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History of Spread Betting and Risks

1900s ->The advent of Bucket Shops

Back in Wykoff and Livermore days you did not need a stock brokerage account to trade stocks. In fact, you never had to buy or own a single share of stock - ever!

Some of the major Wall Street firms started out as bucket shops. When you hear the term bucket shop today it means a stock broker that sells pump and dump stocks in a high pressure operation. The term meant something different in the old days. If you walked into a bucket shop in the early 1900s it would look like a mini stock exchange. Blackboards with stock symbols and prices covered the walls, and clerks, usually teenagers looking to get into the business, scurried around reading a clankity-clank ticker tape and updating the prices on the boards.

You could walk into a bucket shop off the street and after making a deposit or otherwise establishing your bona fides you could spend the next several minutes or hours betting on the price movement of Union Pacific, and dozens of other NYSE stocks. You could buy or sell or sell short anytime you wanted. At the end of the day you collected your money or kissed it goodbye and received a hearty invitation from the shop owner to come back tomorrow, as the case may be.

You never saw a stock certificate and the shop owner didn't either. You were trading on the price movement only. Bucket shops were eventually outlawed. I suspect more from the growing political influence of the Wall Street firms than anything else.

1975 - 1980 -> Early Origins in the UK

Is spread betting as old as the City itself? Certainly not! It all started back in 1974. At that time it was illegal for British citizens to trade gold purely for speculative purposes, so Stuart Wheeler, the founder of IG Group, hit upon the idea of allowing people to trade the price of gold as an index.

At the time Stuart Wheeler started making a market to his friends on the price of gold. Every week, in those days, a select group of people met in New Court, at the offices of N.M. Rothschild, the merchant bankers, to 'fix' the prices at which gold bullion would be bought or offered for sale by the firms that dealt in the metal. When they had agreed on the prices they announced the result to the market, and that became the basis on which gold would be traded until the next 'fix'. Wheeler made a 'buy' and a 'sell' price on where he thought the next 'fix' would be set.

Those who thought that the price of gold would be above his placed a buy bet, those who thought the price would be below placed a 'sell' bet. This is how the 'Investors Gold Index' was born. Back then the Bank of England objected to the company trading under that name so it was quickly abbreviated to IG Index (International Gold), which was the forerunner of all the spread betting bookmakers today.

Such trading was a complete innovation in those days, but the amount of interest it generated in such a new market encouraged Wheeler to expand and widen the choice of instruments on which clients could bet.

Wheeler dealer: Tycoon Stuart Wheeler made his fortune with a spread betting company.

Spread Betting started in 1974. A young unemployed stock broker by the name of Stuart Wheeler had a brainwave that started people trading on gold prices. Stuart Wheeler's idea was to create an index that would give investors the opportunity to bet on the movement of gold, without having to actually buy or sell the physical commodity in the market. This new, innovative company was baptized Investors Gold Index - until the Bank of England objected to it trading under that name and it became IG Index. A short while later IG extended the product range to include foreign exchange and commodities. That you might say was the thin end of the wedge.

1980 - 1990 -> Continuing Growth

The spread betting market continued to grow in the 1980's boosted by the economic boom at the time, however the market was still restricted to a very narrow segment of the population. One of the problems at the time was that the spread betting companies only made prices for currencies, commodities, options, and a few major indices - markets not known to Joe Public and thereby only few professional investors were willing to bet on the direction of these markets. It is worth noting here that the general public were used to investing in stocks and bonds and spread betting at the time was still uncharted territory.

The lack of technology during these years also made trading difficult for both investors and the companies themselves. The average investor found it difficult to acquire sufficient information on these markets in order to make a prediction on the market direction and second the technology was not advanced enough for providers to offer spreads on a multitude of markets. Spread betting is also a fast-moving instrument; spreads are continuously being created and adjusted in order for the system to work. The information about the spreads that the spread betting providers have created must be communicated to the trader immediately. Consequently, once the trader sees a spread, they must be able to execute a bet on the spread before it changes. In the 1980s, no real time portal was available to display the spreads and make the bets. The technology wasn't advanced enough for spread betting companies to offer spreads on stocks as this requires thousands of different spreads a day.

