Evil Spread Betting

The way I look at the spread betting and tax is like this… Spread betting providers make money when clients lose money. If the client makes money the spread betting company loses money. So it’s in the companies’ interest to make trading as difficult as possible when a client is making money. Therefore the more money you make with a spread betting provider the harder it will become.

In contrast a good broker only makes money from the spread and/or commission and do not trade against you, so it’s in their interest that the client doesn’t lose their balance. A good analogy is to think of a trading with a spread betting as walking up a slope whose gradient becomes steeper and steeper the more money your make. Whereas trading with a good broker means that the gradient remains constant regardless how much money you make, albeit with the occasional steep step (tax bill) At some point the savings in tax will be out weighed by the losses and difficulties incurred by the spread betting provider trading against you, at which point you should move over to a good broker.

Answer: IG don’t dictate the price of the share and they make their money on the spread. I’m certainly not one of those who believe in the fallacy that spread-betting companies somehow manipulate global markets to shake individual holders out of positions. Only the 80% of people who lose spread betting believe in that hokum 😛

I would agree that spread betting companies have improved over the years (9 years ago I used Spreadex and Finspreads) with tighter spreads but there are still people out there who complain of the ability of spread betting companies to stop hunt, make their own prices, spike prices, requotes, invalid prices, change leverage momentarily closing trades etc.

In the past some providers used to have untradable spreads on everything years ago when they were young and IG Index ruled the world. Today IG are still expensive on some things and some instruments have unfair spreads with all spread betting brokers to this day. We all love EURUSD and GBPUSD for tight spreads and movement potential, but look at some FX pairs, commissions, stocks etc and you will see a spread:movement ratio which will make you feel sick.

So now if you trade something outside FX you can compare the bookie price to the real price and see how close it is….and it should be close these days. If you see a dodgy data spike anywhere you can ring up and moan, they should sort it for you else you walk. But with FX this has been hard as no central exchange, so Peter says 36 was the high, Paul says 39, who is right? So this is still an area the “bookie” side of the business can fiddle the numbers a bit to balance the losses on their books, while the “broker” side of the same company hedges as and when it can. Again, with technological advances and stiff competition, it’s getting better all the time – it has to. In any case I would seriously look at things outside FX to trade for peace of mind with regards to dodgy data tactics, plus non-FX is often easier to trade.

So do spread betting providers hedge client positions? I think its a case of matching buyers with sellers of a currency locally (using the brokers own book), and any imbalance that forms, risk is hedged by the broker entering a trade with their liquidity provider. In the past spread betting companies used to take a position entirely against client like a bookie and of course would play tricks to win, but now they are hedge in underlying Market up to a point and so hope clients win else they lose business (by losing a client).

The problems happen I think when the broker tries to hedge and fails or does not get the price he needs to completely hedge – when that happens, the market maker turns to the clients and takes the risk away from there – freezing their prices, re-quotes, slippage, big spread – who knows what!

Its a way for the broker to de-risk – he does not want to end up speculating on the currency markets like us suckers – he wants to provide a service so that we can do it – and make a lot of money out of it. I’m not sure how prevalent this is but I know for a fact that MiFID covers all areas of financial markets, including, price manipulation. So spread betting companies cannot really hunt stops to trigger orders as has been sometimes suggested.

In any case the industry is getting MUCH better with every year as competition gets hotter and spreadbetting gets bigger. People aren’t taking sh*t from bookies anymore and it’s showing. The problems are the adverts on TV and the gimmicks like cashback offers that are widely offered by providers these days, and these kind of promotions appeal to the adrenaline side of speculators but don’t do much good to the industry as a whole.

One reader commented; Don’t forget spread betting providers’ dirty little secret…bid-offer spreads can fluctuate a lot, particularly overnight when you least expect it, especially in times when a future markets becomes momentarily illiquid – this is when financial spread betting providers tend to hike their spreads! This can trigger your trade stops at prices you would never have imagined the market you’re trading on could go to! For instance: BEL20 spreadbet index normal spread 10 pip…just last week it went up to 210 pips almost wiping out my account balance and triggering a margin call!! Was verified to me that in theory it jump to 1000 pips!!!! Just imagine getting hit by a margin call and then getting your trade closed 1000 pips away from the index price! Also in theory this could happen to any stressed futures market…If liquidity dries up in the futures market, spread betting spreads can move quickly…think silver if COMEX ran short of physical, think euro fx pairs should meltdown be imminent. Another negative consequence of a spread jumping is you may be stopped out of a spread trade if you have set a stop loss via your spread betting company.

