MoneyAM Shares Magazine


Spread Betting vs Futures - which is better?


Futures and spreadbetting may fit your investment style if you want to make a quick profit, hedge your portfolio or simply speculate on a wide range of markets in a tax-efficient manner. Experts explain how these instruments work and argue their usefulness to investors.

David Jones, Shares Magazine: Today, we are discussing what is the best choice for investors - futures or spreadbetting, or both together? But first, let's explain what a futures contract actually is.

Charles De Roeper, Berkeley Futures A futures contract is the obligation to take delivery of a commodity or financial product at a price agreed today or now for delivery at some time in the future. A futures contract is dealt on an exchange, which means that the price is transparent and it is operated through the clearing system.

Jones: Over to the spreadbetters. How would you describe a spreadbet?

Dan Moczulski, IG Index, Effectively, a spreadbet is a way of speculating on the movement of any particular event. In the case of financial spreadbets, it is a bet on an underlying market for a particular time frame. The more the market goes in your favour, the more you collect; the more it goes against you, the more you lose. As it has a time expiry, a spreadbet is very much equated with a futures contract because, in that way, they perfectly mimic the movement of each other.

Jones: If I'm spreadbetting, what markets can I trade?

Foster Bowman, iDealing:, Well, it depends on which broker you use but, generally, spreadbetting can cover everything that's available over the counter or on exchange-traded financial markets and more. Spreadbetting is, as Dan mentioned, a bet on the price or the outcome of events - that can include sports events, political events, anything you want.

Jones: And if I'm trading futures...?

Ben Few Brown, GNI Touch: The main contracts are divided into the financial and commodities areas. With commodities, you've got most of the agricultural crops - cocoa, coffee, wheat, soya beans. Then you get the base metals, precious metals, energy - gasoline contracts, oil contracts. In the financial markets, you've got various government bonds, currency contracts, interest rate contracts and stock indices such as the FTSE and S&P.

There are futures contracts on most open-market type instruments. Where there are free-flowing markets, futures contracts generally exist.

Jones: Let's focus first of all on a futures contract on one market everyone is familiar with - the FTSE 100. How does the future price compare to what's going on with the FTSE?

De Roeper, Berkeley Futures: Basically, the FTSE that you hear on the news is the cash FTSE, which is obviously the conglomerate of a whole load of shares put together. As the FTSE future is deliverable some time in the future, it's a forward contract. All forward contracts have an interest rate element. So the major difference is the time and the cost of money to borrow to that contract for that time. Against that, of course, the shares that constitute the index will receive dividends. Let's say the interest rate is 5% and you take away 2% for the dividend return, that will give you a forward rate of about 3% over the spot rate for the year, so it's going to be 0.75% for the three-month future.

Jones: That explains why if I'm looking at the FTSE future price and the cash price, there's going to be a difference.

De Roeper, Berkeley Futures: There's always a difference. Now, of course, if interest rates were at 1% and dividends at 2%, it would go into reverse, so the cost can be cheaper. For instance, say you look at the currency markets, where you've got the dollar at one interest rate and sterling at another: if you're lending the pounds, you are receiving a higher interest rate than you are borrowing the dollars, therefore the price can be cheaper in a forward contract.

Jones: Say I go to IG Index and want to spreadbet on the FTSE: how do you derive your prices?

Dan Moczulski, IG Index: Exactly the same. In fact, generally we take the lead from the futures market itself. As I suggested before, although one of the two products has the moniker of a bet to make it tax-free, they are nigh on identical in what they're purporting to follow.

Advantages: Leverage and Gearing

Jones: Why would I want to start doing all this derivatives trading and wander away from my Abbey Nationals and my BPs and my Glaxo shares? What are the benefits?

Bowman, iDealing: With either category of financial instrument, they offer leverage, they offer the ability to go long or short and, crucially in the case of spreadbets, any profits you make are free of capital gains tax. Both instruments can also be used for hedging the exposure you have, whether it's an existing investment or an investment that you expect to take place in the future.