1990's -> Modern Day Spread Betting

The mid-1990's beckoned the start of the technology boom and, although no one probably recognised it at the time, this was going to play an important part in the development of the spread betting industry. Stock market happenings became headline media news as dotcom stocks soared and this in turn helped to attract a younger and more IT-savvy audience. In these days because of the brutal volatility many people did not have buy and hold investment plans for investing in technology stocks so looked at spread betting as a versatile tool for taking advantage of short-term price movements in individual companies and indices (such as the Nasdaq) alike.

With the subsequent bursting of the technology bubble in March 2000 this brought a general bear market that ran well until 2003. This also helped bring the industry well in the spotlight as spread betting empowered investors to take advantage of market downturns. The bear market in share prices also saw the start of an extended period of weakness for the US dollar - the pound continued gaining value against the dollar and went from being worth some $1.40 in 2001 to more than $2 towards the end of 2007. The mainstream media started to cover global markets such as currencies and commodities such as gold and oil - and this helped to boost the interest of some people to these other markets. Although these markets were traditionally accessible via futures, spread betting allowed for such markets to be traded from one account, at a size that could be adjusted to reflect the individual's risk profile.

With the advancement of technology in these days and then the internet in the early 2000's the spread betting industry was destined to change. Spread betting providers launched online trading platforms and started to cover more markets with up-to-date quotes, historical data and more competitive spreads. Online tools such as automatic stop loss orders also helped investors to manage their risk so they didn't need to be sitting in front of the screen all day long and thereby momentum for spread betting grew rapidly.

Spread betting was now available to the average investor and consequently another boom was started for the industry as both providers and traders took advantage of new opportunities. The number of traders increased dramatically which boosted volumes for the providers and customers demanded more instruments to trade on - of course with the internet providers were now able to meet this demand and provided more coverage. This began the world of modern day spread betting where nearly every sort of financial instrument is available to bet on. In these years spread betting really took off as finally there were systems available which allowed the individual trader to keep up with the fast paced changes of the markets and be able to take advantage of a price at any given moment by dealing directly online.

Spread betting has now grown into a recognised and established alternative investment vehicle where individual traders see it as a high risk, high reward way to make tax free gains trading the stock market. Faster computers and live trading platforms are making online trading and consequently spread betting more popular than ever before and with the general investor getting involved spread betting is regularly seen advertised in newspapers, magazines and television shows.

The economic turmoil that we have recently witnessed has again pushed the financial markets into the mainstream - probably even more than ever before. Banks failing, shares plummeting and the soaring oil price have resulted in wild moves in all sorts of different markets and has made people more aware of the impact all this can have on our lives. This, together with the increasing propensity for people to take control over their own finances, has helped the spread betting industry evolve and grow and leave investors and traders with more choice, more tools and more markets than ever before!

The Way they Were....

This is how the IG Index and City Index websites used to look in the early internet days (1998)...ah things were so much simpler then -:)

History of Spread Betting

Why Spread Bet at all?

Everyone is attracted to the idea of making money out of backing their judgment, particularly when they see an anomalous situation which they think will be corrected, or when they spot a share price trend and want to cash in on it by riding the rise or fall so long as it lasts. Spread betting allows you to do this very efficiently without the need for access to large amounts of capital.

One of the most important aspects of financial spread betting, and one that is no longer available to the ordinary investor in stocks and shares, is that you can make money from a falling share or commodity price in just the same way that you can win from a rising one. Financial spread betters are just as happy operating in a falling market, when all conventional investors who hold equities or commodities in their portfolios are getting more and more depressed because they are watching the values of their investments diminishing all the time. If they have to liquidate any holdings, they will either get a smaller profit, or an outright loss. However, the spread better will be able to take full advantage of falling prices and make as much money as they fall as they would when they rise. Furthermore, the spread better is able to make a whole lot more money out of the same share if the price turns and climbs back to where it was previously, whilst the holder of the same share can only watch the recovery, if it happens, and sigh with relief.

