Synthetic indices are designed to simulate real-world markets. However, price movements in the synthetic market are immune to inflation, geopolitics, and macroeconomic news. Instead, synthetic indices rely on algorithms and random number generators to create prices with predefined volatility characteristics and market-like trends.
The model behind synthetic indices has raised multiple questions among traders. Some think brokers can manipulate synthetic markets, given that computer algorithms generate the price trends and volatility.
This article examines these concerns by reviewing how synthetic indices are generated and where misconceptions may arise and documenting facts.
Regular financial instruments generate their value from the underlying assets. The prices, volatility, and liquidity rates are determined by factors such as inflation, geopolitics, and supply and demand curves.
However, synthetic indices are the total opposite. They are built on mathematical models and secure random number generation that simulate market-like behavior. Behind the scenes are random number generators and algorithms that drive price changes according to predefined rules and volatility parameters.
These algorithms are designed to be unpredictable but develop consistent price trends, mimicking price and volatility patterns in the real markets. If you are interested in investigating synthetic indices and trading them, you can check here.
Are synthetic indices manipulated? The simple and correct answer is no. Many people think that synthetic indices can be manipulated because they are generated by computer algorithms. Some traders argue that brokers can manipulate the code to ensure the house wins.
Reading through various trading forums, there are questions on whether the broker can fake numbers to widen spreads, trigger losses, or delay trade execution. These claims are driven by the fact that there are no underlying assets, which characterize the conventional equity, forex, and commodity markets.
Most brokers and platforms offering synthetic indices state that the random number generators and algorithms used to produce price data are cryptographically secure and audited by independent third parties.
The purpose of the audits is to prove that, behind the scenes, the numbers cannot be manipulated. This is intended to produce fairness and dissipate fears from traders willing to invest in synthetic indices.
The audits check to see whether the algorithmic processes conform to expected standards of randomness. One thing you should note is that the depth of the audit reports often varies from broker to broker. However, external regulations from financial authorities further reinforce operational transparency because manipulation of pricing models could jeopardize regulatory standing.
Some traders say trading synthetic indices is akin to gambling because of the random and unpredictable price movements. The idea of speculating on price movements can resemble placing a bet based on direction rather than informed technical and fundamental analysis.
However, trading synthetic indices requires an understanding of how to read and interpret technical indicators. With appropriate understanding, discipline, and risk control, synthetic indices trading is considered financial speculation, not straight gambling.
The idea of trading indices can be seen as too good to be true by most people, including seasoned professional traders.
Are synthetic indices manipulated? No, they are not. However, you must ensure you find a broker that is licensed to alleviate any fears of manipulation.
