How It Works
The concept of trading is simple. If you think a market is set to rise you ‘buy’ or if you think the market will fall you ‘sell’. The difference between the sell price (bid) and buy price (offer) is known as the ‘spread’
When you trade you are not physically buying shares, but instead taking a position on whether a price will rise or fall. Find out more below.
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Spread Trading is a leveraged product. Unlike a traditional share transaction, a client only has to fund a percentage of the value of the position. This characteristic means that clients can have greater exposure to a product and/or a more diverse exposure across products but, by its nature, Spread Trading is a high risk activity and should only be used by individuals with investment experience. If in doubt, a potential client should seek professional advice.
Spread Trading enables clients to speculate on the world’s financial markets in local currency which takes away the costly headache of any currency conversion required for other comparative products. Irrespective of whether an individual thinks markets are likely to rise or fall, Spread Trading provides a perfect vehicle for a person to efficiently back their judgement in Naira.
- Ability to speculate on a wide range of asset classes including Indices, FX and Commodities
- Ability to a profit from rising and falling markets
- Ability to trade using leverage (a client can magnify exposure)
- Ability to trade foreign products in Naira which negates FX exposure
- Ability to trade in (typically) smaller size than is conventional in the Underlying markets
- Ability to manage risks with a variety of risk management tools
- Can be used to hedge exposure to physically owned assets
- No commission. All costs are included in the Spread.
MeriFX has agreements with a number of market participants who stream live data from exchanges and market counterparties around the world. The MeriFX team use this pricing data to quote Spread Trading prices. The Spread Trading price tracks the movements in the Underlying market price. For instance, if the Underlying market price rises 1% then MeriFX’s Spread Trade price will rise simultaneously and proportionately.
Each Spread Trading market price has a ‘Spread’ as the name suggests. The Spread represents the difference in points between the buying price (the higher price, the Offer price) and the selling price (the lower price, the Bid price) of a market. Many of the products that can be traded with MeriFX have a fixed Spread but some (mostly individual shares) have a variable Spread which is dependent on the real bid-offer Spread in the Underlying market.
If the client thinks the market is going to rise he will typically ‘Buy’ (Go higher than) the Offer price, if the client thinks the market is going to fall he will typically ‘Sell’ (Go lower than) the Bid price.
The ‘Stake’ is the amount per Point movement in the market which the client wishes to trade. Instead of buying or selling a number of shares, the client nominates a Stake for each trade. The Stake represents the value of each Point movement in the Underlying instrument where the Point refers to the unit of price movement in the Underlying instrument as stipulated for that market. For example, for a UK share, a point will usually equate to a penny movement in the share price or for a FX product it may be the 4th decimal. The client decides their Stake depending on their risk appetite and available funds. For every Point the market moves in the client’s favour the profit & loss on the trade will improve by the amount of the Stake. For every Point the market moves against the client the profit & loss on the trade will worsen by the amount of the Stake.
Example of a Buy trade (going higher than the market)
A client decides to trade the FTSE 100 Index. MeriFX quote a price of 6500-6502. The client thinks that there is good news in the market and believes that the Index will rise. The client decides to Buy ₦ 1000 per Point at the Offer price (the higher price), 6502. Later in the day the client is proved to be correct and the FTSE has risen. MeriFX are now quoting 6552-6554. The client decides to close his position which he does by Selling the same Stake at the Bid price (the lower price), 6552. The profit and loss on a Buy trade, otherwise known as a Long position, is calculated using the following formula:[Closing level – Opening level] x Stake = Returns
So in this case:[6552-6502] x ₦ 1000 = ₦ 50000 (i.e the client has profited ₦ 50000 on the trade)
Example of a Sell trade (going lower than the market)
A client decides to trade spot Gold. MeriFX quote a price of 1320.0-1320.4. The client thinks that the easing of global inflation concerns will lead to a fall in the price of gold. The client sells ₦ 500 per Point at the Bid price (the lower price), 1320.0. The client proves to be wrong and the following week MeriFX are now quoting 1330.0-1330.4. It is important to note that spot Gold is traded to one decimal place ie each Point represents a 10 cent movement in the Underlying. The client decides to take a loss and close the position which he does by Buying the same Stake at the Offer price (the higher price),1330.4. The profit and loss on a Sell trade, otherwise known as a Short position, is calculated using the following formula:[Opening level- Closing level] x Stake = Returns
So in this case:[13200-13304] x ₦ 500 = – ₦ 52000 (i.e the client has lost ₦ 52000 on the trade)
In essence, the profit on a trade is calculated by multiplying the Stake by each Point the market moves in the client’s favour, but the opposite is true in that the loss on a trade is calculated by multiplying the Stake by each point the market moves against the client.