Ben Few Brown, GNI Touch:: Really it's a matter of gearing. You only need to put up a small amount of the full consideration for trading futures or CFDs, for example, therefore you can have much more efficient use of your investment capital and greater flexibility with your portfolio.

Jones: Coming back to the gearing: we know that spreadbets and futures trade on margin, so I put down X pounds and effectively I can control 10 or 20 times X. Can you explain the concept of margin and why it's not as risky as some might think?

De Roeper, Berkeley Futures: Margin is a deposit. When you deal through an exchange, as opposed to a spreadbet, there are two people involved in the transaction - the buyer and seller. We clear that business through a clearing house, which demands both sides put up a deposit for the good faith, basically.

This means that the clearing house and the exchange receive our money and your money together, which guarantees that we're going to be paying you or you are going to be paying us, whichever one wins on the deal.

So the idea of margin is really to guarantee that you're going to get paid. If I lose a million and you make a million, you're you going to get the money off me. And if I keep losing, I have to keep increasing my margin.

The risk of margin is really one of self-discipline. It's to do with whether you over-gear or under-gear yourself. Say you buy 10,000 Abbey National shares: if you do the same with a CFD, you are going to have the same risk as buying the physical share. But if you have then bought 10 times as many of a CFD, you have multiplied your risk by 10 and your potential profit or loss by 10.

Margin in itself is not risky. The risk is how you handle it. Margin trading is fine, it's just up to you whether you're an idiot trader or a disciplined, good trader.

Bowman, iDealing: A lot of beginning and intermediate investors confuse margin with a product category. In layman's terms, margin just means that you may have to send your broker more money to cover your losses if you do lose. That's it. If you put all of the money that you have in your initial deposit and you lose more than that, then you're going to be bankrupt. But that's a silly misuse of margin.

Who dabbles?

Jones: How do people trading these markets trade? Do they jump in and out 50 times a day or do they hold stuff for weeks?

Ben Few Brown, GNI Touch:: The biggest volume of business is probably done by the day traders. People getting in and out within the day, maybe many times a day, basically looking to make short-term moves out of the market. They're the people providing liquidity. A couple of weeks is quite long-term in the derivatives market. Longer-term trading is probably still best done in the stock market as opposed to a CFD, unless it's a long-term shorting position, because the cost of borrowing and the saving of stamp duty on the CFD don't generally benefit a long holder. They probably do as well going into the underlying market, although in that case they're not going to be availing themselves of the gearing available on spreadbetting or a futures contract.

De Roeper, Berkeley Futures: It depends really on the type of user. The futures markets were originally set up not for speculation but for protection. You produced your coffee in Brazil and it took three months for it to get here, meanwhile, the price would change. So you went to one of the coffee houses in London and agreed the price today for delivery in three months' time.

Now that still happens an awful lot, so the trade houses will be in the market perhaps forward hedging for a year or two. Likewise, the banks may be in there hedging interest rate movements, and you have people who are protecting their portfolios or trying to gain extra income from their portfolios. They'll all be long-term strategic traders.

The day trader is really a short-term speculator, dealing minute by minute, hour by hour. He gives us lots of commission and provides the market with huge amounts of liquidity, which means that the spread is very tight because so many people are trading.

Jones: How do the spreadbetting clients break down?

Dan Moczulski, IG Index: It's very similar. I'd love to tell you spreadbetters will all go on a particular time frame, but it just doesn't happen. It relates very much to the type of trader and how they're looking to trade markets. You may well have a short-term speculator who views himself as a long-term hedger - they'll use the account and the contracts in many different ways.

Jones: Foster, your company does traditional stockbroking as well, so maybe you have slightly longer-term buy-and-hold clients. You also offer CFDs and spreadbets, so how do you see your clients breaking down on the spreadbetting side? Is it similar to the others?

Bowman, iDealing: Yes. When they use spreadbets or CFDs at iDealing, it's generally for short-term positions. If you take into account the incremental financing charge for the rolling products, two to two-and-a-half months is generally your break-even versus the stamp duty that you save from using those products.

