Hi
Just wondering if anyone can tell me how the cfd providers can provide prices over 24 hours for the different indices. Are they able to hedge their positions despite the wide spread or are they taking the opposite side of your trade? Sorry if i'm asking something dumb, just started trading cfd's and want to find out slightly more about how they make the mkt.
That's good question.
In my opinion, the answers are vary depends on which underlying products you are talking about.
Say FTSE100, some CFD market makers do provide a 24 hours tradeable spot price while some investors,like you, would like to take risk and entry this market made by this provider. Currently, when all those providers offer THEIR ask-bid quotation to you, it does not mean that there is a underlying trackable market they could follow, therefore,
in essentially, when you open a position with the CFD provider, they are on the opposite position to you ALL THE TIME as same as every singal CFD agreement made between the investor and relevant CFD provider, whatsoever using Market Maker Model or DMA Model.
What you worried is that how does this CFD provider manage their risk.
They have 3 ways to manage the risk.
1. DO NOTHING.(when their net position valuation is too low, that's the optimum decision making.)
2. Forward their net position to third countparty in full.(they play a role as an agent)
3. Develop a complex strategy by using a tested model reduce their risk in an acceptable level.Nomally, avaliable tools contain index options and/or highly linked portfolio asset.