The Spread Trading product tracks the Underlying product from which it is derived exactly. For all intents and purposes, other than ownership, a Spread Trade replicates all the attributes of the Underlying market. So, if a dividend is payable on a share in the Underlying market then the dividend is also due to holders of long positions in Spread trades on that share. The same goes for all corporate actions that affect the price of the Underlying.
The characteristics of the product will come to the fore in the following section, ‘Trading with MeriFX’ which will hopefully answer any operational questions relating to the product.
Market Name – Refers to the Underlying market on which the Spread Trade is derived.
Spread – Details the Spread that MeriFX uses to quote Spread Trades. The Spread that we use during overnight hours are in brackets. For shares this is presented as a percentage of the share price which is added to the Underlying market price to derive the Quote.
Trade Per – Represents the relevant unit of the Spread Trade price to which a Point relates.
Initial Margin Requirement – This represents the cash amount that a client has to have on account to open a trade on the specific product. It can be expressed as a factor of the Stake or a % of the nominal value of the trade.
Trading Hours – Details the hours in which MeriFX offers a price on a specific Spread Trade. These times typically reflect the trading hours in the Underlying instrument’s market on which the Spread Trade is derived.
Guaranteed Stop Premium – This represents the extra cost to a client who opts to set a guaranteed stop loss.
MeriFX may amend the market information sheets from time to time to reflect changes in Underlying market conditions but we will always ensure that clients are updated with any changes.
All Orders will either be an instruction to Buy a Spread Trade at the Offer Price or to Sell a Spread Trade at the Bid Price.
MeriFX will treat all Orders as a Buy or a Sell instruction without reference to whether such Orders are intended to open or close or part close a Spread Trade. Any Orders made by a Client with reference to opening or closing or part closing a Spread Trade are not binding on MeriFX. It is the Client’s responsibility to ensure that an Order actually closes or opens a Spread Trade.
If a Client places an Order to open and the Client has an open position on that product, we will treat the Order as an Order to close the existing open position to the extent of the size of the Order and, if the Order is greater in size than the existing open position, then the existing open position will be closed in full and a new Spread Trade will be opened in relation to the excess size of the Order unless the Client has selected the “Hedging” button on the deal ticket. If this box is ticked we will treat the Order as an Order to open a new position in the product to run concurrently with the existing open position.
The Quote determines whether an Order has been filled and not the market price of the Underlying instrument.
It should be noted that the Quote may be higher or lower than the price for the relevant Underlying instrument on the Exchange or from the Liquidity Provider due to a number of factors, including without limitation, interest rate costs, Dividends, scrip issues, stock splits, competitor quotes or the weight of client business.
Example of Gapping
The client has a Long Position in PQR Ltd, having bought ₦ 500 at 20.32 with a Stop Loss Order set at 19.32. The price of PQR shares drifts lower and then gaps through the 19.32 level on the back of a profits warning. The first price that MeriFX can reasonably offer after the announcement of the profits warning is 19.07-19.10. Rather than the client’s position being closed at the Stop Loss Order level of 19.32 it is closed at 19.07, meaning that, due to this Gapping the client has incurred a loss which is ₦ 12500 more than the loss the client would have otherwise suffered had the position been closed at 19.32.
The client is concerned about market volatility and wish to guarantee the level at which the trade is closed if the market falls. The client places a GS Order at 41.00. The cost of placing the GS Order is ₦ 6630 (500 x 4420 x 0.3%).
