FinanceFeeds speaks in detail to CMC Markets’ Head of Institutional Richard Elston, and analyzes the company’s ability to provide live market CFD pricing on a B2B basis. “Forex has always been well established, but we’re now in a position to offer our Indices, Commodities and Treasuries CFDs to institutional clients right alongside currencies. This affords clients real flexibility” he explained
In some of the regions of the world in which the retail FX industry is at its most developed, and in which large, long-established and often publicly listed giants sit at very much the same table as the institutional partners which punctuate the most important global financial centers, contracts for difference – known as CFDs – represent the cornerstone in trading instruments.
For this reason, it has been essential for the stalwarts of the retail FX industry to continue to develop and operate their own proprietary trading systems which are specific to the provision of CFDs to a loyal and discerning audience, largely on domestic soil.
CMC Markets is one of the world’s most widely renowned CFD providers, its new ‘Next Generation’ trading platform having been the fruit of a $100 million development investment, and is operated and supported in its entirety in house.
The company stands in a unique position among its peers which adorn the ultra-modern financial district that lies within a few footsteps of Liverpool Street Station, in that unlike some of London’s retail market specialists, CMC Markets has a very international and all encompassing institutional division, hence the company’s senior talent understands the relationships with Tier 1 providers, and clearing venues that are required in order to correctly price its range of instruments.
The majority of equity CFD providers look to offer a relationship along the lines of a traditional brokerage, acting as an agent on behalf of their clients. In other words, they are not risk-takers but instead look to hedge their CFD transactions in the underlying cash market.
So if a client was, for example, to submit an order to buy 10,000 CFDs in a company’s stock, the provider would simultaneously enter the market, buy 10,000 shares in that particular company as a hedge, and write a CFD to the client at the same price.
In this way, the client receives the position that he wants, namely long 10,000 CFDs in that particular company, while the provider has hedged his short CFD contract with the client by buying stock in the market. Although counterparties to the CFD transaction, the fact that the CFD provider is hedging means that any price improvement can be passed on to the client, who as a result pays the best cash market price.
For this reason, the relationship between the client and CFD provider is crucial, as traders need transparent prices that track the cash market without any delays, and with firms that do not have specific relationships with institutional providers, pricing what can be construed as an off-exchange futures contract is a very significant challenge.
CMC Markets has considered the need to provide a fully comprehensive order execution management solution for CFDs, and has during the past few months concentrated on expanding its ability to provide full pricing information to clients.
This week, CMC Markets has entered into a strategic partnership with FlexTrade, a company whose FX execution management system accesses more than 70 liquidity providers.
Operating with banks, ECNs and exchanges, FlexTrade is a broker-neutral, execution and order management trading systems for equities, FX, options, futures and fixed income securities. Last year, FlexTrade opened an office in Sydney Australia, in the heartlands of another major market center for CFDs.
To detail this partnership comprehensively, FinanceFeeds spoke today to Richard Elston, Head of Institutional at CMC Markets.
When asked what the partnership will do to enhance the trading environment, Mr Elston explained
“The partnership has been designed to ensure clients – like aggregating brokers and smaller, emerging hedge funds – have the best possible access to the widest range of asset classes. Forex has always been well established, but we’re now in a position to offer our Indices, Commodities and Treasuries CFDs to institutional clients right alongside currencies. This affords clients real flexibility” – Richard Elston, Head of Institutional, CMC Markets
The decision to partner with FlexTrade was a matter of interest, in which Mr Elston stated “FlexTrade is a well-respected brand with a solid product offering. Not only does this make our decision to work with them an easy one, but this pedigree also affords end-users the confidence they need.”
Clearly, CMC Markets occupies a somewhat unique position in that many CFD companies globally do not have the ability or remit to access real market liquidity, and favor the b-book, generating their own prices.
With regard to CMC Markets’ connectivity to live markets and its in-house institutional and prime of prime division, FinanceFeeds asked whether CMC markets is looking to become the CFD liquidity provider of choice across markets where direct market acces (DMA: is important.
“CMC Markets is in the rare position of being able to deliver tier one liquidity in both FX and CFDs through a combination of the institutional relationships supported by our strong balance sheet and also the liquidity which is delivered by our own clients. We see this as being a core component of our market-leading proposition” – Richard Elston, Head of Institutional, CMC Markets
“Also, will CMC markets look to establish itself as the CFD liquidity provider across UK, Australia, China, HK and other very important markets where DMA is very important” explained Mr Elston.
“CMC Markets is looking at this from a global position so Flextrade’s presence in the major data centres will ensure seamless connectivity for clients worldwide” he confirmed.
Most certainly FinanceFeeds concurs that with regard to the ability to price CFDs, CMC Markets is well-known in the industry for its transparency in pricing.
Using market data from the relevant exchanges, CMC Markets derives the most accurate prices for clients to trade against. The execution process is further enhanced by the availability of tier one liquidity across both FX and Indices, Commodities and Treasuries CFDs.
This ethos was exemplified in July this year, when Andrew Wood, CMC Markets’ Business Development Manager in Australia explained to FinanceFeeds during a meeting in Sydney that for those OTC instruments listed on MT5, the depth of market measure has to work differently by proactively allowing resting stop and limit orders to be placed.
Mr Wood explained that this enables users to take full advantage of price movements, rather than just seeing orders rejected in full, owing to insufficient market depth.
Mr Wood was indeed referring to the recent launch by CMC Markets of market depth information against CFD products on its Next Generation trading platform and that the company has now uniquely incorporated that its our API for those simply looking to tap into the liquidity feed.
With the burgeoning popularity of the MT5 platform amongst brokers based in the Asia Pacific region, it would seem as if more CFD providers will be offering this functionality in due course – although for now anyway, CMC Markets is the only liquidity provider offering this functionality.
Thus it’s not only a case of the availability of market depth information giving CMC’s own clients a better trading experience, but it also means that those signed up to brokers using MT5, trading on-exchange products and who in turn are taking liquidity from CMC, will also now have an extra layer of transparency on hand.
It is clear that the method by which CFDs are provided to clients is one that must be evolved, and it is partnerships like this one between CMC Markets and FlexTrade that serve to do exactly that.
Image: CMC Markets’ Michael Hewson with the Next Generation multi-asset trading platform