David Clerkin – The POST.IE
The Irish stock market is set to suffer significant fall-out from last week’s dramatic drops.
Many wealthy investors in contracts for difference (CFD) products, and in specialist investment funds with a heavy exposure to the Irish market, are understood to have incurred significant losses.
CFD holders, whose business accounts for up to 50 per cent of trading volumes on the Irish Stock Exchange, were among the heaviest losers in last week’s share decline.
Now it has been learned that they have also had their buying power severely curtailed after a move by Cantor Fitzgerald, the US investment bank that provides the bulk of CFD products to clients of Dublin brokers, to protect itself from losses caused by falling share prices.
This will severely curtail their trading levels in the market, cutting the overall level of activity in the market and the income of stockbroking firms.
CFDs, which have also attracted business from wealthy investors, allow them to gain exposure to individual stocks without physically buying the shares in question. They have attracted large commission fees for local broking firms and are considered one of their most lucrative sources of income from high net worth clients.
They also generate spin-off fees – the Irish Stock Exchange estimates that CFDs drive between 30 per cent and 50 per cent of its total share trading volumes.
Cantor changed its policy governing margin payments from CFD clients last week, doubling the amount of upfront cash they must put up to trade in CFDs.
The move will mean that CFD traders who put €10,000 in their trading account will, from now on, only be able to have exposure to shares worth €50,000, down from €100,000 under the previous policy.
CFD traders also suffered heavily during last week’s market sell-off, which knocked 10 per cent off the main financial stocks in Dublin between Thursday and Friday.
The highly leveraged nature of the instruments meant that a 10 per cent fall in an individual stock would have been enough to wipe out all the money put up by a typical CFD investor to enter into a contract.
Some brokers said clients who had enjoyed lengthy success in CFD investing had continued to roll up their investments into fresh CFDs, instead of taking their gains in cash.
Last week’s falls brought previously successful trading strategies to an abrupt end, they said.