What is a quotation step?
A quotation step is the smallest possible unit of variation between 2 consecutive prices of a financial instrument. Each asset has its own listing step. In Forex, the quotation step is 1 pip . On stocks and indices, it is 1 point or tick . On bonds, it is 1 basis point. It is therefore the minimum difference between bid and ask , between supply and demand on an asset.
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Example of no quotation
Take the example of the future CAC 40 . Its rating step is 0.5. If it is 5500 / 5500.50, the following price can be:
- Unchanged: In this case the price remains 5500 / 5500.50
- Upward : In this case, the price is 5500.50 / 5501
- Downward : In this case , the quotation is 5499.50 / 5500
Who determines the rating step?
The listing step is set by the regulatory authorities on an organized market. This is the case for derivatives (futures, warrants, options, etc.), stocks and government bonds. If we take the example of the future CAC 40, which is a standardized product, the quotation step is the same for all participants on the financial instrument. Your broker has no influence over it. It simply transmits your stock market orders to the clearing house in charge of the organized market.
On the other hand, if the product that you are processing is not standardized, that is to say that it is traded over the counter, then the broker is free to decide on the listing step. This is the case with CFDs. A CFD is a pure creation of the broker. He can freely decide on the trading step on each CFD.
The listing step: a source of income for brokers
When a broker creates a product (like a CFD), it is backed by an underlying asset , which is the equivalent of the product created on an organized market. The price step of the product created should therefore in theory be the same as the underlying. Take the example of the CAC40 future and the CFD. The latter replicates the evolution of the price of the future CAC40. However, this is often not the case. The broker artificially inflates the CFD listing step.
The objective of this maneuver is simple, it is to earn more money. The difference between the trading step of the CFD and the trading step of its underlying is a hidden source of remuneration for the broker. There is no regulation on this point since CFDs are traded over the counter, it is a transaction between a broker and a trader.
The influence of the trading step on your trading
This remuneration via the listing step is added to the official remuneration of the broker on CFDs, namely the spread. In fact, the larger the step, the more difficult it is for traders to generate profit. The CFD broker being the client's counterpart, this is a benefit for him.
I explain myself with an example. On the future CAC 40, the quotation step is 0.5. On a CAC40 CFD, the broker is free not to touch this increment or to increase it. Depending on the option chosen, this can strongly impact the trading conditions of traders. In all cases, you pay the spread on the CFDs, so let's dismiss this element of remuneration for the broker (spread of 1 point generally on the CFD CAC40)
If the broker does not touch the trading step and keeps 0.5 on his CAC40 CFD, the CFD must vary by 0.5 in the direction of my trade so that I can exit in gain.
If the broker increases the quotation step and passes it to 1 for example on his CFD. In this case, the CFD must vary from 1 and not 0.5 so that I can cut my position in gain. If the future CAC40 varies by 0.5, the CFD does not replicate the increase. This increase goes in the near of the broker.
In this example, it is therefore 50% harder to gain for the trader with a quotation step which has doubled on the CFD CAC40 than compared to a CFD whose quotation step is identical to that of the underlying (the future CAC 40).
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