IB Index CFDs - Facts and Q&A

The following article is intended to provide a general introduction to index-based Contracts for Differences (CFDs) issued by IBKR.

For information on IBKR Share CFDs, please click here. For Forex CFDs click here.

Risk Warning
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

68.7% of retail investor accounts lose money when trading CFDs with IBKR.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

ESMA Rules for CFDs (Retail Clients only)
The European Securities and Markets Authority (ESMA) has enacted new CFD rules effective 1st August 2018.

The rules include: 1) leverage limits on the opening of a CFD position; 2) a margin close out rule on a per account basis; and 3) negative balance protection on a per account basis.

The ESMA Decision is only applicable to retail clients. Professional clients are unaffected.

Please refer to the following articles for more detail:

ESMA CFD Rules Implementation at IBKR (UK) and IBKR LLC

ESMA CFD Rules Implementation at IBIE and IBCE

Introduction

IBKR Index CFDs are contracts which deliver the return of a market index. Said differently, the CFD is an agreement between the buyer (you) and IBKR to exchange the difference between the current value of an index, and its value at a future time. If you hold a long position and the difference is positive, IBKR pays you. If it is negative, you pay IBKR.

IBKR Index CFDs are traded through your margin account, and you can therefore enter long as well as short leveraged positions.

IBKR Index CFDs   Commissions  
Contract IB Symbol Per Trade Min. Per Order Currency Multiplier*
US 500 IBUS500 0.005% 1.00 USD 1
US 30 IBUS30 0.005% 1.00 USD 1
US Tech 100 IBUST100 0.010% 1.00 USD 1
           
UK 100 IBGB100 0.005% 1.00 GBP 1
EURO 50 IBEU50 0.010% 1.00 EUR 1
GERMANY 40 IBDE40 0.005% 1.00 EUR 1
FRANCE 40 IBFR40 0.010% 1.00 EUR 1
SPAIN 35 IBES35 0.010% 1.00 EUR 1
NETHERLANDS 25 IBNL25 0.010% 1.00 EUR 1
SWITZERLAND 20 IBCH20 0.010% 1.00 CHF 1
           
JAPAN 225 IBJP225 0.010% 40.00 JPY 1
HONG KONG 50 IBHK50 0.010% 10.00 HKD 1
AUSTRALIA 200 IBAU200 0.010% 1.00 AUD 1
*times index level          

The price of the Index CFD is directly related to the price of the exchange-quoted related future. The price-movement of the Index CFD tracks the movement of the related future, although the price levels differ by an adjustment for interest and dividends (fair-value adjustment).

For example (actual quotes):

29-Jan-15 IBDE 30         DAX Mar'15    
Time Bid  Ask Spread Change   Bid  Ask Spread Change
10:10:04 10706.69 10707.19 0.5     10710.00 10710.50 0.5  
10:10:11 10704.19 10705.19 1 -2.5   10707.50 10708.50 1 -2.5
10:10:19 10709.19 10709.69 0.5 5.0   10712.50 10713.00 0.5 5.0
10:10:27 10710.19 10710.69 0.5 1   10713.50 10714.00 0.5 1
10:10:33 10709.69 10710.69 1 -0.5   10713 10714 1 -0.5

IBKR Index CFD Price Determination: As discussed the IBKR Index CFDs track the related future, adjusted for fair value. The synthetic index level is very close to the cash index, but may differ somewhat as explained below.

In the futures market fair value is the equilibrium price for a futures contract. It is the price at which an investor effectively pays the appropriate rate of interest, and is compensated for the dividends he forgoes by holding the future rather than the underlying shares.

The fair value is determined by adjusting the cash index as follows, taking into account the time remaining to expiry:

Cash Index Value + Interest - Dividends = Future at Fair Value

To determine the value of the IBKR Index CFD, we reverse the process:

Actual Futures Price - Interest + Dividends = IBKR Index CFD Value

The result is not necessarily the same value as the cash index. This is because the starting point is the actual price of the future, and the future may trade above or below its fair value.

Having established the level for the synthetic index, the actual CFD quotes show spreads and ticks that reflect those of the underlying future. IB charges a commission rather than widening the spread, enabling a transparent comparison between the returns of the Index CFD and the related future.

