Contract for Difference (CFD) Trading in New Zealand

New Zealand has been somewhat neglected up until recently as Australia is well recognized as the home of many traders. This doesn’t mean that there haven’t been any traders in New Zealand, just that they probably had to organise to trade with brokers outside New Zealand.

As you can guess from the prior, things are changing direction for the New Zealand trader who has hopes to access the several different markets that contracts for difference can provide. CMC Markets opened an office in New Zealand in 2006 and leading the way in terms of CFD brokers based in New Zealand. This is not surprising, as CMC was the only provider until 2009.

Recently in 2009, IG Markets, which has operated in Australia since 2002, decided to open an office in New Zealand, and it is rapidly growing its customer base. The Australian portion of IG Markets customer base is already about 15% of the company’s global revenue, and IG will be happy if the New Zealand market gives them 10% of what the Australian market is giving them. They were the first provider to offer CFDs in the local New Zealand currency. This is great opportunity for New Zealand traders, as it permits traders to trade international markets, including foreign indices and commodities, in New Zealand Dollars. This nice change makes all the issues with currency exchange price variations and additional costs go away, leaving the trader to consider only the CFD movements without having to worry about an additional variable.

The interests of the financial industry in New Zealand are represented by the New Zealand Financial Markets Association (NZFMA), and this organization promotes the standards for the industry. Just as with most other markets, the New Zealand trader can find CFD dealers that offer contracts on thousands of shares, including all the major shares on the major markets – Australian, European, Asian and from the United States.

The New Zealand market for CFDs has an enormous potential, so it is surprising that it has taken so long before being “discovered”. There is already a financially aware clientele, as New Zealand has a relatively high level of share ownership. In fact, a study conducted by the New Zealand Stock Exchange in 2000 identified that 30% of New Zealanders of voting age owned shares directly. While CFDs are a recent invention, the tremendous potential that they give for leveraging the value of an investment means that it was inevitable that their use would migrate to this country. Couple this with an attractive regulatory regime, and in retrospect the expansion appears obvious.

The CFD market is still in its infancy in New Zealand but the number of retail investors interested in trading the markets are on the increase. CMC Markets is claimed to be New Zealand’s leading CFD (Contract for Difference) provider having moved into the market in April 2006 and opened an office in Auckland. For instance in just one week in October 2008 CMC Markets reported a total trade count of 33,516 with turnover amounting to more than NZD$1.44bn across all instruments. At the time of writing (Oct 2009), IG Marketshave also setup operations in New Zealand and started offering trading in New Zealand dollar-denominated CFDs which means that clients can trade gold, oil, the Dow the FTSE directly in New Zealand dollars and thus avoid currency conversions and foreign exchange fluctuations. IG Markets is hoping New Zealand will provide business equal to about 10 percent of its current Australian base, which has 30,000 to 40,000 clients (with about 20 to 30% of them being active).

The clients are somewhat less experienced in terms of trading the markets and for this reason certain providers like CMC Markets have launched limited risk accounts which provide traders with Guaranteed Stop Loss Orders (GSLO) on every trade. This allows traders to exit trades at predetermined prices should markets gap against them which guarantees that traders never lose out more than their original deposit (the catch is that the commissions are slightly higher than the standard account to cover the insurance risk and GSLO’s are only offered on the more liquid and popular trading instruments).