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Author Topic: CFD trading issue  (Read 814 times)
slothbag
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March 07, 2012, 09:46:32 AM
 #1

I have been thinking about how to set up a CFD trading project but have a problem someone might know a solution to.

Lets say trader A wants to go long on AAPL shares for 1000 shares @ $500usd, and trader B agrees to go short AAPL for 400 shares @ $500usd.  A position is matched and created for both traders for 400 shares @ $500.

AAPL goes up in price to $600usd a share.

If trader B wants to liquidate his loss there shouldn't be a problem because trader A will happily take the profit.  However what if trader A wants to liquidate which forces trader B to "realize" the loss.  In a market with high liquidity a potential buyer of trader A's long position could be found to take its position. However in a low liquidity market there probably wont be anyone to assume trader A's long position and after trader B "realizing" the loss there may be no one to take up a new matching position with trader B for him to recoup his losses on any downward swing.

What about if the profiting trader wants to liquidate he only gets 50% of the profit, so that the loosing trader only realizes half the loss? Still pretty shitty for the loosing trader.

Or is it a known risk in a low liquidity market that you may not be able to liquidate easily?

Thoughts?
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slothbag
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March 07, 2012, 11:54:05 AM
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The only solution I can see is if trader A wants to force liquidate, he has to cancel the order and both trader A and trader B walk away with no money made or lost except for maybe a small fee/penalty.
copumpkin
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March 07, 2012, 03:29:48 PM
 #3

I have been thinking about how to set up a CFD trading project but have a problem someone might know a solution to.

Lets say trader A wants to go long on AAPL shares for 1000 shares @ $500usd, and trader B agrees to go short AAPL for 400 shares @ $500usd.  A position is matched and created for both traders for 400 shares @ $500.

AAPL goes up in price to $600usd a share.

If trader B wants to liquidate his loss there shouldn't be a problem because trader A will happily take the profit.  However what if trader A wants to liquidate which forces trader B to "realize" the loss.  In a market with high liquidity a potential buyer of trader A's long position could be found to take its position. However in a low liquidity market there probably wont be anyone to assume trader A's long position and after trader B "realizing" the loss there may be no one to take up a new matching position with trader B for him to recoup his losses on any downward swing.

What about if the profiting trader wants to liquidate he only gets 50% of the profit, so that the loosing trader only realizes half the loss? Still pretty shitty for the loosing trader.

Or is it a known risk in a low liquidity market that you may not be able to liquidate easily?

Thoughts?

It is a known risk Smiley but either way, if you implement something like daily settlement with a margin account, the potential losses from one of the counterparties getting cold feet are much more limited.
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