The history of CFDs (contracts for difference) starts in the United Kingdom with the passing of the Financial Services Act in the 1980s. This legislation made it much easier for private individuals to buy shares, and spurred the general public’s activity in financial markets. There was a privatization of several public industries, and anyone could have a chance of owning shares in these new public companies.
This increased financial activity had the effect of vastly increasing the volatility of the markets, and created a new level of changing prices that could be gambled on. In particular, the market movements became more nuanced, which geared them towards a certain type of gambling. To take advantage of these price changes, spread betting gambling started to play an increasing role.
Gambling income is not taxable in the United Kingdom. Meanwhile, institutional investors sought more ability to spread-bet on markets in order to hedge their other investments, all with the use of leverage. The combination of this rise in activity along with the lack of tax and regulation triggered intervention from the Government, whose worry was that the sheer amount of wagering could cause swift, harmful swings in the markets. These swings could potentially lead to speculative control of markets, or even alter behaviour inadvertently as an advance indicator of movement in the underlying markets. Still, it became apparent that investors still wanted methods to limit risk exposure and take the right trading positions.
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Originally, the solution was the use of equity derivative swaps, which were gaining popularity in the Interbank markets and quickly becoming a favourite of stock investors. The purpose of the swaps was to insure positions in underlying shares, and they are still used for this purpose by large scale traders. For average investors however, swaps were seen as too complex and unregulated, but there was still demand for products serving the same purpose. This demand was soon met by the creation of CFDs.
History of CFDs: Increasing Popularity
Early CFD brokers extended their reach to individual investors throughout the 1990s, becoming increasingly popular as a way of using leverage to buy and sell trading positions. The more people were making money with CFDs, the more obvious it became that they would spread to other regions as well. Soon, CFDs were well established across marketplaces in Asia and Europe.
As you would expect with a rapidly growing instrument, CFDs have adapted throughout the years to better meet the demands of investors. As the number of CFD brokers continues to rise, the drive to be the best leads to efficiency and innovation. Even traditional share trading firms have introduced CFDs out of the necessity to regain lost business, adding in various types of order filling and their full service approach.
In summary, CFD trading generally delivers benefits for all parties, starting with brokers and continuing all the way to regular investors.