The price of BHP drifts lower and the market closes. Whilst the market is closed there is much negative sentiment in global markets and as a result BHP reopens lower at a price of 39.99-40.00. The GS Order is executed at the guaranteed level of 41.00 and the client incurs a trading loss of ₦ 160000 [(4420-4100) x 500]. If the client had set a Stop Loss Order as opposed to a GS Order, the trading loss incurred in closing the position at the first available market price of 39.99 would have been much greater at ₦ 210500 [(4420-3999) x 500].
Trailing Stop Order
A Trailing Stop Order is a type of Stop Loss Order and is an instruction by the client to close an open position at a price less advantageous than the Quote at the time it is placed but it is designed to track the movement of profitable positions and move accordingly.
The client may set a Trailing Stop Order at the following times:
When the client places a trade which then acts as a Trailing Stop Loss Order instruction to close the open position; or
When the client amends a Stop Loss Order to a Trailing Stop Order
Trailing Stop Orders are subject to Gapping.
Example of a Trailing Stop Order
The Spread Trading price for the FTSE 100 is 6399-6400. The client believes that the FTSE 100 will rise and so Buys ₦ 1000 per Point at 6400. The client would like the Stop Loss Order affiliated to the position to track a rise in the index and so opts for a Trailing Stop Order, which is set at 6350. The client decides on a Trailing Step which has to be set at a minimum of 1. In this example let us assume that the client decides to set a Trailing Step of 10. This means the Order moves in increments of 10.
The price of the FTSE 100 drifts higher. When the Bid Price of Our Quote reaches 6410, the level of the Trailing Stop Order moves up 10 Points, to 6360. For every further 10 Point move higher in the Bid Price of Our Quote above 6410 there is a 10 Point move higher in the level of the Trailing Stop Order. The price of the FTSE 100 continues to drift higher and the Bid Price of Our Quote reaches a high of 6492, by which time the level of the Trailing Stop Order has moved up to 6440, before the price starts falling. As the FTSE 100 price falls, the level of the Trailing Stop Order stays set at the highest level it reached, 6440. The price continues to fall and the Bid Price of Our Quote falls to 6440 at which point the Trailing Stop Order is activated and the client realises a profit of ₦ 40000 [(6440-6400 x ₦ 1000].
(1) it has been cancelled by the client or by MeriFX; or
(2) the Order is executed by MeriFX; or
(3) MeriFX no longer provide a Quote for that particular product.
In addition, Limit Orders, Stop Loss Orders, Trailing Stop Orders and GS Orders will no longer be in effect if the open position to which such Order relates is closed by the client or by MeriFX in accordance with the Client Agreement.
Good until Cancelled (GTC)
This means that the Order the client has placed will remain in effect until cancelled by the client. Orders to Open and Limit Orders default to GTC Orders.
Good until Date/Time
This means that the Order the client has placed will remain in effect until the end of the date and time that the client set.
Unless otherwise stipulated, no Order is guaranteed and is subject to Gapping which means that the client’s Order may get executed at a worse price than set.
We will not be obliged to execute any Order which would result in the client having insufficient Trading Resources to cover the Initial Margin Requirement.
Here are a few examples for fixed factor markets:
Client buys ₦ 5000 per point of Wall Street at a price of 16,000.
Margin required = 75pts
Spread = 4pts
(Margin factor) x (Stake) + Spread x Stake = ₦ 395000
The Client needs ₦ 395000 in Trading Resources to open the above position.
Client buys ₦ 1000 per 0.1 per point of Gold at a price of $1,300
Margin required = 200pts
Spread = 4pts
(Margin factor) x (Stake) + Spread x Stake = ₦ 204000
The Client needs ₦ 204000 in Trading Resources to open the above position.
Here are a few examples for equities:
Client buys ₦ 1000 per point of HSBC at a price of 600p
Margin required = (1000 x 600)* x 5% (Margin Percentage) = ₦ 30000
The Client needs ₦ 30000 in his account to open the above position.
Client buys ₦ 200 per point of BG Group at a price of 1100p
Margin required = (200 x 1100)* x 5% (Margin Percentage) = ₦ 11000
The Client needs ₦ 11000 in his account to open the above position.
Every open position, unless accompanied by a Stop Loss Order, requires the client to deposit at least the IMR + Spread in to their Account in order to open the position and the trading platform holds at least the IMR for the position until it is closed.
