History & Growth of CFDs

CFD History is rich colorful

Contracts for difference are a brand new financial instrument in relation to existing financial products like futures, where the Japanese traded rice on the first official futures exchange in 1710.

Just because they are new does not mean they are not very popular. In fact nothing could be further from the truth with CFDs headlining most financial papers and magazines month after month.

The interest since CFDs launched has been staggering with countries, like Australia, experiencing growth over the last couple of years.

CFD trading originated in the 1990’s by a London derivative brokerage firm called Smith New Court which was later bought out by Merrill Lynch. Smith New Court had clients that wanted a way to short sell the market whilst using leverage and as a result CFDs were born.

CFDs also gave clients a way to avoid stamp duty which is an added bonus, making this product even more popular with traders. The reason there is no stamp duty is because with CFDs you are not holding the physical stock.

The first company to launch CFDs for the retail client was GNI, who created an online trading system called GNI Touch. This enabled traders to trade on the London Stock Exchange without having direct access to it. GNI was later purchased by MF Global in October 2002 creating a world leader in both futures and CFD trading.

CFDs were not really mainstream until the end of the 1990’s early 2000 on the European markets and from here it wouldn’t be long before other countries opened their doors.

CFDs explode on the Australian Market

Contracts for difference hit the Australian market through the CFD broker IG Markets in 2002 and were followed very closely by CMC Markets. When CMC markets first launched CFDs they were called dealforfree.com

In was an inauspicious start as CFDs were unheard of and not many traders could believe such an amazing product could exist.

When CMC markets first launched in Australia, their product enabled you to trade the top 200 ASX stocks at 5% margin (20 times leverage) with no brokerage. It almost seemed too good to be true.

Worldwide access to global markets

Opening a CFD account will get you access to many of the worlds markets including

NOTE:Many of the markets listed above have only been opened since 2007/08 as more and more interest is generated in trading CFDs worldwide.

Worldwide markets a mouse click away

With the internet reaching more and more homes around the world it truly is amazing how accessible CFD trading has become. CFD Trading is making that step so much easier. With more and more baby boomers heading into retirement looking for additional streams of income, trading CFDs will continue to boom for many years to come.

Company profits tell the real story

A recent article in the Australia Financial Review (AFR) on CFD Trading highlighted the incredible growth of CFDs despite the incredible volatility the Australian share market has been experiencing early in 2008.

Australian CFD brokers CMC Markets & IG Markets reported incredible growth with CMC Markets claiming a record profit of just under $100 Million for its 2007/08 financial year. CMC markets was also reported to have earned $US340 Million in global revenue and Australian and Asia Pacific contributed about 40 percent.*

The 2007 Investment trend report details the number of CFD traders in Australia had doubled in 1 year to 31,000. Having said that, churn (CFD traders moving from one CFD broker to another) among CFD brokers was high with 32 per cent of current traders reporting they had already switched.

ASX Regulated CFDs (Australian CFD Market)

In Australia the CFD market is predominately unregulated; however, the ASX (Australian Stock Exchange) did launch their own CFD exchange in November 2007 providing participants the extra protection of being exchange listed.

Unfortunately the product hasn’t generated a lot of interest among serious CFD traders due to liquidity reasons and in some cases an increased bid/ask spread. The market is growing and it will be interesting to see how strong this market becomes.

* Source: AFR June 5 2008 written by John Wasiliev.

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