 

Low Commissions and Financing Rates: Unlike other Index CFD providers IBKR charges a transparent commission, rather than widening the spread of the related future. Depending on the index, commission rates are only 0.005% - 0.01%. Overnight financing rates are just benchmark +/- 1.5%.

 
Transparent Quotes: Because IBKR does not widen the spread, the Index CFD quotes accurately  represent the spreads and price movements of the related future, and there are no re-quotes. What you see is what you get.
 
Flexible Exposure to Major Markets: IBKR Index CFDs are available for the main US, European and Asia Pacific indices. They can be traded in lots as small as 1X the index level, a fraction of the size of the related futures. And unlike the related futures, they do not need to be rolled over. You can trade all European and US IBKR Index CFDs from 09:00 - 22:00 CET.
 
Margin Efficiency: IBKR Index CFDs are margined at the same low rates as the related future, adjusted for contract size (subject to a minimum of 5%). Retail clients are subject to regulatory minimum initial margins of 5% or 10% depending on the index. Please see ESMA CFD Rules Implementation at IBKR for additional detail and examples.
 
IBKR also offers intraday margin rates on Index CFDs at a level consistent with that of the related futures contract. Intraday rates are generally set at 50% of the overnight rate and are offered during a time frame which begins at the start of liquid trading hours and ends 15 minutes before the liquid trading close. Retail clients are subject to the ESMA minimum margin requirements both intraday and overnight.

IBKR Symbol Liquid Hours Total Hours* Time Zone
IBUS500 09:30 - 16:00 03:00 - 16:00 EST
IBUS30 09:30 - 16:00 03:00 - 16:00 EST
IBUST100 09:30 - 16:00 03:00 - 16:00 EST
       
IBGB100 08:00 - 16:30 08:00 - 21:00 GMT
IBEU50 09:00 - 22:00 09:00 - 22:00 CET
IBDE40 09:00 - 22:00 09:00 - 22:00 CET
IBFR40 09:00 - 18:15 09:00 - 22:00 CET
IBES35 09:00 - 17:35 09:00 - 20:00 CET
IBNL25 09:00 - 17:30 09:00 - 22:00 CET
IBCH20 09:00 - 17:27 09:00 - 22:00 CET
       
IBJP225 09:00 - 15:00 09:00 - 15:00 JST
IBHK50 09:30 - 16:00 09:30 - 16:00 HKT
IBAU200 10:00 - 16:00 10:00 - 16:00 EDT

*Total Hours may be restricted to Liquid Hours during periods of extreme market volatility

Trading requiring margin involves a high degree of risk and may result in a loss of funds greater than the amount you have deposited.

 
Dividend Adjustment: Based on ordinary dividends for the constituents of each index. Dividends are accrued on the ex-date and settled T + 2.
 
Corporate Action Adjustments: None for the CFD. Corporate actions are reflected in the index level
  
Trading Permissions: Same as for Share CFDs
 
Market Data Permissions: Index CFD market data is free, but permission is required for system reasons

 

Worked Trade Example (Professional Clients):

Opening the Position

You purchase 10 IBUS30 CFDs at $23,534.48 for USD 235,344.80, which you then hold for 5 days.

IBUS30 Index CFDs – New Position
Reference Underlying Price 23,465 - 23,466
CFDs Reference Price 23,533.48 - 23,534.48
Action Buy
Quantity 10
Trade Value USD 235,344.80
Margin (variable, minimum 5%) USD 15,393.00

 

Interest tier Charged (on USD 235,344.80 over 5 days)
Flat Interest (BM + 1.5%) USD 235,344.80 2.684% (USD 87.73)

Closing the Position

Exit CFD Position
  Profit Scenario Loss Scenario
Reference Underlying Price 23,627 - 23,628 23,303 - 23,304
CFDs Reference Price 23,693.34 - 23,694.34 23,369.34 - 23,370.34
Action Sell Sell
Quantity 10 10
Trade Value USD 236,933.40 USD 233,693.40
Trade P&L USD 1,588.60 (USD 1,651.40)
Financing (USD 87.73) (USD 87.73)
Entry Commission 0.005% (USD 11.77) (USD 11.77)
Exit Commission 0.005% (USD 11.85) (USD 11.68)
Total P&L   USD 1,477.25 (USD 1,762.58)

 

CFD Resources

Below are some useful links with more detailed information on IBKR’s CFD offering:

CFD Product Listings

CFD Commissions

CFD Financing Rates

CFD Margin Requirements

CFD Corporate Actions

CFD Contract Specifications

The following video tutorial is also available:

How to Place a CFD Trade on the Trader Workstation

Frequently asked Questions

What Indices are available as CFDs?

