There are a number of different financial products that have been used in the past to speculate on financial markets. These range from trading in physical shares either direct or via margin lending, to using derivatives such as futures, options or covered warrants. A number of brokers have been actively promoting CFDs as alternatives to all of these products. Although no firm figures are available as trading is off-exchange, it is estimated that CFD related hedging accounts for somewhere between 20% and 40% the volume on the London Stock Exchange (LSE). A number of people in the industry back the view that a third of all LSE volume is CFD related. The LSE does not monitor the numbers but the original 25% estimate as quoted by many people, appears to have come from a LSE spokesperson.

The CFD market most resembles the futures and options market, the major differences being:

• There is no expiry date, so no price decay;
• Trading is done off-exchange with CFD brokers or market makers (note exception with ASX discussed below);
• CFD contract is normally one to one with the underlying instrument;
• CFDs are not available to US residents;
• Minimum contract sizes are small, so it’s possible to buy one share CFD, low entry threshold;
• Easy to create new instruments, not restricted to exchange definitions or jurisdictional boundaries, very wide selection of underlying instruments can be traded.

Advantages

• Market Independence; the exchange has to make sure markets are fair, orderly, and transparent.

• Transparency; ASX reports on all ASX CFDs transacted, open positions, bid, offers and their volumes and ASX CFDs are traded in the same way as other ASX traded contracts. ASX CFDs are offered on a separate market with a separate book to that of physical stock trading on the ASX.

• Counterparty risk; all settlement obligations are cleared and guaranteed by SFE Clearing Corporation (SFECC) which has a statutory obligation to operate "fair and efficient" facilities. These are monitored by both Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA). The ASX claims this reduces counterparty risk as the payment is guaranteed by the exchange central clearer which has much larger capital reserves than any individual broker.

Disadvantages

• Higher costs; the exchange and the clearing house need to earn money and so charge fees as well as the broker. In addition the broker’s administration costs tend to be higher to comply with exchange and clearing requirements.

• Limited products; Australian Securities Exchange only offers a small number of CFDs, does not cover all physical shares on its own exchange and does not offer CFDs on shares from any other country. It does offer a small number of global indices and some currencies.

• Pricing; one side effect of the separate order book for CFDs on the exchange is that prices and spreads are based on CFDs orders only. This means that the price and spread of an ASX CFD can be different from that of its underlying instrument.