What is CFD Liquidity and where to find it?
The term liquidity is generally used in the financial markets to describe the ease by which an asset can be converted into cash without difficulty. It is all-important when it comes to trading as it is a key factor in being able to make a profitable trade. To understand CFD liquidity, it is useful to look at trading this increasingly popular financial instrument.
Why Trade CFDs?
Contracts for difference (CFDs) are a simple and cost-effective way to trade on a variety of financial markets without the need to own the underlying asset. They are effectively an agreement between two parties, i.e. the trader and the CFD provider, to exchange the difference between the opening and closing price of a contract. In recent years, they have become a popular means for traders to diversify into different global markets.
CFDs thus enable investors to assess rising and falling markets, as well as to trade with margin/leverage. They are traded in dozens of markets, and as well as cash and futures products, they are available for commodities such as gold and oil, stocks and indices.
Trading CFDs offers the following advantages:
The ability to hold long and short positions in order to capitalise on bull and bear markets
Leverage enabling margin trading to maximise profit potential with a lower outlay (note: leverage may also increase losses)
Flexibility regarding the size of your positions so you get exactly the exposure you want
Out of hours trading
As we have seen, liquidity is important for all tradable assets so that transactions can be completed as quickly and cost effectively as possible. The growing popularity of the CFD market has been accompanied by new participants from both retail and institutional backgrounds, including online trading firms and individuals, along with intermediate brokers.
In some ways, the CFD market remains somewhat traditional in respect to its predominantly over-the-counter (OTC) nature, rather than the usual regulatory trend which encourages more central clearing.
For this reason, there is a big reliance on liquidity providers (LPs). So what should prospective brokers and traders look for in an LP? Some firms are able to offer broader and more diverse service than others, but it should be noted that there is much less primary liquidity in the underlying markets on CFDs compared to Forex. Hence, being able to add internal liquidity to the exchange liquidity is important in providing a high level of service to partners.
Due to the OTC mode of CFD liquidity provision, a key factor in sourcing a suitable LP is that, from a credit risk perspective, they should be an experienced and reliable counterparty. A CFD LP should also provide a wide range of markets and reliable continuity in terms of pricing and depth of liquidity. An increasing number of traders would like 24/5 access to major markets which, although fairly typical in Forex, is less usual with CFDs. An LP should also offer a good range of connectivity options.
The depth of liquidity offered by a CFD LP can vary to a large degree, as can the connectivity options available. Those who embrace the latest technology, including API connectivity are aspects that should be considered, as is solid experience in their field.
B2Broker is an expert in liquidity provision, offering single and direct market access to Tier-1 FX liquidity venues, offering unmatchable levels of technology, deep liquidity and speed of execution at ultra-competitive trading costs.
B2Broker is ranked as a Top 10 LP in the industry, offering an easy-to-implement solution for brokers, with access to over 800 trading instruments and 7 asset classes on one single multi-currency account. The company is a market leader in CFDs, offering an incomparable CFD liquidity solution to all its clients.
Multi-connectivity cross connection is available to 6 different trading platforms: MT4, MT5, One Zero, PrimeXM, Integral and B2Trader and can be connected via FIX API, Rest API and Socket API to any system to enable processing of large liquidity volumes. Liquidity can be delivered to any trading system, CFD liquidity to any trader, cash liquidity, cash trading and OTC deals.
Brokers can be connected to B2Broker's liquidity pool in just 5 minutes with immediate access to a range of other benefits including USD, EUR or any fiat currency denominated accounts, BTC or ETH nominated marginal accounts, direct access to the deepest institutional liquidity pools, super-tight spreads and much more. Contact us now.