Client Affairs

Taking A Look At The World Of Spreadbetting

Tom Burroughes Editor London 23 April 2010

Taking A Look At The World Of Spreadbetting

Spreadbetting has been buffeted by the financial turmoil but the sector continues to show plenty of life with continued development in the products and services on offer.

Financial turmoil has left investors bloodied by heavy losses in recent years but the desire to play the markets through spread-betting accounts is continuing to show plenty of growth.

One of the oldest spread-betting firms, London-based IG Index (founded in the early 1970s), is reportedly looking to expand in the US market after regulators there moved to ease draconian limits on the use of instruments such as contracts for difference, treated as gambling under US law. In the US, online gambling - unlike in physical locations such as Las Vegas - is largely banned, although the exact regulations will vary depending on an individual US state. IG, which is based in the UK, wants to use the Nadex online futures exchange in the US that it bought in 2007. Nadex has secured regulatory permission to make technical changes, opening the door for trading in instruments akin to CFDs.

Elsewhere - as recently reported by this publication - Trendwatch Asset Management, based in London, has launched what it says is the world’s first “fully managed” and regulated spread betting service, winning regulatory clearance to be used by retail investors in the UK and abroad. And subscribers to WealthBriefing, of course, can now access the WealthSpreads account by clicking here. It is now a commonplace to see advertisements for spreadbetting in the financial media, a process accelerated by the internet.   

As the sector has grown, so, inevitably, has the attention of government regulators. Controls have tightened on spreadbetting in the European Union. The Markets In Financial Instruments Directive, or MiFID, requires spreadbetting firms to set an appropriateness test for any would-be clients so that people who bet are considered suitable and can shoulder any financial losses. The industry has come a long way from near-obscurity in the early 1990s to being an established part of the financial scene.

Estimates vary on how many people spread-bet: a study by the Cass Business School in London has predicted that the number of people in the UK with a spread betting account could reach one million by 2012. The Times (of London) newspaper reported last year that 30,000 spread bet accounts were opened in 2008.

Leveraged bets

Although some readers will be familiar with the principles, it is worth recapping that spread-betting is, essentially, a way of making leveraged bets on market prices in that the punter stakes a relatively small amount of cash up front on a trade, in the hope of making a significant gain. On the flip side, losses can be far greater than any initial cash stake, which is why many spreadbetting firms require or advise clients to buy automatic clauses, or stop-losses, to close out a bet in the event of an adverse price move. Spreadbetting and CFDs differ slightly: spreadbetting is exempt both from stamp duty tax and capital gains tax in the UK, while CFDs pay capital gains. Punters can bet on the movement of an index in either direction - so this form of trading makes it possible for a trader to "short" a price move as well as profiting by being "long".

There are plenty of firms to choose from: besides such names as IG Index, firms in the sector include City Index, financial Spreads, Cantor Index and CMC. Barclays Stockbrokers, for example, offers spreadbetting accounts to clients, as does TD Waterhouse.

The range of markets in which investors can trade is now wide: firms will typically give punters the chance to trade in equities, bonds and commodities. The internet and growing competition between firms helps drive down fees – in most cases, a firm takes a “cut” to earn a living via the bid/offer price spreads that investors can use.

Most lose

A not-so-hidden secret of spread-betting is that while many punters enjoy playing the markets and some may even make a killing, for the majority, it is not a way to build wealth over the long run. As with playing poker, blackjack or Baccarat, it is the casino, rather than wannabe James Bonds, who make the money in the long term. The website points out that most spreadbetters lose money. It says that according to a report by the North American Securities Administrators Association, only 11.5 per cent of trades make a profit over the term of their trading and at least 70 per cent lose money while the balance break even. But such figures do not seem to be sapping willingess of people to trade - the fun, as much as the prospect of money, is what seems to drive many clients to enter the fray. 

There is some evidence, meanwhile, that firms have been poaching clients from rivals rather than seeing a broad-based rise in the total number of people who play this market, which may explain some merger and acquisition activity in the sector in recent years. WorldSpreads has joined forces with Ladbrokes in February this year to offer spread bets to the clients on the bookie’s database.

Another firm, ETX Capital, is looking to widen its market by cutting minimum bet sizes for some of its products and refunding clients for a minimum figure of £250 in the first 10 business days of their trading so that clients do not get disheartened by losses in their first days.

The industry has been buffeted by the financial turmoil and as some of these developments suggest, firms are trying to make their services easier to use while reminding novices of the risks. Spreadbetting is a form of gambling and even the savviest investor needs to remember the age-old adage: don’t stake more than you can afford to lose. Spreadbetting can be a lot of fun and give punters an adrenalin boost but they should not forget that this is not a way to patiently create wealth over the long run.

If you would like to take part in a free trading game that will run throughout May, then please click here and register for a demo account before 30th April.

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