A lot goes wrong when investing in CFDs. Our firm has handled more than 60 cases in recent years against foreign providers of CFD investments. The AFM and the Fraud Helpdesk warn about unreliable providers. What exactly is the problem with these investment products?

What is a CFD?

Many inexperienced investors who get into “contracts for differences” think that a CFD is a type of stock with a buyer and a seller. The seller apparently wants to sell the CFD on some kind of stock exchange, as is the case with shares, and the broker apparently receives a commission for this transaction. But that’s not how it works. There is no public exchange where you can buy CFDs, there is no seller who already had the CFD and wants to get rid of it, and a CFD is not a stock. A CFD is a contract on a price of an underlying asset, which asset itself is not purchased. The value linked to the CFD does have a daily changing rate. Consider, for example, the dollar exchange rate, the price of a barrel of oil, or the value of a Tesla share on the New York Stock Exchange. The CFD can be opened – with which you enter into a contract with a counterparty – and a CFD can be closed, which creates an obligation to settle on the difference in value. Thus, if the CFD investor has a profit on the “trade,” this profit must be paid out by the counterparty to the contract, who – it cannot be otherwise – makes a loss. This leads to the question: who is the counterparty to this contract, if not a buyer or seller on a public exchange?

Who is the contractual counterparty in a CFD?

CFD brokers are sometimes very secretive about who the counterparty is in CFDs. The answer to that question is very important. After all, when outstanding positions are closed and settlement is due, one party to the contract has a profit and the other a loss. In other words, if it is the investor who makes a profit, there must be someone else who makes a loss. Suppose that this counterparty to the CFD contract is a third party who happened to have an opposite view of the development of the underlying asset, which expectation does not materialize, while the CFD broker has merely brought these parties together, then there is not much to worry about. But now suppose that the other party is not a third party, but that the CFD broker himself is the one with whom the contract is entered into, then that changes the situation. Think about it: if the investor makes a profit, the broker has to pay it out and thus the broker makes a loss, while the broker is also the creator of the financial product; he then cuts into his own flesh if his client cashes in profits. And the reverse is also true: if the investor loses, the broker makes money. There is then a conflict of interest between the investor and the broker. To be more precise: the broker first has an interest in having the investor deposit money with which positions are opened, and later the broker has an interest in having the investments evaporate, so that the investor loses his deposit. If there are no more open positions to be settled while the investor has lost his deposit, the broker no longer runs the risk of having to pay out any profits to the investor, and what was initially the investor’s deposit is turned into the broker’s profit. Behold a scenario to make a lot of money at the expense of inexperienced investors who cannot see behind the scenes and who do not realize that the broker has its own interest in the investment results.

The effect of conflict of interest on investment advice

Suppose a broker in no way advises the investor, does not co-sign, and does not manipulate, but only makes money by charging a small commission. In that case, the investor will have little or no conflict of interest. This is also called “execution only” service; a broker’s only interest in this type of service is that a lot of trading is done. If a CFD investor is with such a non-advising broker, and if he or she has a strong view of the development of the underlying prices themselves, and this view comes true, with the right sense of timing, then an investor can make a lot of money with CFDs. But that is not what we see and hear from our clients who have lost a lot of money with CFDs. These clients tell us that they are just beginners, have no clear vision and were intensively guided and advised by one or more account managers on the choices made. When we get the facts right, the word manipulation is often more appropriate. In the stories of victims, certain fixed steps can often be recognized. Read more about the playbook of unreliable CFD brokers here. Now comes the point: if on the one hand an investor is guided and/or advised and on the other hand the broker makes money when the client suffers a loss, then it is obvious that the broker will guide the client in such a way that the client first makes money (because then he will deposit again and open more trades) and then the advice (by which we also mean the advice not given) will be aimed at making the client lose his money. That is why it is so important to know who the counterparty is in a CFD contract, because that way the underlying interests and motives become visible. Is it a third party who makes a profit when the CFD investor loses, or is it the CFD broker himself who runs off with the loot, while the investor thought he was being advised professionally and honestly?

What do the AFM and the Fraud Helpdesk?

