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dsalas

Spread Betting a Scam

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Hi guys, do you consider spread betting a scam, i have been thinking about it since it could be a solution for those who want to day trade shares with low capital no?

 

thanks a lot

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Its great for swing trading.

Intraday trading, the spreads can make turning a profit too hard, but people make money of they are good at trading, and can trade something like GBPUSD which generally has only a 2pip spread on spreadbet platforms.

 

As for daytrading shares, unfortunately not! :(

Id LOVE to daytrade stocks, as when I demo trade them using direct access platfroms I make 'money' nearly everyday for months at a time.

Unfortunately, the spreads on stocks at spreadbet firms just aren't acceptable.

Sometimes the spread of a stock can be 1c trading direct and 12c trading through a spreadbet firm.

 

Fine for swing trading stocks though

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I disagree.

 

Trading against a single counter party is inviting that counter party to fleece you.

 

The tax free argument is null and void as it will be so much harder to make a profit in the first place with such high spreads and a counter party whos interested in your loss only.

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As I understand it spread betting came out of the costs of actually trading the underlying - particularly in the UK where stamp duty for stocks is a killer.

It has grown from there and in the UK is tax free (subject to conditions) and hence a viable option for many.... this is a very valid argument for it success.

Yes - you will also have the counter party risk and the issues of widening spreads. However for the upsides of leverage, low costs and flexibility for variable position sizes and different instruments, there is definitely a good reason to trade via a spread better for some traders.

It is just another speculative instrument.

Now if its a scam or not will depend on the provider.

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I disagree.

 

Trading against a single counter party is inviting that counter party to fleece you.

 

The tax free argument is null and void as it will be so much harder to make a profit in the first place with such high spreads and a counter party whos interested in your loss only.

 

Indeed, However there are a few 'proper' brokerages. The list is growing too which is kind of refreshing. The only trouble is that there tend to be more restrictions in sizeing with some (e.g. the ones that hedge every single position).

 

I generally agree with Lazarus (which is why I didn't post originally). There was handy link someone posted a while back that listed 'proper' DMA brokers. Broadly speaking there are two types of broker that are pretty different in many aspects.

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I hate Spread Betting. They make up their own rates after market hours. They act as broker and act as an exchange. I dont think they hedge all their trades. Since many end up on loosing side, they earn not only commissions but the money which a trader has lost as well.

 

I love when my bid/ask order goes directly to exchange floor and i am trading among real human beings.

 

I will never ever open a spread betting account.

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Which spread betting companies can any of you recommend?

 

where do you live?

What instruments do you wish to trade?

Do you require the ability to use custom indicators / charts etc etc?

 

Personally I like RBSmarketindex.

IGindex are popular.

Tradefair are good in terms of execution but platform is a little basic.

'New kid on the block' is 'smartlive' who use metatrader platform

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If you have the account to trade full size futures contracts or FX lots, have a look at ProSpreads . They operate a different model to most 'spread betters' - it feels like direct access trading (or Currenex for FX) through a glass wall. No requotes, because you're trading either market spread or Currenex spread, and whenever I've needed help it's been right there on the phone. Their interest is similar to direct access shares brokers - they make money from volume, not trading against you. I have an account, which I've only demoed so far, but no other connections with them. They're planning to introduce Mini FX lots in 2011.

 

'Traditional' model spread betters (ie the other kind, basically bookmakers) can feature wide variable spreads, stop losses way out on a limb (I remember seeing a 75c minimum stop loss on Crude on a demo platform from one of the biggest operators), and stories of mysterious spikes which don't appear on other datafeeds are rife, as are stories of consistent winners' accounts being closed. I think it's as well to remember that this is spread BETTING, which is why it's tax free. Many operators are trading their own 'book' against you. Just like traditional 'turf accountants', the job of the typical spread betting company is to provide facilities to enable clients to consistently lose small to medium amounts of money, which they do very efficientlly.

 

As a student of trading (rather than an expert tader), my current opinion is that spread betting with most operators has similarities to trading a small retail FX account for real - It's fine if you're happy to lose relatively small amounts of money for the 'fun' of 'trading', with the dice loaded against you - but why would you want to do that?

 

Max

Edited by maxr

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For the most part I'd call it a scam in the same sense as a casino. The house has an advantage. They will play lots of games with you if you're successful. They'll lock you out of the platform, quote your stop even if the market didn't, things like that. Firms have even said that if you're winning then they assume you're cheating and that's their excuse for locking you out. It's happened to more people than just me. How would you feel if your broker refused to get you out of a trade?

I've closed all my s/bet accounts and just trade direct access. I would advise against s/betting. But then again most people lose so they won't even notice the tricks.

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I've spread bet profitably (albeit in a small account) for over 6 months now with IG Index. I choose them because they are a FTSE 250 company so "should" be fairly safe and respectable. Their spreads are very similar to most US FX broker who are market markers, 2pips on eurusd and 3 pips on gbp-usd.

