Simon Denham, Managing Director of LCG responds to your Questions


Q.: Do traders who trade bigger amounts or more frequently get tighter spreads than lower risk per point or not?

I trade the indices mostly and was just wondering whether clients who trade £50-£100/ point using capital spread get tighter spread than lower risk per point or not?

A: We treat all clients the same whether 1 pound or 200 pound. The margins that we require are the same but for some of our really big clients we do ask for extra margin against positions as the low margin requirement on LCG is not really equitable (from a CS risk reward point of view) when clients are trading in the equivalent of 300 contracts on the exchange.

I can tell you from experience that when you get bigger with CS you don't get lower spreads - you actually get higher spreads because they purposely slip you a pip here and there to make sure they can get their hedge on. As far as stops go there is no difference apart from they will also slip your stop position too. And yes, I speak from experience.

 

Q.: Your prices for the FTSE Index rolling daily and FTSE Index Dec are way too different to the market price?


I have been looking at spread betting and tried the demo account once with LCG which I thought was a good way to learn but it did not go too well. I have now been offered the chance to try it again so as I am interested in spread betting I thought it was a good idea, but after looking at the prices you show I am put off.

I understand that with spread betting, the spread relative to the price; that the price will differ slightly from the actual price on the market and most of the other bits, i.e. I feel of having a fairly good understanding in general about it. I also feel I am fairly good at picking what the stocks and indices will do as much as one can be.

What I am having a problem with is this, the price of the FTSE on the market is just over the 6000 mark at present and I am interested in spread betting on the FTSE but although I understand your prices may be slightly different, they are showing FTSE Index rolling daily 6023 -6029 and FTSE Index Dec 6048 - 6054 which are way different to the market price. I think this is too far away from the real prices and thus does not give me any confidence to buy and sell through spread betting, i.e. If the market moves up for example, with the different prices it shows it may be entirely different to what happens.

Obviously what I would like is to see the spread betting prices mimicking the market prices as close as possible but the bit mentioned above seems to differ too much for my liking. Any help appreciated.

A: To start with the December price includes the effect of interest and dividends. The rolling price is again derived from the Futures price, but because it's adjusted for the above, it will be much nearer (but not the same as) the actual index during market hours.

As your question is about the LCG Demo I feel that we may be able to answer it if you call us during market hours 07.00 - 21.15.

The problem may be as boring as that we have not got the right price on the demo (although we are quite good at this these days) because, much as the demo is a useful tool, it does naturally come below the importance of the main live system. The prices on the demo are live but the charts are 15 mins delayed.

The demo is really there so that clients can get to grips with the trading platform, the terminology, what stops mean, how the order books work...etc without making expensive mistakes. Although some clients do use it for 'paper trading' I am a great believer that trading experience is only gained when it means something. Demo account trading is never painful; you never have to make a hard decision or really, seriously, question your actions or intentions.

I realize that big institutions make huge back testing procedures (i.e paper trading on historical data) on their new programs. But in these instances it is just computers making the decisions not 'fallible' human beings. If anyone has a 'new' trading system I would recommend rigorous back testing with none of that "oh well of course I wouldn't have traded then" or "I ignored that trade signal because ...etc.

Q.: Why do some of your quotes not reflect the real market?

A: Our quarterlies are based on the futures rather than the cash indices. This is because the futures move very much faster than the cash indices. The FTSE is only re-calculated every 15 seconds. In that time the futures can (and do) move 20 or 30 points. If we just quoted the index a client following the futures would know in advance which way the cash index was going to move.

If you are referring to currencies, note that as opposed to stocks or indices the forex market lacks a centralised exchange; all forex trades take place between an international network of banks and institutions. The fact that the market factors all global major financial centres and time zones ensures maximum liquidity round-the-clock. This also means that one spread betting provider might quote a price that is just slightly different from another provider, whereas an index or a stock should always be the same wherever it is traded. For instance, LCG derives its live streaming foreign exchange prices from Currenex; an independent electronic trading exchange that connects in excess of 70 global banks, ensuring pooled liquidity.

Q.: How does your fair value system work?

A: Fair Value is 'based' on the interest rate cost of holding a cash position up to the expiry of the front future contract plus the index value of any dividends expected to be paid between now and the expiry of the future. Sometimes this fair value might consist of just a few ticks out as an individual stock moves further than its starting 'weighting' at the beginning of the day. Generally our fair value will remain the same through the day (normally taken from the Bloomberg Fair Value page) but sometimes the cash index Fair Value to the future does need adjustment during the session.