The principal indices in the United States, Europe and Asia Pacific. Please see CFD Product Listings for more detail.

Do you have CFDs on commodities?

IBKR does not currently offer Commodity CFDs.

How do you determine your Index CFD quotes?

IBKR Index CFDs track the related future, adjusted for fair value. It is in effect a synthetic index level that is very close to the cash index, but may differ somewhat as explained below.

In the futures market fair value is the equilibrium price for a futures contract. It is the price at which an investor effectively pays the appropriate rate of interest, and is compensated for the dividends he forgoes by holding the future rather than the underlying shares.

The fair value is determined by adjusting the cash index as follows, taking into account the time remaining to expiry:

Cash Index Value + Interest - Dividends = Future at Fair Value

To determine the value of the IBKR Index CFD, we reverse the process:

Actual Futures Price - Interest + Dividends = IB Index CFD Value

The result is not necessarily the same value as the cash index. This is because the starting point is the actual price of the future, and the future may trade above or below its fair value.

Having established the level for the synthetic index, the actual CFD quotes show spreads and ticks that reflect those of the underlying future. IBKR charges a commission rather than widening the spread, enabling a transparent comparison between the returns of the Index CFD and the related future.

How do you determine margins for Index CFDs?

The margins are the same as for the related future, adjusted for size, including lower rates intraday. Please refer to CFD Margin Requirements for more detail. Retail clients are subject to regulatory minimum initial margins of 5% or 10% depending on the index. Please see ESMA CFD Rules Implementation at IBKR for additional detail.

Are short Index CFDs subject to forced buy-in?

No. As the reference instrument is a future, the index CFD is not affected by stock loan availability.

How do you handle dividends and corporate actions?

The index level itself is adjusted for corporate actions, and no direct adjustments to the CFD are
necessary. Index CFDs are however adjusted for dividends as the underlying future is typically based on a price index. The only exception among the currently available IB Index CFDs is Germany 40 (IBDE40), which is based on a total return index.

For an overview please see CFD Corporate Actions.

Can anyone trade IBKR CFDs?

All clients can trade IBKR CFDs, except residents of the USA, Canada, Hong Kong, New Zealand and Israel. There are no exemptions based on investor type to the residency based exclusions.

What do I need to do to start trading CFDs with IBKR?

You need to set up trading permission for CFDs in Client Portal and agree to the relevant trading disclosures. If your account is with IBKR (UK) or with IBKR LLC, IBKR will then set up a new account segment (identified with your existing account number plus the suffix “F”). Once the set-up is confirmed you can begin to trade. You do not need to fund the F-account separately, funds will be automatically transferred to meet CFD margin requirements from your main account.  

If your account is with another IBKR entity, only the permission is required; an additional account segment is not necessary.

Are there any market data requirements?

The market data for IB Index CFDs is free, but you need to subscribe to it for system reasons. It is a global permission (like FX), so you only need to subscribe once. To do this, log into Client Portal and click the User menu (head and shoulders icon in the top right corner) followed by User Settings. Under Trading Platforms select the Configure (gear) icon next to Market Data Subscriptions. Click the Configure (gear) icon next to Current GFIS Subscriptions to review what other services you may be interested in. Alternatively you can set up an Index CFD in your TWS quote monitor and click the “Market Data Subscription Manager” button that appears on the quote line.

How are my CFD trades and positions reflected in my statements?

If you are a client of IBKR (U.K.) or IBKR LLC, your CFD positions are held in a separate account segment identified by your primary account number with the suffix “F”. You can choose to view Activity Statements for the F-segment either separately or consolidated with your main account. You can make the choice in the statement window in Client Portal.

 

If you are a client of other IBKR entities, there is no separate segment. You can view your positions normally alongside your non-CFD positions.

Can I transfer in CFD positions from another broker?

IB does not currently have a facility for transferring Index CFD positions. 

 
In what type of IBKR accounts can I trade CFDs e.g., Individual, Friends and Family,
Institutional, etc.?

