Learn about CFDs

1. Getting Started
2. Trading Stocks on Margin
3. Basic CFD Trade Mechanisms
4. A Closer Look at CFD Trade Orders
5. The Mechanics of a Market Maker CFD Trade
6. The Mechanics of an Exchange Routed Trade

The Mechanics of an Exchange Routed Trade

In this edition, we walk through the mechanics of a CFD Trade that is routed to the exchange order book.

As explained in a previous edition, the exact mechanics of making a CFD trade is dependent on the CFD provider and the trading platform, but we will take a walk through making a CFD trade using our CFD trading platform which is routed to the stock exchange.

Out of over 4,100 stocks available as CFDs from the 22 stock exchanges we support, we are currently the market maker for around 500 of the most popular. So if you are trading the major "blue-chip" companies, we are likely to be the market maker (up to a maximum amount of shares). The remaining around 2,000 stocks and trades in stocks above our maximum amount are routed directly through to the exchange. It is trading these stock CFDs that we will be discussing in this edition.

If you have our demo download, why not open it up and try this out yourself.

In Falcon Trader , you trade CFDs through the CFD Trade Module. If you don't have this open, open it from the Trading > CFDs > CFD Trade menu.

Order Books

At the stock exchange, an order book is maintained for each stock which contains – amongst other things – the number of shares that can be bought (at the Ask price) and sold (at the Bid price) at different price levels.

The current market price that shares can be bought and sold is at the top of the order book and is known as the "Yellow Strip Price".

Volume Weighted Average Price
As the order book can move faster than the data can be processed and routed to you over the Internet, the price displayed in the trading platform is only indicative of the current market price from the order book. The price displayed also takes into account the number of shares you entered for the trade. So for example, if only 500 shares of the German company Altana are available at the current market price of 44.90 and you want to buy 1000, the remaining 500 shares will be filled at the next price level 44.91. This price is called the volume weighted average price.

The overall price displayed will then be ((500 * 44.900) + (500 * 44.910)) / 1,000 = 44.905 EUR/Share. The 0.04 EUR/Share difference you can see between the price displayed 44.945 and the calculated price 44.905 is the trading commission added to the trading spread.

CFD Trade Module

When trading CFDs that are being routed to an exchange, the CFD Trade module looks like this:

Instead of the simple Buy and Sell buttons, you now have to chose whether you want to place a market or limit order to buy or sell. You are also given options for placing orders join the current buy or sell price (sell at the current Bid price or buy at the Ask price).

Trade Order types

When CFD trades are routed to the exchange, trading is done by trade placing trade orders in the order book. You need to decide and you need to decide what type of order best fits your situation:

• Market Orders (Buy @ M and Sell @ M buttons)
  Market orders pretty much guarantee that your full order will be filled, but not the price at which it will be filled. All being well, you will get the displayed Volume Weighted Average Price but it is also likely that the market has moved since then and the price will differ.
  If you want a trade that will fill at the best available price – for example, some important news about a company has been released that will affect the share price and you want in as fast as possible – use a Market Order.
• Limit Orders (Buy Offer and Sell Bid)
  Limit orders are used when you want to trade at the displayed price displayed or better. Limit orders do not guarantee you will get a position or that your complete order will be filled. So maybe only half of an order for 10,000 shares can be filled at the price you placed the order; the remaining 5,000 will be placed in a new order at the same price and wait for the market to hit that price again.
  Use Limit orders when you want a specific price, for example when the price of a stock is approaching a level of resistance and you expect a reversal in the near or immediate future. But be aware, you might not be filled.

Join Bid and Join Offer options
The CFD Trader module also offers buttons for joining the currently displayed Bid and Offer prices, so if the current market price at which you can buy a stock is 100, you would add your order to the order book to sell at 100. This is also done using limit orders that guarantee the price of your trade but not that you will be filled.

When using the Join Bid and Join Offer options, be aware that for the volume you are trading, the Volume Weighted Average price displayed might not be at the top of the order book but be an average of a number of levels.