I am being a bit thick, I think, but what if most of IG Index’s clients do well in one year?

If they’ve hedged their book properly that shouldn’t matter.

Ok, let’s take a very simplistic model and assume the underlying market is 76@77 and so they quote 75@78. Ideally they would prefer when you go long 78 someone to sell 75s. But if more people buy 78s they can always go and buy 77s in the underlying.

Now multiply that through size and you get the principle.

To explain the reasoning: I sell you something that doesn’t exist for 100p. At the same time I buy an identical something that doesn’t exist from someone else for 95p. You are happy, the other chap is happy and I am 5p richer without taking any risk or laying out any capital. On top of this, I then charge both of you a series of fees for funding your positions, again, one pays me 2.5% over base and the other pays me similar. I can also charge you both if the trade is in a non base currency plus any number of other minor fees.

Multiply this thousands of clients and by how ever many seconds there are in a day and it adds up to quite a bit of money.

Edit: I’m also pretty sure they make a lot of money in financing costs.

Once you have a large enough book of business it is all about managing the flow profitably and not about taking the other side of the client as much smaller firms have to.

A very clear example of this is that last year saw an unprecedented continual rise in the market which for nearly 8 months favoured clients and went against the brokers. Clear proof of this lies in the fact that IG increased revenue over this period whereas the smaller brokers suffered huge losses as they had to pay out to clients.

If IG Index can increase revenues during a period when clients are making money it becomes clear that running a large enough book is about risk and flow management and not about betting against the client.