How Hedging the CFD´s

Discussion in 'Forex Brokers' started by ttrade, Nov 6, 2012.

  1. ttrade


    I ask me a question. "How the CFD Brokers hedging the risk in CFD´s"
  2. They execute a position in the underlying security, usually futures for index CFDs, or the stocks themselves on stock CFDs.

    CFDs are insanely profitable for brokers because they pad the price spread (spread markup) of the underlying market (if the emini S&P500 futures contracts are at 0.25 points, it's common to see SP500 CFDs with a 0.50 spread or higher.) Plus (in a lot of cases) charge you a commission atop of it.

    Not to mention they provide you greater leverage than you can find in the underlying markets, allowing smaller traders to execute larger (and much more profitable) orders than they would be able to otherwise. And then they charge you interest on that leverage to make even more profit.

    Or.. they internalize. Should other traders on their book want to open opposite positions around the same time they'll likely just internalize the order and capture the spread as additional profit.

    Or.. they don't hedge at all. Usually they'll identify traders that suck and take on couterparty risk to profit from their loss. Not just traders that suck, but traders who fit patterns that suggest they'll be trading with a negative expectancy. A lot of new traders, and gamblers, often fall into this bucket.

    (Some areas of the world don't quite allow this.. like in Australia where all orders must be centrally cleared and their CFD market is DMA based like a stock exchange would be.)

    So in all, there's not much sense in trading CFDs if you have access to the underlying markets and are sufficiently capitalized. But if you enjoy gambling and making brokers rich, please continue to trade the crap out of them. :D