Jones: So what we're saying is that if they hold for longer than two-and-a-half months, then it's costing them more money.

Bowman, iDealing: In most cases, yes. But having said that, most people's positions are no longer than two weeks anyway, even for the equity contracts.

Comparing Futures versus Spread Betting

Jones: Let's get to some of the nuts and bolts of the futures versus spreadbetting argument. If we start from the futures side of things first of all, what would the spread be on a FTSE March future at the moment?

Ben Few Brown, GNI Touch:: Probably one point. It can be half a point. Officially, one tick is half a point, which is worth £5.

Jones: Okay, so a quote would be 4340, 4340.5 for example?

Ben Few Brown, GNI Touch:: Yes, or it could be 4341. It just depends on the liquidity in the market at that time. A point or less is what you'd expect to find.

Jones: And a typical spreadbet price on the future at the moment?

Dan Moczulski, IG Index: It does depend on the broker, but generally on the FTSE contract you're looking at about eight points.

Jones: So if I think the FTSE is going to go up over the next couple of days and I trade the FTSE future, my break-even is maybe a point. But if I trade the FTSE with a spreadbetter, then I need an eight-point move to break even. Why would I bother trading with a spreadbetter when my break-even is so much further away?

Dan Moczulski, IG Index: You're completely correct. This relates to what clients are potentially looking to receive and what profit they're looking to take from a trade. But what I would say with the spreadbet as opposed to a futures trade is that, on a very simple level, that eight points covers all your costs. You don't have the clearing fees, the cost per contract; you don't have to pay for a terminal every month, which I believe some firms offer for £200 and some for £500 - it doesn't exist for any of the spreadbetting firms.

Jones: So with some futures firms, I have to pay money on top?

Dan Moczulski, IG Index: From ones that I've looked at, you'll have a fixed fee per month. Generally, there can be a rebate against commissions but if you don't deal up to that each month, you have the fixed charge.

Jones: If I want to trade futures online, you're saying companies will levy a charge for using their platform whereas with spreadbetting there's no charge.

Dan Moczulski, IG Index: I would say as well that there are quite a few instances where you might feel a spreadbet would be easier to do. Take the FTSE contract that we mentioned - if you were to do 50 lots on a spreadbet price, you'd have no trouble getting away with it. Because we don't have the liquidity problem that maybe an exchange would have, quite often on a spreadbet you can get away with quicker prices and instant execution.

Jones: So you're saying that on a spreadbet, I could trade a bigger lot size than I could in the real market and see it filled quickly. That's because you are taking the risk on your book - the risk is with you, not with someone else in the market?

Dan Moczulski, IG Index: Rather than say we take on the risk, we're hoping to have someone on the other side. But generally speaking, yes. There would be no problem in our trading on the FTSE in, say, 50 lots, which is quite difficult on the exchange.

Jones: Charles, what's your come-back on all that?

De Roeper, Berkeley Futures: Well, I suppose there may be some firms still charging for terminals but certainly we don't and some other firms don't nowadays.

Secondly, commission is equivalent to about half a point to a point, so the total cost of a round turn will be anything between one and one and a half points, which is equivalent to point seven five spread on each side rather than the eight point spread quoted by spreadbetters. Commission includes the clearing fee, our fee, exchange fee and everything else.

As far as size is concerned, a proper trader can see how many contracts are for offer, at what price and then the prices behind them. So before he actually goes into a trade, he will know he can get the fill at these different prices all the way up. Then he can either back off and not trade, or decide to trade, or he can put a bid or an offer in at his price and let people come into it.

The advantage of spreadbetting is tax, the disadvantage of spreadbetting is cost. A 'scalper' is normally looking for two or three points in the market. If you're paying eight points in the spread you're actually looking at 12/13-point movements in the market to get a reasonable profit.

