Who is on the other side of your CFD trade?

When you buy a share on an exchange, the other side is another investor, and the venue is indifferent to your outcome — it earns fees either way. When you open a CFD, the other side is the broker itself. That structural difference is the last big idea in this course.

The two books

Brokers manage the risk they take from clients in two ways, and most use a mix:

• A-book (hedged). The firm passes the risk on, typically by taking an offsetting position with a liquidity provider or in the underlying market. Its revenue is the spread, commission and financing markup. It does not profit from your loss — it profits from your activity.
• B-book (internalised). The firm keeps the risk. Your loss is its revenue and your gain is its cost.

Internalisation is not automatically improper, and there are legitimate reasons for it: client flow largely offsets itself (one client long, another short), and netting internally is cheaper and faster than hedging every ticket externally. Firms disclose their approach and are supervised on how they manage the resulting conflict.

But the structure is what it is, and stating it plainly is not an accusation: in the internalised portion of the book, the firm's interests and the client's are directly opposed. That is a conflict of interest in the exact technical sense of the term, which is why regulators require firms to identify, manage and disclose it rather than pretend it away.

Where the conflict shows up mechanically

• The price. The broker quotes it. It is derived from an underlying market, but the spread applied is the firm's.
• The financing markup. A discretionary component of the daily cost, set by the firm on the full notional.
• Execution details. Slippage, requoting, and the price at which a close-out actually fills are all in the firm's operational hands.
• "Commission-free." Where there is no commission, the revenue is in the spread and the financing. Free naming rarely survives contact with a cost breakdown.

How to read a risk disclosure

Every regulated firm publishes the documents that answer these questions. Reading them is a general financial-literacy skill, useful far beyond this product:

1. The loss percentage. What is it, and what period does it cover? It's the headline number regulators mandate for a reason.
2. Who is the counterparty, and which entity are you contracting with? Same brand, different subsidiary, different regulator, different protections. This is in the client agreement, not the homepage.
3. Does the firm deal on its own account? The conflicts-of-interest policy and the order-execution policy answer this directly.
4. The close-out level and negative balance protection. At what equity percentage are positions closed, and can the balance go below zero for your entity and account type?
5. The full cost formula. Spread, commission, the financing rate and its markup, dividend adjustment percentages for long and short, inactivity fees, currency conversion.
6. Client money and compensation. Is client money segregated? Which investor-compensation scheme applies, up to what limit, and does it cover this entity? Segregation is not the same as owning an asset — a CFD is a claim on the firm, whatever cash sits alongside it.

If a document is hard to find, that itself is a data point. Regulated firms publish these; they're usually two clicks from the footer.

The honest closing frame

None of this says a broker is dishonest — the industry contains firms with long records, real supervision and published policies. It says something more durable: know the shape of the contract you're in, and know who profits from which outcome. That question applies to every financial product you will ever encounter, and this is simply the product where the answer is most direct.

Try it now

1. Find any regulated CFD provider's public risk warning and note the loss percentage and its date. Do not open an account — you are reading a public document.
2. Locate the firm's conflicts-of-interest and order-execution policies and find the sentence describing whether it deals on its own account.
3. Compute the all-in one-year cost of a hypothetical $50,000 notional position at a real benchmark plus a 2.5% markup — the latest SOFR fixing, below, supplies the rate — and compare it with the cost of simply owning $50,000 of the same asset. Write both numbers down. The comparison is the literacy.