Business model · Dossier
Inside the Brokerage
How a CFD broker makes money, distributes risks and sets incentives – explained from the perspective of a fictitious pattern broker.
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PerspectiveSources of incomeExternal protectionInternal riskHybrid modelsGrowth accountingInfrastructureTesting questionsClassificationSourcesOne interface. Several business models.
The fictitious Model brokers offers customers leveraged CFDs through a trading platform. Behind charts and order masks, he organizes contracts, prices, financing, risk management and sales. Its economic logic stems from these functions – not from the name of the software.
Is the broker paid for a service, does he bear the market risk of the client positions, or does he combine both?
We look at three simplified constellations: external hedge, internal risk book and a combination. Our sample broker is the contractual counterparty of the customer. A real agent with a different contract structure must be considered separately.
Musterbroker is a fictitious explanation model. The following calculation values are freely chosen examples, not market statistics, tariff indication or forecast.
Where the revenue comes from.
| Component | Economic function | Consequence for customers |
|---|---|---|
| Spread/Price premium | The difference between customer price and procurement or reference price can make a contribution. The entire visible spread is not automatically brokerage profit. | Already the entry and exit cause costs. Instrument, timing and liquidity influence comparability. |
| Commission | Explicit remuneration per transaction or unit of volume, after deduction of related outside costs. | A narrow spread alone does not describe the total price. |
| Funding | Overnight costs can include cost sharing and surcharge; sign and calculation are dependent on the tariff. | Check holding time, reference rate, markup and chargeable days. |
| Internal market risk borne | Result of net non-externally hedged exposure to customers. | Customer profits can be an economic burden on the broker; customer losses can favor it. |
| Additional charges | Depending on the offer, for example, currency conversion or inactivity fees. | Read price list and actual billings together. |
Turnover is not profit. Technology, personnel, security, payment processing, distribution and other operating costs must be financed. A customer deposit is initially an obligation to the customer, not freely available proceeds.
External hedging: earning from trading activity while transferring risk.
The sample broker concludes a CFD with the customer and a separate counter-trade with a hedging partner. With a suitable size, simultaneous execution and matching prices, the market-related results largely compensate for each other. Premiums and commissions can make a contribution.
Single simplified transaction
The customer achieves 100 € market-related profit before costs. The broker owes this 100 €, but also achieves 100 € in the ideal matching counter-business. From 6 € explicit customer commission and 2 € direct external costs remain 4 € contribution before further costs. The $100 is not an additional brokerage proceeds.
The hedge can fail or be incomplete: delayed execution, other prices, deviating contract characteristics, failure of the partner or a necessary collateral payment. „Externally hedged therefore does not mean risk-free. The customer also continues to have the contractual claim against his broker.
Are positive and negative price deviations treated equally? How are orders executed if there is no liquidity? Which law applies to the customer contract?
Internal risk: the result of the opposite position.
Without a suitable external hedge, the sample broker itself bears the remaining market exposure. If the customer’s market-related claim increases by €100, this debits the broker by €100. If the customer loses 100 €, the counter-position works in the opposite direction in favor of the broker. Fees, defaults, protection and costs are not yet taken into account.
Many client positions can balance out: comparable long and short positions reduce net market risk. An internal book is therefore not simply the sum of all customer deposits or losses. Exposure, instrument, duration, price and outcome components shall be neatly separated.
An economic incentive to disadvantage requires attention. Whether prices, execution or billing are actually unfair must be checked on the basis of concrete rules and data. A loss rate of the customers in itself proves neither manipulation nor the profitability of the broker.
The broker can also suffer high losses: customers can be right together, markets can jump or positions can only be closed at strongly changed prices. Its risk-bearing capacity is therefore part of the customer perspective.
Hybrid: Hedging is a decision.
The sample broker may hedge a portion of the net exposure and bear a portion itself. It can treat different instruments differently or trigger hedging only at defined risk limits. A customer order and the broker’s hedging order are two different processes.
