The London Stock Exchange's Exchange Traded CFDs (ETcfds) service will revolutionise the trading of contracts for difference (CFDs) by allowing them to trade alongside the underlying equity in SETS - Europe's most liquid order book for UK equities.
Undergoing testing from the start of 2009 to be offered live later in the year, this pioneering development combines the flexibility of a CFD contract with the benefits of a standardised, centrally traded and cleared product - particularly advantageous in these stressed market conditions.
By bringing CFDs "on-book" the London Stock Exchange is able to provide users with an additional way to trade the share market, manage risk and enhance portfolio returns, and in so doing, attract new participants, new flow and new trading opportunities - increasing liquidity and market efficiency to the benefit of the market as a whole.
No other venue offers a combined CFD and equity order book with fully fungible trading between the two products. Being "on-exchange" and by nature a standardised product, ETcfds offer a number of additional advantages to their OTC counterpart. For example, their regulatory status overcomes mandate barriers and the standardised terms and rates remove the need for individual ISDA agreements, manage corporate event decisions and all competitive rates to be applied universally. This model evolves the existing OTC model by making the prime broking function part of the infrastructure, resulting in a far more efficient process.
The ETcfd model innovatively utilises the existing cash equities infrastructure and brings together the individual expertise of the exchange, LCH.Clearnet and several leading financial houses in order to widen participation, improve liquidity and significantly enhance the efficiency of vanilla CFD trading. The standardised contract enables the clearing house to treat ETcfds and equities in the same way, allowing multilateral and cross-product netting, which reduces balance sheet exposures and delivers collateral savings through efficient margining.
Finextra verdict: As competition among trading venues in Europe hots up with new players growing execution market share, the onus is on the traditional exchanges to prove they can still deliver innovation and benefits to the market. The ETcfds initiative from the London Stock Exchange is a perfect example of this in action.