The London Stock Exchange plans an organised market by the end of this year in contracts for difference (CFDs), a sometimes controversial method of buying shares without paying their full price, The Times has learnt.

The LSE has quietly written to market participants inviting them to a seminar at the end of this month at which it will set out its plans for a combined order book in equities and CFDs. It is thought the plan is to give reputable investors a way to trade on a well-regulated market in the instruments, which are a form of equities derivative.

In taking out a CFD an investor “buys” the shares concerned, paying a deposit or “margin” representing just a fraction of their actual value. The shares are retained by the broker or other party with which he or she is dealing. The investor takes a contract to buy the shares over a given period, after which the two settle up. If the shares have risen, there may be a profit. But the potential downside can be almost unlimited.

The LSE is not giving further details on its plans but it is understood to involve bringing CFD trading on to the Sets electronic platform. Investors will be able to match CFD and equities orders against one another.

This, it is hoped, will increase liquidity on the exchange and allow trading to be carried out in a more orderly manner. A limited number of member firms would be “Prime Financing Partners” and would manage financing of CFD dealing and arrange stock borrowing. These are expected to be drawn from the City’s existing brokers and investment banks, and they will need also to be members of LCH, the old London Clearing House.

The LSE will start to select potential participants next month through a tender process. CFD trading will at first be limited to FTSE 100 stocks but will be rolled out into the rest of the market if the experiment is successful.

CFDs have attracted controversy ever since their invention during a takeover bid in the mid1990s. The big City investment bank that first used them received a rebuke from the Takeover Panel. But they have been used in subsequent bid battles to allow raiders to build up substantial stakes at a limited cost, though such stake-holding may not bring with it voting rights over the shares in question. They have therefore become considerably more mainstream and accepted.

The LSE initiative will have the effect of making trading much more transparent and better regulated. At present, the contract is between the investor and the company creating the CFD and takes place off market.

The LSE said: “We can confirm this is something we are discussing with clients.”

In November the Financial Services Authority, the City regulator, which is known to have harboured concerns about CFDs, issued a consultation paper over the vexed matter of disclosure during such stakebuilding.

This suggested that there should be greater disclosure where the investor was able to exercise voting rights through CFDs and could therefore exert hidden influence on the company.

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