Counterparty

The party on the other side of a contract. On a CFD the broker is the counterparty rather than a messenger: the position exists between those two names, and nothing is routed to an exchange to create it. The firm's own position is the mirror of the client's until it nets that exposure or passes the residual on, which is the origin of the conflict of interest the model carries.

Two consequences follow, and both are checkable. A contract can only be closed with the firm that wrote it, so there is no transfer of an open position to another broker and no secondary market for it. And the financial standing of that firm is part of what the holder carries, because the firm is the party that owes the difference whenever the contract settles in the client's favour. Regulators address the second point through capital requirements and through client money segregation, not by removing the exposure.

Where practitioners disagree is what the firm does with its side. A firm that hedges its net exposure externally has no directional interest in an individual client's result, while a firm that retains it does, and critics of that model argue the conflict is structural rather than curable by disclosure. Firms answer that exposure is netted across a whole book before anything is hedged, and that execution and client money are supervised for exactly this reason. Neither answer settles the question, which is why how a counterparty executes is worth asking of any firm rather than assumed from the label it uses.