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Background and History

The application of CFDs first became widespread in the UK equity market in the early 1990s, the driving force being a requirement by non-market makers (see jargon buster) to be able to go short (sell stock not yet owned with the expectation that the price will fall). It wasn't until the early 2000s that CFDs became available to private investors.

At that time only market makers, most of whom were integrated within big investment banks, were able to trade CFDs. So the investment banks became natural CFD providers, while typical users included hedge funds, arbitrageurs and funds pursuing market-neutral strategies. Demand then grew to include long contracts as well as short, as no stamp duty was payable on these transactions because no actual stock transfer took place.

With the introduction of the SETs system (Stock Exchange Electronic Trading system, displaying and matching orders to buy and sell shares on a computer screen) to the UK market in 1997, stamp duty exemption was widened to include recognised liquidity providers (eg market makers) who were members of the Stock Exchange and it is these members who now provide CFDs to private investors.

Nowadays, a growing number of private investors use CFDs both as part of their trading portfolio and as an alternative to physical share trading. This group includes both short-term frequent traders as well as long-term investors looking for a flexible alternative to margin lending or a way to profit in falling markets.

The other event of significance in the history of CFDs is the growth and proliferation of the Internet, both as an information resource and a way of placing trades.

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