Your CFD broker is the counterparty, and that is not the problem
A CFD is a bilateral contract: no exchange, no third party on the other side. What decides whether their interests clash with yours is not that, but whether they hedge the exposure. What ESMA wrote, and the number the broker publishes on its own front page.
You hit buy. The chart moves, the position appears, and instinct says that somewhere out there a person just sold you those euros.
That is not what happened, and it is not a secret. In a contract for difference there is no exchange, no shared order book and no third party on the other side: the contract is between you and your broker. That is the definition of the product, not a shady practice.
What deserves an article is what happens next, inside the house, to the position they just opened for you.
A CFD is a contract, not an order in the market
Buy a share on an exchange and your order is matched against another participant's; the stock changes hands. There is a record, there is a clearing house, and there is a public price anyone can look up.
A CFD does not work that way. It is a bilateral agreement to settle in cash the price difference between opening and closing. Your broker is the party that signs it with you, calculates the reference price, and pays you if you win.
That has a consequence people routinely skip over: the bid-ask spread you pay is not the fee of an intermediary carrying you to the market. It is the margin of the house selling you the contract.
What the regulator wrote about its own sector
In May 2018 the European Securities and Markets Authority (ESMA) restricted the sale of CFDs to retail clients. The decision published in the Official Journal&from=EN) gives the reason in recital 51:
"Conflicts of interest have and may arise from the fact that some CFD providers are counterparties to clients' trades without hedging their exposure, therefore placing their interests in direct conflict with that of their clients."
Read it slowly, because the sentence is built with real care. The conflict does not come from being the counterparty. It comes from being the counterparty without hedging the exposure.
Recital 101 finishes the thought while justifying the required protections: the problem bites "particularly when CFD providers do not hedge their clients' trades and so benefit directly from client losses".
The two things a broker can do with your position
A broker who has just opened a long for you has exactly two options for the risk they have taken on.
| Hedges the position | Keeps the position | |
|---|---|---|
| What happens to your risk | Passed to a liquidity provider | Held on their own book |
| If you win | Earns the spread anyway | Pays out of their own pocket |
| If you lose | Earns the spread anyway | Books what you lost |
| Where their revenue comes from | The volume you trade | Your result |
| Their interest versus yours | Indifferent | Opposed |
The left column describes a toll business: it wants you trading often and staying alive to keep trading. The right column describes something else.
Neither is illegal, and most brokers run both at once across different slices of their book. The point is that from the outside you cannot tell which one you are in, and the marketing label will not tell you either: "ECN" and "STP" are not regulated categories with a supervised definition, they are sales terms.
The number the issuer publishes itself
Here is the part nobody has to investigate, because it is printed on the broker's own front page. Since 2018 every CFD provider in the European Union has been required to publish the percentage of its own retail accounts that lose money.
National supervisors measured that before the warning was imposed, and ESMA's decision collects their results in recital 35:
| Supervisor | Retail accounts losing money | Average loss per client |
|---|---|---|
| Cyprus | 76% | €1,600 |
| Spain | 82% | €4,700 |
| France | 89% | €10,887 |
That is where the much-quoted "74-89%" comes from. In the article on binary options we warned that pinning that figure on binaries is a mistake: it belongs to CFDs. This is where it lives.
And it is worth being precise about what it measures. It does not say the broker cheats. It says that with the leverage on offer and the costs applied, four out of five Spanish accounts ended in the red. Why that happens even with nobody manipulating anything is the arithmetic in risk of ruin and in what leverage is.
This "market maker" is not the one on your chart
It deserves its own paragraph because the confusion never stops.
When Smart Money Concepts talks about the Market Maker Model, it describes a narrative about how large institutional players supposedly move price: accumulation, manipulation, distribution.
When we say here that your broker acts as a market maker, we mean something entirely different: who signs the contract and who keeps the risk. They share a name and nothing else.
What the regulators decided
| Measure | ESMA (European Union) | FCA (United Kingdom) |
|---|---|---|
| Maximum retail leverage | 30:1 down to 2:1 by asset | 30:1 down to 2:1 |
| Margin close-out | At 50% of required margin | At 50% |
| Negative balance | Guaranteed protection per account | Guaranteed protection |
| Incentives and bonuses | Banned | Banned |
| Risk warning | Mandatory, carrying the firm's own % | Mandatory |
ESMA measures were temporary and national authorities made them permanent. The UK's Financial Conduct Authority, the FCA, finalised its own in July 2019 and estimated the saving to UK consumers at between £267m and £451m a year. That figure does not measure fees: it measures losses the rules expected to prevent.
What a licence actually protects and what it does not is covered in why a regulated broker matters and in is my money safe.
What this article does not tell you
It does not say brokers manipulate price against you. That is the sector's most repeated accusation and also the one almost nobody evidences. ESMA describes a risk and an incentive to do it, which is not the same as claiming it happens.
It does not say that keeping the risk is a scam. It is a disclosed, legal, supervised model, and a firm that hedges everything is not automatically better for you either: it will still charge you the spread on every trade.
It does not rate specific brokers or publish a list. What is verifiable before you open an account is three things: which entity signs the contract, under which licence, and what percentage of losing accounts it publishes itself.
And it does not say that forex and a CFD on forex are the same thing. The underlying currency market is a zero-sum game before costs, with participants who are not there to beat you. The contract you sign to reach it is another layer, with another party, and that layer has arithmetic of its own.
What it leaves you with is a better question than "is this broker any good?". The question is: when I lose, who gets paid?
