Is Spread Betting Bad? Myths and Rumours...

Let's reflect on some of the more widespread rumours surrounding the spread betting industry. 'They stop hunt', 'the spikes are synthetic', 'the slippage took me out', 'they re-quoted me', 'the platform froze', 'they moved my stop', 'they closed my account due to not liking me winning and or scalping', 'their spreads are way off Direct Market Access', 'their prices are 2 pips away from the real market', 'they accused me of cheating', 'they're just a bunch of crooked bookmakers, they only want losers'...is there anything I left out?

I have mentioned such issues in the past but below are some of these points based on real trader experiences, observations and opinions:


They Stop Hunt

Trader 1: This line of thought is closely related to the theory that the spikes are synthetic. Yes, the data from spread betting providers is prone to the very infrequent spike. So is the data from some charting software companies that have absolutely nothing to gain from it. It is just a mistake. And it happens. What most people don't seem to realise is that this is a fantastic opportunity. God knows how much money I've made off this in the past. If you see it and you're not in, get in fast. Bank your profits. Hope they don't notice. If you see it and you are in and you lose money as a result, ring up and complain. Money will be refunded every time. Easy. There is no way anyone could ever make me believe this was stop hunting. As for small price fluctuations, this is slightly more suspect but on the whole I still think its rubbish. Yes, I do, from time to time, see a price with an spread betting company that goes 1 or maybe once in a blue moon 2 pips from the DMA price. If this is actually repeatedly costing you money, the problem lies in your stop placement not the spread betting company. If your stop is a couple of pips above/below a daily/weekly high/low or 4hr/daily/weekly swing high/low etc, you need to re-think things.

Trader 2: No, only as much as the real market does, in that there are always 'magnetic' levels with lots of orders being fired off. Most of their clients lose money on their own accord anyway, we can safely assume this, no elaborate algorithms conceived by the spread betting company is necessary, there is one already, the market itself!!!!

Trader 3: 'they stop hunt' = markets gravitate to size, check prices from an independent source.

The Slippage took me Out

Trader 1: Slippage happens in the direct market too. It's a result of there not being sufficient liquidity to absorb your actions. If you hit market in Dec FTSE at £100 a point at 4.45pm, you're not getting the price you wanted. Simple. But the real question is, do spreadbetting companies slip you more than the direct market would? I don't have any evidence of this with most of the providers out there and as most of you know, have traded actively in spread betting whilst being in the direct market at the same time. The exception to the rule was Gekko spreads who repeatedly slipped me on everything. I'm talking £1 bets in the Bund. When I contacted them several times about this, they closed my account. Nice.

Trader 2: In the real market this is always a possibility. In the spread betting world, where you're only trading their quoted price (as they all stress) slippage only happens because it's artificially added by the software when prices move quickly. They could instantly fill at exact prices if they wanted to, but then they'd lose out on their hedges in the underlying market (if they really have a hedge). IMO, they mostly add as much slippage as they think they can get away with, which, may have been too much in the case of VDM.

Trader 3: "the slippage took me out", = you're lucky you got out then!!!!!

The Platform Froze

Trader 1: One has to be careful who one listens to before taking things at face value. For instance: "My platform froze just when I went to close my position which was showing a profit of £200. It was deliberate freezing by the provider to stop me taking profit. There was no other reason for it. I've not turned my computer off for 3 day straight and was using Windows Media Player, FX Pro charting with 12 live charts, IG's Java Charts, Ransqwark, Outlook Express, Excel and was on Youtube and all of them seemed to be going fine." Again, I've experienced platform freeze myself and I've had the price go phone only at an inopportune moment. These things happen. Do they happen deliberately to take money from the trader? I honestly do not believe this for one second.

Trader 2: This used to happen a lot, especially with Fatspreads, but whether it was deliberate or not, they can't get away with it now as everyone has fast broadband and decent computers.

They Closed my Account due to not liking me Winning

Trader 1: This has happened to me on one occasion. And albeit I'd prefer to think it was because I was winning too much, it was more probably because I was constantly complaining over slippage (Gekko) and alerted them that what they were doing was wrong. I admit that if you are entering short-term trades on a very frequent basis and are very profitable, there is a possibility that you may end up with your account getting closed. But I have no proof of this and this is just my two cents. I don't think other trader types would have anything to worry about.

Trader 2: I've never really won sufficiently to discover this but I believe that they will certainly make it difficult for traders who scalp.

Trader 3: It is not about losers or winners. They couldn't care less, unless the internal risk management system is totally out of work. Individual trade patterns is what alerts them (not necessary a winner), and there are plenty of short term scalpers around turning on the alarm, this resulting that you could in fact get flagged.

They Accused me of Cheating

Trader 1: Erm...then you probably did. Spread betting companies aren't stupid.

Trader 2: I have never really understood this, especially the accusation that clients who have a faster price feed are not playing fair.

They only want Losers

Trader 1: Take this from a spread betting firm's view; if you were the owner of a spread betting company would you only want losers? Personally, I would want the best traders! For obvious reasons...

Trader 2: They would obviously want a constant uptake of new clients since most traders invariably lose and thus don't need to be hedged. However, having a number of really good consistent traders would come in useful; such traders could both be hedged and shadowed. I can also see advantages to having a bunch of mid-range clients with funded, rather than margin, accounts that poodle along winning big now and then, and losing small here and there, and meanwhile, they have the use of your capital? Okay, perhaps this applies less in these days of low interest rates, but it's not 'nothing' either to a spread betting provider's bottom line.

Trader 3: I don't believe this to be true. From experience I can say that the best client spread betting providers can have is one who churns his account yet struggles to make sufficient profits to justify a withdrawal; but doesn't lose too much to end up giving up or wiping him out. Recruiting new clients is expensive and requires effort on the part of spread betting providers. Winners and losers both have advantages; ultimately this depends on the business model employed by the spread betting firm and the person you are asking.

There is no doubt whatsoever that spread betting providers have improved massively over the past years and I believe that many of the myths (bad ones in most cases) surrounding spread betting companies are now simply myths. The thing is that when it comes to these kind of suppositions regarding underhand tactics being used by cheating spread betting companies; such things cannot stay secret forever, insiders and employees know what's going on and that will make its way externally via whistle blowing or unhappy employees who hold a grudge against their company...etc This sort of public exposure would bring down any spread betting provider and the fact that this never happens is probably proof in itself that no such manipulation exists.

The rumours above may originate from the fact that it is natural for people to try blaming others for their lack of performance. This sometimes provokes emotions like resentment, anger, chagrin or doubt and the stock market or spread betting providers are prone to becoming targets for these emotions. On the other hand successful traders tend to look at losses more open-mindedly and will ask search for answers inside themselves (could I have done anything differently?).

The only real problem remaining today appears to be that some spread betting providers still discriminate and flag some of their clients on a constant basis by way of trade rejections and referral to dealers, this in order to control how and when certain traders will be able to get into the trade. However, discrimination of clients is not allowed according the EU MiFID financial directives. Otherwise, spread betting companies have come a long way in the right direction compared to just a few years back. Unfortunately, most of us British love to moan about almost anything and it is somewhat a national pastime to complain, even though no problem really exists.

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