Pricing models for online trading

For traders looking to trade CFDs and FX online, the pricing model is always a consideration. Alex Douglas, Associate Director, City Index sheds some light on the key characteristics and differences between the various pricing models.

Alex Douglas, Associate Director, City Index

1. What are the different pricing models currently available in the market for online trading?

The CFD models most people would be familiar with are the Market Maker and Direct Market Access (DMA) models. Each of these offers some advantages over the other. For example, the Market Maker model can provide liquidity in excess of that available in the underlying market, while the DMA model allows investors to trade on prices that directly reflect the underlying physical market.

In reality, things are not so black and white. At City Index we provide a hybrid of these two models that we call Straight Through Pricing. We believe that this platform provides our clients with the best features of both the Market Maker and Direct Market Access models, providing a better all-round trading experience.

2. Why are there so many different pricing models available in the market?

There are a wide range of CFD models because each company individually selects the set of features that they wish to offer to their clients. Each of these unique sets of features will place the CFD provider at a different point in the spectrum. Because of this, it is too simplistic to place all CFD providers in one of just two categories.

3. What are the key characteristics of the different pricing models? What are the key differences?



* Physical market volume will be used as a reference
** May not be available for certain markets

In addition to the liquidity and price source differences highlighted above, the ability to offer a Guaranteed Stop Loss is often used as a point of differentiation between providers.

4. What is City Index's pricing model and why did the company choose to adopt this pricing model?

City Index offers the flexibility of providing liquidity in excess of the underlying market, combined with prices that directly reflect the underlying market, with the added bonus of flexible Guaranteed Stop Loss orders via the Straight Through Pricing model. We believe that with this model, we are able to offer our customers the good characteristics of both the Market Maker and DMA model without the downsides.

5. What should traders look out for when considering the different pricing models? How does the pricing model affect individual traders?

Traders should look for a provider that offers prices that directly reflect the underlying market to ensure a fair playing field. They should also look for the ability to minimise their downside risks through the use of Guaranteed Stop Loss orders. In addition, traders should look for a company with strong financial backing and a substantial history of providing ongoing access to clients over multiple market cycles.

For more detailed information about pricing models, please click here to view a recent interview with Alex by Securities Investor Association (Singapore).







Risk warning:
Trading CFD and FX on margin carries a high level of risk, and may not be suitable for all investors. You should carefully consider whether such trading is appropriate for you in the light of your experience, objectives, financial resources, risk appetite and other relevant circumstances. If in doubt, please seek independent expert advice. When considering the benefits, you should also consider the risks. The leverage associated with CFD and FX trading facilitates trading in larger size compared to traditional full value trading as the deposit requirement (i.e. the margin requirement) is only a small percentage of the total trading value. However, this also means that an adverse movement in the underlying instrument can quickly expose you to losses in excess of the initial deposit. You may lose some or all of your investments. Visit www.cityindexasia.com.sg for the complete Risk Disclosure Statement.

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