History of CFDs

Contracts for Difference (CFDs) have been used in the UK stock market for a number of years - mainly by institutions seeking to extract the performance of a stock rather than owning the actual share itself.

HISTORY OF CFDS

CFDs became widespread in the UK equity market in the early 1990s, driven by non market makers wanting to be able to short (selling to open) stock. At that time only market makers (most of whom were integrated within big investment banks) were able to do this. Subsequently investment banks became natural CFD providers, while typical users included hedge funds, arbitrageurs and funds pursuing market-neutral strategies. As no actual stock transfer was taking place, no stamp duty was payable on these transactions.

As a result demand evolved to encompass long contracts as well as short. Although CFDs confer no ownership rights such as shareholder voting rights, they do reflect the performance of the stock, usually including dividends and corporate actions such as share splits. For many users (including short-term traders) these features may be the most important.

With the introduction of the SET (electronic trading system) to the UK market in 1997, stamp duty exemption was widened to recognised liquidity providers who were members of the Stock Exchange. It is these members who now provide the retail CFD product

IT WAS THE year 2002 and a few providers of Contracts for Difference (CFD) were just opening their offices in Australia. Before this year, not many Australians have heard about this derivative product that was already gaining popularity in the United Kingdom. Not surprisingly, most of the CFD providers who introduced this financial instrument to retail traders in Australia came from the UK, with long history of either fund management or currency trading (FX) behind them.

Fast forward 2006. At the last count, there are more than 10 CFD providers in Australia and the number is still increasing. While the Australian market is only a fraction of the UK market, the growth and popularity of CFDs among Australians is no less than spectacular. It is not only the number of CFD providers that is growing. The number of people now trading CFDs has more than doubled in the last 12-18 months according to an independent market research on the growth of CFDs.

There is no question that the level of interest in and awareness of CFDs has definitely improved over the past four years. You only need to look at investment and trading seminars and conferences that now
feature speakers about CFDs. A few years back you would hardly hear any presentor talking about CFD trading. Today, there will be at least a couple of CFD presentors in each trading/investment conference.
Given the changing environment in the global and local financial markets, where people are always on the look out for better and more efficient trading instruments on the one hand, and new products and regulations being introduced on the other hand, it can be said that CFDs are here to stay. With most investors and traders benefiting from share/equity trading, it is only a matter of time for the level of CFD trading to mirror that of the actual share trading.