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Interesting little scrap from IC Daily


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I subscribed to the (free) daily trading email from Investors Chronicle, which is worth 10 minutes every day and in today's edition there's an interesting little bit on Plus500:

For the fifth time since February, the CFD provider has flagged record levels of platform trading activity, though customers' recent net gains, and uncertainty over Australian regulatory changes and continued market volatility, means internal earnings forecasts are in-line with market consensus. Such concerns keep us doubtful, too.

 

This seems to imply that they would make more money if their customers lost more often... just a misunderstanding on IC's part?

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19 hours ago, dmedin said:

 

This seems to imply that they would make more money if their customers lost more often... just a misunderstanding on IC's part?

hardly since these brokers make money by being the counter-party . the entire industry needs careful supervision due to the inherent conflicts of interest

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On 09/06/2020 at 06:33, deus777 said:

hardly since these brokers make money by being the counter-party . the entire industry needs careful supervision due to the inherent conflicts of interest

Do you think the bigwigs in the City of London care about punters losing money gambling on the markets?

I think the people who founded and own IG are members of the same clubs and dine, date and drink with the same people who are regulators ... you can guess what I think :) 

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Ultimately if people quite because they consistently lose then brokers lose out surely? Brokers make money on the spread and commissions so it's in their interests that you trade as frequently as possible which in itself holds risks. I don't think losing trades make any more money than winning trades for them. I'd be interested in a conflicting view. 

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On 14/06/2020 at 08:58, amichalskiuk said:

Ultimately if people quite because they consistently lose then brokers lose out surely? Brokers make money on the spread and commissions so it's in their interests that you trade as frequently as possible which in itself holds risks. I don't think losing trades make any more money than winning trades for them. I'd be interested in a conflicting view. 

Yes that's what I thought, but it seems that outlets like IC (which is owned by Financial Times) have other opinions.

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The degree that platforms/firms hedge CFDs and spreadbets vary.  Many platforms fully hedge (or attempt too) against the underlying market and solely make money from the bid-ask spread (based on the underlying plus a mark-up to cover execution costs), commissions and financing.  Most platforms will attempt to internalise trades (match offsetting trades on the platform before hedging any net position in the market to minimise execution costs.  IG's policy to hedge is fully as possible against client positions, ie not to take on market price risk on client trades.

Other firms/platforms (Plus 500 fall into this camp) will hedge net exposures to client trades to lesser extent and seek to gain if the market goes against its punters (but will lose if the market goes in favour of clients).  I believe the rationale of taking on some of the exposure of punters trades that is on average punters generally always lose money and therefore they will gain if they are on the other side rather than other market participants.  Clearly for Plus 500 this wasn't the case in the most recent quarter as  a significant proportion of their profit gained from higher trading volumes was wiped out from losses on non-hedged client trades.

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