Iíve read up a fair bit on the subject, but one thing doesnít seem to be explained anywhere I've looked. CFD is a contract for difference between buy and sell price between 2 parties. Obviously I am one of the parties and can only assume that the service provider and its underwriter are the other party. So my questions (assuming a DMA market) are:
a) If Iím holding a long position in ABC, then is the provider holding an offsetting short position in ABC in the underlying equity?
b) if a) is true then when is the short position executed? The instant the trade is made, at market, or are the offsetting positions simply balanced gradually throughout the day (obviously there will be some clients long and some short on ABC so they cancel each other and donít need to be balanced continuously).
Assuming Iím on the right track here, if I go long on a ABC CFDs, the provider goes short on the underlying. Depending on the volume, this short puts downward pressure on ABC. The consequence is that unlike buying the equity where buying exerts upward pressure (which is what you want), buying CFDs would actually exert downward pressure (what you donít want) on the market. This Ďpressure reversalí is also leveraged against my position.