Risk Rules
An instrument exceeds a predefined net exposure. The broker reduces the risk by an external counterposition.
Customer segmentation
The treatment can also be linked to characteristics of the trade flow. Then there are additional questions about equal treatment, disclosure and execution quality.
The terms A-Book and B-Book usually describe risk treatment. They do not replace a contract analysis and do not prove the actual routing of each order or a certain level of customer protection.
The economics behind growth.
More customers, more trading volumes and longer holding periods can increase different sources of revenue. This creates potential incentives: more frequent action, larger positions or longer financing. Whether advertising and customer support responsibly limit these incentives is a separate audit question.
Example contribution calculation
200 active customers × 10 completed trading cycles per month × 4 € contribution per cycle = €8,000 monthly contribution. After assuming a fixed cost of € 9,000, the result is −1.000 €before taking into account additional components of earnings and taxes.
With the same bill, 20 cycles would result in a contribution of €16,000. This shows a volume incentive, not a recommendation for more frequent action. Each cycle here expressly denotes a complete entry and exit.
The profit threshold in the example is €9,000 / €4 = 2,250 cycles per month. The invoice is valid only for constant unit contribution and constant fixed costs. Customer acquisition, discounts, outages and changed third-party costs can break the acceptance.
In the case of an internal risk book, a fluctuating market result is added. This cannot be seriously derived from a blanket assumption as to which share of customer deposits is lost. Client deposits, trading volume and broker sales are different sizes.
Who works behind the brand.
| Function | Contribution to the tender | Open customer question |
|---|---|---|
| Contractual broker | Customer contract, product design, pricing and execution rules | Which legal entity owes the performance? |
| Technology / White Label | Platform, infrastructure and, where applicable, purchased operational functions | Which functions are outsourced and who is responsible for disruptions? |
| Liquidity / Hedging | Prices and counter-trading for the broker | Is there a direct claim of the customer or just a separate brokerage contract? |
| Payment / custody | Deposits and withdrawals and handling of customer funds | Where is the money and under what conditions is it available? |
| Distribution/intermediation | Acquisition and support of customers | Is paid according to new customers, deposit, volume or other result? |
A white label explains why several brands can use a similar surface. It alone does not say who is the counterparty, nor which functions the brand provider itself controls. For failures and complaints, the customer needs clear responsibilities.
Location and license are also different questions. A company headquarters does not automatically answer for which customers and services a authorisation exists. The actual company and the specific scope of permission belong in the provider test.
From business model to verifiable question.
- Contract: Counterparty and competent company.
- Price: Compare spread, commission and financing as an overall burden.
- Design: Investigate timestamps, prices, rejections and both positive and negative slippage.
- Risk: Who carries the exposure and which statements for protection are actually proven?
- Distribution: Question remuneration and possible incentives for additional action.
- Claim: Clarify jurisdiction, access to money and complaints.
A concrete assessment requires contract documents, price lists, execution principles and transaction data. A professional platform interface or a model label does not replace this examination.
Agent, Principal, STP and Risk Books Related
How execution parameters can change the customer perspective
Context and further evidence.
The model calculations are editorial examples. For regulatory classification, legal space and version are crucial. ESMA deals with different hedging constellations and resulting conflicts in its historical CFD Q&A.[ESMA] In a multi-company audit, the FCA examines in particular spread, commission and overnight financing as elements of the customer burden.[FCA]
Sources & scope
Check the evidence.
- ESMA · Q&A on CFDs, 2016 · SECTION 5, pp. 18–20
Historical MiFID classification; no blanket current legal assessment.
Open the source ↗ - FCA · CFD price and value review
Multi-company supervisory audit; not transferable to each provider.
Open the source ↗
Understand the cost of the entire position
Break down spread and markup, include commission and financing, compare position size and margin itself.
Fee knowledge and interactive calculator →Who is actually allowed to make the offer?
Examine permission, provider role, market access and protection requirements for EU, UK, Switzerland and USA together.
Regulatory Requirements · Part I →