Published On: Mon, Nov 12th, 2012

The History of CFDs

Many of the products available to the modern trader have been around for decades if not centuries. Futures, for example, actually date back to about 1710 when the Japanese started trading rice in the forerunner of modern futures markets.

CFDs, on the other hand, are a fairly new kid on the block of the trading world. The first Contract for Difference made its appearance in the early 1990s in London. Jon Wood and Brian Keelan of UBS Warburg are widely credited as launching the first CFD transactions during the Trafalgar House deal.

Originally CFDs were not available to retail traders.  They were mainly used by institutional traders and hedge funds which needed an investment tool to hedge their share portfolios on the London Stock Exchange.

The fact that, since no actual shares are bought or sold, CFDs do not attract stamp duty made them immediately popular. Their leverage and their ability to ‘short’ the markets quickly turned them into very popular trading instruments.

The first company to introduce CFDs to the retail public was GNI Touch – which was later taken over by MF Global. Other early market players included CMC and IG.

Nobody could predict the immense popularity that CFDs immediately enjoyed with the trading public. According to a 2007 survey by Investments Trends, CFDs were growing at the astronomical rate of 100% per year in Australia and they predicted the trend to continue for the foreseeable future.

Very soon it was not only shares on the London Stock Exchange that could be traded with CFDS, but also international stocks, indexes, bonds, commodities and finally even currencies. Index CFDs, such as those on the DAX, NASDAQ, S&P 500 and FTSE in particular became very popular with a public that saw the leveraged nature of CFD trading as a doorway to easy riches.

CFD providers quickly spread from London to countries in Australasia, Africa and other parts of the world. The first CFDS were released in Australia in 2002 by CMC markets and IG markets.

For the first few years CFDs were exclusively traded over-the-counter. Australia was the first country to introduce exchange-traded CFDs. This happened in November 2007 when the Australian Securities Exchange launched CFDs on 50 shares, a number of global indexes, a couple of commodities and 8 forex pairs.

The history of CFDs in the UK has not been without controversy. Insider traders soon realized they could bypass insider trading legislation by buying or selling CFDs rather than the actual shares. After a number of high profile court cases the Financial Services Authority was forced to expand the disclosure regime to CFDs.

Today there are numerous CFD brokers around the globe. A few of the major ones are CMC Markets, First Prudential Markets, IG Markets, Saxobank, Sonray Capital, GFT, Marcquarie Bank and City Index.

The range of products has since increased to include a large number of international share indexes and individual shares, as well as a diverse range of commodities, bonds and currencies.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.