Another reader commented; “Why these opaque, poorly disclosed and inherently dangerous products have not been banned for retail investors is beyond me”.

Answer: For retail investors? Could you be more naive? What the modern day bucket shops? Yeah some of these can be used to create extremely leveraged and volatile positions. Using a car example; either because of safety or the fear of tickets people obey the speed limit. You seem to be arguing that every car be limited to a certain speed that you or someone else arbitrarily deem safe.

Spread bets are still a great tool if you know and understand how they work. They also allow you access to some markets that would be prohibitive to trade in as the margin requirements are quite high in dollar terms, that in effect would raise the risk profile of your trades.

Someone commented; “Spread betting providers reckon punters lose money because generally they close their profit positions too early and leave their losing positions too long hoping for a bounce back. All spread betting companies will endorse ‘a profit is a profit’ but they don’t want you to run with your good ones.

Comment: It’s all emotional and bottle really… But if were long and got stopped out no doubt that there will be those that moaning that the spread betting co’s spiked them out..when in fact they were only following the futures…any way’s I will stick to trading hours mainly 🙂

I have kind of decided intraday spread betting and trading isn’t for me to be honest. Its doesn’t suit my temperament. I buy a stock or go long with a monthly contract on a company I like firstly for fundamental reasons and secondly for where it is technically. Like Yell recently, it did nothing and everyone was waiting for a break out above 40p – the volume came when it closed above 42p and was v quickly 58p. Despite its debt, the media sector was being rerated, Yell’s debt got upgraded and it got decent financial press coverage. So up it moved. Then I see the point in going long at £50-£100 a point or whatever. When I have been tracking it and watching it and I know that technically the odds are in my favour. But trading the FTSE100 intraday, I think, for me, is like shooting fish in a barrel. Hence why I got shot today.

Answer: Fine, you tried and it didn’t suit your trading style; but you tried at least.

Comment: On shorting… Well, personal investors shorting means little to the markets and hedging your own holding with a short position as a percentage of its aggregate worth is good. But having your complete holding lent out from under your feet to a hedge fund that also uses the cash you deposited, particularly as part of the service, to position itself directly against your investment is corrupt. That sort of systematic shorting can seriously damage an innovative company’s ability to raise funds and that isn’t good. “Systemic corruption” is a term I’ve been using a lot over the last five years, glad to see it’s now making its way into popular language when describing the Capital Markets.

To Conclude

Spreadbetting had in its early years, and I stress early years a bad reputation, owing to many dodgy practices, which occurred most usually when persons were winning consistently. I greatly suspect that those few who linger on this forum and always leap to say how bad, untrustworthy etc., spread bet companies are, would be those who opened an account during spread betting’s ‘dark ages’. And, in all fairness, they have every right to warn people based on their experiences. My experiences echoed those of the diehard spread bet ‘objectors’ (for want of a better term), in the early years, however, unlike most, I did not give up on spread-betting per se (despite my having to switch accounts when badness abounded) and have gladly lived to see a ‘renaissance’ of sorts develop in the spreadbet industry in recent years. Having said that, there is one company that I would not recommend to this day, but as I’ve not had an active account with them for several years now, I would prefer not to name & shame it, just in case that beast hasn’t just changed its spots…

I must reiterate that I have most definitely experienced the great, and most welcome, changes in the industry over the past decade. And from my experience, it is no longer fair to say that the majority of leading spread-bet companies nowadays, are operating unfairly in any way. Post the Worldspreads scandal, all other spread bet companies have now to try harder to convince customers that they are reputable, and most will act as fairly as possible – wary not only of increased competition, but also of adverse publicity being spread across the internet. The main couple I have been using have been honest in every way possible; and most particularly so once the dark ages ended. That is, when I have lost at any point in recent years, it was because of my mistakes and nothing to do with any spread bet company’s unfair play. I’ve been treated, I must hastily add, just as fairly when fortune’s smiled.


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