Does supply and demand in CFD trading affect the actual price of financial market?

  • $\begingroup$ I suppose by margin trading you mean trading delta one products that have an embedded financing component - e.g. CFDs and leveraged certificates? Trading in those products does not directly affect the underlying asset’s prices but only indirectly through the issuer’s hedging activity. The issuer will also pool the risks from its client transactions and not directly hedge in the market. $\endgroup$ Dec 23 '17 at 13:04
  • $\begingroup$ Yes, I mean exactly CFDs. I edited my question accordingly. $\endgroup$
    – Farrukh
    Dec 23 '17 at 13:09

Buying or selling a CFD only indirectly affects the underlying assets’s price through the CFD issuer’s hedging activity. The feedback effect is not deterministic and unlikely to be noticeable for relatively small trades.

The CFD represents a claim against the issuer who usually pools the resulting exposures up to a certain extend instead of directly hedging one-to-one in the underlying asset. This allows them to internalize the bid-ask spread which is often not much wider in the CFD than in the secondary market. However, this also increases the variance of their p&l. Once the net exposure in a stock, sector or other risk factor becomes too large, then the issuer will reduce it by hedging.

This approach works well if the issuer has a lot of uninformed retail traders on his platform which generate frequent trades with small and often offsetting exposures.


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