 

So for scalping I think they are a bad choice but for swing trading they are fine. The other point is that the UK government classes SB as gambling so your profits are Tax free but you can't offset your losses against your tax liability.

 

I'm only guessing here, but I think why they may have a poor reputation is that because you can open an account with a very small deposit. This leads to newbies practicing little or no money management and after a few trades the initial funding is lost. If you had to open an account with say £5000 min you would be inclined to take it more seriously. This is why though I can agree and understand the oft quoted "do not trade with money you can't afford to lose" when its applied to very small accounts this can lead to risk taking, as if you do lose, its no big deal.

 

Someone else has mentioned prospreads as they hedge all your positions but you need to at this stage trade in standard lots, but no bad thing perhaps in the long run. They have DOM and add a small markup spread to the actual market spread instead of charging a commission.

 

Personally I have just recently moved away from spread betting and opened a ECN account with MB Trading in the US as I felt uneasy with the market making aspect of SB. But horses for courses and all that;-)

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Adding to what Silverpuma said, research (Teweles: The Futures Game) has shown that another major factor for so many losing is transaction costs. Given the wider spreads you will pay with a SB, AND that any quote is likely to be a few cents/ticks against you as the SB knows your position/next move, SB account holders are on a hiding to nothing. Add up all those extra spreads, slippage, anti-quotes, etc and I bet you will be surprised at how much they add up to over time. They will probably be the difference between a winning and losing month for most newbies even if they are just starting to turn the corner - even if swing trading.

 

The last thing any new and probably underfunded trader needs to do is handicap him/her self even further with a SB account.

 

I'd rather make a good profit and pay tax on it, than a loss. Simple!

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Go and read Reminiscences of a Stock Operator - the description of the old bucket shops is exactly what spread betting companies are today. I actually can't believe how same it is and yet it is still allowed. I have had a spread betting account, there is no doubt they can easily manipulate the fills that you get. Even if the wait 2 minutes to fill you they can then essentially give you the worst price the market offered for that 2 minutes to gain an advantage. Then again THEY are the market so they can give you whatever they want. For longer term trades this probably isn't a problem, but in the long term I am sure if you are profitable the will find a reason to terminate your account. Just like in the day's of Reminiscences.

I would now never trade on a market that has no tranparency. Especially as I am day trading where it is impossible not to be highly effected by these guys.

 

Just my two cents.

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Actually I still have a couple of spreadbetting accounts. Scam is a pejorative and not entirely accurate.

 

Spreadbetting does these things:

- offers you tax free income in the UK which makes up for a LOT

- charges you in extra spread instead of commission which does reduce confusion

(and reduces comms for small bets but increases them for large)

- lets you use small position sizes

 

However, they are bucket shops because they take the other side of your trade only offsetting some of their risk, and may indulge in some practices that irritate the punter:

- varying spread at news times (to protect their axxxs, as do the market makers on ecns)

- holding that spread too long (compared with the market makers)

- shading the spread to one side or another by a few ticks.

- doing their own stop hunting (as opposed to every other intelligent person joining in taking a bit from the most obvious positions for overly nervous stops to be placed).

 

If I was in the UK then the first point would overwhelm the advantages of the others but I'm not and my size is reasonable so I use Interactive Brokers even for my forex.

 

Note that most of the forex brokers are also "spread betters" although lacking the UK tax free status: Oanda, Fxcm, etc etc all hide the commission in the spread and take the other side of your bet.

 

Note also that you can overcome the effect of the second group of practices by trading longer term with holds in the swing trading range rather than day trading.

Edited by Kiwi

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I have been spreadbetting for over 2 years and for me it works. I use one of the larger brokers and only trade FX where the spreads can be as tight as 1pip. I agree that when you look at anything exotic the spreads can be crazy so it all depends on what you want to trade

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ProSpreads advertise 'direct market access style trading' on Futures etc, and the couple of people I know who trade it for real say it's very good. Their FX trading runs on a Currenex system (which as I understand it means trading being matched amongst traders, with banks supplying liquidity as required - is that correct?). They had plans to introduce Mini lots in FX, but that's not available yet. So it's kosher trading, not 'bucket shop', with fast execution and no requotes. Their FX spreads are somewhere between spot FX ECN account rates (but no separate commission) and spot FX 'bucket shops', so you pay a pip or two spread to get the tax advantages of spread betting. You do have to trade full FX lots and futures contracts with ProSpreads, so you'd need a healthy account balance, good money management, and proven trading methods.

 

Of course, If you're not making more than your personal CGT allowance (which is £10,100 single, £20,200 couple), or otherwise using your GCT allowance every year, there's no point in opening a spread bettting acount for the tax advantages. If you're just doing it for a bit of fun and don't mind losing a little, you can open 'bucket shop' spread accounts with very small sums - but in that case, why not just get a free demo FX account and paper trade? You'll have more beer money left that way.

