Bourse in world first with CFD exchange
Kevin Andrusiak September 07, 2006
THE Australian Stock Exchange is establishing the world's first exchange-traded market for contracts-for-difference on the Sydney Futures Exchange, after yesterday naming eight broking firms as designated price-makers.
It is a move designed to create liquidity for the rapidly emerging investor appetite for CFDs, which have been around for about 20 years in overseas markets, but are just starting to catch on in popularity in Australia.
CFDs are a leveraged play on stock prices. Essentially, a CFD is an agreement between a buyer and seller to exchange the difference in value of a stock between when the time a contract is opened and closed. It gives an investor a chance to cash in on the performance of a stock, without owning it.
Big market players at the moment include Macquarie Bank, Man Financial and Perth-based Marketech.
After the new market is introduced, investors will be able to call their broker and ask for a BHP CFD, which will be traded through a price-maker on the SFE.
Like many derivative products, traders can also make money by betting on a downward movement of a stock or commodity.
Current volumes are unknown because CFDs are only traded over-the-counter in Australia.
By making an exchange-traded market for the product, the ASX said it would improve transparency and give secure counter-party backing.
"While CFDs have been one of the fastest growing product sectors in financial markets in recent years, the exchange-traded CFDs to be listed on SFE will become the first to offer all the benefits of central counterparty clearing, frontline regulation, liquidity provision and multi-broker access," the ASX said in a statement.
It is the first new product offering from the ASX since it merged with the SFE in July.
The designated price-makers are Commonwealth Bank, Credit Suisse, IMC Pacific, Optiver Australia, Susquehanna Pacific, UBS Australia, Merrill Lynch and Timber Hill Australia. The SFE is believed to have been looking at building the exchange for more than 12 months.
However, over-the-counter CFD traders believe the new market will increase the spreads for the CFD stocks on offer on the SFE model, because of the distinct price formulation in CFDs.
They argue that they can get the stock at real-market prices through access to real-time ASX boards.
The SFE said the exchange-traded CFDs will be listed across a broad range of assets, including global equity indices and major Australian stocks.
Foreign exchange crosses and key commodities, including gold and oil, will also be included.
Trading is scheduled to begin next April.