Q.: Can i place all my trades over the phone? What is your spread on daily dax and daily ftse for phone dealing?

A: In general you can place all trades over the phone - we will normally add a pip to all spreads for this.

Q.: Simon, do you offer quarterly equity bets on the LCG platform like CMC do?


Meaning holding longer term positions doesn't get expensive as cost of carry is pretty much just LIBOR. Can't find anything about it on the website.

A: Yes, we do offer quarterlies on all of our equity markets...these are not available in the demo/simulator platform.

The forward value of a quarterly is as you say calculated with the cost of carry (libor) plus any dividend adjustments. Libor is adjusted to reflect higher rates (for buyers) and lower rates (for sellers). The rolling charges on LCG are plus or minus 2% (not 3% which, I believe, is what the other company mentioned charge).

Quarterly prices are wider than rolling (obviously) and there is a point at which rolling becomes more expensive than quarterly trading. This is different for different products depending on the spread charged but in FTSE 100 shares is something like 2/3 weeks (of course for those of you who are short and who like to see the income rolling in every day it can often be more of a psychological thing rather than a value one !).

Q.: I understand that you offer 24hr trading on currencies, but from 21:00 - 07:00 this is online only. However, is there telephone support during the night?


For instance if the platform or my PC crashed and I wanted to exit the trade on say, Cable, could I do that by ringing someone?

A: Unfortunately the answer, currently, is no. In actual fact (unless we are putting an upgrade through) the platform is very robust overnight with very little down time.

We will be moving to a 24 hour manned desk but this is some way in the future. However, having said that if the system is down any stop loss levels will still be honored on re-opening.

Q. Can you comment on whether CS is ever going to offer 1 pip on indices?

A: I can answer that ... the answer is no. 1 pip prices are narrower than the exchanges in most cases. We would just be rejecting half the trades we got as soon as the majority of clients realized that 'free money' was on the table and we would ruin our hard earned reputation.

No matter how fast a spread betting system is, they all work on the premise of taking an exchange price into a pricing engine adjusting it and then pushing it out onto the trading platform. This means that there is always a tiny (in some cases very tiny) delay in price movements on the exchange versus the SB platform. At 2, 3 ,4 pips (depending on the market) we can absorb this but at 1 pip we would just lose money to everyone with a direct access system who was not greedy and just took pip after pip after pip. As I understand was happening with our friends. Although I may be wrong.

People may say that the FTSE is 1/2 pip wide on the exchange but in reality it spends most of the time 1 and 1 1/2 pip wide. The Dow is more frequently 2 to 3 pips wide (in more than a couple of contracts) than not. Although the Euro is 1 pip wide sometimes more often it is not. And sterling oscillates between 1,2, and 3 pips. On top of this we have to include dealing costs...etc.

Also we have to be aware that we are not allowed to give the exact exchange prices to our clients for contractual reasons. At 1 pip wide we would effectively be giving this for free to clients which would open us up to problems with our price feed suppliers {from experience I can say this is a real headache with exchanges, exchanges ask for a lot of $$$ to be able to display their prices in real-time and you would have to reach separate agreements with the exchanges (FTSE, Nasdaq, CAC30...etc)}.

I know that many people will discount most of what I have said as just protective of our position but it all remains a fact.

Everything has to be done on a common benefit level, we offer (as do the other SB companies) a simple and generally cost effective route into the derivative/financial markets but at 1 pip wide where is our 'slice' of the action. Every trade would start at a loss for us (as hedging costs us money) and we would be in the position of hoping that clients lose virtually every time.

P.S. it depends what you mean by tight spreads. If you mean a tight price that you get 99% of the time as against claiming the 'lowest spread' that you get maybe 60% of the time ...which would you rather have?? As I have stated many times on this thread it is much better to have a few accounts opened (with various providers) so that you can benefit from the best prices at any one moment.

UPDATE: LCG are now offering 1 tick FTSE Rolling Daily spreads. 1 point spread on FTSE Rolling Daily. Hehehe. Now, the same for Dax, CAC and DJI Rolling Daily please... Market forces or improved technology? Either way, I'm chuffed it's in place!

