I wasn't going to bother posting, but it's this sort of...

I wasn't going to bother posting, but it's this sort of misinformation that causes such confusion.

Firstly, there are 2 CFD models, Market Maker (MM) and Direct Market Access (DMA).

Let's first look at the MM model...Yes a MM model may or may not hedge your position in the underlying market, yes it is well documented that they don't hedge the majority of their clients, because the majority of their clients lose money, thereby making the MM money. They will selectively hedge positions in the underlying market but at their discretion.

It is also true that they have the right to take opposing positions in the market to effectively bet against your position. They may quote you the same spread as the underlying market, but they may not, especially in times of high volatility.

So yes, effectively if you're losing money, they're making it.

With a DMA model, when a client places an order, the order goes straight through into the underlying market...you can see it in the course of trades, you can see an order in market depth. It is transparent. There is NO input from the CFD provider. The actual act of placing an order into the market is identical to placing an equities trade. The provider does not benefit if you're position is a losing one, or a winning one. To suggest otherwise is as ludicrous as suggesting that when you place an order with Commsec in your equities account, that they have a vested interest in your trade losing.

Yes DMS CFD providers can use client monies to finance the "hedging" of overnight positions, but "hedging" in this case doesn't mean betting against the position in the market...the position is already in the market. The provider may/will however use pooled client funds towards the financing of holding those overnight margined positions.

So yes, the only way a CFD DMA provider will make money from a straight DMA model is from commissions, and overnight interest charged.

Now some providers may be involved in taking market positions or proprietary trading, which may add risk. I can not speak for all DMA providers but FP Markets (my provider) do not do either. A point they make in their disclosure (just after the part quoted by a previous poster, but conveniently replaced with "blah blah blah").

Here is the full paragraph:
"We do use client money to hedge positions, which means you have counterparty risk of both FP Markets and the Hedge Counterparty defaulting, however it is important to note that we do this to ensure that we are always 100% hedged so that no market risk is faced. Unlike most CFD providers we do not run any market risk or proprietary positions."

I'm totally in favour of the banning of the use of client monies for proprietary trading.

It was suggested that the likes of Commsec don't carry this counterparty risk...this from their disclosure:
"Client Money – even though the money to which you are entitled in respect of your CFD account is paid into a client segregated trust account, this may not afford you absolute protection in the event that CommSec cannot meet its obligations."

Obviously you need to be comfortable with the risk model and asset backing of your provider, and I am. I'm all for any changes to the industry that promote stricter reporting and controls in that regard. But the banning of use of client monies completely in my opinion would be a totally unacceptable outcome for the industry, especially for those that make their living from it.

DMA CFD's bring a transparency and lack of conflict of interest that simply wouldn't exist if we solely had Market Maker modelled providers. In my opinion the commission cost increase that would surely come from a total banning of the use of client monies would make the difference between a sustainable income trading, and failure, for many traders.