All margin and cash accounts are eligible for CFD trading. 

What are the maximum positions I can have in a specific Index CFD?

There is no pre-set limit for position size, but please be aware that trade-size restrictions apply to Index CFDs. Please see the table at the beginning of this document for more detail.

Can I trade CFDs over the phone?

No. In exceptional cases we may agree to process closing orders over the phone, but never opening orders.

 

Overview of IBKR issued Share CFDs

The following article is intended to provide a general introduction to share-based Contracts for Differences (CFDs) issued by IBKR.

For Information on IBKR Index CFDs click here. For Forex CFDs click here. For Precious Metals click here.

Topics covered are as follows:

I.    CFD Definition
II.   Comparison Between CFDs and Underlying Shares
III. CFD Tax and Margin Advantage
IV.  US ETFs
V.   CFD Resources
VI.  Frequently Asked Questions

Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

68.7% of retail investor accounts lose money when trading CFDs with IBKR.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

ESMA Rules for CFDs (Retail Clients only)

The European Securities and Markets Authority (ESMA) has enacted new CFD rules effective 1st August 2018.

The rules include: 1) leverage limits on the opening of a CFD position; 2) a margin close out rule on a per account basis; and 3) negative balance protection on a per account basis.

The ESMA Decision is only applicable to retail clients. Professional clients are unaffected.

Please refer to the following articles for more detail:

ESMA CFD Rules Implementation at IBKR (UK) and IBKR LLC

ESMA CFD Rules Implementation at IBIE and IBCE

I.  Share  CFD Definition

IBKR CFDs are OTC contracts which deliver the return of the underlying stock, including dividends and corporate actions (read more about CFD corporate actions).

Said differently, it is an agreement between the buyer (you) and IBKR to exchange the difference in the current value of a share, and its value at a future time. If you hold a long position and the difference is positive, IBKR pays you. If it is negative, you pay IBKR.

IBKR Share CFDs are traded through your cash or margin account, and you can enter long as well as short leveraged positions. The price of the CFD is the exchange-quoted price of the underlying share. In fact, IBKR CFD quotes are identical to the Smart-routed quotes for shares that you can observe in the Trader Workstation and IBKR offers Direct Market Access (DMA). Similar to shares, your non-marketable (i.e. limit) orders have the underlying hedge directly represented on the deep book of those exchanges at which it trades.  This also means that you can place orders to buy the CFD at the underlying bid and sell at the offer.

To compare IBKR’s transparent CFD model to others available in the market please see our Overview of CFD Market Models.

IBKR currently offers approximately 8000 Share CFDs covering the principal markets in the US, Europe and Asia. The constituents of the major indexes listed below are currently available as IBKR Share CFDs. In many countries IBKR also offers trading in liquid small cap shares. These are shares with free float adjusted market capitalization of at least USD 500 million and median daily trading value of at least USD 600 thousand.  Please see CFD Product Listings for more detail. More countries will be added in the near future.

United States S&P 500, DJA, Nasdaq 100, S&P 400 (Mid Cap), Liquid Small Cap
United Kingdom FTSE 350 + Liquid Small Cap (incl. IOB)
Germany Dax, MDax, TecDax + Liquid Small Cap
Switzerland Swiss portion of STOXX Europe 600 (48 shares) + Liquid Small Cap
France CAC Large Cap, CAC Mid Cap + Liquid Small Cap
Netherlands AEX, AMS Mid Cap + Liquid Small Cap
Belgium BEL 20, BEL Mid Cap + Liquid Small Cap
Spain IBEX 35 + Liquid Small Cap
Portugal PSI 20
Sweden OMX Stockholm 30 + Liquid Small Cap
Finland OMX Helsinki 25 + Liquid Small Cap
Denmark OMX Copenhagen 30 + Liquid Small Cap
Norway OBX
Czech PX
Japan Nikkei 225 + Liquid Small Cap
Hong Kong HSI + Liquid Small Cap
Australia ASX 200 + Liquid Small Cap
Singapore STI + Liquid Small Cap
South Africa Top 40 + Liquid Small Cap
Brazil Bovespa
Russia MOEX

II.   Comparison Between CFDs and Underlying Shares

Depending on your trading objectives and trading style, CFDs offer a number of advantages compared to stocks, but also some disadvantages:
 
BENEFITS of IBKR CFDs DRAWBACKS of IBKR CFDs
No stamp duty or financial transaction tax (UK, France, Belgium, Spain) No ownership rights
Generally lower margin rates than shares* Complex corporate actions may not always be exactly replicable
Tax treaty rates for dividends without need for reclaim Taxation of gains may differ from shares (please consult your tax advisor)
Exemption from day trading rules  
US ETFs tradable as CFDs**  

*IB LLC and IB-UK accounts.