Simon's comment on this development: The FTSE future trades on 0.5 pip wide and (compared to the Dax, Dow and currency markets) is reasonably stable. My dealers reckoned they could handle one pip on the FTSE so I have let them loose on it. (although, truth be told, we did not expect a 40 point gap on the open and a 90 point rally on the first day!!)

Q.: May I ask why you have decided to discontinue the daily cash futures?

A: We have closed them down because we get about one trade every three days in the FTSE and none in the Dow and Dax whereas 99.9% of business is done on the rolling daily bets nowadays.

Because so little business was being done in the markets it was felt that the extra man hours required to ensure that they were in line with the rest of the market made them too onerous for any possible profitable return.

In reality they are completely fictional markets and rely too heavily on whatever the market makers do in the auction after hours. And we are fed up with complaints about a sudden shift in the settlement price at 16.36 six minutes after the market has closed.

Note that we have only closed the daily 'cash' market not the daily 'future' market.

Q.: The Extraordinary Cost of Spreadbetting Futures


For the last few months I've been paper-trading a new idea I've had for futures. Rather than have to open a new account with a futures broker, it was easier to run it through the prices from my existing spreadbetting accounts.

With CMC, IGIndex and Finspreads all offering a pretty good range of futures spreadbets, I've just gone through an exercise to work out what the effective round-turn commissions are for a bet of the equivalent size of one contract - after all it's worth a slightly higher comm for the tax saving isn't it?

Er, no... The costs are extraordinary. CMC's spread (the lowest!) on Wheat for example is equivalent to a $150 commission for a contract. Given that the Wheat contract is pretty small and I might trade two or three of these....

I only worked this out when I couldn't see why my P&L taken from spreadbet quotes was wildly adrift from that taking the future's price and adding a commission. It's obvious when you think about it - a 2.5 point spread for Corn, when the contract's worth $50 a point.

The details will depend on each traders' style, but for me I'm far better off paying top-rate CGT than trying to trade through a spreadbet - and that's before you consider the other pros and cons of betting against the house through spreadbetting.

I've cut and paste some details below - in each case I've taken the narrowest spread from CMC, IG and Fins:

Effective RT Comm $
(per contract - based on narrowest spread)
Dow 40
S&P 50
NAS100 60

Bonds 60
Euro 100
Yen 100

Crude Oil 60
Heating Oil 252
Unleaded Gas 252

Gold 100
Silver 300
Copper 150
Corn 125
Beans 50
Bean Meal 100
Bean Oil 48
Wheat 150
Cotton 200
Sugar 112
Cocoa 80

A: Maybe if you would like to look at equity pricing we may be able to redress the balance somewhat. LCG quote a spread of just 0.1% around FTSE 100 shares and 0.25% around FTSE 250 stock with no further commission or brokerage and on just 3 to 5% margin. Compare this to buying the real thing, 0.5% stamp duty (our gordon must have his slice!), brokerage on the deal (generally about £10 in AND out)... 100% of the money up front and then capital gains tax if you make a profit. On this calculation SB is far cheaper than the Direct Access that seems to be beloved of so many commentators.

Odd commodity markets are very difficult to price because many of them are 'open outcry' markets where the bid/offer last trade that you see on your screens is just information and not actually real prices. And the electronic 'out of hours' markets are typically very, very thin. The spread betting company must take this into account when pricing what are after all not the most popular markets on the board. Generally you will find that oil and rolling gold are much more realistically priced because they are much more liquid and now have a good electronic data feed from which to price.

Q.: Had a problem with ETX Capital yesterday afternoon, They actually suspended trading meaning no one could exit or enter trades on their web site.


I sent them a email as I was none too impressed as I had tried to exit with a twenty pip profit which I saw reduced to a one pip profit. here is their reply.

Dear Sir,

Thank you for your email.

Yesterday afternoon the CBOT trading exchange failed which resulted in our feed suppliers being unable to supply feeds for the mini Dow which we use to update prices on the website. As a result of this we suspended the feeds which were not updating. We were able to change our feeds so that we took prices from the Dow pit trading which allowed us to resume trading on the website.

At no point would we ever suspend trading as a result of our exposure to any markets. Any investor who has a position and is unable to trade via the website is welcome to ring in to close; unfortunately due to the sheer numbers of players on our system we are not able to take player trades over the phone.

