Cfd broker
Family X · Account mechanics
Not to be confused with cfd, cfd trading, forex broker.
CFD broker is a firm that offers contracts for difference to retail clients, acting as the counterparty to every trade rather than routing orders to an exchange. The client never owns the underlying share, index, commodity or currency; the position is closed by an offsetting trade and the net difference is settled in cash. Because the broker is the counterparty, the terms of the contract — margin, spreads, financing and any restrictions — are set by the broker and vary by jurisdiction and firm.
How the relationship works
A CFD broker quotes a two-way price for each instrument. The client takes the opposite side of the broker's quote, so the broker's book carries the client's loss as its gain before hedging. Many brokers hedge or internalise that exposure, but the legal counterparty remains the broker.
Key consequences:
- No exchange or central clearing house stands between the two parties, so the client bears the broker's credit risk.
- Prices are the broker's own quotes, which may track an underlying market but are not that market.
- Margin requirements, financing charges and trading hours are contractual terms set by the broker, not by an exchange.
Worked example: financing a long CFD position
A client buys 1,000 CFDs on a stock at a broker's offer of 250.00 pence. The broker charges overnight financing at a rate linked to a benchmark plus 2.5% per annum, applied to the full notional value. The position is held for 30 days.
The charge is deducted from the client's account regardless of whether the position is profitable, and the rate is a broker term that differs between firms and over time.
Regulatory variation
Rules governing CFD brokers differ by jurisdiction. Leverage caps, negative balance protection, marketing restrictions and the treatment of retail clients are set nationally or regionally, so the same broker may operate under different terms in different countries. A broker's regulatory status and the protections attached to a client account therefore depend on where the client is resident and which entity holds the account.
Often confused with
- cfd
- A CFD is the contract itself — a bilateral agreement to exchange the difference in an asset's price — while a CFD broker is the firm that writes and prices that contract; the visible sign is that the CFD is the instrument on a statement, whereas the broker is the named counterparty.
- cfd trading
- CFD trading is the activity of buying and selling those contracts, whereas a CFD broker is the business that provides the prices and executes the trades; the visible sign is that trading appears as a series of transactions, while the broker appears as the account provider.
- forex broker
- A forex broker specialises in currency pairs and may operate as an exchange-like venue or a counterparty, whereas a CFD broker quotes a wider range of instruments including shares, indices and commodities as contracts for difference; the visible sign is the product list, with currency pairs only versus a multi-asset CFD list.