The term ‘requote’ is driven from a lack of liquidity in the underlying market whereby the client will be ‘requoted’ with a new price for the remainder of the position.
The CFD broker will instruct the client that there is insufficient volume in the market for their order and fill at the next level on their book, therefore filling their order at different levels which effectively works out to be an average fill – the requoted price. It is important to note that requoting will only take place in a market maker environment whereby effectively the provider may manipulate the spread on a particular stock or tradable contract after the client has placed an order.
The issue with requoting which at first glance seems beneficial is that the requoted price is not necessarily reflective of the order book in the underlying market price so it is essential that the client knows that their broker is dealing in guaranteed market prices. If not then there is a chance that they are going to be disadvantaged on their fill. In this situation the broker will be showing their own market depth which they may manipulate in their favour depending on market conditions at the time. Therefore the average fill you will receive may potentially be worse than the fill you would get using a DMA (Direct market access) broker.
Historically this method of filling client’s orders was cheaper in terms of funding and commission as compensation for the potentially worse fill over DMA providers, however with the benchmark commission rate being 0.1% it will be the DMA providers who offer the most competitive package in terms of costs incurred.
On the flip side of market makers are the DMA providers who will never requote. Here the client will effectively take out the underlying asset in the market therefore always getting the market price regardless of conditions. The real benefit comes from the transparency in the market, working off the ‘fill or kill’ method, if the market is not good in a size it will be rejected, however clients have the option of working a trade at a set level in the market as well as receiving an average price to deal based on the underlying physical market. This ensures that CFD prices are identical to the cash market and volumes listed on the ASX.
Whilst it is important to note that the practise of requotes really only applies to a client order larger than the market size, it can provide the client with an instant fill. However the price requoted will be at a worse price than initially quoted.
Harley Salt, Senior Sales Trader, IG Markets
Disclaimer: The views expressed in this article are those of Harley Salt, a representative of IG Markets and is not intended as general advice. This does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.