The client is not able to open a trade unless the client has sufficient Trading Resources to meet the IMR. Trade requests are not part filled.
It is important to note that a Stop Loss Order set by the client is not guaranteed, it is subject to Gapping, an occurrence whereby the Quote moves from one price to the next price, through an order level. In such circumstances the client’s Stop Loss Order will be executed at the Quote based upon the first price that we are reasonably able to obtain in that Underlying instrument. This is the reason why 20% of the IMR is added to 100% of the Stop Loss Order to calculate Margin, to act as a buffer in the event of Gapping.
If a GS Order is placed as opposed to a Stop Loss Order, the system simply calculates the Margin as 100% of the GS Order. This is because there is no Gapping risk if the client decides to use a GS Order. The system will still use the IMR if it is a lesser amount than 100% of the GS Order.
The following three scenarios are used to illustrate how Margin is calculated:
Margin calculation when there is no associated Stop Loss Order
The client decides that the Wall Street Index is going to rise. The client Buys ₦ 1000 per Point of the Wall Street Index at 16000 and does not place an associated Stop Loss Order:
|Spread Trade Example||Long ₦ 1000 per Point of Wall Street at 16000|
|Wall Street Spread||4|
|Margin (IMR)||₦ (1000 x 75) + (4 x 1000)= ₦ 79,000|
The client needs ₦795,000 in Trading Resources to open the above position.
Margin Calculation with an associated Stop Loss Order
Using the above scenario, the client decides to place an associated Stop Loss Order at 15950:
|Spread Trade Example||Long ₦ 1000 Naira per Point of Wall Street at 16000|
|Stop Loss Order Level||15950|
|Margin Calculation||Distance = 16000-15950= 5020% of Margin Factor = 75 x 20% = 15Total Margin charged = 50 +15 = 65|
|Margin||₦ 1000 x 65 = ₦ 65,000 (as is less than IMR ₦ 79,000)|
The client needs ₦65,000 in Trading Resources to open the position in the above situation.
Margin Calculation with a GS Order
Following the same scenario, the client decides to place a GS Order at 15950 as opposed to a Stop Loss Order:
|Spread Trade Example||Long ₦ 1000 per Point of Wall Street at 16000|
|GS Order Level||15950|
|Margin Calculation||Distance =16000 – 15950= 50|
|Margin||₦ 1000 x 50 = ₦ 50,000 (as is less than IMR ₦ 79,000)|
The client needs ₦50,000 in Trading Resources to open the position in the above situation.
If the cash on the client’s account and the value of their open positions falls below the Margin required on their account, they will be required to fund the shortfall. In such circumstances the amount that they would have to pay would be sufficient to ensure that they have covered the Margin required to maintain all the open positions on their account.
MeriFX may contact the client to inform them that they are required to make an additional Margin payment, otherwise known as a Margin Call, but we are not obligated to do so. Our failure to contact and inform them of a Margin Call in no way negates their obligation to monitor their open positions and pay any Margin shortfalls when necessary.
We have the right to close out all open positions when the ratio of equity on a client’s account [Cash Balance + Open Position P&L] to Charged Margin falls to or below 20% of the Margin required to support those open positions].
All Spread Trades offered by MeriFX will be subject to an Overnight Financing charge. A debit or credit is made to the client’s account each day the client holds a Spread Trade position Overnight, including non-Business Days. Generally, if the client is Long of a Spread Trade Overnight then there would be a financing charge, and if the client is Short there may be a financing rebate. MeriFX take the notional Spread Trade value of a position and calculate a daily interest charge for that position. The formula used to work out financing charges is as follows:
Overnight Financing Formula
F = [(PU) x S x I]/365
F = Overnight Financing
P = Closing Price
U = Unit Risk
S = Stake
I = Applicable interest rate [Relevant Financing Rate +/- Financing Spread]
Applicable Interest Rate
The Applicable Interest Rate is the financing interest rate used to calculate Overnight Financing. The Applicable Interest Rate is calculated by taking the Relevant Financing Rate and adding or subtracting the Financing Spread.