 

By the way, I haven't yet seen a forum post which suggests that the writer has started with a very small spot FX or spread betting account and grown it to the point where they're now making a living trading., without introducing capital (starting with $500 then adding $50K from your bank is easy, IF you have that $50K). There must be such people out there, and I'd be encouraged to hear they've achieved that - because my researches in the last few weeks tend to indicate that the vast majority of active small spot FX and spread bet traders either blow their accounts, or don't manage to grow them quickly enough, because the odds are stacked against it one way and another. Have any of you managed it?

 

Max

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ProSpreads advertise 'direct market access style trading' on Futures etc, and the couple of people I know who trade it for real say it's very good. Their FX trading runs on a Currenex system (which as I understand it means trading being matched amongst traders, with banks supplying liquidity as required - is that correct?). They had plans to introduce Mini lots in FX, but that's not available yet. So it's kosher trading, not 'bucket shop', with fast execution and no requotes. Their FX spreads are somewhere between spot FX ECN account rates (but no separate commission) and spot FX 'bucket shops', so you pay a pip or two spread to get the tax advantages of spread betting. You do have to trade full FX lots and futures contracts with ProSpreads, so you'd need a healthy account balance, good money management, and proven trading methods.

 

Of course, If you're not making more than your personal CGT allowance (which is £10,100 single, £20,200 couple), or otherwise using your GCT allowance every year, there's no point in opening a spread bettting acount for the tax advantages. If you're just doing it for a bit of fun and don't mind losing a little, you can open 'bucket shop' spread accounts with very small sums - but in that case, why not just get a free demo FX account and paper trade? You'll have more beer money left that way.

 

By the way, I haven't yet seen a forum post which suggests that the writer has started with a very small spot FX or spread betting account and grown it to the point where they're now making a living trading., without introducing capital (starting with $500 then adding $50K from your bank is easy, IF you have that $50K). There must be such people out there, and I'd be encouraged to hear they've achieved that - because my researches in the last few weeks tend to indicate that the vast majority of active small spot FX and spread bet traders either blow their accounts, or don't manage to grow them quickly enough, because the odds are stacked against it one way and another. Have any of you managed it?

 

Max

 

I'm in a similar situation, and decided to trade futures. Why not trade a transparent market if you can?

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Spread betting is a legitimate form of financial trading. Get the market direction right and you make money - their prices mirror the market. Is that so hard/complicated? Yes because getting the market direction right is hard.

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Its certainly not for the faint-hearted, but its fine as long as you understand the risks, leverage and use a reliable and established company to set up an account with. I've used IG markets for years and never had any problems (although I did lose out quite heavily on the "flash crash" when it happened as my stops were wiped out.

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Spread betting is not a scam, its just a tax-exempt 'professional trading' version of gambling at the casino ... but hey people will speculate on anything! When is it coming state-side???

 

MMS

 

Frankly, I can 't understand why the US hasn't embraced it. The whole reason that it is tax free in the UK is because most traders lose money, and it's better for the Inland Revenue to forego taxation on a handful of successful accounts rather than allow deductions for thousands of unsuccessful accounts. Surely that would also be a preferable scenario in the US?

 

BlueHorseshoe

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Something is very clear throughout this thread: people think that spread-betting firms are 'taking the other side of their trades'. This isn't true. A spread-betting firm takes the same trade as you in the underlying market***. This is hedging, and is how they lock in their profit from the spread - taking the other side of your bet wouldn't be - it would be gambling.

 

Here are two simple examples:

 

1) You buy at 100 and pay a 3 pip spread.

2) The spread betting firm buys at 100 and pays a 1 pip spread.

3) The market rallies and you exit at 110.

4) The spread betting firm also exits at 110.

5) The spread betting firm uses their 10 pip profit to pay you your 10 pip profit, leaving them with a 2 pip profit from the spread.

 

1) You buy at 100 and pay a 3 pip spread.

2) The spread betting firm buys at 100 and pays a 1 pip spread.

3) The market sells off and you exit at 90.

4) The spread betting firm also exits at 90.

5) The spread betting firm has a 10 pip loss, but this is covered by the 10 pip loss from your account, leaving them with a 2 pip profit from the spread.

 

They are hedging to lock in numerous small, secure profits from the spread. It is this steady stream of guaranteed (while ever they have customers) profits that has made them wealthy and successful, not gambling against you.

 

Spread-betting companies don't care whether you win or lose - they get their money either way - just like a normal broker who gets their commission regardless.

 

*** A spreadbetting firm doesn't actually take the same trade as you. They don't look at individual positions and hedge them because the SB position size is at the discretion of the customer, whereas the contract size for the underlying market is fixed by the exchange.

 

Spreadbetting firms simply have a risk management desk that looks at net exposure across all their customer's accounts (I know this for a fact; I have sat at that desk).

 

Hope that's helpful.

 

BlueHorseshoe

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