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Contracts for Difference Set for Growth

With more people than ever looking to experiment with CFDs, providers are looking to target stockbrokers in the next five years to expand their client list. Product innovation is in the wind too. The CMC group, parent of deal4free.com, is looking to expand its product range for the next generation of CFD clients by offering exposure to treasuries and commodities. The move follows successful experiments with similar types of stocks on the spread-betting side of the business.

Everyone's interested in oil at the moment - it's the hot thing and we can offer a certain amount of exposure through CFDs.

Michael Kuhnel Senior CFD dealer at CMC Group

Kuhnel adds that the company is looking to diversify by offering exposure to stocks like rice, cotton and corn through CFDs in addition to expanding into global markets such as Canadian stocks and the US Russell index.

Also on the product front, Finspreads launched miniCFDs in August this year and says interest has been strong, with hundreds keen to dip their toe in the market. Like other CFDs, miniCFDs offer the ability to go long or short and trade on margin with no stamp duty, but the difference is that they allow the client to trade on as little as one share at a time with a minimum deposit of just £100.

MiniCFDs

Patrick Latchford, IFX Markets' head of equities with oversight of Finspreads, mini CFDs and IFX CFDs, believes the amount of money invested will continue to grow.

Latchford is quick to defend his company's decision to offer investors the option to invest a relatively small amount in baby CFD products. He claims rival companies set a relatively high hurdle rate, which denies some clients access to an account.

'I don't see other players in the market going down the route we've taken,' he says. 'We've progressed from the spread-betting side, where we've always offered the opportunity to go in at a lower level trade.' But competitors are keen to play down these kinds of innovations, saying the product has always been flexible and traders have just not been made aware of how to use it.

GNItouch director in charge of CFDs, Philip Adler, says: 'Accessibility - that's what's changed - and the products in different forms have become more readily available.'

Adler takes credit for kick-starting CFD trading in the UK in 1988, and says his company was one of the first with a product for the retail market. The main selling points for the CFD products remain the same - the ability to go short, leverage and no stamp duty.

He has strong views on miniCFDs, saying he is uncertain about Finspread's strategy. 'I think the concept of miniCFDs is quite odd. They are just CFDs in a smaller size, but within reason you can deal in and out within a day in a normal CFD.'

But Latchford says IFX is not particularly interested in using the spread-betting side of the business as a training ground for CFDs. He believes part of the problem with using spreadbetting in this way is that a lot of people see the process quite literally as a bet and are quite uncomfortable with it. He says: 'CFDs offer a very small trading share and clients recognise what they're doing. It's not necessarily better or worse - it's like going to one shop rather than another. A lot of it is style over substance and from an income point of view there's not a lot in it. CFDs are more akin to shares.'

He thinks the miniCFD development has been very successful in educating clients about the way the product works, a strategy the company piloted with the spread betting side of the business. The corporate strategy is to grow in the retail market. Latchford says his company is not in competition with groups like Cantor and is accessing a different segment of the market.

A leap of faith

Adler plays down criticism that a minicfds client may as well be looking at a real-size version of the product, saying that any client 'can make the jump across' from mini to IFX CFDs at any time, but only a handful have taken this option.

He emphasises that his company works with traders, not investors. He says it important to make the distinction between active traders and investors who are putting money away for a rainy day, adding that CFDs are not a product that should be sold to Aunt Agatha. According to Adler, the reason CFDs have taken off in the last couple of years is partly down to the technology stocks boom, which saw more people become active traders. 'I think the market is a little bit friendlier than it was a few years ago, and people are consequently looking at being more active.'

The CFD side of the business generates three types of client: the active high net worth retail trader; wholesale futures, stockbroker and spread-betting firms, and institutional and hedge fund-related business. The company aims to grow the CFD arm organically in the next few years through advertising and marketing, which always generates a good number of new clients. But the main focus will be on boosting the take-up from stockbrokers.

'The big foray is to try to get more stockbrokers interested,' says Adler. 'The spread-betting companies have thousands of clients who may chose to be more active as they become more familiar with the CFD market.'

Adler is confident that as interest grows stockbrokers will want added expertise to navigate the market and that this is where GNI will come in. His team is aiming to contact and meet every stockbroking firm in the UK by the end of this year and he sees the company moving into 'a provider role' by the end of 2005. He says: 'I suspect the products will remain pretty much the same as they are now - we have already been innovative with the product. Now we are looking towards distribution.'

The big hitters

While Cantor Index head of strategy David Buik compliments rivals City and IG index on their success with clients looking to deal in small amounts, he says Cantor concentrates on 'the big hits'. He believes clients who are looking to take 'trips' of less than £25,000 a time should be looking at spread-betting, not CFDs. 'If you are doing CFDs, then I don't see the point in small amounts. I don't see why lots of people do it,' says Buik. He adds: 'Spread-betting and CFDs can offer the same things but the only difference is the trader does not get quite such competitive options on the price he pays.'

Although Buik thinks stockbrokers tend to 'stick their heads in the sand' over new products, he believes many have now realised CFDs are not going to go away and predicts more will look to whitelabel in the future. He also feels there has been some miscommunication and says it is important stockbroking firms realise that CFD providers are not out to steal their clients: 'An enormous number of trades on the London Stock Exchange are CFD trades and I think this will continue.'

A CFD gives exposure to the performance of the underlying share without owning it, allowing investors to bet on upward or downward movements. Purchases of CFDs will generate share trades on-exchange as the broker will generally hedge the transaction, although some buy futures or options instead.

According to leading brokers, CFDs account for more than a third of the share trading on the London Stock Exchange these days but because the products are off exchange, the LSE is unable to estimate the figures. Buik says one of Cantor's strengths over competitors is the fact that it already has a stockbroker within the company and is not at the beck and call of outside firms. 'We are the only company that operates Chinese walls with regards to our stockbroking arm,' he says.

Opinions on the risk nature of CFDS are changing

City Index chief market strategist Tom Hougaard says that, like a lot of people in the investment community, he used to perceive CFDs as fairly risky investments and definitely not for the risk-adverse, but that his opinion has now changed markedly. He believes it is only a matter of time before all the big banks enter the market. 'We've already seen some of the biggest high street banks enter this area. We offer a service for Barclays clients who want to use CFDs. We have the knowledge and experience of ten years offering these products and stand behind the bank.

We will try and continue this and grow. If the stock market behaves I believe more investors will want to invest in CFDs as part of their overall portfolio, and perhaps for retirement. We want to emphasise that CFDs could be an integral part of that portfolio.

Tom Hougaard CityIndex Market Strategist

Hougaard thinks that CFDs will always be a tool for investors who are more risk tolerant, but says: 'There seems to be a growing culture of people who - with the news flow available over the internet - are far more keen to take an active interest in the markets. I do think more people are curious to see what they can do.'

Hougaard echoes the view of many in the market who see a new generation of investors emerging with a short-term investment horizon, having grown used to boom and bust. These are the people the CFD providers will be targeting in the next five years