To give you a quick example, if a scalper trades, say, 10 contracts, that's equivalent to £100 a point. If he does that every single day over 260 trading days in a year, the cost on a FTSE trade using a futures contract would be £39,000 a year, being the cost of brokerage, dealing and market spread. The cost of doing the equivalent trade on a spreadbet at eight points is £208,000, so there's a massive difference. For scalpers, therefore, any futures contract is far better but for longer-term people sometimes perhaps the tax advantage is attractive.

Dan Moczulski, IG Index: We've used the FTSE March contract as an example but, generally speaking, a scalper wouldn't deal on the March contract, he'd deal with a daily FTSE future which has four points of spread, and if he was in and out of the market he'd perhaps deal on an hourly contract which has two points of spread.

Jones: So although we're using the March future and March spreadbet to try and compare apples with apples, what you're saying is that for a shorter-term trader, there are alternatives out there where the spread comes down.

Dan Moczulski, IG Index: I think that's a distinction between the two products which is worth pointing out. Futures contracts, by their very nature, have to be homogenous and they have to be standardised, so you have these quarterly contracts - March, June, September and December. Because spreadbetting can be a little bit more flexible and because it's not necessarily relying on the underlying exchange, it does have the ability to provide much cheaper prices for much shorter time-frames.

Jones: So for the short-term trader, there is a less expensive spreadbetting route while on the futures side, it does look tighter for the scalpers trading the real market.

Bowman, iDealing: I'd say the main bottom line is that the tax-free consideration of spreadbets should be the driving factor in whether or not someone trades a future or a spreadbet. If you expect to make money and you don't want to pay tax on that profit, then you use a spreadbet. If I didn't care about the tax consequences of my trading P&L on the FTSE 100 I'd trade the futures contract. That doesn't go for all markets though. Most notably, the liquidity is much better than the equity products offered by the CFD and spreadbet shops than that in the single-stock futures market in LIFFE, whereas exchange traded financial futures, commodity markets and index futures have fantastic liquidity because that's where all the institutional players aggregate their liquidity. I think Dan's point on contract flexibility warrants underlining. A contract can be created by the spreadbet firm, delivered, traded and monitored sometimes within days. So if someone came to iDealing or IG Index and said they would really like them to consider coming out with a contract that expires weekly, it could be done. It can't be done in an exchange-traded market with that speed because the whole market is underpinned by contracts and standardisation. Basically, if you want to trade tax-free, use a spreadbet; if you don't care, go where the liquidity is best.

Jones: Obviously, we have a big headline hook with spreadbetting - if you make £500,000, you don't have to give the Chancellor any more. Plus you have this flexibility, because it's the spreadbetters who decide what market they're going to offer, so they can create all these weird and wonderful things, whereas the futures brokers are a go-between between us and the real market exchanges.

Ben Few Brown, GNI Touch:: One point I'd like to expand on is that a futures contract is a standard contract and the FTSE, for example, is traded in lots that are £10 a point. A smaller or retail trader can trade in lesser amounts, in pounds per point, so they can design their own contract size. That is pro the spreadbetting side. From the scalper side, I cannot see why any short-term traders, unless they were paranoid about the tax and always made money on every single trade, would use a spreadbet mechanism where there is an eight-point cost, when the highest retail rate that we offer is point eight of a point round-turn. Also, on the tax side, losses do occur and losses are offsetable for tax. Should you be trading the FTSE to hedge an underlying share portfolio, you may not be too worried about the fact that your profits in futures might be taxable because they would be offset by the loss against the underlying portfolio which you're hedging. Should you spreadbet your hedge and have the underlying portfolio in the stock market that you're hedging, and should the stock market move in your favour, you're going to have a double-whammy because you're going to have to pay the tax on your profits from the stock market but you're going to take a loss on your hedge anyway. So there are various different angles on whether the tax is a good or a bad thing.

Jones: Let's talk a bit more about the mechanics of trading. With spreadbetting, people are quite familiar with how much they can make or lose because they bet so many pounds per point. So if I buy the FTSE at £10 a point and I have a stop loss 100 points away, then I know my risk is going to be £1,000 because there's a hundred points times £10 a point. How does it work in the futures markets - how do I adjust my risk and adjust my position sizing?

