CFDs: A Brief History and Insight

About the Author

Samuel Morton is a Forex and CFD, day and swing
trader. He is a master of price action trading and the
proud owner of www.love-the-pips.com. Samuels
success in financial trading is evident through his ability
to consistently gain high returns from trading over-thecounter markets.
Learn more about his style of trading and his trading
performance at www.youtube.com/user/lovethepips
About the Book
This book provides no trading strategies or advice. It is
written to give a very brief historical background of the
CFD.
Legal Info
The author (Samuel Morton) does not warrant that the
information contained in this eBook is free from errors
and omissions. Changes in circumstance after the time
of publication may impact on the accuracy of the
information.
Samuel Morton is not liable for the accuracy of any
information and shall have no liability to the users of the
information for any loss, damage, cost, expense incurred
or arising by reason of any person using, acting on, or
relying on the information whether or not the loss,
damage, cost, expense incurred was caused by reason of

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CFDs: A Brief History and Insight

any error, negligent act, omission or misrepresentation

in the information.
CFD trading is high risk and you will lose money.
This eBook cannot be reproduced or distributed
without the express written permission of the
author.

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CFDs: A Brief History and Insight

Keelan & Wood

Available information on the invention and history of
the CFD can be vague and misleading but I will
endeavour to share what is available, and try to make the
unclear become clear as I write about CFDs and their
impact on the world of financial trading.
CFDs are widely credited to two men, Brian Keelan and
Jon Wood. Keelan, born in Paris April 1955, won an
exhibition to study at Oxford University, England. Here
he became Chairman of the Junior Common Room (a
group to represent the undergraduate population),
edited the Oxford Literary Review (an academic journal
of literary theory) and captained the colleges University
Challenge team.
Leaving Oxford Keelan joined Credit Suisse White Weld
(an investment bank partnership between White Weld &
Co and Swiss Bank, Credit Suisse). It was here Keelan
first made a name for himself, working in the Eurobond
market. In 1980 Keelan joined Hill Samuel, a leading
British merchant bank later bought by Lloyds TSB, and
in 1983 Keelan joined Merrill Lynch. His position at
Merrill Lynch took him to New York but he was to
return to Britain in 1987 where he had joined Swiss
Bank Corporation (later merged to become UBS). It was
his position here that Keelan would meet Jon Wood and
would mark the start his most influential career.
Wood, born in Yorkshire, England 1961, studied
economics at Loughborough University. He was dyslexic
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CFDs: A Brief History and Insight

but good with numbers. His career took him to Swiss

Bank Corporation (SBC) where he was employed as a
trader. Wood had phenomenal success in his profession
reportedly earning $2.4 billion for SBC. It was at SBC
Keelan and Wood, the creator of the CFD, met and
worked together. Wood would later become Head of
proprietary trading at UBS and then become founder of
his own hedge fund, SRM Global Fund.

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CFDs: A Brief History and Insight

From Trafalgar House to a Global Phenomenon

The invention of the CFD is widely credited to both,
Brian Keelan and Jon Wood. In the course of planning
its bid for Northern Electric in 1995, Trafalgar House (a
British company with interest in property investment,
property development, construction, engineering,
energy, shipping, hotels, and publishing) entered into a
number of CFDs with its financial advisor, SBC, the
employer of Keelan and Wood.
The reason for these transactions, Trafalgar House (TH)
would have exposure to upward price movement of
electrical shares. The announcement of THs bid to
purchase Northern Electric would likely increase share
price and TH would benefit from this. SBC hedged this
position by purchasing the actual or real shares
(underlying shares or asset).
At the time these CFD transactions were not disclosed
by TH or SBC as neither Companies Act nor Code
required them to be. As the use of CFDs became more
popular changes to the Codes disclosure provisions
changed.
Soon after the TH and Northern Electric bid, CFDs were
being used by hedge funds and institutional traders to
hedge positions on the London Stock Exchange. This
was attractive due to CFDs cost-effectiveness they
required a small margin and avoided UK tax (stamp
duty).
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CFDs: A Brief History and Insight

