What Are Synthetic Indices? A Complete Guide for Brokers

Synthetic indices have emerged as one of the most exciting innovations in online CFD trading, offering brokers a unique way to differentiate their platforms and provide clients with 24/7 trading opportunities. But what exactly are synthetic indices, and why should your brokerage consider adding them to your product lineup?

In this comprehensive guide, we'll break down everything brokers need to know about synthetic indices—from how they work at a technical level to their business benefits, regulatory considerations, and integration process. Whether you're exploring synthetic indices for the first time or evaluating providers, this guide will equip you with the knowledge to make informed decisions.

What Are Synthetic Indices? Definition & Core Concept
How Synthetic Indices Work: The Technical Foundation
Types of Synthetic Indices Explained
Why Brokers Offer Synthetic Indices: 8 Key Benefits
Synthetic Indices vs Traditional CFDs: Key Differences
Regulatory Considerations for Offering Synthetic Indices
How to Integrate Synthetic Indices Into Your Platform
Conclusion: Are Synthetic Indices Right for Your Brokerage?

1. What Are Synthetic Indices? Definition & Core Concept

Synthetic indices are simulated financial markets that mimic the behavior of real-world indices but are not derived from actual underlying assets. Unlike forex pairs (which track real currency exchange rates) or stock CFDs (which follow actual stock prices), synthetic indices are generated entirely by algorithms—specifically, cryptographically secure Random Number Generators (RNGs).

Think of them as "video game markets" for trading: the price movements follow defined statistical rules (like specific volatility levels or periodic spikes), but they're completely independent of economic news, central bank decisions, or geopolitical events.

Key Characteristics of Synthetic Indices

•Algorithmically Generated: Prices created by RNG algorithms, not real market data
•24/7 Trading: No weekends, holidays, or market closures—continuous operation
•Defined Characteristics: Each index has predictable statistical properties (e.g., a fixed volatility index might maintain 75% annual volatility)
•No External Influence: Immune to news events, economic data releases, or black swan events
•Infinite Liquidity: No slippage, no requotes—every order executes at quoted price

2. How Synthetic Indices Work: The Technical Foundation

At the heart of every synthetic index is a Random Number Generator (RNG)—but not just any RNG. Reputable synthetic indices providers use industry-leading algorithms to ensure fairness, unpredictability, and cryptographic security.

The Price Generation Process

Step 1: Initial Parameters

Each synthetic index is defined with specific parameters—for example, a fixed volatility index might have a target annual volatility of 75%, while a spike index might have an average of 1 spike per 1000 ticks.

Step 2: Tick Generation

The RNG generates price movements (ticks) based on the defined statistical model. For fixed volatility indices, this follows a geometric Brownian motion with specific drift and volatility coefficients. For spike/dip indices, the RNG determines when upward spikes or downward dips occur.

Step 3: Feed Distribution

Generated prices are distributed to brokers via ultra-low-latency real-time data feeds, delivered through redundant infrastructure across multiple global data centers.

Step 4: Client Trading

Traders see the prices on their MT4/MT5 platform and place orders just like they would for forex or stocks. Orders execute instantly at the quoted price with no slippage.

Ensuring Fairness: Third-Party Audits

Reputable synthetic indices providers undergo regular third-party audits to verify the randomness and fairness of their RNG systems. These audits test for statistical biases, predictability, and adherence to declared parameters—similar to how online casino RNGs are certified. Brokers should always ask for audit reports when evaluating synthetic indices providers.

3. Types of Synthetic Indices Explained

There are several categories of synthetic indices, each with unique characteristics that appeal to different trading strategies:

Fixed Volatility Indices

These indices simulate markets with constant, defined volatility levels. Common configurations include 10%, 25%, 50%, 75%, 100%, 150%, and 200% annual volatility, allowing traders to select their preferred risk and price movement characteristics.

Best For: Traders who want predictable volatility for strategy backtesting, algorithmic trading, or those seeking specific risk levels. Ideal for volatility-based strategies.

Fixed IV + Spike/Dip Indices

These indices combine fixed volatility with periodic directional spikes (upward) or dips (downward) at statistically defined intervals. Common configurations include spikes or dips occurring at average intervals of 150, 300, 500, or 1000 ticks. The frequency, magnitude, and direction are fully configurable.

Best For: Scalpers, pattern traders, and those seeking opportunities from sudden price movements. Very popular with retail traders seeking volatility events.

Fixed Tick Size Indices

Indices with precisely controlled minimum price movement increments. Available in multiple variants (0.1, 0.2, 0.3, 0.4, 0.5, etc.), these provide predictable price step behavior and are ideal for strategies requiring exact pip movements.

Best For: Scalpers requiring precise entry/exit points, range traders, and algorithmic strategies built around specific tick movements.

4. Why Brokers Offer Synthetic Indices: 8 Key Benefits

1. 24/7 Revenue Generation

Unlike forex (closed weekends) or stocks (closed evenings and weekends), synthetic indices trade continuously. This means clients can trade—and you earn spreads/commissions—at 3 AM on Sunday or during Christmas. No more dead periods.

2. Product Differentiation

In a crowded CFD market where most brokers offer identical forex pairs and stock CFDs, synthetic indices make you stand out. They're a unique selling proposition that attracts curious traders and those burned by traditional market volatility.

3. Simplified Risk Management

No exposure to geopolitical shocks, flash crashes, or central bank surprises. Your risk management becomes more predictable since synthetic indices follow statistical models rather than real-world chaos.