**EEA area clients cannot trade US ETFs directly, as they do not publish KIDs.

III. CFD Tax and Margin Advantage

Where stamp duty or financial transaction tax is applied, currently in the UK (0.5%), France (0.3%), Belgium (0.35%) and Spain (0.2%), it has a substantially detrimental impact on returns, particular in an active trading strategy. The taxes are levied on buy-trades, so each time you open a long, or close a short position, you will incur tax at the rates described above.

The amount of available leverage also significantly impacts returns. For European IBKR entities, margin requirements are risk-based for both stocks and CFDs, and therefore generally the same. IB-UK and IB LLC accounts however are subject to Reg T requirements, which limit available leverage to 2:1 for positions held overnight.

To illustrate, let's assume that you have 20,000 to invest and wish to leverage your investment fully. Let's also assume that you hold your positions overnight and that you trade in and out of positions 5 times in a month.

Let's finally assume that your strategy is successful and that you have earned a 5% return on your gross (fully leveraged) investment.

The table below shows the calculation in detail for a UK security. The calculations for France, Belgium and Spain are identical, except for the tax rates applied.

  UK CFD UK Stock UK Stock
All Entities
EU Account
IB LLC or IBUK Acct
Tax Rate 0% 0.50% 0.50%
Tax Basis N/A Buy Orders Buy Orders
# of Round trips 5 5 5
Commission rate 0.05% 0.05% 0.05%
Overnight Margin 20% 20% 50%
Financing Rate 1.508% 1.508% 1.508%
Days Held 30 30 30
Gross Rate of Return 5% 5% 5%
       
Investment 100,000 100,000 40,000
Amount Financed 100,000 80,000 20,000
Own Capital 20,000 20,000 20,000
       
Tax on Purchase 0.00 2,500.00 1,000.00
Round-trip Commissions 500.00 500.00 200.00
Financing 123.95 99.16 24.79
Total Costs 623.95 3099.16 1224.79
       
Gross Return 5,000 5,000 2,000
Return after Costs 4,376.05 1,900.84 775.21
Difference   -57% -82%

The following table summarizes the reduction in return for a stock investment, by country where tax is applied, compared to a CFD investment, given the above assumptions.

Stock Return vs cfD Tax Rate EU Account IB LLC or IBUK Acct
UK 0.50% -57% -82%
France 0.30% -34% -73%
Belgium 0.35% -39% -75%
Spain 0.20% -22% -69%

IV. US ETFs

EEA area residents who are retail investors must be provided with a key information document (KID) for all investment products. US ETF issuers do not generally provide KIDs, and US ETFs are therefore not available to EEA retail investors.

CFDs on such ETFs are permitted however, as they are derivatives for which KIDs are available.

Like for all share CFDs, the reference price for CFDs on ETFs is the exchange-quoted, SMART-routed price of the underlying ETF, ensuring economics that are identical to trading the underlying ETF.

V.   CFD Resources

Below are some useful links with more detailed information on IBKR’s CFD offering:

CFD Contract Specifications

CFD Product Listings

CFD Commissions

CFD Financing Rates

CFD Margin Requirements

CFD Corporate Actions

The following video tutorial is also available:

How to Place a CFD Trade on the Trader Workstation

 

VI.  Frequently Asked Questions

What Stocks are available as CFDs?

Large and Mid-Cap stocks in the US, Western Europe, Nordic and Japan. Liquid Small Cap stocks are also available in many markets. Please see CFD Product Listings for more detail. More countries will be added in the near future.

 

Do you have CFDs on other asset classes?

Yes. Please see IBKR Index CFDs - Facts and Q&A, Forex CFDs - Facts and Q&A and Metals CFDs - Facts and Q&A.

 

How do you determine your Share CFD quotes?

IBKR CFD quotes are identical to the Smart routed quotes for the underlying share. IBKR does not widen the spread or hold positions against you. To learn more please go to Overview of CFD Market Models.

