Detailed History Of CFDs - How Has CFD Trading Developed?
CFDs are one of the most interesting ways of trading because of its unique features. However, the history of CFDs isn’t as ancient as you think.
It is relatively new compared to other forms of trading such as forex, futures, commodities, etc.
The only trading instrument that came after the CFDs is cryptocurrency trading. In this article, we will take a look at the origins of CFD and the traders who can be attributed as the first CFD traders.
First, we will take a look at the definition of CFDs.
What Are CFDs?
CFDs are contracts that buyers and sellers form between them. A trading broker and a trader is form this contract between them.
CFDs are leveraged financial products. Here, you speculate on the price movements of global financial instruments such as shares, commodities, currencies, indices, cryptos, etc.
You don’t own these assets and instead, bet on their rising and falling prices. As they are leveraged products, that means you can trade them on margin.
This makes them risky and profitable at the same time.
You can open CFD positions using a small investment known as margin. Using this marginal investment, you are able to trade positions of high value.
Basics Of CFD Trading
The first thing you need to realize with trading CFDs is you have to go either long or short. Going long means opening a buy position on the asset because you assume its price will increase.
On the contrary, you go short i.e. you sell the asset when you think its price will drop.
You also don’t have to pay the full amount of the transaction to start your CFD trade. Suppose you are interested in trading shares of a company which is worth $15 a contract.
You are interested in going long on these shares, and so you purchase 10 shares. The total value of this transaction is worth $150.
You would have paid this full amount if you were dealing in a share market. But margin and leverage play a role in CFD trading.
If the margin for this asset was at 10%, then you will pay only 10% of the total transaction cost.
In this case, the trader only has to pay $15 to trade shares of worth $150. This makes his leverage 10:1.
We have described CFD trading in our other CFD articles. Let us get to the history of CFD trading.
History Of CFDs
The British first developed the CFDs in the 1990’s. The inventors of CFD are Jon Wood and Brian Keelan.
They were both from UBS Warburg, which is a Swiss multinational investment bank.
The first CFD transaction is said to have happened during the Trafalgar House Deal. CFDs were initially traded as equity swap on margin.
CFDs were not immediately released to the common traders. They were rather used as a hedging tool by hedge-funds and institutional traders to hedge their stock portfolio.
They took advantage of the marginal trading offered by CFD. Another advantage enjoyed by these traders was the lack of ownership in CFD assets.
As there were no owning of shares, they were also exempted from stamp duty in the United Kingdom.
These traders took complete advantage of features of CFD such as leverage, margin, hedging, lack of stamp duty, etc. As such, it started gaining popularity rapidly.
By the late 1990’s, brokers started seeing the potentiality of CFD trading if introduced to the mass public.
Hence a number of UK companies started introducing CFD trading to retail traders, making them aware of the benefits that CFD offered.
One of the first companies to introduce CFD trading to retail traders was GNI (Gerrard and National Intercommodities).
Brokers started releasing trading platforms exclusive for CFD trading. GNI was later acquired by MF Global (Mans Financial Global), a major global financial derivatives broker.
History of CFDs: Beginning of Retail CFD Trading
With the start of the new millennium, IG Markets and CMC Markets, the two UK-based trading giants, had entered the CFD market by providing their own CFD trading to their clients.
These two companies really made CFD trading popular and took it to new heights. They didn’t just stop in the U.K. IG and CMC expanded their CFD operations to Australia in July 2002.
Since then, many other brokers and institutions have introduced CFD trading in many other countries.
These countries include Germany, France, Canada, Japan, Italy, Hong Kong, The Netherlands, Norway, Portugal, Austria, Cyprus, Ireland, Russia, Singapore, South Africa, Spain, Switzerland, New Zealand, Turkey, and many others.
The biggest exclusion among this list is the United States, where trading CFDs is prohibited. There is no brokerage or firm that provides CFD trading in the U.S.
However, some U.S residents perform CFD trading through offshore accounts in CFD permitted countries.
CFDs are traded OTC (Over the Counter). In 2007 however, the Australian Securities Exchange (ASX) offered exchange traded CFDs.
This was both advantageous and disadvantageous for traders. The advantages included a decrease in counter-party risk and increased transparency but the disadvantages were increased costs and lack of liquidity.
The Australian traders felt the disadvantages outweighed the advantages and therefore, opted for the previous over-the-counter option. In June 2014, CFDs were traded OTC again.
Controversy with CFD Trading
With popularity, came problems. In June 2009, the UK regulatory body FSA (Financial Securities Agency) released a disclosure stating CFDs to be avoided being used in inside information cases.
Insider trading was already banned and considered as a punishable offense when trading stocks.
There was no such rule for CFDs. After a number of high-profile cases were caught carrying out insider trading using CFDs instead of stocks.
In the following years, various European regulatory bodies issue restrictions on CFDs.
- In 2016, the European Securities and Markets Authority (ESMA) laid out a warning against the sale of CFDs. Numerous complaints from traders about facing losses were a result of this ruling.
- In November 2016, CySEC limited the maximum leverage to 50:1 and prohibited bonuses when signing up for an account.
- French regulator Autorité des marchés financiers banned all advertising of CFDs
CFDs may not have rich ancient history, but it certainly has an interesting one. Operating from the 1990’s, CFDs has been a popular choice for traders because of its lucrative features.
The future for CFDs is bright as it has been increasing in popularity and is profitable for traders.
With more regulation, reach, and interest, CFDs will soon become the preferred method of trading assets without owning them.