I have not had to ask one client for extra funds in three months and we have not had one bad debt since launching. 
When I meet Denham he has a glass of red wine in one hand and a mobile phone in the the other. Tanned and well-dressed, he looks every bit the irresponsible spread better. That stereotypical image, however, is about to be destroyed when he discloses Capital Spreads zero tolerance risk philosophy.
Previously head of options at spreadbetting giant Cantor Index, Denham formed Capital Spreads in October 2003. He invited fellow Cantor employee Rachel Woodford to join him as his 'number two', heading the customer services division. From the outset, the customer was to be Denham's number one priority. In a market where new spreadbetting firms seem to emerge every day, this was essential.
'I saw an opportunity for a more streamlined version of spread betting, one that allowed us to focus more on the customer,' says Denham. 'The service is primarily internet-based, but is backed up by phone. We were able to build our own software, and to develop a system tailored to what clients want. After all, we have been fortunate to see what works out there. The result is that we hardly get any calls.'
A cynic would argue that perhaps the lack of calls is down to lack of customers? Not so, apparently. 'We are doing extremely well, and are ahead of our initial targets. Our systems are designed in such a way that our customer base could triple tomorrow and we could easily cope,' says Denham. He is also quick to point out that Capital's spreads are among the tightest you will find in the City. It is all starting to sound a bit too good to be true. Just how does the company make its cash?
It is soon apparent that Capital Spreads is more concerned about not losing money than actually making it. The fear that private investors most commonly hold toward spread betting is the risk of immediate and hefty debt should a trade go in the wrong direction. Spread betting is a form of geared trading, and just as your profits can be instantly multiplied so can your losses. Denham is eager to calm this fear and he operates a risk strategy that might just be the right tonic.
'Spread betting is only risky if you take a big risk when doing it,' says Denham. 'At CapitalSpreads, we are reducing clients' risk on their behalf.'
I have not had to ask one client for extra funds in three months and we have not had one bad debt since launching.
Every new trade placed at CapitalSpreads is automatically allocated a stop loss based on 80% of the funds available in the client's account, or it is set at something called a 'maximum computer-generated stop loss'. This ensures each client's risk is effectively controlled and there are always enough funds to support the trade.
Of course, any major shocks such as another 9/11 will probably take traders well into the red, as the stops are not guaranteed. However, it appears to be the next best thing and all traders, whether holding shares or spread bet positions on 9/11, were bruised regardless. 'We have a zero credit policy,' says Denham at Capital Spreads
Denham is also keen to promote spread betting as an effective risk strategy for shareholders. 'Using a form of derivatives to protect your share portfolio is one of the best ways to control your risk,' he says. 'Spread betting, being relatively cheap and easy, is an ideal hedging tool.'.
It is also a practice on the increase, giving some peace of mind to investors in nervous markets. Using spread betting, shareholders are able to 'short' a share if they are worried about a potential short-term fall in price. If their concerns prove to be true, the resulting loss in share price is more than compensated for by the spread betting gains. If the reverse occurs, effective use of stop losses can neutralise any damage.
The article above has been published with the courtesy of 'Shares Magazine'.
Following up with a questionnaire interview below.
Financial-Spread-Betting: Hi, can you introduce yourself and your company to our readers? Please tell us a little about the founders' background.
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Simon:
My name is Simon Denham and I am the Managing Director of Capital Spreads, which is the Spread Betting division of London Capital Group a well-established financial institution based in the City of London. I have extensive experience of the Spread Betting world and have been a trader and manager in the City for over twenty years.
Capital Spreads was the brain-child of John Rowe, owner of LCG. John has been a colourful member of the City trading fraternity for many years. He saw the opportunity to build a successful business in the fast growing market place that is Spread Betting.
Capital Spreads has also been joined by Rachel Woodford, ex-head of marketing at Cantor Index and Customer Services at City Index to give a further level of experience in the management structure.
Financial-Spread-Betting: Tell us why you decided to plunge into the spread betting business. When did Capital Spreads first open for business?
Simon: We saw an opportunity for a new SB company to offer a fairer deal to clients and to position London Capital Group in a (newish) fast growing market. Capital Spreads went live on the 16th October 2003.
