Daryl Guppy brings you up to speed on where CFDs originated, how they have evolved and how you can make CFDs work for your trading.
In the beginning
The history of CFDs (contracts for difference) is a story of increasing sophistication of traders and investors and the redefining of the financial marketplace, as roles within retail trading are themselves redefined. The evolution has become a revolutionary transfer of the power of risk management and the way trading activity is used to make money. The revolution is in the ability to manage risk in ways that can only be applied using CFDs and that cannot be replicated in the physical stock market. Not a bad achievement for a retail product that started in the United Kingdom in around 1998.
CFDs are currently traded in the United Kingdom, Australia, New Zealand, Germany, Italy, Switzerland, Sweden, Norway, Belgium, Denmark, Netherlands, France, Spain, South Africa, Hong Kong, Singapore and the United States (to non-residents only).
The origin of CFDs brings together five historical features: taxation, leverage, the internet, going short and ‘hot money’.
In some ways, CFDs are an unintended consequence of excessive taxation. Prohibitive stamp duty in the United Kingdom and the difficulty experienced in establishing and maintaining short positions in individual stocks facilitated the creation of CFDs. They were developed in the early 1990s and enabled large hedge-fund clients to easily sell short the London Stock Exchange with the benefit of leverage, and stamp duty exemptions.
In the late 1990s, Gerrard & National Intercommodities introduced CFDs to the retail market. GNI offered its clients CFD products and an innovative trading system that, for the first time, allowed private clients to trade directly into the London Stock Exchange. They were able to trade long or short without having to take delivery of the underlying shares. In the early 2000s CFDs were introduced into Australasia.
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The YTE Team…