Perpetual CFDs: how they work, what they cost and when to trade them

The number of trading instruments available continues to grow, with perpetual CFDs one of the latest additions to the derivatives list. With futures, options, CFDs, tokenised stocks, and now perp CFDs, it is important to understand why you would want to use on over another.

It is certainly better to have a few instruments up your sleeve for when your trading plan calls for them. So let’s get you up to speed with the world of perpetuals; when they make sense, how to compare fees, and how to trade them.

What is a perpetual CFD?

A perpetual CFD gives CFD-style access to a market designed to have no expiry, enabling 24/7 trading and a weekly funded rate, without owning the underlying asset.

Perpetual: describes the market structure in this case. Traditional futures contracts have an expiry date, where a February future eventually reaches February and expires. If you still want the exposure, you need to move into another contract. A perpetual market removes that expiry.

CFD (or contract for difference): an agreement between you and your broker based on the movement in the price of another market. You don’t buy the underlying asset but instead, the profit or loss on your CFD position changes as the reference price moves.

At first glance, a perpetual CFD might look like another version of a normal CFD. You can trade long or short, you use margin rather than paying the full value of the position, and you never own the asset you are trading. But there are some important differences that can change how and when each one is used.

A perpetual CFD gives you CFD-style access to a market designed to keep trading without an expiry date. That can mean 24/7 trading, no futures rollover to manage and a funding rate that is fixed for the week ahead rather than continually resetting throughout the day.

For the right trade, those are meaningful advantages. But for others, you may simply be paying a recurring funding cost for flexibility you never needed. It comes back to having a clear trading plan before you place the trade, that way you can pick the right choice for what you have in mind.

If you intend to stay in a trade for as long as the trend remains in tact, it doesn’t necessarily make sense to add a date to that. If on the other hand you are taking a seasonal call on a January move, and do not intend to be in a position after a certain date, a specific contract can make sense. Again, a trading plan will tell you which you need.

Perps remove the expiry date

With a perpetual CFD, there is no contract month to monitor and no quarterly roll just because the calendar tells you to do it. That can make perpetuals particularly attractive when the duration of your trade is uncertain.

You might hold for six hours, or two weeks, or you might remain in the position until a particular momentum indicator changes direction. Whilst the instrument does not impose an expiry date on the idea, it is important we don’t confuse no expiry with free to hold forever.

The longer you hold a perpetual CFD, the more important its funding cost becomes.

How funding works

Native perpetual futures markets usually use a funding payment between longs and shorts to keep the perpetual contract reasonably close to its reference price, but those funding rates can change frequently.

If you’ve traded perpetuals before, you may have noticed that a position that initially looks inexpensive, can become much more expensive when positioning becomes heavily one-sided.

There are a few ASIC regulated brokers offering perpetual CFDs, with Pepperstone leading the way. We are going to use their offering as our example case throughout for consistency, and because they have made the comparison a little easier.

The broker has made the funding mechanism more predictable, by publishing a funding rate for the week in advance and applying the resulting adjustment daily as a swap without a broker markup. This way, you know the exact rate being used for the week ahead, and can play accordingly.

Cost Example: Regular vs PERP CFD

Pepperstone calculates financing on many share and index CFDs using an interbank/reference rate plus or minus its financing charge. The precise calculation differs by asset class, but if we take SpaceX shares as an example that can be traded as both instruments, the CFD calculation on this day is reference rate+2.5%, which would be 6.37% p.a.

Closing price × trade size × (reference rate + Pepperstone charge) ÷ 360

At this rate, a $10,000 CFD position (SPCX.US CFD) would work out to $1.77 per day, or $12.39 for the week (if the rate was consistent across a 360 day calendar), plus the commission of A$0.02 per share each side. That works out to 0.1239%, plus round trip commission of $12.24 (assuming 5x leverage buying ~306 shares). For a one week hold then, you are looking at a 0.2463% cost.

The perpetual CFD on SPCX (SPCX.US.PERP) does not have commission to factor in, simply making the calculation comparison on the week the weekly funding rate displayed in platform. If that rate is less than 0.2463%, the PERP CFD will be cheaper to carry than the vanilla version. Although the comparison shifts some if a position is held longer, with the commission added into the regular CFD changing over time.

Perpetual CFD vs a normal CFD: where is the real difference?

As you can see, there are some subtle differences at first glance that are actually quite important to the overall structure and experience.

