2007 will be an innovative year in Australia’s financial sector. The ASX is set to launch exchange-traded Contracts for Difference. Since CFDs were introduced to the Australian market a few years ago the growth in the volume of contracts traded has been astonishing, no doubt at least partly due to the current bull market. This growth has also resulted in a significant increase in trading volumes of the underlying shares listed on the ASX, as the CFD providers hedge their exposures. So while the ASX has no doubt done well out of increased fees from trading, they obviously want to get a piece of the action for themselves. It will be interesting to see how their offering compares to the current leading CFD providers and how these providers will adapt to the new competition. I wonder if it will introduce opportunities for arbitrage? It also looks like the ASX will be one of the first exchanges to have listed CFDs, the only other that I have been able to find is the London Stock Exchange.
Whilst the ASX looks to innovate through new products, a consortium of sell-side banks and brokers led by the New Zealand Stock Exchange will be establishing an Australian ECN (to be headed by Greg Yanco, a former ASX exec), an alternative trading venue for ASX-listed shares.
From a technology perspective this will mean an increasing focus on the FIX protocol and I expect algorithmic trading will also increase rapidly in Australia. I wonder if AMQP might also play a role in the network’s implementation?
CFDs close in on share trading – Australia
26 October, 2006, Michelle Baltazar
Contracts for difference (CFDs), a derivatives product which came out of nowhere five years ago, are now the second most popular trading instrument in the country with the Australian Stock Exchange (ASX) gearing up to launch their version next year.
Brisbane based trading software group Market Analyst Software surveyed more than 1,000 traders on their trading patterns and found that CFDs, which originated in the UK and launched in Australia in 2001, are used by nearly one in two traders.
While 86 per cent of respondents still trade shares directly, a high 47 per cent trade CFDs followed by 20 per cent who trade futures and commodities and 13 per cent who trade options.
“We were astounded by this. We asked them ‘what instruments are you trading?’ and I couldn’t believe how many said they use CFDs. It has really taken off,” said Matthew Verdouw, Market Analyst managing director.
He noted that CFDs are killing the market for warrants with only 3 per cent of the survey respondents trading in them.
“What we’ve done with our software is that we change it as people come along requesting different features. We used to have a lot of requests for options and warrants but that’s a trickle now because people are all wanting to try CFDs,” he said.
The Australian Stock Exchange (ASX) cemented the sector’s potential further when it announced last month that it will launch the world’s first exchange traded CFDs.
In the second quarter of 2007, CFDs will be listed on the Sydney Futures Exchange (SFE) platform with the proposed suite including Australia’s top 50 stocks, major global indices and selected commodities.
They have already appointed so-called designated price makers (DPMs) namely Commonwealth Bank, Credit Suisse, IMC Pacific, Optiver, Susquehanna Pacific, UBS Australia, Merrill Lynch Australia and Timber Hill Australia.
Verdouw said, “I think the CFD market is going to explode. People are going to see that it’s a simple and easy thing to trade. Of course there are greater risks but the analysis they’ve done on the raw stock is something they can apply on CFDs except they could get higher returns from the extra leverage.”