Financial-Spread-Betting: Where exactly is your business located?
Simon: Capital Spreads is based in the heart of the City of London, in Gresham Street.
Financial-Spread-Betting: What are the minimum/maximum stakes?
Simon: Minimum stake size is either £1, $1 or €1 per point/tick
Financial-Spread-Betting: What is the minimum deposit required to open an account? Is there a maximum deposit?
Simon: We do not require a minimum deposit. You must just ensure that you have sufficient funds on account before you open a trade. You can calculate the min deposit required by multiplying your stake by the Min IMR (initial margin requirement) for each product. This information is found on the information button provided for each product, or on our market information sheets which can be found on our website.
Financial-Spread-Betting: Are accounts denominated only in GBP or can clients also trade in USD or EUR?
Simon: You can open a £, $ or € account. You can make this selection when you complete the application form.
Financial-Spread-Betting: Is interest paid on the balance of the accounts?
Simon: No
Financial-Spread-Betting: What is the Initial Margin Requirement (and general margin requirements)?
Simon: The Initial Margin required for each product varies considerably in accordance with the general volatility of the individual market concerned. Our general minimum margin requirements are much lower than our competitors BUT this is in part because our computers will set stops within the levels of the funds available on the client account.
Financial-Spread-Betting: Do you offer Stop Losses/Credit Betting/Demo Account? Can Stop Losses be activated when you are closed? Do you apply slippage?
Simon:
We do offer Stop Losses in fact every trade is automatically allocated a stop-loss. You can then amend your stop to suit your needs i.e. you can move it closer to your position, or further away within the limits of the funds available on your account.
We do not offer credit accounts. This is how we are able to offer such great value spreads, as Credit control is a very expensive business!
There is a Demo Account on our site, which gives you a very good idea of how our live site works. When you sign up, we forward a step by step guide with pictures to help coach you through the trading platform.
Stop-losses are not activated when we are closed.
No stop is 'guaranteed' which means that we do apply slippage. But in eight months of trading we have yet to have a serious slippage to a clients stop loss (i.e. we have not yet had to make a single margin call to any of our clients ... not one!!)
Financial-Spread-Betting: Please explain how you handle re-quotes and order confirmation times. And fast markets?
Simon: We do not make requotes, either a trade is accepted or not. Clients will know within a few seconds as to whether their trade has been accepted. If there is a problem with trade levels the trade will be declined and the client will then have to trade again at a new level. In fast markets (as with the real financial markets) trades are only accepted if they are compatible with the current market price.
Financial-Spread-Betting: Do you accept deposits by BACS? Which other payment methods do you accept?
Simon: Yes, you can pay directly into our bank account if you wish. Most clients pay by credit or debit card online or over the telephone. You could also send us a bankers draft or personal cheque made out to Capital Spreads
Financial-Spread-Betting: What is the maximum amount you can lose? (do you take bets on credit?)
Simon: In general the maximum you can lose is the maximum you choose to deposit with us due to our stop loss policy. But there may be situations where a market gaps through your stop level. As per my previous answer we have yet to make a single margin call to any client.
Financial-Spread-Betting: Do you accept international clients?
Simon: We have clients all over the world. As stated before you can open an account in £ sterling, US dollars or Euros. We cannot offer accounts to US citizens as spread betting is illegal in that country.
Financial-Spread-Betting: Are there any general safeguards for clients - protected accounts for clients' money or segregated accounts...etc?
Simon: Capital Spreads are regulated by the FSA - Financial Services Authority. They ensure that we hold all client's funds in a segregated account. The segregated funds are held by Barclays Bank.
Financial-Spread-Betting: Are you regulated by the FSA (United Kingdom)? What protection does this give to clients?
Simon: Yes, as stated earlier we are regulated by the FSA and our clients are thus covered up to around £40K over and above the fact that client funds are held in segregated accounts.
Financial-Spread-Betting: How wide are the spreads? How do they compare to other spread betting firms?
Simon: Our spreads are some of the tightest in the market. Check the comparisons table at by clicking Here
These examples are taken from the official published Market Information of each organisation and do include short term special offers.
