553.0.

Q.: What is the difference between Daily Cash and Daily Future. Does the Daily Future refer to the Rolling?

A: Cash means Index as Underlying (e.g. DAXI). So it is always the traded underlying/ or calculated index.

Future means: Future of the Index (e.g. FDAX) as underlying.

Dow Jones Ind. Avg (Cash) vs. DJ Future (Future).

...etc

Futures have an expiry date, changing every 3 month (march, june, sept, dec).

The future is also a contract, but instead of a stock exchange it will be traded on a futures exchange. The price is a result of all buy and sell orders in a certain underlying instrument, usually futures. The futures have other characteristics/ specs like regular contracts.

For trading purposes the futures market could be/ will be used as indication in which direction the underlying will move.

If you have access to future prices you can compare cash and future. If the future goes down, the cash will follow...etc. (it's a bit more different in reality).

Future prices you can get (15 minutes delay) directly from the Eurex - the marketplace for those products - Eurex - Europe's Global Financial Marketplace.

Q.: But isn't the Daily Cash buying the contract right now at current prices?

A: Ok , let me try explaining

First: Every contract has an underlying. Punktum!

The underlying could be an index, an equity, bond, commodity whatever. Usually traders are mainly interested in the cash market. They have access to real-time quotes, times and sales etc. so it is much easier to compare.

You can trade the underlying directly (stock or commodity exchange) or OFF exchange (OTC) with several brokerage companies.

If you are interested in trading leverage products you have to use financial spread betting, contracts for difference, options or futures.

Financial spread betting (also with CFDs) provides you the opportunity to invest a small amount of money to participate in movements of your preferred underlying.

Financial spread betting: Place a Stake per Point/Tick/ Pip.

Contracts for Difference: Size.

Financial spread betting: Stake: £1 per point = You win/ lose £1 per Point of the movement of the underlying, Stake 5 per Point = You win/ lose £5 per Point of the movement of the underlying.

Contracts for Difference: Margin 20 %:

Size: For 1 Point you leverage with factor 5.


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