What keeps the ASX Listed CFD price in line with the underlying price?
The price of an ASX Listed CFD is closely related to the price of its underlying instrument. It is also closely related to the price of other exchange-traded derivative products, such as futures and options, based on the same underlying security.
There are three factors that ensure this outcome:
- Daily Settlement Price: The Daily Settlement Price for ASX Listed CFDs is the same price as the closing price for the underlying instrument or index. For example, in ASX Equity CFDs, ASX uses the closing single price auction which determines Daily Settlement Prices at 4.10pm. These prices are used as the Daily Settlement Prices for ASX Equity CFDs. This ensures both markets close at parity. Daily variation margins for ASX Listed CFDs are therefore based on the closing price of the underlying instrument or index.
- Arbitrage: During the trading period, the arbitrage between the ASX Listed CFD and underlying instrument ensures both markets remain at or close to parity. This arbitrage is based on the opportunity for traders to profit whenever the two markets are out of line. For example, assume the price of BHP Billiton shares are trading at $48.50 bid and $48.55 offered. If the ASX BHP Billiton CFD is offered below the bid on the ASX ($48.50), a trader will profit from buying the ASX BHP Billiton CFD at the lower price and selling the share at $48.50. The ASX has appointed designated price makers (DPMs) to provide prices in the ASX Listed CFD market. DPMs and other sophisticated market participants can be expected to utilise arbitrage to ensure that prices for the ASX Listed CFDs do not 'get out of line' with the underlying instrument or index.
- Price competition: DPMs compete to trade as this determines any incentive paid to them by ASX. DPMs provide users of the market with enhanced liquidity and tighter bid and offer spreads.
- Contract Design and Cashflows: ASX Listed CFDs include cashflows (Contract Interest, Dividend Cashflow, etc.) for all positions held. This has the economic effect of making the ASX Listed CFD position identical to holding a leveraged spot position in the underlying instrument.