Some historical resources will share that a London based

brokerage firm, Smith New Court, later to be bought by
Merrill Lynch, created the CFD to help institutions
hedge their exposure in the markets. Some resources
even state that Keelan and Wood were traders at Smith
New Court. TH and Northern Electric are more
commonly referred to when reviewing the history of
CFD. If Smith New Court were involved somehow, it is
not commonly known. Keelan unfortunately passed
away in 2005, aged 50, and there is very little available
on the history and origins of CFD trading.
As the late 1990s approached CFDs were introduced to
retail traders but shares on the London Stock Exchange
were the only CFDs offered. GNI was the first company
to offer a CFD trading service GNI Touch. GNI and
GNI Touch would later be purchased by MF Global and
eventually go into administration (not the best start for
CFD trading!).
Come the year 2000 IG Markets and CMC Markets
offered CFD trading services. As retail traders realised
the real benefit of trading CFDs high leveraged
products meaning high returns with small investment
the CFD boomed in popularity.
As the CFD market grew CFD providers expanded the
amount and diversity of CFDs offered for trading. Shares
on the London Stock Exchange were no longer the sole
financial instruments offered but indices, global shares,

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CFDs: A Brief History and Insight

commodities, currencies, and bonds were also being

offered.
By 2002 CFDs were expanding overseas, first to
Australia, at the time of writing this book CFDs are now
offered in Hong Kong, the Netherlands, Poland,
Portugal, Romania, Germany, Switzerland, Italy,
Singapore, South Africa, Canada, New Zealand, Sweden,
Norway, France, Ireland, Japan and Spain. To this day
CFDs are not offered in the US due to US restrictions on
over-the-counter financial instruments.
Today there are several highly recognized international
CFD providers.

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CFDs: A Brief History and Insight

The CFD
CFDs are traded between individual traders or
institutions and a CFD provider. These are the two
parties that create the contract in contract for difference.
The CFD is created by the trader opening a trade with
the CFD provider. This trade can either be long or short.
Long being a buy trade where traders will profit as price
of the bought instrument appreciates. Short being a sell
trade where the trader will profit as price of the
instrument depreciates. This trade once opened is
referred to a position, a long position or a short position.
Once the position is closed the profit is paid to the trader
by the CFD provider or the loss is deducted from the
traders account and given to the CFD provider.
CFDs are referred to as being an Over-the-Counter
Market (OTC Market). Shares and other financially
traded products are traditionally traded on an exchange.
These products are referred to as exchange traded
products (ETPs). On an exchange buyers and sellers
meet and agree to exchange financial products at an
agreed price. The CFD market differs from this
traditional way of trading, as the buyer and seller is
always the trader and the broker and there is no
exchange. Brokers clients (traders and investors) are
able to purchase or sell a CFD product and the broker
will act as the second party. This transaction, of buying
and selling with the broker, rather than through the
broker, has caused some concern to those desiring to
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CFDs: A Brief History and Insight

trade CFDs. There is worry that traders and investors

are trading against the broker and that it is of best
interest (for the broker) for clients to ultimately lose.
This worry is totally flawed and is spawned by sore
losers and those who are uneducated in CFD broker
procedures and regulation. Very few of these concerns
will be legitimate, those that are will need to be followed
up with the broker in question.
The reality is that traders are not actively trading against
their brokers and the broker is not out to get you. CFD
brokers act as market makers they create markets,
CFD markets.

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CFDs: A Brief History and Insight

The Provider
For year end 2012 CMC Markets reported a net worth of
over 84 million with over 52 million cash in bank. IG
Markets reported a net worth of over 252 million with
over 209 million cash in bank. Both CFD providers
display a steady increase of net worth year on year
(information found at www.companycheck.co.uk).
It is obvious the CFD industry is flourishing. With the
entrepreneurial spirit that exists in the 21st century it
should not be surprising. The general population want to
make money and lots of it. Trading is a pathway to
achieving this and CFDs make that path simple. But how
do the CFD providers make their money? If CFD
providers are not trading against their clients then how
do they financially benefit from offering CFDs?
CFD providers are market makers. They create a CFD
market and offer traders and investors to buy and sell
the CFD offered. Each CFD offered by the broker will
potentially provide two main sources of income; spread
and fees.
The spread is the difference between current market
price and the ask price offered by the CFD provider. For
example, if the UK100 (CFD of the FTSE100) is
currently priced at 6,525 the CFD provider will offer to
open a buy position at 6,526. The 1 point difference is
the spread. The CFD provider will bank the monetary
value difference as their own.
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CFDs: A Brief History and Insight

CFD providers hedge positions taken by their clients.

