Simon Denham, Managing Director of LCG responds to your Questions


Q.: Simon...you said 'when I used to trade' I take it running a spreadbetting company is much more lucrative for you than trading used to be?

A: You would hardly expect us to be running at a loss..... not very secure for client money if we were...I was a proprietary trader for a series of Banks from 1983 to 2000 trading in positions of many hundreds of millions (if not Billions) of pounds. You can be assured that I would not have survived for that length of time if I was bad at it.

Mind you I find it much more difficult to trade my own money... I think that is a very different skill.

Q.: It is my understanding that no spread betting firm will hedge every position given to them - its too expensive for a start - is this right?

A: You are quite correct in that we are unlikely to hedge every position. Dealing costs mean that in many cases we will wait for another client to either trade in the other direction or for a series of clients to build up a position that becomes an economic amount for us to hedge.

 

Q.: So do you hedge traders who know what they are doing?

A: When we identify winning clients who trade in size then we tend to add them to what we call 'marked risk' clients and do indeed go with them. We have a growing band of major winners who it would be foolish of us to ignore. But if someone was winning a grand a week we probably would not even notice them.

But most of the trades we take counter act other trades (as many buyers as sellers). A good example of this is Wall Street at the moment, we have some 450 separate positions ranging from £1 to £200 a point and yet the total net position at the moment is £35. The larger we get the more this tends to be the case especially in Indices and FX.

If the client is just pipping around in £10 a point we probably would not notice him/her unless we felt they were scalping. In which case we may then turn them from auto accept to trader accept. Again we have a few people who are designated this way.

Q.: Just out of interest, how many of those 450 positions would you expect, on average, to be stopped out (for a loss)?


I would guess you have mostly new traders so around 350, perhaps?

A: A good question because, as we often comment on our seminars it is not the volume of losing trades that hurts traders/players it is the discipline (or rather lack of it) that hurts. In fact (almost unbelievably) our clients have more winning bets than losing ones... it is just that the size of the losing bets is invariably bigger than the winning ones. If all SB clients used the old 3 to 1 rule they may not win (as position taking can be a real bugger) but they would certainly cut back the losses.

Q.: Why not let your dealers shadow all your winning (star) punters by over-hedging them?


Remember they are the best indicators you will ever get of market direction, if I ran a spread betting business I would love to have these big hitters betting with me, as I would double their stakes by hook or by crook but just get the money on - they are a gold mine.

A: Most open positions are in equities and most are long. It is very difficult to say if our equity traders are 'good' traders simply because they have been long for the last 3 years and have made shed loads of money. We have a hedging strategy that has worked very well for us (i have commented on it in the past).

As an example this month has proved to be very, very good for clients they (you?) are up hundreds of thousands of pounds. But our hedging strategy has made us much more than this from the exchanges. Your argument would have merit if all we did was quote a few markets but we don't. We quote 3000 different financial markets. We cannot have an opinion in all of them so we have an opinion in NONE. The dealers follow the hedging rules to the letter. This means that we can be sure in the long run that we will give ourselves the best chance of making money and not having huge P/L swings day by day.

The problem with over-hedging is that you would have us take huge risks. We are not clients, we cannot risk all our money on the chance of our clients getting it wrong (or right) and if we get it wrong, ce la vie, we live to fight again. LCG must follow its policies otherwise our investors would quickly lose confidence in our strategy.

We have risk parameters which we must not break. These are our overall hedging criteria. Following 'Star traders' just means that we don't lose to them not that we make money from them. In the same way that a bookie on the rails at doncaster will lay off his risk we are no different. When Goldman Sachs make some huge $5Bln Private Equity backed deal do you think that they take the full risk themselves? Of course not, they take what risk they are happy with and sell the rest on to other banks/pension funds...etc.

Q.: Am I correct in thinking that you do not offer mean Force Open - to open a position without closing an existing position?


Am I correct in thinking that you do not offer mean Force Open - to open a position without closing an existing position - can be useful if you are trading over different time zones. This could be useful in a straddle trade - if you are expecting a large move but don't know in which direction place a trade in each direction and close the loser when the direction is known but you do need a guaranteed stop in both directions which I know CS do not offer and the expectation that the winning trade will cover the cost of the losing one.

A: You can trade in the same derived market but on different expiry dates but you cannot (in the same account) have a long and short position in the same contract. In reality opening equal and opposite positions is a bit silly. You will then be sitting on two positions one of which will be in a profit and the other in a loss. This encourages traders to then take the position that is in profit whilst running their loss. Something that I continually warn against in seminars...

Just realize the profit/loss and then trade again at a later time/date. Remember...any fool can take a profit...it takes a trader to take a loss.