Relevant Financing Rate (RFR)
The RFR is typically the benchmark cash rate of the country to which the currency of the Underlying instrument of the Spread Trade relates. For example, the RFR for a UK share Spread Trade is the Bank of England cash rate.
It should be noted that the RFR for an FX Spread Trade is different. The RFR for a FX Spread Trade is actually the interest rate differential between the two countries of the two quoted currencies in the FX pair (see below for more detail).
The Financing Spread is the interest charged/paid by MeriFX above/below the RFR. Financing Spreads are listed in the Market Information Sheets.
In order to calculate the Overnight Financing, we use our marked-to-market Closing Price for that end of day.
Overnight Financing is calculated using a 365 day count.
Overnight Financing: Non FX products
Example of Overnight Financing on a Share trade
A client Buys ₦ 1000 per Point of BG shares, which the client holds Overnight. The Bank of England Cash Rate is 1%. The Closing Price for BHP is £11.50. The Financing Spread is 2.5%. Using the equation above:
F = [(P / U) x S x I] / 365
Where Closing Price P=11.50, Unit Risk U=0.01, Stake S=1000. The applicable interest rate, I, is worked out as the Bank of England Cash Rate (1%), as it is a UK product, plus 2.5% as it is a Long Position, equalling 3.5%:
F = [(11.50/0.01) x 1000 x 3.5%]/365 = ₦ 110
This amount would be calculated after the close of business and ₦ 110 would be debited from the client’s account.
If you the client had Sold ₦ 1000 per Point the above example instead of Buying, the calculation would differ due to a different valuation of I, the applicable interest rate. As it is a Short Position, I is worked out as the Bank of England rate (1%) minus 2.5%, equalling -1.5%. The calculation would be as follows:
F = [(11.50/0.01) x 1000 x -1.5%]/365 = – ₦ 47
This amount would be calculated after the close of business and ₦ 47 would be debited to the client’s account. It is important to note that this is a debit to the client’s account and not a credit. Despite the fact that the client has an open Short position and may expect a credit to the account it is actually a debit due to the fact that the Bank of England rate is so low at 1%.
Overnight Financing: FX products
Although the formula for calculating Overnight Financing (F) is the same for FX as it is for other asset classes, it is important to note that the RFR is the interest rate differential between the two quoted currencies.
When holding an FX Spread Trade there is an interest rate benefit in holding the Long currency and a cost in being Short of the other currency. MeriFX then subtract our Financing Spread, which is usually 2.5%.
For example, if a client goes Long AUD/USD and the Australian RBA cash rate is 4.5% and the US Fed Funds rate is 0.5% then the RFR will be 4.0%. Our Financing Spread is then subtracted irrespective of whether you are Long or Short of the Spread Trade.
A client Buys ₦ 1000 per Point AUD/USD, which the client holds Overnight. The RBA rate is 4.5%, the Fed funds rate is 0.5% and the price of AUD/USD is 0.9258 at the time. Using the financing equation:
F = [(P/U) x S x I] /365
Where Closing Price P=0.9258, Unit Risk U=0.0001, Stake S=1000, applicable interest rate, I =[(4.5%-0.5%)-2.5%]=1.5%, as worked out by taking the RBA rate 4.5% , subtracting the FED funds rate (0.5%) and then subtracting our Financing Spread of 2.5%:
F = [(0.9258/0.0001) x 1000 x 1.5%]/365 = ₦ 380
₦ 380 would be credited to the client’s account.
If the client had Sold in the above example as opposed to Buying, the difference would be in the determination of I:
F = [(0.9258/0.0001)x 1000 x [(0.5%-4.5%)-2.5%]/365 = – ₦ 1649
As this is a negative figure, -₦ 1649 would be debited from the client’s account.
to place trades on their account;
to place Orders,open or amend existing Orders on their account;
to look at live charts of various markets;
access to other information relevant to their account such as cash balance and open positions
To place a trade on a particular device the client opens a trade ticket on the chosen market, selects the trade criteria and then presses the Buy or Sell button. If the trade is successful the client will receive a confirmation ticket will appear on the mobile screen and the details of the trade will then appear in the account area.
If an Underlying instrument to which a Spread Trade relates has been de-listed, we reserve the right to close all affected open positions at the Closing Price at our discretion.