4. No Liquidity Concerns

With synthetic indices, there's infinite liquidity. You'll never face the "thin market" problem where client orders can't be filled, or where you need to manage inventory from an LP.

5. Attract Algorithmic Traders

The predictable statistical properties of synthetic indices make them ideal for algo trading and backtesting. You can attract a sophisticated client segment that values these characteristics.

6. Flexible Markup Structures

Most synthetic indices providers offer transparent base spreads, allowing you to add your own markup. This pricing flexibility helps you balance competitiveness with profitability.

7. Appeals to Emerging Markets

Synthetic indices have gained massive popularity in regions like Africa, Southeast Asia, and Latin America, where traders seek alternatives to traditional instruments. If you target these markets, synthetics are a must-have.

8. Quick Integration & Low Overhead

Integrating synthetic indices into MT4/MT5 is typically faster than onboarding traditional LPs. Most providers offer plug-and-play solutions with 10-14 day deployment timelines. Learn more about our integration process.

5. Synthetic Indices vs Traditional CFDs: Key Differences

Aspect	Synthetic Indices	Traditional CFDs (Forex, Stocks)
Price Source	RNG algorithm	Real market data (exchanges, LPs)
Trading Hours	24/7/365—no closures	Market-dependent (weekends/holidays closed)
Volatility	Predictable, defined by index type	Variable, influenced by news/events
Liquidity	Infinite—no slippage	Varies by instrument and market conditions
Gap Risk	Zero (continuous operation)	Weekend gaps, news gaps
Broker Risk Exposure	Statistical risk (if B-Book)	Market risk, LP counterparty risk
Client Appeal	Novelty, 24/7 access, algo-friendly	Familiarity, fundamental analysis

6. Regulatory Considerations for Offering Synthetic Indices

Important: This is not legal advice

Always consult with qualified legal and compliance professionals before offering synthetic indices. Regulations vary significantly by jurisdiction.

How Are Synthetic Indices Classified?

In most major jurisdictions, synthetic indices are classified as CFDs (Contracts for Difference) and fall under existing CFD regulations:

EU/UK (ESMA/FCA): Synthetic indices are treated as CFDs subject to leverage limits (1:30 for retail), negative balance protection, and marketing restrictions.
Australia (ASIC): Similar CFD treatment with disclosure requirements and product intervention powers.
Offshore Jurisdictions: More flexible, but still require appropriate disclosures that synthetic indices are simulated markets.

Are Synthetic Indices Considered Gambling?

This is a common concern. When properly structured, synthetic indices are clearly financial instruments, not gambling, because:

• They involve leverage and margin (financial product characteristics)
• Traders can use technical analysis and strategies
• Proper risk warnings and disclosure materials are provided
• The RNG is audited for fairness (not a "house edge" casino model)

However, some ultra-conservative regulators may still scrutinize synthetic indices. Always ensure your disclosures clearly explain that these are simulated markets and not based on real underlying assets.

7. How to Integrate Synthetic Indices Into Your Platform

Step 1: Choose a Synthetic Indices Provider

Evaluate providers based on:

• Uptime SLA: Look for 99.9%+ guarantees with financial penalties
• Latency: Sub-10ms execution for quality client experience
• Transparency: Clear pricing, audited RNG, and no hidden fees
• Support: 24/7 technical support with fast response times

Learn about Synthetics.trade's liquidity offering →

Step 2: Technical Integration

Most brokers use MetaTrader 4 or 5. Integration typically involves:

Receiving API credentials and documentation from your provider
Installing a bridge or gateway plugin on your MT server
Configuring symbol specifications (spreads, leverage, margin requirements)
Testing in a sandbox environment
Going live with monitoring and client education

Typical timeline: 10-14 business days for standard integrations. Explore our broker solutions →

Step 3: Client Education & Marketing

Synthetic indices are new to many traders. Invest in:

• Educational webinars explaining how synthetic indices work
• Demo accounts where clients can practice without risk
• Strategy guides (e.g., "How to Trade Boom & Crash Indices")
• Transparent risk disclosures about simulated markets

8. Conclusion: Are Synthetic Indices Right for Your Brokerage?

Synthetic indices are not a replacement for traditional CFDs—they're a complementary offering that addresses specific client needs and business goals:

Synthetic Indices Are Ideal If:

✓ You want 24/7 revenue generation
✓ You need product differentiation
✓ You target emerging markets (Africa, Asia, LATAM)
✓ You want simplified risk management
✓ You serve algorithmic traders

Consider Carefully If:

• Your clients demand only "real markets"
• Your regulator has expressed concerns about synthetics
• You operate in jurisdictions with gambling law ambiguity
• You lack resources for client education

For most brokers, the answer is yes—add synthetic indices, but as part of a diversified product lineup alongside forex, commodities, and stock CFDs. The 24/7 nature, predictable characteristics, and unique appeal make them a valuable addition that can drive client acquisition, retention, and revenue growth.

Ready to Explore Synthetic Indices for Your Brokerage?

Synthetics.trade offers enterprise-grade synthetic indices liquidity with 99.99% uptime, transparent pricing, and full integration support. Request our technical guide and pricing information.

Schedule Consultation View Solutions

About the Author: This guide was created by the Synthetics.trade team, a leading B2B provider of synthetic indices liquidity serving 200+ brokers globally. With 4+ years of experience and 99.99% uptime, we're committed to helping brokers succeed with synthetic indices.