Global Securities Markets: Navigating the World's Exchanges and OTC Markets

THE OUTLOOK FOR CFDs

The CFD market in the United Kingdom has grown significantly in the past five years. Recently, figures from the FSA indicated that about 30 percent of equity trades were in some way driven by CFD transactions where the CFDs referenced the underlying shares in question.

The global outlook for CFDs also looks increasingly promising even though they are not yet approved in the United States. Even though traditionally CFDs have been traded off-exchange as OTC derivative products, they have for a long time now been accessible to a wide range of investors, including retail investors. This is attributable to innovations in electronic trading systems in the late 1990s, which allowed retail investors the opportunity to trade CFDs on London Stock Exchange (LSE) stocks.

Since 2007, the Australian Stock Exchange (ASX) has afforded further opportunity to retail investors to trade CFDs by creating an exchange-listed CFD product—a product listed on a separate market on the ASX. There are attempts in the United Kingdom, although these have been put on hold for an indefinite period, to also create an exchange-listed CFD product on the LSE. The added attractions of exchange-listed CFDs are obvious, as all trades will be guaranteed by a CCP, thereby significantly lessening counterparty risk exposure and also providing a depth of liquidity.

1. In simple terms, the difference has been likened to the difference between a bus and a taxi. A bus has a schedule with set stops and a ...