I trust this answers your question, should you require further information please do not hesitate to contact us.

Kind regards

Mic Mills

Futures Trader

A: All spread betting companies allow trading over the phone...but clients have to be slightly reasonable. If a company has an internet trading system and it goes down you would hardly expect that company to have dozens/possibly hundreds of people sitting around waiting to answer the phones on the off chance that the trading platform failed.

If you expected this of every trading platform/financial market in the world I can assure you that the costs of trading would increase massively as the exchanges / brokers / SB market makers...etc all over the world would pass this cost onto the clients.

So when problems occur (and after all this particular one was not of the SB companies making) clients must expect some delay in phone answering.

If an exchange goes down, for traders on that exchange that is the end of the story... NO TRADING...SB companies are not perfect (of course) but in the particular instance mentioned they performed far far better than the exchange...especially as the market was quite volatile at the time.

Q.: "Avoid trading cash FTSE products that the spread betting companies offer since, as already mentioned, it's just some fictitious instrument with some connection to the FTSE index/future"


I thought I'd see how things have (or have not) changed, so I just went went for a small cable trade with LCG.

After the H&S dropped and bounced off the support at 28 I awaited a long... as of old, LCG were above the chart price (metatrader) (ie chart 1.8551 = LCG 8552/8555), and sometimes a little more. After entry and it moved into about 10 pips profit, I moved my stop loss and as soon a I did, CS spread, all of a sudden became - chart price 1.8551 = LCG 8549/8552 and I was out. Consequently I needed to add on an additional 3/4 pips to allow for their little games.

Avoid trading cash FTSE products that the SBs offer since, as already mentioned, it's just some fictitious instrument with some connection to the FTSE index/future. The connection can be changed at the spread betting company's whim. Putting stop orders on this market is incredibly dumb since the SB can fill you at whatever price they feel like (since they control the pricing - their little product, remember?) Instead trade the daily FTSE future which is based on the real underlying futures market and therefore can't be manipulated by the SBs.

A: I feel I must comment here on these statements.

To believe that we have time or the inclination to 'bias' our prices is frankly laughable we take trades all the time in thousands of markets and most positions/trades would not even register. To compare our 'live tradeable' prices with a company who only produce charts on which you cannot actually trade is ridiculous. Our prices come direct from the real market bank feeds exchange feeds etc. If we quoted 1 or 2 pips too high/low our big players who trade in 100's of pounds a point would come in and slaughter us.

The arguments over the FTSE prices will go on forever. YES the price is 'our price' because there is NO SUCH THING AS THE FTSE 100 SPOT/CASH PRICE as you cannot actually trade in it. You can only trade in its 'derivative' which is the FTSE future. if you look at a chart for the FTSE 100 index on a tick by tick basis you will see that it only updates 4 times a minute whereas the Futures can change more times than that in a second. This means that the index will nearly always have a higher-low and a lower-high on the exchange charts than on a spread betting platform. BUT if you overlay 'Our Quote' chart on the cash market versus the exchange chart for the Futures market you will see that they will match price action for price action. Please remember that if our charts show a low at a price then ipso facto we were also offering the other side of the spread for a buyer. We have many instances of clients 'buying' below the exchange chart low and selling above the high.

In all this talk about biasing prices the main point appears to have been lost. Although we do not bias prices the reason that companies (not just SB's but market makers in general) do this is to tempt trades in the opposite direction to the risk on the book. If our clients are heavily long of something it is in our interest to raise our price above the market to a) tempt sellers thus reducing our market risk and b) dissuade further buying which would increase the book risk. As stated we do not do this, but 'in general' bias should benefit the majority of position holders at that particular moment in time. (of course for those with a short position in the above example it would add insult to injury!). Of course the perception amongst clients will always remain that biasing is only put in place to activate stops (which is why we make it company policy not to bias).

As always we trade in all good faith with our clients but occasionally problems occur. I can assure everyone that we currently do not have a single client set up for filtering. We are currently happy with the pricing model on our platform but that does not mean that this is a constant position of course (as we are a market maker NOT an exchange) deals will be rejected. On exchanges if you miss the price (as frequently happens...just ask an arcade or prop dealer) this is the equivalent of a spread betting company rejecting a price. Do direct access dealers then complain to the exchange? Of course not! They then try to trade at the next price etc...