Essentially, financial spread betting is short term trading, as opposed to longer term investing, as well as being an adjunct to investing over a longer period. It can be used very effectively to protect profits that have been achieved in the core holdings of a portfolio, and this is described in more detail in Part 3 on Thursday.

There is another aspect to financial spread betting that has come about more or less by accident. The imposition of massive regulation upon stockbrokers and institutions which are licensed to deal in investments on a regulated investment exchange brings greatly increased costs which are passed on to the client. Government stamp duty, dealing commissions both when you buy as well as when you sell which can vary in amount considerably between firms of stockbrokers and banks, and of course, the iniquitous capital gains tax, have all combined to make short term trading unattractive if you have to try to make money by buying and selling individual shares. None of these costs apply when you engage in financial spread betting. There is no capital gains tax to pay when you win. Of course the corollary applies; you cannot offset losses against gains, either from spread betting or any other investment activity. Nevertheless, by the judicial use of stop-loss limits, you should be able to ensure that your gains far outweigh any losses that might arise.

How risky is it?

All investments carry a degree of risk, some greater than others. Financial spread betting is at the high end of the risk table in that, theoretically, your losses are unlimited, but there are several things that you can do to minimize the degree of risk, and at the same time control your exposure to actual loss. In fact you should not get involved in such financial short term trading activities unless you are prepared to follow the simple and obvious rules of common sense that govern such activities.

Firstly, you must always apply guaranteed stop-loss limits to your bets, regardless of the additional cost of provision of this safety factor. In certain circumstances, without such protection, the very real potential loss can be an infinite amount of money. Secondly, you must really know as much as possible about the company or commodity upon which you are going to place your bet. You should become an expert in your chosen sector, and stick closely to what you know. Be persuaded to open or close a bet by your own judgment, rather than relying on a 'tip in the pub'.

Thirdly, monitor your bets all the time that they are running - events that can have a dramatic effect on your open positions can happen very fast and without warning. Finally, you must be prepared to cut any losses without emotion getting involved. If you follow these rules you can reduce the degree of risk substantially.

The main problem with spread betting is that people see how quickly money can be made, they get a taste of it and imagine an easy life, trading for a living and being a big swinging dick, the reality is that it takes hours sitting in front of a monitor and is on the whole pretty soul destroying when you are not in a winning position.

Is it for you?

Not everyone is suited temperamentally to financial spread betting. This is not so much the case for sports spread betting, probably because the potential amount of monetary loss is considerably smaller in most sports (other than cricket or rugby union perhaps) and such betting is generally regarded as somewhat more frivolous than as being a full time occupation.

Financial spread betting does require a degree of nerve and courage, as well as the ability to accept losses without it affecting your judgment in the same way that players in high stakes poker games must remain aloof from emotional involvement when play goes against them. This state of mind is essential if you want to be able to continue to calculate dispassionately the odds against winning or losing as circumstances change at speed.

How do you get started?

You need to open an account with a financial spread betting bookmaker. Generally the larger firms will offer facilities to place sporting bets also. All have to supply you with full details of their terms and conditions before they can accept any bets from you. They will want to know how much money you will want to stake normally, and they will ask for a deposit to be placed with them. This sum usually will be around £2,000 and they should pay interest to you whilst it is kept in their clients' account.

It will pay you to get to know an individual dealer with whom you transact your business because the relationship that you can build may be beneficial to you both. Trading with bookmakers tends to be rapid, since they have got a large number of clients and cannot afford to spend a lot of time discussing any particular bet. They are not there to give advice; you are supposed to understand the language and how it all works, but usually they will try to help those who tell them that they are beginners.

Remember that all telephone conversations with bookmakers are recorded, and this is very much to your advantage because if you dispute any verbal instruction that you may have given to the bookmaker, you are always able to demand to listen to the tape of the original telephone call. Make sure that you fully understand all the terms and conditions as well as settlement terms at the beginning of your relationship before you start to place your first bets.

With thanks to veteran stockbroker and spreadbetting guru Charles Vintcent who contributed in part to this article. Charles is the author of the best-seller, How to Make Money from Financial Spread Betting.