THE AFM and the Fraud Helpdesk warn that the latest warning campaign against investment fraud explicitly suggests that there is or may be a conflict of interest between the investor and the CFD broker. The AFM and the Fraud Help Desk do not explain how they came to the conclusion that the CFD broker has its own interest in the outcome of trades that may conflict with the client’s interest, nor do they literally say that the broker itself is the counterparty to a CFD, but they phrase it as follows: ” Moreover, these rogue brokers mislead their clients. Indeed, in the telephone “guidance” these brokers are not honest about the risks and conceal to have a (financial) interest in the investor’s loss. Consequently, the vast majority of CFD investors lose a lot of money. “.

What does the judge say?

In our country, many lawsuits have been filed against the CFD brokers during the period 2019-2025. The question of whether the broker is the counterparty to the CFDs says something about the motives that a broker may have to manipulate and guide the client in such a way that the broker makes a profit and the client loses, but the question of who is the counterparty to a CFD has not itself been the decisive issue in the many lawsuits. For this reason, the answer to the question of who is the counterparty in CFDs usually does not come up in the proceedings, or is only touched upon as an aside. But there is an exception to this: in the judgment of November 24, 2021, the District Court of Midden-Nederland addresses this issue in detail. The CFD broker has defended itself by claiming that it is not the counterparty to the contract. The counterparty would be an “external liquidity provider,” a so-called “liquidity provider,” according to the broker. The court did not find this position credible:

“4.61.

Although [CFD broker] argued at the hearing that there was no conflict of interest as referred to in the ESMA decision, she was unable to dispel the court’s doubts about this. Her story about this was not easy to follow. [CFD broker] states that it has a contract with an external provider of liquidity that distributes any profits made by the participant, and that provides [CFD broker] with a fee based on the volume in which the client in question trades. However, it is not clear how that external liquidity provider hedges its financial risks. If that is by asking [CFD broker] to allow another client to take a counter position, there may well be a conflict of interest. Moreover, [CFD broker’s] attorney stated at the hearing that he tried to get to the bottom of the construction but that [CFD broker] did not show the back of her tongue because it would be a trade secret. That[CFD broker] relies on this, however, is not logical. After all, it no longer performs trading activities and exists only to settle claims for damages (see 2.14.). The question is therefore justified as to what [CFD broker] is hiding from its own lawyer and from the court.

4.62.

The court is also left with the question of why – if [CFD broker] has no interest in its client’s transactions and only offers “execution only” services – the account managers of [CFD broker] gave concrete advice to [claimant] on which currency to invest in. That such advice was given is evidenced by the various recorded conversations between [claimant] and the account managers (see also below).

4.63.

Given what the court has considered above at margin numbers 4.60. to 4.62., the court assumes (as insufficiently reasoned dispute) that [CFD broker] also had its own interests in [plaintiff’s] trading and that those interests could clash with those of [plaintiff].”

Conclusion: who is the counterparty, the broker or a third party after all?

From this ruling by the Utrecht judges, one can deduce that although it is not 100% certain that the CFD broker itself was the counterparty in the transactions, it does seem to be so because the broker does not want to disclose and apparently has something to hide. For the outcome of this lawsuit, it ultimately does not matter because other arguments are ultimately decisive (the aggrieved investor is proven right). How we think about it, after dealing with dozens of cases? We think that CFD brokers who intensively guide inexperienced clients always have a self-interest and always profit when the deposit is lost, namely through swaps and other means by which the investor pays for the transactions and the risk the broker takes on the client. In fact, from the first deposit, the deposit is collateral for loans with which to buy risky investments on which the counterparty to the CFD – whoever it is – is high risk, and high risk simply must be rigorously hedged and offset by high profit. Whether this is done by entering into the contract with the broker itself or with another legal entity that may or may not have a relationship with the broker is irrelevant to the outcome of a lawsuit, but if you are new to CFD trading, it is still good to know that you may be dealing with an investment product where the provider of the product may have an interest in the opposite outcome to the one you had in mind when you started this form of trading.

Our specialist: Marius Hupkes