If you’re day trading during the ordinary market session and intend to be flat by the close, a normal CFD may well do everything you need. On the other hand, if you want access to weekend trading, or if you want access to a synthetic market that isn’t otherwise covered, the perpetual CFD earns its place.

If you are deciding between the two here are how they stack up from a trading perspective

Markets you couldn’t otherwise trade: Synthetics

This is where perpetual CFDs become more than an alternative way of trading gold or the NASDAQ, as they can also reference a synthetic market. This basically means that instead of taking its price directly from an exchange-traded asset, the reference price can be constructed using an external valuation, model or other defined methodology.

That opens the door to markets that simply don’t exist as ordinary listed securities yet, like pre-IPO stocks.

Let’s go back to the example of SpaceX. Whilst SPCX can now be traded as a CFD, or bought as a regular shares on the NASDAQ, prior to the June IPO, there was no public market for trading the company. Using Perpetual CFDs, Pepperstone offered SPCX.US-PERP as a 24/7 CFD before the listing, giving traders exposure to movements in a synthetic SpaceX valuation, with the pre-IPO trade spread-only.

That provided a way to express a view on one of the world’s most closely watched private companies before ordinary listed shares were available.

This is not like buying pre-IPO shares in the company, as you do not join the shareholder register, gain voting rights or stake a claim on stock at IPO. It simply allowed trading of a CFD whose synthetic reference price was designed to represent the market’s changing view of SpaceX’s value. But it does provide access to the synthetic valuation that otherwise might not be possible within a regulated trading platform here in Australia.

Different risk with synthetics

If you are trading an unlisted stock, or trading on the weekend, there is no continuously traded live public price where you can independently compare the quote. So you are relying more on your provider/broker than ever.

It is important to understand that when the underlying asset begins live trading after the weekend, or lists publicly in the case of pre-IPO shares, the synthetic market and the listed market do not have to meet perfectly.

There are clear upsides and downsides to trading when the primary exchange is closed, and this is a risk you need to understand and consider against the benefits.

Perpetual CFDs vs traditional futures

For an active or professional trader, exchange-traded futures can be excellent because they often offer deep liquidity, transparent centralised pricing and efficient margining. A perpetual CFD trades some of that exchange structure for simplicity, and in this case, a known funding rate for the coming week.

A futures contract’s price already reflects the economics of carrying the underlying exposure to its expiry. Depending on the market, that can include financing rates, expected income or dividends, storage costs, convenience yield and other factors.

Your costs can appear through the futures price itself, the bid/ask spread, brokerage and exchange fees, and if you want to maintain the exposure beyond expiry, you then have the costs of rolling from one contract to another.

When to trade a perpetual CFD

Simply put, I would use a PERP CFD when its structure solves a problem in my trade. That means if I want synthetic exposure, am unsure on when the trade will close in a momentum following move, or want to be able to react over the weekend. With all the volatility in oil markets this year, and social posts moving markets considerably over the weekends, this has become something I want more than in the past.

So if you are trading an ordinary market during ordinary hours and are planning to close out your position the same day, there may be very little reason to pay for all that extra flexibility. And if you’re investing rather than trading, this is not the instrument for you. Make the trading product fit your trade, not the other way around.

The bottom line

Perpetual CFDs are not going to replace ordinary CFDs or futures, but I’d like think they fill some of the gap in between. You get the flexibility that comes with CFDs; fractional positions, leverage, the ability to go long or short, and a familiar trading platform, combined with continuous trading, no expiry and clear funding.

This structure applied to certain pre-IPOs can provide opportunities you wouldn’t otherwise have with a regulated broker. There are other platforms that offer pre-listing exposure, but when you have to rely so heavily on your provider for pricing the market, trust becomes more important than ever.

Perpetual CFDs definitely have a place in our trading toolkit, but it certainly is not the product for all seasons, just like anything else. By having a clear trading plan, you can quickly identify which is going to be the optimal choice by asking yourself how long the trade is going to be open, whether you can trade it already in another form, and what the costs are going to be over the trade duration.

Once you’ve worked those things out, you have your answer as to whether PERPs are going to be a better fit than one of the more mainstream avenues. Choose the structure that best fits the trade, and ideally, have a broker that can fulfil most of your needs so you do not have to scramble around trying to open new accounts at the last minute when the need arises.