Q.: Do you ever skew spreads/prices?

A: Mr Simon Denham had this to say -:

Nearly all stops (over 99%) at LCG are filled at their requested levels. FACT.

We certainly do not assign account managers to anyone at all. We do not even notice the vast number of trades going through as they do not affect our overall risk models. FACT.

We never (that is NEVER) fiddle around with prices on our platform. All prices come direct from exchanges and go through our price engine which calculates the price put out to clients. This price is not affected by our position in that market. FACT.

We have five dealing desks taking over 40000 individual trades a day (over 8000 for each desk), 35000 clients, tens of thousands of positions and over 3000 markets - do you really believe they have time to 'adjust' prices on individual markets?

We have never closed a client for being a winner FACT - we merely go into the market and match their trades.

We cannot 'move the market' to harm clients.the money needed to move a market even a pip is far too much to warrant the tiny extra profit. To trigger a stop we would have to actually force the exchange price up (or down) to the clients stop price which would in most cases take far more than 30/40 contracts and anyway might fail which would leave us with twice the sized position going the wrong way! I am not going to claim that we do not make mistakes because we do...but we NEVER make deliberate attempts to take out a client position.

To conclude LCG does not bias prices, never has, never will. The only things in the provider's favour are the spread (never discount this as it is, when all is said and done this represents our profit margin) and the fact that, yes, we can put some clients on dealer acceptance. Any order fill must be justified by the underlying market bid/offer (not where it trades..but the bid and offer on the exchange or relevant bank feed).

Q.: All very well but for a fact I saw a spike pre 8:00am on the FTSE 100 December...


...lasted no more than 1 minute, and had a range way beyond other 1-minute ranges at that time, shooting to 30 or 40 points above the prevailing quote. I think that after the 8:00am open, the index rose through the high of the spike.

A: Pre-eight on the FTSE it is known that the prices are 'manufactured' but they are generally based on the perception of the opening as per the activity in the DOW Jones, S&P and DAX futures which are all open and taking into account any corporate announcements that morning. As we approach 8 most of the dealing desks watch the 'uncrossing' on the futures. This can 'wing about' a bit as traders try to 'spoof' the market by putting big buy/sell orders in the pre-opening uncrossing pool and then pulling the order with a few seconds to go.

Most of the spread betting companies watch the prices of the other spread betting providers as well to check that no obvious 'arbitrage' opportunities are available. I would be surprised if one spread betting company spiked their price by 30 pips against the other companies as there would be nothing to stop all their clients trading in the opposite direction at the advantageous price. If the move was made merely to take out stops then any client who was made aware of it would presumably complain and/or move his business away. As LCG only quotes 4 pips in pre market hours (others quote from 8 to 6) we are generally inside the quotes of the other SB companies and can therefore demonstrate that our quotes were representative of concensus amongst our peers in premarket conditions.

To be honest we would far prefer not to quote a single market without the underlying 'real' exchange quote to back up our prices but clients really like the fact that they can try to outguess 'the experts' in what is generally a 'toss of the coin' scenario. The FTSE is the only market that we (or most other spread betting companies) quote outside of exchange hours.

Q.: But couldn't a spread betting company easily arrange for a quote to jump around a bit to minimise its overall position, rather than maintaining an exact distance from the underlying future?


Just a few points for a few seconds could have a significant effect on whether they need to hedge when there are orders littered around...

A: As I have mentioned above LCG never bias' its prices. Any spread betting firm could move the 'fair value' to do as you say but if there was a complaint they would have to prove to a client (and the FOS) that the fair value was reasonably consistent during a session.

If for instance the difference between the future and the cash was 20 points when the client entered the trade in the morning and then moved to 14 pips and back up to 20 again (taking the stop out in the process) the client would be justified in their suspicion.

All I can suggest is that you put the daily future and the rolling cash in your portfolio and then watch it.

It might change slightly during a session as the cash market does alter slightly as major constituents of the index shift a bit during the day but this should be a very occasional adjustment. If the difference is widening and narrowing all the time then all I can suggest is that you jump ship to another provider. To be fair to my dealers there is generally a bit of adjustment in the first hour of dealing as the fair value settles down but even this should not be more than a couple of points.

In reality we do not watch the order monitor in this fashion and only see stops when they are activated (we call it "redlined") so with LCG it is a moot point anyway.


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