Contracts for Difference Trading in Germany

CFDs in Germany

CFD, the abbreviation for "contract for difference" is one type of derivatives, which is in the Anglo-Saxon world, particularly in the United Kingdom has been established for for decades. In Germany, this form of investment is possible only since 2006. The Germans have long been reticent to commit to Contracts for Difference, but in the last few years there has been increasing acceptance, to the extent that Germany may now be the fastest expanding market for CFDs. The upsurge seems to stem from the European Union's regulations entitled Markets in Financial Instruments Directive (MiFID), and this has led to more CFD dealers opening offices in the country.

Meanwhile, according to estimates by the market leader IG Markets in this country about 70,000 investors with CFDs. Before the advent of online trading, most people living in Germany who wanted to use CFDs chose to open accounts with English CFD dealers. The natural consequence of more Germans wanting to trade with the leverage of CFDs is that the English CFD brokers have been looking to open branches specifically to serve the German market.

IG Markets, which started its CFD trading operation in 1999, opened a German office in 2006, somewhat ahead of the surge. Delta Index, the Irish based online trading company, expanded into the German market with a portfolio of German directed CFD products introduced in 2009, resulting in expansion in the Dublin office. And in 2010, FXCM, which is recognized as a major Forex broker and CFD dealer, opened an office in Berlin.

It is estimated that the German CFD market is increasing by 6% per month in terms of trading volumes, and there are more than 40,000 active CFD traders. But the number of active traders is projected to reach a quarter of a million in the next few years, as CFDs become more popular.

It seems that Germans are seeing the CFDs as a good vehicle for trading on market indices, as the vast majority of the activity is involved with these. In 2008, the last year for which there are reliable figures, the stock index activity in the CFD field was nearly 82% of the whole market. Forex hit 11% of the CFD volume, which is somewhat surprising when you consider that the true Forex market already has the inbuilt facility for leveraging your trades. This means that the use of CFDs for trading currencies was more for the other advantages that they offer, such as the reduced lot sizes and simplicity.

With only around 3% of the CFD market, both commodities and equities were very distant in popularity. For equities, CFDs provide an excellent way to gear up your trades which cannot be achieved as easily or at all when you trade directly in the stock market, where the best broker's margin is typically only 50%. It is likely that this segment of the CFD market will take off when the true benefits of CFD trading become realized by the Germans. Commodities, usually traded as futures, are already highly leveraged, so the low CFD use in this market was understandable.

In brief, the German market for CFDs is expected to expand greatly over the next few years as more traders come to realize the benefits offered.

CFDs Trading Germany: Industry

Having been introduced to Germany in 2005, contracts for difference (in german known as a contract for differenz) have grown in popularity since the (2008) financial implosion, taking market share away from an even more popular trading instrument known as Zertificaten (Certificates), which, like contracts for difference, offer short-term traders leveraged exposure to market risk but without the counterparty guarantees of central clearing. In fact it is reported that while CFDs surged in 2008, volume in certificates dropped by as much as 40%. This can partly be attributed to the fact that CFDs are generally more liquid and tradable than certificates, which are structured products issued in specific tranches, often offering pay-outs triggered by specific events or price breaches.

Two German researchers recently stated that the notional value of an entire branch of Germany's retail derivatives sector had risen 49% in just one year on a 116% surge in volume. Traditional old guard companies like Goldman Sachs and Dresdner Kleinwort dominate the certificates markets while CFDs are offered by niche companies like CMC Markets.

In Germany, the CFD market competes with leveraged structured products. One difference between the products is that one has to open a margin account with a provider to trade CFDs whereas for structured products one only need to open an account with a broker such Cortal Consors or Flatex to access all the products from 15 major issuers, as well as smaller providers.

The market for CFDs is still relatively small compared to the market for leveraged structured products offered by the major banks although CFD providers have increased their marketing spend to attract more online day traders. The smaller German CFD providers compete with established UK companies such as CMC Markets, City Index, ETX Capital and IG. Local brokers include Cortal Consors (which has stopped offering CFDs), Flatex and S-Broker; the online the online brokerage belonging to the Sparkassen (savings banks) group - also trades CFDs. One bank which offers CFDs is Commerzbank which offers access via the comdirect CFD trading platform (Comdirect is 80% owned by Commerzbank) with Commerzbank acting directly as the market-maker on its own over-the-counter platform.

The latest arrival was Munich-based DAB Bank which added CFDs in December 2013 to its product range for its online brokerage customers, using a platform called Margin Trader with Italian DAB subsidiary Fineco Bank as market-maker. For most CFD providers in Germany, building links with the online local brokerages is crucial - even though investors may also deal directly with their online trading platforms.

Most major German banks in the German structured products market still don't offer CFDs so the big CFD providers have the market mostly to themselves. The three biggest CFD providers in Germany are IG Markets, CMC Markets and ETX Capital which are thought to have 90% of the German market between them. IG advertises heavily in local retail finance magazines and also runs campaigns at Eintracht Frankfurt football stadium.

In Germany much of the action is concentrated on major stock indexes with the bulk of trading being on the DAX rather than other European indexes.

Major Indices: 70.50%
Sectors: 0.50%
Individual Shares: 4.80%
Commodities: 5.30%
Forex: 18.90%
Source: CFD Verband

The number of customer accounts had reached 36,000 by the end of 2008 [latest figures March 2011, estimate the figure to 70,000] but this is still very small compared to the number of certificate customers. That the proliferation of CFDs is still far behind that of the certificates market can be justified by the enormous competition from the certificates market, which is founded in Germany by major international banks as issuers. Operators of CFD platforms are in most cases, specialist providers such as world market leader IG Markets, which is based in London. Only the Dutch ABN Amro had recognised the opportunity in 2007 by launching its own "Market Index" platform, which is now operated by the RBS.