Q.: When I look at the info on GBPUSD on your platform, it says the IMR is 60. That is not really accurate, is it? The Initial Margin Requirement is much more than that...?


The Initial Margin Requirement is much more than that, although it comes sharply down once a tight stop is put in. This is important because one cannot open a £10/pip position on GBPUSD, for example, with £500 in the account, which should be possible if the IMR was really 40.

A: We do not call it IMR we call it "Min IMR..." the definition in our terms is 'Minimum Initial Margin Required' to open a position. So our terminology is exactly correct. The margin that is taken when you open a position is dependent upon the funds on your account. If you have more funds than the Min IMR then the computers will take more... up to a maximum of the 'Max CGSL' and will place stops accordingly. If you wish to commit the Min IMR to a position then your stop must be much closer. This is hardly unfair...if a client is only willing to commit the Minimum IMR to a position then we will insist on a very tight stop.

Q.: So, does it mean I can open a £50/pip GBP/USD position if I have £3,000 in my account?

A: You could if you wanted to. Our computers would place a stop 48 pips away. But, to be honest, if you are trading spot currencies your stops should be much tighter than this anyway, unless you were trading a 'dead hand' system in which case you would presumably have more leeway (cash) available. 48 pips loss implies that you are looking for 150 pips on the up side (using the 3 to 1 rule) and how many spot traders are looking for that?

Margin is there to be used if you want it. It is up to the client to limit his own exposure as in all trading situations. We give clients the opportunity to trade on reasonable prices, we don't force anyone to deal and if anyone cares to come to our seminars we are absolutely up front about the risks and pitfalls of Spread Betting (and of trading in general).

One of my favorite examples is that if you were a hedge fund and returned 30% in a year to your investors you would be considered 'brilliant' a 'genius' and invited to dinner parties and be talked about in newspapers etc... but too many 'punters' try to turn £5,000 into £10,000 in one day! We continually stress that you should be looking for profits of £60 on each trade whilst risking just £20 with that kind of capital.

Q.: How do you weight the FTSE Rolling daily? It doesn't seem to move according to the future, it is much more stable and does not reflect the actual movement of the future as it varies between 1-2 spreads.

A: Our computers just take an average mid point of the bid/offer and will not react to every tick because from the bid/offer point of view nothing changes.

i.e. if the market is at 6350-6351 and the bid trades and the offer trades 5 times each but neither bid nor offer ever actually get removed then whilst the Futures charts will show this continual price action 1 pip up 1pip down etc etc our bid/offer will (of course) never have changed.

As our charts are taken from the Bid side of our price this will have the effect of seeming to smooth our price action as compared to the FTSE futures activity.

If you could look at a chart of the bids (or the offer) on the FTSE future it would look more like our chart.

Q.: Your share spreads are tighter than most other companies. It is a pity that you offer such a limited range of stocks compared to IG Index, especially US stocks, which I deal in.

A: LCG will add any (liquid) US stock you wish for. It is just that there are thousands of stocks and (in reality) very little interest from our clients even in the big ones that we quote. We currently quote 203 different US stocks and as you can imagine these are (in general) the biggest stocks. At the moment we have positions in just 40 of them as opposed to the fact that we have client positions in all 350 of the FTSE 350.

If you want a particular stock just e-mail our customer services and they will look into it.

Q.: I have made some trades but nor the spreads nor the margins resembled anything advertised on the LCG site, in fact the spreads and margins were twice as much?

A: The margins are flexible in that if you have the available funds on your account they will take up to 10% on a FTSE 100 stock. But if you amend the stop loss to a much tighter price (i.e. closer to the current quote) the minimum margin requirement for a FTSE 100 stock is just 3% (FTSE 250 is 5%). There are occasional differences if the stock is considered to be a bit leery but the vast majority are as stated. The spreads on a FTSE 100 rolling daily are just 0.1% around the exchange quoted price (0.05% above and 0.05% below) which when you consider that stamp duty alone, before you even consider commissions etc, is 0.5% shows how using spread betting for short to medium term trading is generally a more efficient use of trading funds than direct access on equity trading...

Q.: Simon, a technical question. Why do I get timed out from the dealer quote window after a few minutes?


This is a real problem I face while trading, if this is server side time out it should be removed. No time out please.

A: There is a time out after 10 minutes (i think) on deal tickets. Nearly all the spread betting companies have a time out on some part of their platform on no client activity because of the loading factors involved. We used to have a much shorter time out but have steadily increased it.

Q.: Is there any way of setting the LCG charts to open with your favourite settings by default?


They seem to open with 10 minute and ADX automatically whereas I'd prefer 1 hour and MACD...

A: The charts will always open with 10 mins but you can change the other settings by just clicking on the 'disc' icon next to the print and paintbrush icons. This saves your technical settings for the next time you log in.


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