How do CFD brokers make money?

CFD trading platforms have three potential sources of income, trading revenue (commissions or spreads), financing charges and the b-book.

Trading Revenue

It’s common for a broker to charge a commission or widen the spread around the market. If a broker offers DMA, CFD trading commission will be added post-trade, otherwise, CFD commission will be built into the spread around the underlying market bid/offers.

Financing Charges

CFD positions are held open overnight then a financing charge is applied and is typically set at a percentage above and below an interest rate benchmark. For example, funding might be set at + or – 2.50% over LIBOR. The mark-up over the benchmark creates another source or venue for the CFD broker. CFD traders pay to fund long positions overnight, and when interest rates are normalised, they can receive funding on their short positions. However, with interest rates at close to or even below zero, that tends not to be the case.

B-Book

When you open a CFD position, your CFD broker takes the opposite or opposing side of the trade. Some choose to hedge that position in the market, other don’t So, for example, if you choose to open a long (buy) position on 5,000 shares of ABC Inc. at $10.00 per share, your broker will incur a short position in 5,000 shares of ABC Inc. at $10.00 per share.

You and your broker are the counterparties to the CFD trade. The profit and loss, or exchange of cash flows in the trade, will be between those two counterparties and no one else.

If the broker opposes its client’s positions and does not hedge that exposure then the broker’s trading P&L will be the inverse of its clients, such that it will make money if they lose and lose if they profit. Whether the broker hedges its position or opposes them is a commercial decision. However, if we assume that brokers hedge, then having written a CFD to their client, the broker now has an equal and opposite position to them – shorts to their longs and longs to their shorts. In our hedged example, the broker will enter the exchange-traded market and trade against their position by selling stock against a long position (a client short position) or buying stock against a short (a client long position). If the broker purely acts as an agent however, then they will not hedge against a client’s short position in this way. Rather, they will sell stock in the market and borrow the stock from a third party, for a fee, to make delivery/settlement of the physical stock. If a stock is in demand, then additional fees may be incurred in borrowing the stock, and these may be passed on to the end client.