 

Can I see my limit orders reflected on the exchange?

Yes. IBKR offers Direct market Access (DMA) whereby your non-marketable (i.e. limit) orders have the underlying hedges directly represented on the deep books of the exchanges on which they trade. This also means that you can place orders to buy the CFD at the underlying bid and sell at the offer. In addition, you may also receive price improvement if another client's order crosses yours at a better price than is available on public markets.

 

How do you determine margins for Share CFDs?

IBKR establishes risk-based margin requirements based on the historical volatility of each underlying share. The minimum margin is 10%, making CFDs more margin-efficient than trading the underlying share in many cases.  Retail investors are subject to additional margin requirements mandated by the European regulators. There are no portfolio off-sets between individual CFD positions or between CFDs and exposures to the underlying share. Concentrated positions and very large positions may be subject to additional margin. Please refer to CFD Margin Requirements for more detail.

 

Are short Share CFDs subject to forced buy-in?

Yes. In the event the underlying stock becomes difficult or impossible to borrow, the holder of the short CFD position may become subject to buy-in.

 

How do you handle dividends and corporate actions?

IBKR will generally reflect the economic effect of the corporate action for CFD holders as if they had been holding the underlying security. Dividends are reflected as cash adjustments, while other actions may be reflected through either cash or position adjustments, or both. For example, where the corporate action results in a change of the number of shares (e.g. stock-split, reverse stock split), the number of CFDs will be adjusted accordingly. Where the action results in a new entity with listed shares, and IBKR decides to offer these as CFDs, then new long or short positions will be created in the appropriate amount. For an overview please CFD Corporate Actions.

*Please note that in some cases it may not be possible to accurately adjust the CFD for a complex corporate action such as some mergers. In these cases IBKR may terminate the CFD prior to the ex-date.

 

Can anyone trade IBKR CFDs?

All clients can trade IBKR CFDs, except residents of the USA, Canada, Hong Kong, New Zealand and Israel. There are no exemptions based on investor type to the residency based exclusions.

What do I need to do to start trading CFDs with IBKR?

You need to set up trading permission for CFDs in Client Portal, and agree to the relevant disclosures. If your account is with IBKR (UK) or with IBKR LLC, IBKR will then set up a new account segment (identified with your existing account number plus the suffix “F”). Once the set-up is confirmed you can begin to trade. You do not need to fund the F-account separately, funds will be automatically transferred to meet CFD initial margin requirements from your main account.  

If your account is with another IBKR entity, only the permission is required; an additional account segment is not necessary.

Are there any market data requirements?

The market data for IBKR Share CFDs is the market data for the underlying shares. It is therefore necessary to have market data permissions for the relevant exchanges. If you already have market data permissions for an exchange for trading the shares, you do not need to do anything. If you want to trade CFDs on an exchange for which you do not currently have market data permissions, you can set up the permissions in the same way as you would if you planned to trade the underlying shares.

How are my CFD trades and positions reflected in my statements?

If you are a client of IBKR (U.K.) or IBKR LLC, your CFD positions are held in a separate account segment identified by your primary account number with the suffix “F”. You can choose to view Activity Statements for the F-segment either separately or consolidated with your main account. You can make the choice in the statement window in Client Portal.

If you are a client of other IBKR entities, there is no separate segment. You can view your positions normally alongside your non-CFD positions.

Can I transfer in CFD positions from another broker?

IBKR does not facilitate the transfer of CFD positions at this time.

Are charts available for Share CFDs?

Yes.

In what type of IBKR accounts can I trade CFDs e.g., Individual, Friends and Family, Institutional, etc.? 

All margin and cash accounts are eligible for CFD trading. 

What are the maximum a positions I can have in a specific CFD?

There is no pre-set limit. Bear in mind however that very large positions may be subject to increased margin requirements. Please refer to CFD Margin Requirements for more detail.

Can I trade CFDs over the phone?

No. In exceptional cases we may agree to process closing orders over the phone, but never opening orders.

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.

 

How to Place a CFD Trade on the Trader Workstation

How to place trades in U.K. CFDs on the Trader Workstation

How to Request Trading Permissions for IB U.K. CFD's

How to request trading permissions for IB U.K. Contracts for Difference (CFD's)

 

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