Scalping, Day Traders and SpreadBetting

Q. What is scalping?

We asked this question to Simon Denham, Managing Director of Capital Spreads -:

A: There is no absolute definition of scalping but...from our viewpoint scalping is when a client continually attempts to trade on slightly delayed prices in fast moving markets...By continually I mean every few minutes...

So suppose a client does 40 bets a after day...this will flag him up to the dealers...sorry but that is the fact of the matter...they will generally analyse the time in position but may not make an average...if enough of the trades are suspicious then we just make it difficult to scalp a moving price by placing the client on dealer acceptance. Put in another way if someone wins tiny amounts on each trade (and hardly ever loses) we just take the view that he is scalping.

The fact is that systems get faster and faster but there will always be that tiny delay which leaves us open to abuse. If you see a quick profit and want to take it that is entirely your decision...if you hold positions for 15 seconds or 15 minutes then that is your skill against the market (not against us) you can trade 50/100 times a day it is all the same to us, if your trades are done on fair prices then good luck to you because you are beating the market not Capital Spreads.

Scalping is watching a bank feed move and then trading on the fact that our prices may be fractionally delayed (although this delay is getting almost infinitesimal now). A scalper will buy off Capital Spreads at say 1.6305 in Cable when he knows that the price in the market is already 1.6306-1.6309 and is taking advantage of a latency issue. If the client buys at 1.6305 when Capital Spreads would have to pay 1.6309 how on earth can we 'hedge'. We would merely be locking in a loss every time. The scalper will immediately sell at 1.6306 taking a one pip profit. Capital Spreads would then have to sell out of the 1.6309 buy with a 1.6306 sell making a three pip loss. (Capital Spreads is like any client when we go to hedge...we must also 'pay the spread'). So after the scalper has closed out Capital Spreads would be left with the loss to the scalper AND the loss in the hedge.

In reality we have over 45000 clients and only a couple of hundred on dealer acceptance. We just quote market prices to our clients...we have continual two way business all the time in Forex markets and we look (in the main) to just try to make the spread overall. If we have a client who makes good solid profits using whatever trading systems he/she has developed then we may just back his/her bets in the market we certainly do not stop them trading.

We do have the odd market that is on dealer acceptance as well (brent oil for example) because of the lack of liquidity in the quoted market. But we will normally accept 40 to 50 quid a point even when there are only a few contracts on the bid/offer. We have any number of winning clients who trade in quite large size and hold their positions for a considerable time. These clients never get put on dealer acceptance because they are not just trying to 'have us over'.

Q. Will a spread betting bookie stop you if you scalp consistently?

A: Most probably yes (unless you use a professional outfit designed to handle day traders like ProSpreads. Short term trading is disliked (if you are a winner) because a provider cannot efficiently hedge your positions. For example if you trade inside their average 'time base' in terms of book hedging. The firms will use terms like 'scalper' but that term is generally subjective. In the company's terms any client who makes money from them in such a manner which cannot be hedged would represent 'scalping'.

A good friend of mine works at one of the larger spread betting firms and for obvious reasons I'm not going to name him or his company. He CATEGORICALLY states that 'clients trading in very short time-frames (sub 5 minute) at larger size £50+ a point who consistently win will be referred to dealer, they are a business and want profitable business and they don't pay his wages by giving cash away'. He also confirms that they watch for clients who have a fast feed and an even faster finger, he reckons this activity is really watched for and anyone doing it will last no more than 48 hours before they're put on dealer referral.

It's not all bad. If you trade over longer time periods and consistently win, his spread betting firm will love you. When they hedge your position they put in some of their own dough (because you are so good and win all the time) and they win too!

As Simon Denham of Capital Spreads defines scalpers: Scalping clients just sit at the screen for hours on end and only ever trade when the price has moved on a live plaform by 2 pips or more in a clip and then they immediately push the trade button. The 0.25/0.5 second delay on the price is sufficient to get a trade on. When the price is just 1 pip wide this means that they are always on a profit before the trade has even been accepted. If a client only did this a couple of times a day we would never see it but....human nature being what it is these 'scalpers' sit there all day and do it 20 or 30 times in a session day after day making them easy to spot. We do not take their winnings away, they can remove these and boast about how they beat the spread betting provider, but from the moment we identify them we put them to dealer acceptance so that they are having to trade in the same fashion as everyone else (i.e. trying to beat the market... not just taking advantage of a platform).

