This is an article about how brokers make money in the spread-betting and CFD (regardless of the market). I used to be one and know how it works.
It is a highly profitable business model with multiple revenue streams.
1. They trade against you
If you buy 10,000 Euros, you need someone to sell them to you.
If the Euro drops 2% and you sell your position back to your broker for 9,800 Euros, guess who has just made 200 Euros?
Whether you like it or not, your broker is on the other side of the trade. It is the definition of a broker
2. They make you to trade more
Brokers spend a lot of money on marketing. They offer cheap carrots (sign on bonuses etc) to get you to trade more. They know that you are much more likely to lose than win.
3. They make your market and take your spread
If you buy and immediately sell at the market, you lose money.
This is because the person willing to pay the highest price now (you), pays the “Ask”, which is always higher than the “Bid”, the lowest price a seller is willing to sell at.
The broker site in the middle, connects buyers and sellers and rightfully pockets the difference. This is a critical piece to understand. When I was a broker it used to drive me mad, that traders did not understand this basic, but so important piece of information.
4. They simultaneously trade with you
If they have a proprietary trading desk and they see you do well, they will track your trades and trade with you – no financial authority is there to stop them.
In other words, they can simultaneously trade with you and against you – whether you lose or win. In the long run, they might not always beat you, but they will always earn money.