De Roeper, Berkeley Futures: The first thing you have to know is the contract size which you're trading, and I suggest that if you don't, then you shouldn't be trading. In the case of FTSE, for example, it's £10 a point. In the case of gold it's $100. That's because each contract is 100 ounces of gold. So you simply multiply that by the stop loss level down to which you are prepared to risk.

Jones: So if I'm used to trading the FTSE with a spreadbetter, maybe I fancy doing it a lot more short term and futures are the way for me. If I'm trading with a spreadbetter at £100 a point, then it's basically 10 FTSE contracts I'm trading.

De Roeper, Berkeley Futures: Exactly.

Jones: Let's say I'm new to the whole trading thing and the idea of £10 a point of the FTSE scares the pants off me. Is there anything I can do with spreadbetting to minimise the risk?

Dan Moczulski, IG Index : Most certainly. IG has a minimum bet size of £2 a point which is a fifth of a normal contract. Our sister firm, Spreadright.com, has a minimum bet size of 50p a point, dramatically less as a way of dipping your toe in the water to see whether the futures markets are for you. I would also suggest you've got flexibility, including guaranteed stops, which aren't available in the futures markets.

Jones: So if I'm long the FTSE and there's a big terrorist attack, for example, and the market opens 500 points lower, if I had my guaranteed stop maybe 200 points below the level it was at the previous night, I would be out for a 200 points loss.

Dan Moczulski, IG Index: Exactly. A good example of this was when it was announced that Saddam Hussein had been found. The Dow future jumped 70 points in the blink of an eye. Many of our clients who were short of the markets had guaranteed stops and were completely protected. That won't be the case if you go straight to the futures market.

Jones: Is there anything similar we could do in the futures markets?

Ben Few Brown, GNI Touch:: No. A futures broker is an agency broker on to the exchange, so you're really operating in the big boys' world and you take those market movements. On the subject of guaranteed stops, there's no such thing as a free lunch and I think that people should probably drill down into the overall costings and see whether they're better off with a guaranteed stop or an on-exchange stop over a long period of time. Of course, isolated incidents, such as markets gapping through terrorism or world news, can be found where it has been extremely beneficial to have a guaranteed stop. But I would say that, over the long term, some research into finding out which is the cheapest mechanism and the safest way of operating or the cheapest way of operating should be undertaken by the prospective user.

Jones: That's a very good point. Guaranteed stops give you the ability to sleep at night and not worry about extraneous events that are going to drive the market a bit crackers, but there is a price to pay. Let's say a guaranteed stop costs you 1%, for example, and you trade once a week. That means that over the course of a year, you've paid an extra 50%-odd in spread and maybe you get an extreme move once a year. It's how big the extreme move is, isn't it?

De Roeper, Berkeley Futures: There is another issue here: price transparency. On-exchange prices are made public, the price data is reported and the levels at which executions are made can be investigated and looked at. With spreadbetting, you are trading an over-the-counter product with a counter-party and you have no recourse, as in the FX markets, to what those underlying prices are, how they've been devised or any other thing. I'm not suggesting for a moment that every spreadbetting firm is ripping its clients off, because they wouldn't survive very long in business, but you do have no recourse to any form of pricing mechanism. I spend hours every day talking to customers asking me why they haven't got an execution on their order. The problem is, you may be wanting to take a profit in, say, gold at 420 and you see on the screen that the June or April contract traded at 420. But, unfortunately, only one contract may have traded at 420 and you weren't at the front offer. What I can then do is get an official time and sale from the exchange. It's very useful to be able to settle any dispute. But the main importance of transparency, from the trader's point of view, is knowing exactly where the market is and that it's fair.

Dan Moczulski, IG Index: It's a good point and I cannot deny the fact that you can explain to people why their orders have been filled or why they've not been filled. However, a spreadbetting firm doesn't have to adhere to the market and what's available on the bid or offer, we can fill this person regardless because it's not actually having to prove that it's there.

