By R Sivanithy
ANECDOTAL evidence suggests that the market for contracts for differences (CFDs) has grown strongly over the past few years and shows no signs of slowing down. No one knows just how big the local market is, since these instruments are traded over the counter (OTC).
But thanks to aggressive advertising and marketing by the big CFD players, an increasing number of retail investors are known to be trying their luck in the CFD arena, probably also encouraged by the fact that several local brokers have also jumped on the CFD bandwagon.
This is fine - the more financial instruments there are available to the investing public, the better. But CFDs are highly complex instruments with plenty of inherent risk.
With a currency CFD for example, it is possible to enjoy 100 times leverage, an attractively high number if the market moves in the investor's favour. But what is sometimes forgotten in sales pitches is that the knife cuts both ways.
So you have to wonder: Are retail players fully informed of all the risks? Or is the financial industry's approach the same as it was on the sale of the failed structured products such as Lehman Minibonds - that is, to focus almost exclusively on high potential returns and downplay the high risks?
You also have to ask, for example, why it is that CFDs are not allowed to be sold to retail investors in the US. And why it is that in the UK, retail investors have to take a suitability test before being allowed to trade CFDs?
Australia has, until now, had no major restrictions on CFDs. But last week, the Australian Securities and Investments Commission (ASIC) - the country's corporate regulator - said that it was looking to clamp down on the CFD industry because of widespread ignorance of the risks.