A band of colourful characters, led by ex-London Metal Exchange trader Frank Chapman, comprise the dramatis personae at London Capital Group, an intriguing financial services outfit that has stormed home with stellar interims, thanks to a sterling turn from spread betting outfit Capital Spreads.
Chief executive Chapman kick-started his City career on the floor of the London Metal Exchange and has also had stints at Cal Futures, Baring Securities and as a head of trading for a hedge fund in a joint venture with HSBC. Before founding LCG, chief operating officer Simon Denham ran the options and derivatives desk at Cantor Index, focusing on spread betting and CFDs. Well-briefed investors will also recognise non-executive chairman Robert Loosemore as the man who floated Torex Retail on AIM in early 2004.
The trio recently announced a 385 per cent surge in profits to £1.65 million, on turnover lifted 52 per cent to north of £3.5 million, with Chapman delighted with growth rates in both live customer accounts and daily trading volumes at Capital Spreads, the spread-betting division.
Today, we catch up with Simon Denham of Capital Spreads and learn how things have changed in the last three years.
Financial-Spread-Betting: OK, thanks for being with us Simon today - could you tell us about Capital Spreads...a little bit of history for our readers.
Simon: Capital Spreads is the spread betting unit of London Capital Group and was launched in October 2003 by myself and Rachel Woodford (both from Cantor Index) the company has grown at a very fast rate sitting in a niche area between the other major spread betting companies.
Financial-Spread-Betting: You launched into a market with established competitors such as IG Index, why were you confident there was room for another player and how difficult did you find it to establish yourselves?
Simon: We were confident that we could give a slightly different outlook on spread betting with our lower risk model that we felt would appeal to clients who were not confident of their own discipline. We sold it on tighter spreads and lower margins a philosophy we hold to this day. I am not going to say that it did not involve a lot of hard work but in the main I can genuinely say that I have enjoyed it.
Financial-Spread-Betting: Capital Spreads launched its proprietary trading platform in 2003. How different is the platform today from what it was 3 years ago?
Simon: We have had two major upgrades in that time but these have mainly affected functionality from a client account management point of view. The level of sophistication from 'order functions' to 'charts' and 'technical analysis' is much greater than on launch date. But we have very definitely made sure that our platform remained 'the same' from a look and feel point of view as this is what our clients like.
Financial-Spread-Betting: What type of customers is the platform targeted at and has it been as successful in attracting the volumes and growth of business you anticipated?
Simon: We focus on the small to medium sized punter who wants simplicity and ease of trading. Our growth has been much greater than any of us expected.
Financial-Spread-Betting: Spread betting has always been marketed as being tax-free. But how big a deal is the tax-free status, given that rival trading products let you offset losses against gains?
Simon: The tax free status has taken a bit of a back seat especially in FX and Single Stocks. The spreads on our FX prices now rival FX platforms and those on Equities are actually narrower than the 'real' thing when taking into account brokerage and Stamp Duty. We still mention it occasionally but it is not so important any more.
Financial-Spread-Betting: Has anyone ever compared the cost of trading through a spread better and through an online broker?
Simon: There are several sites which have done this, they have generally come to the conclusion that depending on what market you trade depends on whether it is cheaper to spread bet or to go direct access.
Financial-Spread-Betting: Do you hedge clients' positions (or 'net positions')? Or do you simply take a view of the market each day and adjust your quotes accordingly to balance your spread? Or is laying off bets too expensive to do in practice?
Simon: We run a book in which we take risk in every market up to a certain level and then if the clients build positions greater than this we hedge. So we have individual market risk levels, group market risk levels and global risk levels all of which we must be inside at all times. If we hedged trades as they came in it would just be far too expensive.
Financial-Spread-Betting: If so wouldn't moving the spread create potential arbitrage opportunities at the other spread betting companies?
Simon: We never bias our prices. We are occasionally forced to move them slightly otherwise arbitrage possibilities may occur. Which we try to avoid.
Financial-Spread-Betting: How does someone hedge their share portfolio by using spread betting, or is there perhaps a better tool for this?
Simon: By making a spread bet in the opposite direction to his share portfolio in the relevant share. In the UK a £10 bet is the equivalent to 1000 shares so to exactly match a 5000 share holding in Rio Tinto he would have to make a £50 sell bet. He can make this bet on the rolling or the forward expiry date. A short rolling bet attracts interest on overnight positions (i.e. we will pay a fee to a short position holder in a rolling UK equity bet).
Financial-Spread-Betting: Any idea of total volume of spread betting market? Do you think spreadbetting will receive the same clout and recognition as brokers in the UK market in the coming years?
Simon: We transact about £300M value per day. I don't think that it will ever get to the levels of conventional trading. CFDs are likely to take that space.
Financial-Spread-Betting: There are so many new spread betting firms around today it can be confusing deciding which one is best for you. Is it just a matter of looking for the tightest spreads?
Simon: In the main Yes... companies may confuse the issue with various imponderables but in general the tighter the spread the greater the profit potential.
Financial-Spread-Betting: Do you think that there are too many spread betting companies around?
Simon: No, there are something like 300 stockbrokers in the City of London alone. There are only around 10 spread betting companies in the world.
