The emergence of CFDs came largely from retail traders who wanted to obtain the privileges previously only enjoyed by institutional investors. CFDs have appeared in the institutional market since the 1970s and are familiar to institutional participants as stock swaps. A swap is a transaction between two institutions. Payments to one or both sides of a transaction are tied to the performance of stocks and stock indexes. Sometimes swaps are used to avoid withholding taxes, obtain leveraged financing, or enjoy owner returns without actually owning the stock. The most common type of transaction is an interest rate swap, in which one party agrees to pay a fixed interest rate to another party in exchange for a floating interest rate. Other swaps frequently traded among institutions include asset swaps, bond swaps, debt swaps, equity swaps, liability-equity swaps, roll swaps, and interest rate swaps. The swaps market has traditionally been inaccessible to retail investors due to restrictions on higher starting trade sizes in the institutional market. CFDs enable retail investors to reap the benefits of participating in the swaps market.
CFDs originated in the UK and became a relatively mainstream trading product in 2000. Once CFDs appeared, they quickly spread and gained popularity around the world. London still maintains its position as the most mature CFD market in the world. We can see the development of CFDs through trading volume. In 2000, the trading volume of CFD products was US$2.5 billion, which rapidly increased to US$52.5 billion in 2004. It is estimated that more than 25% of all trades by retail clients of the London Stock Exchange are based on CFDs. Other CFD markets are experiencing similar rapid developments.
People's interest in the CFD market is mainly due to the wide range of transactions that can be carried out in different markets around the world through CFDs. Demand for CFDs has expanded from margined FX and stocks to precious metals, commodity futures and Treasury bonds.