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Analysis
ASX launches CFD exchange
Toni Case - November 5, 2007
The Australian Securities Exchange launches contracts for difference (CFDs) into the mainstream this week with the world’s first exchange-traded CFD market. Starting Monday 5 November, the doors will be open for investors to trade 16 equity CFDs, with the range expanding to index, forex and gold CFDs just over a week later.
Participating brokers in the exchange include ABN AMRO Morgans, Bell Potter Securities, CommSec, First Prudential Markets, MF Global, Morrison Securities, OMFinancial, Sentinel Financial Group and Trader Dealer.
From a little-known product back in 2002, CFDs - undoubtedly the biggest trading innovation in recent times - have come a long way. First introduced to Australia just over five years ago by international players IG Markets, MF Global (called Man Financial at the time) and CMC Markets, CFDs today claim upwards of 5 per cent of the market.
The ASX’s involvement in the market legitimises a product that in the early days was regarded as little more than gambling – a night at the casino or a flutter at the horses. It also introduces CFDs, a highly leveraged derivative, to a much wider audience.
The implications of the ASX involvement in the CFD market shouldn’t be underestimated, not only for competing CFD firms that have been offering CFDs on an over-the-counter basis for the past five years (an over the counter product means that the trader deals directly with the CFD provider as opposed to dealing directly with an exchange). While some CFD providers, such as CommSec, FP Markets and Man Financial, will be offering ASX CFDs as an alternative avenue for their CFD trading clients, other providers will not. Clearly, the launch of ASX CFDs will increase the number of players in an already hotly contested market, with the ASX becoming a direct competitor to some existing CFD firms.
A second point is worth mentioning; over the years CFDs have been largely sold as a retail product. Online punters trading the markets at home or in the office have been the target client-base of CFD providers, which is in stark contrast to other popular derivatives offered by the ASX such as futures, options and warrants – which are predominantly sold to institutional investors. Clearly, the task for the ASX is managing the risks of such a leverage product in the hands of retail clients. Wild swings in share prices, market corrections and the like, can cause havoc to the average CFD trader's account. While institutional investors with deep pockets can weather such storms, smaller retail traders are more exposed to harsh winds.
Within its educational handouts, the ASX discusses the benefits of combining an ASX CFD with an exchange-traded option (ETO) for protecting downside losses. A trader is encouraged to buy a put option to protect a "long" ASX CFD position. Indeed, educational lessons such as these will be high priority for the ASX over coming months.
In the main, ASX CFDs share similar features to CFDs currently offered by CFD providers. These features include:
1. The ability to go long (buy) and short (short sell to profit from falling prices)
2. No expiry date
3. Daily interest charges on long CFD positions
4. Daily interest paid on short CFD positions
Additional benefits of ASX CFDs include receiving income in the form of franking credits on dividends (called franking credit cashflow), and the ability to convert ASX equity CFDs into ordinary stock at a set price.
More articles from this week's newsletter:
Fundamentals: Telltale signs to sell that stock
Stocks: Another hot mining prospect
Smart investing: ATO toughens up on SMSFs
Resident Trader: How to profit from volatility - part 3
Stocks: Stock winners and losers from bullish currency
Stock of the week: Straits Resources weathers the storm
CFDs: ASX launches CFD exchange
Expert panel (CFDs): Top Ten CFD stocks for the week
Whatever your views, you can discuss this article - or any of Toni's articles - on our message board Your 2 Cents.
Toni Case is Australia’s first journalist to specialise on Contracts for Difference (CFDs). She was a staff writer for Shares, Personal Investor and Asset Magazines, and today is a regular columnist with the Australian Financial Review. She is a qualified financial adviser, and has an Economics (Honours) degree from Sydney University.
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