Financial-Spread-Betting: What are your unique selling points?
Simon:Financial-Spread-Betting: What instruments are available to bet on at Capital Spreads?
Simon: We quote on over 3000 products including: Main indices, currencies, commodities, bonds & interest rates, FTSE 100 & FTSE 250 shares, DOW 30, S&P 500, Nasdaq 100 and the Dax 30. If you cannot find a product you wish to trade on our site, we will generally add them on request.
Financial-Spread-Betting: As of now, what trends do you see in the markets people choose to trade?
Simon: In general clients will trade in the most volatile markets and so for the moment the Forex markets are very popular. As equity markets have been very quiet recently the volumes here have been lower than normal but individual stocks as they come into the news are still very active.
Financial-Spread-Betting: Are there certain markets that clients seem to prefer?
Simon: Indices & Forex
Financial-Spread-Betting: Do you think this will change over time?
Simon: We do not expect this to change too much because these are the most volatile markets and therefore the most popular.
Financial-Spread-Betting: Do you ever see the tax-free advantage of spread betting disappearing?
Simon: Possibly, but there are still many other advantages to spread betting. You do not pay commission or fees. You can trade in one currency. You do not need to deposit large sums of money as margin. You can trade an enormous variety of products all in one place.
Financial-Spread-Betting: We have heard some traders complain that spread betting allows easy leverage but that it comes at a cost - high maintenance and fees. What are your comments on this?
Simon: It is not expensive, particularly if you compare costs to a stockbroker. There are no fees to pay and the maintanence costs are non existent. If you trade in rolling daily bets the cost can become prohibitive if you hold long term positions but with Capital Spreads prices on the quarterly markets being so tight there is every incentive to take longer term positions at minimal cost.
Financial-Spread-Betting: Getting beyond the up-front process, how do your people actually execute? Do you have principles of execution?
Simon: In General we execute trades if the deal price is within our spread at the moment that we receive the trade request.
Financial-Spread-Betting: Are there traders who make a living through spread betting at Capital Spreads? What is the trading style and methods that these traders use for winning consistently?
Simon: Yes, we have a number of clients who trade professionally. We could not possibly comment on their style or trading methods. But the one thing traders should never do is slide a stop. Choose your stop level for whatever reason and stick to it!!
Financial-Spread-Betting: Do you hedge the client aggregate positions or bear the risk yourself?
Simon: Yes we do hedge our clients positions in the market when those positions reach a certain level of exposure (for example we will hedge all positions in oil over £100 a point) every market has a limit set against it and we also have overall limits in each sector (indices, shares, FX etc)
Financial-Spread-Betting: Are there issues of competition between spread betting firms and conventional firms where the products they offer carry similar economic exposure but where best execution is applied differently?
Simon: As we are Market Makers we are not subject to best execution. Our clients make a bet on our price as 'requested' by them.
Financial-Spread-Betting: Do you operate any other sites besides Capital Spreads? Does Capital Spreads form part of a group of companies or are you fundamentally an e-commerce business?
Simon: We also offer online Forex trading at www.lcforex.com. Capital Spreads is part of London Capital Group which has various other broking and trading activities.
Financial-Spread-Betting: There are many sayings in the markets, do you have a favourite one?
Simon: The markets will move in whichever direction causes the greatest amount of pain to the greatest amount of people!
Financial-Spread-Betting: What challenges do you see ahead?
Simon: Rising to challenge the big three SB companies and taking more market share by demonstrating to clients how badly they have been treated in the past.
Financial-Spread-Betting: Any remarkable incident/ trade that happened you could share with us?
Simon: The only trades I remember are generally the losing ones. Losses always linger in the mind. But my best one was a Friday in the UST Long Bond many years ago before the low interest rates of recent times. I was short of the Long Bond and was going on holiday for the next few weeks. The bond was rallying to new highs so I cut my position and left. When I came back two weeks later the Bond had fallen a few big figures and it was only when I looked at the charts that I realised that I had paid the ALL TIME high. ARRRGHHH. So for the next 4/5 years my high print was preserved for all to see.