When you open a CFD position, some CFD providers may hedge that position in the underlying market.
For example, let's say you bought 1000 Westpac share CFDs. As the CFD provider sold the CFDs to you, it would have a corresponding short CFD position. If the price of Westpac shares went up, you would make a profit, while your provider would make a loss. To reduce this risk, some CFD providers may hedge client positions in the underlying market. In this case, if the provider did hedge, it would buy 1000 Westpac shares.
Now the CFD provider would hold two positions – a short position on 1000 share CFDs, and a long position on 1000 shares. If the share price rose, the provider would make a loss on the short position, but this would be offset by a profit on the long position. Likewise, if the share price fell, the provider would make a loss on the long position which would be offset by a profit on the short position.
Some Australian CFD providers use their clients’ money to hedge their risk from clients. While this practice is permitted under ASIC rules, we believe it exposes clients to counterparty risk from hedging counterparties and other clients.
IG has and always will hedge client exposures with our own funds in the underlying market (on a net basis, or directly through our direct market access offering).