Jones: The idea of being able to trade different markets appeals to me, because with both futures and spreadbetting I can trade the big stuff that I know like the FTSE, the S&P and the Dow but I can also trade stuff like the euro, the yen and the pound. That's where a lot of the action has been over the past few months.

But the volatility does scare me a bit and, as I do a normal job, I don't want to be sitting in front of a screen all day watching the markets ticking up and ticking down. What options do I have?

De Roeper, Berkeley Futures: Ideally, you'd go to a broker who can watch for you. Both Ben and myself in our firms have advisory customers as well as execution-only customers, and even execution-only customers can request information or for levels so that they can be telephoned or e-mailed when they hit that level. I would say about half of our customers are in front of a screen for a considerable part of the day and the other half are not, they are on a plane or a train or at work. We will happily look after a position for a customer, give him a call if something interesting or dangerous occurs in the marketplace and basically be his eyes and ears on the market so he can carry on doing his normal job.

Jones: What about spreadbetting? Say I want to spreadbet the euro against the dollar and this thing can swing around 200, 400 points on a busy day. What can I do if I don't want to watch the market?

Bowman, iDealing: Place a limit order or place a stop loss. A limit order is typically used if you want to enter a position at a price that doesn't currently exist in the market - if you want to buy at a price lower than the current level or if you want to sell at a price higher than the current level.

Jones:Let's say the FTSE is at 4500 and I want to buy it at 4450. I don't have to sit there and watch it, I can leave an order to buy it?

Bowman, iDealing: You can leave an order to buy at 4450 and you can go to work or go to sleep or start watching TV and if you get filled, you get filled.

Jones: Then I can just ring up and close it out whenever I want to take my profits.

Bowman, iDealing: You can also use stops to enter positions. You can say: 'I'd like to buy euro dollar if it breaks above 125.' So when 125 is triggered, you're going to enter a long position at the market.

Jones: So if I'm a technical analyst and I think certain levels are important, that's a way of me getting in if these levels get hit or get broken without watching the screen all the time. Can I also do that with futures?

Ben Few Brown, GNI Touch:: Yes, all sorts of orders can be used for all sorts of reasons, opening or closing, it matters not. If you have a position and for some reason you're called away or don't wish to be watching it, you can enter a profit-taking order which may or may not happen in your absence.

Jones: Say, I've got a very understanding employer who doesn't mind me keeping an eye on the market during the day. If I don't want to trade over the phone, what sort of options do I have online?

Dan Moczulski, IG Index: Pretty much all spreadbetting firms have an online platform. The majority of them allow you to place trades, place stop and limit orders, and obviously by its very nature the prices must be pumped out live 24 hours a day. You've also got a lot of functionality on there to help you make the decisions - tick chart, historical charts, news providers and research. There are a couple of firms, of which IG Index is one, which also provide mobile dealing. So if you have one of the new pocket PDAs, you can actually trade on that as well as monitor prices.

Jones: Do I have to pay for all this whizzy stuff?

Dan Moczulski, IG Index: No. There are no IG fees. Obviously if you're using a mobile internet dealing platform, you have to pay your network provider whatever fee it charges, but that's none from us.

Jones: What online options are available to me in the futures markets?

De Roeper, Berkeley Futures: Most firms now offer online trading. We do both for foreign exchange and for futures trading and option trading. There are two types of market nowadays. The electronic markets, where you can deal with matched prices on the internet as opposed to going down to the floor of the exchange where the people in bright-coloured jackets are and the prices are being shouted out. You have the opportunity of placing orders both for exchange products and electronic exchange products. Most of the markets we trade in are open over and above the normal market hours, because there are various different markets which click in with electronic sessions of, say, treasury bonds. You can deal pretty much most of the day and evening and sometimes through the night, but not for products such as the FTSE 100 futures contract which shuts one hour after the cash market at 5.30pm.