Financial-Spread-Betting: The online spread betting market is very dynamic. Looking ahead, is it likely to get harder for leading spread betting providers like Capital Spreads to differentiate their spread betting offerings from other competitors and if so, how do you plan to address this challenge?
Simon: Even after 3 years nobody has attempted to invade the space made by Capital Spreads, all the other spread betting companies are clones of each other we remain the only deposit only, stop protected, non-margin calling, and tight spread company out there.
Financial-Spread-Betting: Where do we find the most movement and how easy are commodities to trade?
Simon: Trading commodities via spread betting is as easy as trading any other market. Clients generally like to trade Gold, Oil, Copper and Natural Gas.
Financial-Spread-Betting: Do you offer trading of FTSE 350 equities? What would it cost to hold a long position in one of these for say 18 months? - if you could give me an example (preferably using Royal Bank of Scotland) of all associated costs (i.e initial spread above market/commissions/rollover costs/financing charge that would be highly useful and indeed crucial to my decision on whether to spreadbet.
Yes, we offer trading on FTSE 350 stocks - margin on FTSE 100 is 3% while the margin on FTSE 250 stocks is 5%. Including cost of carry this would cost around 2% over base rate.
For instance a Buy bet of £10 of Rolling Royal Bank of Scotland:
Market price 1890-1891. Capital Spreads price 1889-1892 (spread 0.1%) This is an 'all in' price, nothing more nothing less. If you had made the same 'bet' by buying 1000 shares you would have paid 1891+0.5%stamp duty +commission (generally about £10) a total price of 1901.5 and then when you trade out you get charged the £10 again.
To make an absolute profit with a 'real' share trade the market would have to get to 1903 bid when you would have made £5. The same trade via spread bet would have made you £100 by this time.
Financial-Spread-Betting: Can you suggest which of your products would enable me to do this most cost effectively? i.e. using rolling/futures bets.
Simon: Depends on your outlook and on the market. In general we say that if your position is held for longer than 3 weeks you should have had a quarterly but it really does depend on the market and the spread.
Financial-Spread-Betting: What are your margin requirements on Small Cap stocks?
Simon: We do not quote small caps, margin on FTSE 100 is 3% on the FTSE 250 it is 5%.
Financial-Spread-Betting: Stops have sometimes been criticized that they often do not adequately protect the trader, but the reverse as some shares may suddenly widen the spread at crucial times, and if this his your stop -> big loss. Please comment.
Simon: In three years of trading even through bomb attacks, crises around the globe, oil shocks etc etc we have never widened a market spread except for Copper and heating Oil and even these have only been because of underlying market illiquidity.
Financial-Spread-Betting: It is my understanding that there is a 2% charge for doing credit card deposits but deposits by BACS are charge-free. Are there any other fees which our readers need to be aware of besides this (and the spread of course..)?
Simon: No, although some credit cards do now consider betting transactions to be 'cash' and charge accordingly.
Financial-Spread-Betting: How long have you been in the broking industry?
Simon: I have been in the financial markets as a derivatives trader/desk manager/options trader since 1983.
Financial-Spread-Betting: What does your average working week involve?
Simon: Most of my role involves development of the Capital Spreads platform / marketing of our brand / oversight of the risk levels / management of the dealing room. I generally get in at around 7.30 in the morning, write market reports...go to interminable meetings with IT, marketing, customer services, new partners etc etc...and usually manage to get out by around 7 or 8 in the evening.
Financial-Spread-Betting: What effect has your role had on your lifestyle?
Simon: I still have a wife!
Financial-Spread-Betting: If you could go back in time and witness one event in history, what would you go back and see?
Simon: I would like to have been in Berlin when the Wall came down.
Financial-Spread-Betting: Tell us about your worst investment... and the lesson you learned from it.
Simon: I have had so many bad calls in my career that I hesitate to focus on just one. BUT at the beginning of this year I was asked for my pick of 2006 and I chose Party Gaming as my buy. Just as well I no longer find time to trade!
Financial-Spread-Betting: Does the Loch Ness monster exist?
Simon: Ha!! NO.
Financial-Spread-Betting: Do you favour technical or fundamental analysis?
Simon: As far as I can see one blends into the other whenever you have a losing position!! Always watch support/resistance levels and get out when you are wrong.
Financial-Spread-Betting: What qualities separate winning traders from losers?
Simon: Run your profits, cut your losses.
Financial-Spread-Betting: Do you think discipline is that important? What other attributes do you consider essential?
Simon: Discipline is (in the end) the only major attribute of a great trader. NEVER FALL IN LOVE WITH A POSITION. (as someone once said to me ...it will never fall in love with you).
Financial-Spread-Betting: Are you optimistic or pessimistic about the UK stock market over the next 12 months?
Financial-Spread-Betting: Make a suggestion to the chancellor of something to include in the next budget?
Financial-Spread-Betting: What books, seminars, and/or courses would you recommend?
Simon: Actually I have managed to go through my entire trading, and city, career without reading a single trading book or going to a single seminar (aside from those that I was presenting) I am sorry to say that, in my opinion, trading cannot be learnt from a book you either have it or you don't.
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