Spread betting and contracts for difference have a number of advantages that mark them out. They allow for leverage and there can be some tax advantages. However one really big advantage that is often prized is that they allow an investor to sell a share short quite easily. This means that an investor can profit from a belief that a share will go down.
Short selling is a very important part of what keeps a financial market liquid and responsive and it would have to be a truly vindictive and economically illiterate government that would do this to the City of London. And true to form the European Union is looking at doing this. So far we only have rumours and if the past form of the European Union and the City of London has anything to go by then there will be a draconian proposal, shocked outrage and a harsh “compromise” that will simply relieve the City that they are being strangled slowly rather than shot. And the British government will not be able to do much to stop it.
If this does happen will this affect spread betting and contracts for difference? Spread betting looks like it is not going to be caught straight away as it is done on a closed exchange; however Contracts for Difference could be hit. The basic rule seems to be to allow a European regulator the power to ban the short selling of certain shares and bonds without any reference to parliament. It will be very hard to maintain this ban when contracts for difference are creating a parallel market, and while nothing is clear about the powers they will have to extend over derivatives such as contracts for difference.