Go back to Contracts for Difference and CFDs

THE JARGON CONTRACTS FOR DIFFERENCE

CONTRACTS for difference are so called because they are a legal contract with a broker. He agrees to pay you the difference between the price at which he buys shares on your behalf and the price at which you tell him to sell them. If there is a loss, you agree to pay him the difference. At no point do you own the shares, just an interest in the gains or losses from those the broker has bought in the market.

You do not have to put up all the cost of the shares, as you would if you were buying or borrowing them directly. Deposits can be as low as 10 per cent, so a pounds 10,000 account with a CFD broker could allow you to speculate on pounds 100,000 worth of shares.

If you were trading shares directly, you would need to be a short seller to profit from stocks going down. Direct short selling involves borrowing shares to sell and returning them with shares bought at what you hope will be a lower price. Selling and buying back a CFDs is as simple as buying and selling one. The explosion of short selling during the bear market has mainly been done using contracts for difference.

CFDs are a matter of livelihood for David Eaton, top, but are more of a lucrative hobby for Mitch Mosley, left, who pick his winners by studying share price charts Timothy Allen; David Sandison.

The contracts for difference that unite Rose and Green

There's only one subject on which both sides in the tussle for Marks & Spencer agree: they hate the use of contracts for difference (CFDs) to accumulate holdings in the company.

These "synthetic instruments" are a way of obtaining a financial interest in a company's shares while not actually buying the stock. They came to prominence some time ago because of the furore over an investment by Michael Spencer, the wealthy City entrepreneur, in 2m M&S shares via CFDs.

So why do Marks & Spencer and Philip Green both object to these things? Well, it's because the holder of the CFD never appears on the M&S share register. So it's impossible for them to know who's driving the share price and why.

For one thing, the famous Section 212 notices - which force anyone who has bought shares through a nominee account to reveal themselves - don't apply to CFDs.

What's more, the rule obliging anyone owning more than 3 per cent of a company's stock to make a public declaration doesn't apply to a CFD holder. And the City market makers - the trading parts of investment banks - which hold the real shares that underpin the creation of the CFDs are also exempted from making any disclosure.

This means that huge interests can be accumulated by wealthy investors in utter secrecy. They can have a significant impact on the outcome of a takeover battle - by influencing the share price - in total anonymity.

They can't be lobbied by the bidder or the target company. And there's the potential for much mischief. So there's a powerful case for the Takeover Panel and the Financial Services Authority to rewrite the rules, to force proper disclosure of CFD investments.

The scale of the possible naughtiness can be seen from figures published by Crest, the settlement agency for the London Stock Exchange, which show how much stock is on loan - which, without going into arcane detail, is a proxy for the volume of CFD business.

In the days before Green announced his intention to bid for M&S, there was a dramatic rise in stock lending, from less than 2 per cent of the retailer's share capital on May 20 to 5.9 per cent on May 26. Stock with a current value of pounds 330m was borrowed as security against assorted transactions on just four trading days. The unmissable implication is that some astute investors had a whiff that a takeover bid was coming.

Now, to be clear, I have no doubt that Spencer's CFD purchase was innocent. I'm sure he made his investment through CFDs because of the cost advantage that there is no stamp duty payable on these trades.

But guess what really troubles him? He tells me that he simply can't understand how his M&S trade leaked because almost no one knew he had done it and there was no public record. His unease is understandable.