This may include buying or selling the underlying asset
to match the CFD position of their clients but commonly
CFD providers hedge client against client. As one client
takes a long position on a particular instrument, another
may take a short position. These positions are hedged or
matched. They balance each other out. The CFD
provider has no exposure and the spread difference on
both positions is theirs to enjoy. There are many
modules used by CFD brokers to hedge their exposure
(unmatched client positions), which vary but generally
involve buying or selling the equivalent of the exposure
on an exchange.
It is important to note here that some CFD providers
will take the other side of a traders position. Over 90%
of traders will ultimately lose, so it makes sense for the
provider to be on the opposite side of those trades and
take the winnings. If a trader has proved that he or she
will consistently make money, then the CFD provider
will generally then hedge positions by the successful
trader, generally by purchasing the actual traded
instruments on an exchange. For this reason, it is vital
that a regulated and well-established CFD provider is
used.
Financing charges, commission and management fees
may also be charged by providers to increase revenue
and cover the cost of offering their services. A provider
that opens a position of an underlying asset to hedge the
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CFDs: A Brief History and Insight

CFD transaction of the client may incur commission

charges. A commission charge or similar may then be
charged to the client to cover this expense.
CFDs are offered on margin or leverage. This means that
CFD positions can be opened at a fraction of the price as
the broker will make the difference between the clients
margin and the financial amount of the position held.
For example, if the UK100 (CFD of the FTSE100) is
currently priced at 6,012 per contract the trader may
be able to open a CFD contract for as little as 60.12 (on
a 1% margin or 1:100 leverage). This form of trading
allows for big returns for small investment. Many
brokers will charge a financing charge for offering this
type of trading.
As technology ever moves forward so do the platforms
offered by CFD providers. Most providers now offer
access to their services on the go via phone apps and
tablets. Many traders offer their own bespoke platforms
that can be accessed via their website or the clients
desktop. Tools used by professional traders are widely
accessible on CFD platforms, Fibonacci and moving
averages being two of the most popular. News
information is also broadcast to platforms enabling
traders to trade news events without the aid of any
secondary source.
In recent years providers have spent funds on employing
analysts to give advice to clients on what and when to
trade CFD derivatives. This advice is normally shared
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CFDs: A Brief History and Insight

with clients via email and text messaging. Some

providers have spent funds on offering clients a social
trading experience. With social trading clients can
interact with each other, share trading ideas, and even
copy each others trades. Whatever the provider is
promoting and advising it is all there to encourage its
clients to open trades. Opening trades means more
spread and fee income, more revenue for the provider.
For the provider, the key to increased revenue is
increased volume of trades.
There is a constant battle for clients in the world of CFD
providers. Advertisements and affiliate programs cover
the web. Providers want more clients, they want more
cash. Because of this battle for clients spread can be
extremely competitive offering traders a lower cost to
trade CFD products. Bonus schemes are also a popular
incentive offered by providers. These bonus schemes
offer clients with a temporary account increase if they
deposit funds and start trading. For example, deposit
1,000 and get an extra 50 added to your account.
Most providers offer free demo accounts with huge sums
of play or paper money. They do this as potential
clients will then get familiar with the providers platform.
When the potential client finally decides to trade live he
is more likely to trade with the provider as the client is
comfortable using the providers platform.

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CFDs: A Brief History and Insight

The Downfall
To some the CFD boom looks like it will never end.
Some traders earn well trading CFDs and are very
satisfied with the service their provider provides. For
others this does not seem the case.
CFD horror stories and negative articles loom the
internet causing some to be sceptical.
One of the issues mentioned often is CFD providers
running positions against their clients based on client
profiles, in the expectation that those clients would lose,
and that this created a conflict of interest for the
providers. Having a provider who wants you to lose and
will benefit from your loss would not make any client
feel confident. Though this is often mentioned by traders
and investors online there is no obvious evidence this is
the case, apart from providers taken the other side of
new traders trade as mentioned in the previous chapter.
CFD providers do not help the situation. A popular UK
based CFD provider states in their terms and conditions
to prevent and minimize conflict of interest, we have
adopted a number of systems and procedures these are
detailed in our Conflicts of Interest Policy whilst the
Conflicts of Interest Policy actually contains very little
about any systems or procedures in place. Whilst saying
this, its important to note that most CFD providers are
highly regulated and do not have the means to ensure
clients lose. Even the dreaded world of binary options
trading is now becoming regulated and their price charts
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stream from a global server so there is no chance of

