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dsalas

Spread Betting a Scam

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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

 

I have a couple of clients in the UK who do spread betting. I'm still a bit foggy on the details but it sounds fundamentally different from the bucket shops in the Forex.

 

Sounds as if the SB firms have a nest on the ground...win when they win and win when they lose!

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I have a couple of clients in the UK who do spread betting. I'm still a bit foggy on the details but it sounds fundamentally different from the bucket shops in the Forex.

 

Sounds as if the SB firms have a nest on the ground...win when they win and win when they lose!

 

Hi Roger

 

Spread Betting has pros and cons, like anything else.

 

If you want to advise your customers without needing to know the ins and outs, then I would steer them away from spreadbetting for daytrading - there are simple mathematical reasons why they are unlikely to overcome their execution costs, regardless of how good your tuition is. For longer term trading, spreadbetting is perfectly viable, though still carries similar risks to DMA forms of derivative trading like futures.

 

Finally, because of how the spread affects trade entry (and assuming you train traders using futures), your students need to know to factor in the SB spread when emulating your positions (ie if you enter with a ten tick stop in the YM, and they're trading via a spreadbetting firm quoting a two tick spread, their stop loss needs to be 12 and their target needs to be 8, in order for their position to reflect yours accurately).

 

Hope that's helpful,

 

BlueHorseshoe

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thanks for your posts bluehorseshoe, very useful information. when trading shares as opposed to indices, they also charge a trading fee on top of the spread which can affect your ability to get in and out of trades with a quick profit.

 

they can be used to hedge a trade too, if you have, or purchase actual stocks, it can be useful to short a percentage via spreadbetting.

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thanks for your posts bluehorseshoe, very useful information. when trading shares as opposed to indices, they also charge a trading fee on top of the spread which can affect your ability to get in and out of trades with a quick profit.

 

they can be used to hedge a trade too, if you have, or purchase actual stocks, it can be useful to short a percentage via spreadbetting.

 

Hi Banksy,

 

Glad you found the posts useful.

 

I've never traded stocks or spread-bet them, but I am aware that the pricing structure is a little more complicated (I think they adjust price quotes for dividends and things, don't they?). I believe the fee structure (spread) is based on the liquidity of the underlying market which, for exotic instruments and thinly traded stocks may be low. This reflects the difficulties they may encounter in mimicing your position in the underlying.

 

Though I have seen absolutely no firm evidence for this, I have been told that a number of smaller UK hedge funds use spread-betting. As I can't imagine that this is their primary method of trading (it would hardly be credible for a hedge fund), then I think that they maybe use spreadbetting as a means to hedge positions, as you suggest.

 

BlueHorseshoe

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Though I have seen absolutely no firm evidence for this, I have been told that a number of smaller UK hedge funds use spread-betting. As I can't imagine that this is their primary method of trading (it would hardly be credible for a hedge fund), then I think that they maybe use spreadbetting as a means to hedge positions, as you suggest.

 

As a hedge fund if you want leverage and shorting abilities you generally require a prime broker of sorts, and a lot of the larger prime brokers dont even look at you unless you have X millions. If you are required to replicate a portfolio approach then maybe a spread better is necessary when you are starting up and dont have the cash. (it does seem an expensive way to do things - however "everything is negotiable")

I cannot imagine you could not do most things through a normal broker like Interactive brokers without the spread costs, and sticking within normal leverage amounts....however as I understand it pretty much every trade in the UK stocks is a spread bet/swap trade anyway due to stamp duty. (not my area of expertise so would need to investigate further.)

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As a hedge fund if you want leverage and shorting abilities you generally require a prime broker of sorts, and a lot of the larger prime brokers dont even look at you unless you have X millions. If you are required to replicate a portfolio approach then maybe a spread better is necessary when you are starting up and dont have the cash. (it does seem an expensive way to do things - however "everything is negotiable")

I cannot imagine you could not do most things through a normal broker like Interactive brokers without the spread costs, and sticking within normal leverage amounts....however as I understand it pretty much every trade in the UK stocks is a spread bet/swap trade anyway due to stamp duty. (not my area of expertise so would need to investigate further.)

 

The person who told me this stated that they (the SB firm) were 'only allowed to deal with small funds'. I asked what counted as 'small', and was told 'up to ten million'.

 

Of course, this was someone in institutional sales who told me this, so it could of course be complete nonsense designed to assert the credibility of the firm.

 

BlueHorseshoe

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