Jones: But with some of the bigger contracts in the US markets I can trade around the clock?

De Roeper, Berkeley Futures: Yes. For instance, you can do gold and most of the currencies around the clock.

Jones: What can I do on iDealing's website.

Bowman, iDealing: In fact, 98% of our trades take place over the internet and 2% over the telephone. So all order entry, order reporting, confirmations and trading executions are done online.

Jones: How does it work? Let's talk about the FTSE again. Do I see a price there updating? Is there a delay when I want to buy?

Bowman, iDealing: It's like exchange-traded products, in that you see the current bid and offer, the last price, and you enter an order. It's order-driven trading, so you can place an at-best order, at-limit, stop or stop-limit order. Then your order status depends on where the liquidity is for a particular contract. Obviously, if you want to do the equivalent of 1,000 FTSE contracts, the liquidity may not be there at the current price. It may be that, for that size, the price is slightly higher but it mirrors the order-driven trading markets that you see on most exchanges and on Nasdaq.

How to open an account

Jones: It all sounds straightforward enough. So let's say I've decided that there is more to the world than Abbey National and BP shares, and I'm going to open a spreadbetting account and a futures account. Are there lots of hurdles that I need to go through? How straightforward is it going to be for me to get one of these accounts opened for futures?

Ben Few Brown, GNI Touch:: We all have the same regulator, whether a spreadbetter or a futures broker, and the main issue is the 'know your client' rule. We are not allowed to give razor blades to babies. We have to make sure that the client is suitable for the trade he is proposing to undertake. But someone who has just been doing a small amount of plain-vanilla share trading I would have thought would be quite acceptable to undertake straight futures transactions and/or spreadbets.

Jones: If I want to open an account with IG, is it a complicated process?

Dan Moczulski, IG Index: No, it's incredibly easy. You've got the option to open one on the internet and, generally speaking, you can open an account in five minutes. Or you could do it through a postal application.

Jones: Isn't that a bit dangerous, giving me all this margin?

Dan Moczulski, IG Index: We're in the same circumstances of being a regulated firm and we have to abide by the 'know your client' rules, but the spreadbetting requirements are less than those of a futures broker by the very nature of a deal being classified as a bet. There are many instances when someone wouldn't be suitable for a futures account as there may be for example a minimum account balance of £10,000, which doesn't apply on the spreadbetting side. But the process is very easy and, generally speaking, you will need to fund the account trades. This, along with the trading limits we allocate to clients' accounts, means it's quite difficult to take exposure in excess of what you are comfortable with.

Jones: Charles, I presume it's a similar sort of process with your firm and you consider your clients very carefully. What would turn you off from someone trading futures or maybe what should someone bear in mind to find out whether futures are for them?

De Roeper, Berkeley Futures: It's whether the investment is suitable for them rather than them for the investment. Should a person with three young kids, a 90% mortgage and £25,000 a year be trading the futures market? My answer is no. It's not designed for that person, therefore we would say no. As a rule of thumb, we ask how much money you have, what's your house worth, what mortgage you've got etc. If the intended amount of the margin investment is more than 10% of that person's liquid cash, by which I mean anything other than the house and his pension basically, then we would say we can't accept that.

Jones: Sounds like a very sensible way of protecting some of the more adventurous traders.

De Roeper, Berkeley Futures: I'd love to say it's to protect them but actually it's to protect ourselves, because the regulators insist on it and we can get our wrists severely smacked.

Jones: And for iDealing? If I want to open an account, what sort of sums do I need and what sort of information do I have to provide?

Bowman, iDealing: To open up a spreadbetting account, you've got to have £2,000. Although we're not required, from a regulatory standpoint, to apply the same threshold for a spreadbetter as we would for a CFD client, in almost all cases we do. We see them as being similar instruments with almost identical risks. You have to prove to us that you have 'sufficient experience' in trading, hedging, speculating in order to have your account opened. We look to the length of time that someone has been trading a particular market and whether or not they've actually traded margin products before. Obviously, if they've traded futures before, they've got a very strong chance of being accepted. If they're FSA registered or if they've worked in a professional capacity in financial markets before, that goes a long way.