If a client is a 'good trader' then he will be a good trader on any platform. If we have put a trader on Dealer acceptance and this is unacceptable then there are numerous other providers out there. I suspect though that most find that they lose on the 'faster' platforms or get put on Dealer approval pretty quickly with the smaller providers.

Q. Why is that that most spread betting companies do not welcome scalpers?

A: Because scalpers are in and out for a pip or two in a few seconds, generally before a position has any chance of being hedged. This is especially bad if the price feed is slow as it renders their positions are unhedgeable, and thus hit a spread betting company's bottom line directly. If all clients behaved like this, they would have to change their hedging strategy.

Someone who consistently takes two points in a second or two hits the bottom line. They want business that they can hedge if need be. They don't want anything they can't. A scalper can lift a price and be out of the market faster than a dealer can hedge, hence the 'referred to dealer' scenario. On average, it's a known cost that makes the client unprofitable. Sure, some may lose, but overrall if they cannot hedge or cannot hedge profitably they have to assume that the profit and loss would be better off without the client's business. Not all scalpers will make money, but the technique relies on getting on the back of a moving market. By the time a dealer tries to hedge, either the client is out for a profit, or the dealer is left to hedge at a worse price. Sure it might whipsaw around which would ultimately leave a swing trader with a loss, but scalpers don't trade like that; they pick off the bank which is last to move its price, and get out for a pip or two.

Q. What's the difference between scalping and day trading?

A: The difference is that in scalping you look to stay in a trade for a timeframe ranging from a few seconds to a few minutes with high leverage scalpers looking to capture just a few pips (1-10 pips) at a time. Day traders stay in the trade from about few minutes to few hours to capture a bigger move (10-50+ pips) with less leverage then what a scalper uses.

Q. When it comes to scalping and scalpers what kind of profit are they really looking to make?

I know that they want to keep profits small and losses smaller, but what kind of profit are they willing to take. 5 cents, 10 cents, 15 cents...I know it depends on what the stock is doing but are they willing to take a 5 cent profit on something?

A: I have a trading buddy of mine who has made scalping a living. From my observations, here is what I can tell you -:

He trades off the tape 90% of the time using a 3-5 tick stop. So in stocks he would be using a couple cents up to a 5 cents. His exits are all scaled out. Because his technique is only trying to capture short term moves, he scales out half at +5, a quarter at +10, and the rest whenever the markets tell him.

I do not think the average trader can profit from his methodology. He is super quick on his entries and is right almost 70% of the time. I do think it takes years of tape reading to master this kind of skill.

Scalping traders do have short time-frames but this can be very if the exit strategy is strictly followed. I guess a novice trader can use it and after experimentation can follow a technique of their own with education and exposure.

Q. What are the limitations scalpers face?

A: Couple limitations I can think of:

  1. Scalpers tend to do 40+ roundtrips day with enormous volume
  2. Will not catch the bigger swing
  3. Staring at tape all day

But this would not be considered a limitation from a scalper point of view. This is their trading style and they tend to be good at what they do. They are very quick to pull the trigger and very quick to exit at the first warning sign as well.

Q. Why would any short term trader, making decent money and presumably trading relatively full time, want to use a spread bet account and not an ECN type set up anyway?

A: First of all: No Tax. Second, the spreads in the ECN's are not as good as many like to say. For example for much of the last few months in 08 and the first few in 09 the spreads on markets like Cable and GBP/EUR were (and still are on occassion) far wider than the fixed 3 points on Capital Spreads for instance. Lastly, banks don't always like scalpers either; pulling feeds from an aggregator like Currenex does happen, and will leave you with sh!t liquidity. Banks have very, very sophisticated analysis tools and they quickly identify those who abuse the service. The banks term it 'toxic flow'. and they want none of it.


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"Daily Dow please"

"Daily Dow 7500/1 sir"

"err yeah i'll buy all i can"

"thats done sir, all you can, buying daily dow 7501"

"err like cool, click"

ring ring ring ring.

"daily, hahahaha, hahahhaa, i'm sorry, doowWWW please, oh christ forgive hum Daily dow."

"daily dow, @ 11,650/1"

"ahhhh, hahaha, sell all i had"

"thats done sir all you had, sold daily dow 11,650"


hmmm nice scalp. must call again...

 ...Continues here - Why do Spread Betting Bookies hate Arbitrage Traders?

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