them manipulating price.
A major concern about CFD providers is the way they
market CFDs to new and inexperienced traders. These
traders obviously lose money, due to being so nave. This
can give off the impression CFD providers are only there
to make a quick buck and do not care about who opens
an account or how much money they lose. Once again
CFD providers do not help themselves. One CFD
provider affiliate program encourages its affiliates to
seek for younger males who have an interest in
gambling. This does not help the image.
New, inexperienced traders loss money, of course they
do. Professional traders get paid a fortune and are
considered extremely clever at what they do. Do you
really think a novice will open an account and within a
few weeks start making a living? With so many traders
posting online about their losses this will put others off
using CFD providers and mark providers with the word
scam.
One of the biggest obstacles to overcome as a trader is
that of trading psychology. The emotional levels of
trading with high risk products are too much for many to
handle. Once again CFD providers do not help
themselves. Providers are great at offering trading ideas
and showing you good positions to take in the market
but not one CFD provider from my research offers
support on trading psychology. This is perhaps a major
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CFDs: A Brief History and Insight

downfall by providers as they are not offering their

clients with the support that is most needed. Once again
providers are not offering the image of a provider that
wants its clients to be successful but an image of trying
to earn as much cash as possible from its client before
the client decides to throw in the towel.
Another common issue often mentioned is that the
provider took my money. This normally entails a story
about a trade that somehow went wrong and it was the
brokers fault. Though some of these complaints may be
genuine most of them could come under the category of
sore loser. Losing money is hard. It is common for new
traders to blame the broker when they lose money. Even
though this may be the case the CFD providers image is
once again under attack.
There have been a few successful court cases against
CFD providers which add incredible weight to the CFD
scam mentality.
In 2012 a major CFD provider, Alpari, was fined
$200,000 for improperly cancelling forex trades and
removing profits from customer accounts. The NFA
document instructing of the fine stated Alpari agreed to
refund customers for losses they incurred as a result of
price adjustments that Alpari made to their account in
connection with their October 2011 market event, as
alleged.

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CFDs: A Brief History and Insight

Why Trade CFDs?

So what is the pull to CFD trading?
As mentioned previously in my book, CFD trading offers
a high return with little investment. This is what the
finance world call margin or leveraged trading.
With margin trading, traders and investors do not have
to pay the full notional value of the CFD. By only paying
part (usually ranging from 0.5%-10%) of the CFD,
traders can control a larger position, amplifying
potential profit (and loss). If desired I can open the
equivalent of 20 contracts on the UK100 for a payment
of around 2630. This is my margin payment and my
position will remain open as long as there are adequate
funds in my portfolio. The same transaction without a
margin or leverage will cost me around 131,000. See
the difference? It is obviously not just cheaper to open a
position but with my margin payment of 2630 I am
reaping the profits of a position of 131,000 (as long as
price moves in my favour).
There are other reasons why CFD trading is attractive
though these are not as major as the ability to pay
margin. Other reasons include the ability to trade a
range of markets from one platform and one provider.
On a CFD platform you may have the option to trade
shares, commodities, currencies and indices all within a
click of a button. Another reason may be that CFDs are
considered simpler to trade and understand than
perhaps purchasing underlying assets on an exchange.
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For example, futures have expiration dates amongst

other things that may make them more complicated to
an investor, whilst a CFD of a future works the same as
any other CFD.
In summary, CFD trading requires a lot less capital, the
opportunity to make high returns, and is generally much
simpler form of trading when compared to ECN trading
or physically purchasing actual financial assets. They are
also exempt from Stamp Duty and accounts can be
opened with no minimum.

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CFDs: A Brief History and Insight

The Future
Who knows where the future lies for CFD providers.
Business continues to grow. Spread betting is growing in
popularity and in some cases, has replaced CFDs. Just
as we speculate about the price of a financial asset we
are left to speculate about the future of CFDs.
There are things we are certain of. The CFD industry
continues to expand with higher revenues year on year,
the CFD industry is now more regulated than ever, and
complaints about CFD trading are dying out.
In my opinion, CFD trading is a great way to profit from
the financial markets. Ensure you open an account with
a regulated broker that has global offices or is based
within the country of your residence. See my FCA
regulated brokers page on my website www.love-thepips.com
I trade CFDs profitably and have minor complaints.

Samuel Morton
Samuel@love-the-pips.com
www.youtube.com/user/lovethepips
www.love-the-pips.com

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