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.

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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.

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