Spreads Grab the Headlines, but Infrastructure Gets the Institutional Flow

Financial market technology has become an increasing priority for institutional traders as they recognise the role of infrastructure in delivering the best pricing and access.

Institutional trader analysis suggests that they are less concerned about index CFD costs than the quality of the execution infrastructure. Institutions need to demonstrate that execution was competitive and expect access to APIs, algorithmic execution, automated hedging and integration with order management, execution management and transaction cost analysis.

London's trading industry is coming home!

While standard transaction cost analysis remains relevant, technology has clearly overtaken simple spread size as the main competitive differentiator, according to Filip Kaczmarzyk, head of trading and XTB board member.

“In a market saturated with liquidity providers offering tight spreads and deep pools, acquiring or building tailored trading technology is critical,” he adds. “Proprietary development offers the best strategic fit despite high capital investment, as third-party solutions rarely meet institutional requirements fully.”

Tight Spreads Are No Longer Enough

Technology has become a bigger competitive differentiator than spreads, not because spreads and liquidity matter less, but because technology increasingly determines whether you can actually deliver them, agrees Jason Hughes, general manager at IC.

“Institutional clients look at the whole execution infrastructure: pricing aggregation, latency, smart routing, failover, risk controls, market data quality and the ability to hold up during stress,” he explains. “Increasingly, that also means resilience and security, redundancy, uptime during outages and protection against cyber risk, which sit alongside liquidity and connectivity in the same conversation about market structure.”

Two brokers can access very similar liquidity, yet produce very different client outcomes depending on how their technology manages those prices and orders. This is especially visible in index CFDs during volatile markets or futures rolls, where the quality of the aggregation and pricing technology determines whether clients see an orderly market or unnecessary gaps and dislocations.

Institutional clients are more focused on who can consistently deliver the strongest overall market structure and execution architecture, adds Hughes.

When Technology Determines Execution Quality

Sam Meisel, financial trader at Spreadex, observes that technology is much harder to commoditise and can have a much greater impact on realised execution quality. That includes platform reliability and speed, uptime during periods of market volatility, the resilience and sophistication of pricing and risk systems under stress, and the quality of the tools and data surrounding the trade.

“A tight advertised spread is of limited value if it isn't consistently available, or if it widens or disappears precisely when markets are moving and clients most need to trade,” he says.

“Conversely, a slightly wider spread can be more valuable if it is supported by infrastructure that remains reliable and delivers consistently in real-world conditions.”

As a result, he sees technology becoming an increasingly important differentiator. “Ultimately, it determines whether pricing and execution are consistently deliverable in practice and that matters whether you're operating at retail, professional or institutional scale,” adds Meisel.

Technology is no longer just a support function but a key part of how institutions deliver better outcomes for clients, says Giovanni Sciortino, product owner for futures & options at Saxo Bank, who refers to AI transforming how investors discover opportunities, analyse information and make investment decisions.

Transparent price construction is another key consideration. “We take fairness of pricing very seriously and as such continuously assess the reliability and quality of the third-party price feeds used to construct our prices,” he says, adding that the firm carries out quarterly and annual reviews of the quality of the prices that clients have received on their trades.

Competitive Pricing Is Just the Starting Point

Chris Cheverall, head of UK at CMC Markets, accepts that technology is becoming a greater competitive differentiator but says it should not be viewed in the same way as spreads or liquidity.

“Competitive pricing remains a baseline requirement,” he says. “The difference is whether a broker can deliver that pricing consistently, at scale and across different market conditions.”

Cheverall agrees that for institutional clients, technology now encompasses resilient connectivity, low-latency execution, reliable APIs, real-time market and account data, automated risk controls and reporting, adding that these capabilities are particularly important as trading hours extend and market-moving events can occur around the clock.

He describes index CFD-specific transaction cost analysis methodology as a developing area but says a genuinely robust approach needs to go beyond conventional equity transaction cost analysis.

“Index CFDs are OTC, leveraged products that often trade across extended hours,” continues Cheverall. “A methodology designed for cash equities may therefore miss important factors, including the quality of the underlying reference market, spread paid, available liquidity and depth, order size, slippage, latency, volatility, time of day and the cost of holding a position. There is not yet one universally accepted standard, so brokers that provide transparent, instrument-level and repeatable analysis can differentiate themselves.”

The value here lies not simply in producing a bespoke report but in giving institutional clients the data they need to assess execution quality over time and make informed comparisons.

The scrapping of MiFID II’s RTS 27 and RTS 28 reporting requirements removed one of the few regulatory mechanisms designed to improve transparency around execution quality. The former required execution venues to publish data on execution quality, while the latter required investment firms to disclose their top execution venues and arrangements. Although these reports had limitations in their usefulness and comparability, they provided a common framework for assessing where and how trades were executed.

Why Index CFDs Need a Different Cost Analysis

Index CFD pricing isn't always a simple pass-through of an exchange price – depending on the product and session, it can be based on the futures contract, a cash index reference or a derived fair value calculation incorporating interest rates, expected dividends and time to expiry.

“Working closely with liquidity providers and market data providers is essential to understand those methodologies, particularly how pricing behaves around futures rolls, dividend adjustments and periods when the underlying cash market is closed,” says Hughes.

During volatile periods, the spread in the underlying cash market widens as liquidity thins out. “Our spread is calculated as a fixed percentage of the price and added on either side of the underlying spread, so our component stays the same in percentage terms,” says Miesel. “What changes is the underlying spread it sits on top of, so the overall quoted spread widens in line with the market.”

Hughes agrees that there is growing scope for differentiation because conventional equity transaction cost analysis can miss important characteristics of an index CFD and notes that a proper framework needs to separate movements in the underlying market from movements created by the broker's own pricing methodology or liquidity sources.

Applying an off-the-shelf equity transaction cost analysis framework can produce benchmarks that appear rigorous but don't necessarily measure what matters in practice.

“A more appropriate methodology needs to take account of how the underlying reference price is constructed, how spreads and liquidity are actually available to the client and the quality of the execution itself,” says Meisel. “That can include metrics such as partial fills, rejects and requote frequency.”