Jones: If they've traded CFDs as well?

Bowman, iDealing: If they've traded CFDs. But that doesn't mean that those are the pre-requisites. Generally, if someone wants to trade CFDs or spreadbets on single stocks and they've traded cash equities only but they've done so for five to 10 years, they should be perfectly capable of managing a margin account.

Jones: With futures and spreadbets, there's a lot of jargon, but when it comes down to it, it's not that complicated and if we leave aside some of the different products you can buy, it's the same as shares. If you think they're going up you buy, and if you think they're going down you can short-sell them. The mechanics of trading these things are not enormously removed from buying or selling shares. It's just understanding the margin and managing the risk.

De Roeper, Berkeley Futures: There are two types of customer that we can all accept. One is a private individual and the other one is an intermediate customer. The FSA requires us to have far more care over those people and checks what we do to a greater extent than the intermediate customer.

The intermediate customer is going to be some other professional. Say if Ben wanted to open an account with me at Berkeley Futures, I would designate him as an intermediate customer, which basically means a professional trader. For the private customer, the protection is much greater - he would have the option of arbitration rather than going to law, and he has access to the Investors Compensation Scheme in case we go bust or there's some sort of disagreement.

Jones: Let's wrap things up. Why do you think people should trade futures and/or spreadbets, and why particularly with your firm?

The Providers

Dan Moczulski, IG Index: IG Index is a 24-hour, one-stop shop for thousands of different financial markets, allowing people to speculate on movements up or down, depending on what their judgements may be. It can range from the beginner who is just finding out about the financial markets to the person who is incredibly experienced and demands liquidity and speed of execution.

Jones: If I've never traded before, why should I be doing spreadbetting?

Dan Moczulski, IG Index: It all depends on what the client wants. If they're currently trading shares for long-term dividends, let's say, and they're holding their stock for two or three years and that is the risk profile that they enjoy, I have no qualms in saying spreadbetting and futures are no use to them except as maybe a short-term hedge tool. If they are interested in short-term gains of between, say, zero and six months, this is a cost-efficient, tax-efficient way of backing their judgements.

Jones: Ben, why should I be looking at futures and why particularly with GNI?

Ben Few Brown, GNI Touch:: I think you've got to have a look at what it is you're trying to achieve. Whether you're looking to make profits through speculation or if you're looking to hedge risk or just have a conservative dabble i n the markets, all the tools are there for you to achieve any one of those aims.

If you are not of that ilk and are just wanting to have a few long-term, bottom-drawer investments, I don't think derivatives would be for you, whether spreadbetting or exchange futures. That has to be down to the choice of the individual, he's got to cost it out, he's got to see whether the tax breaks of spreadbetting are more important to him than being able to offset against other profits or losses on the futures side.

Choosing your broker is very important. On the agency side, the broker is acting on your behalf in the market, providing you a service - you're on the same side. With a spreadbetter, it's just a counter-party facilitating you to do your business.

You may be experienced, you may feel that you know what you're doing and the brokerage or agency brokerage added value may not be important to you. But it is there and to the majority of market users, that's an important criteria in deciding which broker to use.

The balance sheet and financial standing of the broker is also a very important issue, as there have been one or two notable collapses over the past 10 years. GNI is a market leader in distribution of electronic front-end trading systems. We're executing between 15 million and 20 million lots a month across all the electronic exchanges and are the largest single electronic broker, so reputationally we should stand up within the market.

The services we offer are all encompassing. We have a variety of trading platforms for futures, CFDs and foreign exchange, some which suit certain types of customer, others that are for funds or banks, but again the choice is yours and we have a minimum account opening size of £5,000 sterling for the retail client.

Jones: Foster, why choose iDealing for spreadbetting?

Bowman, iDealing: If you ask why people should trade these products, I'd say the bottom line is if you want to make money trading and don't want to pay tax, use a spreadbet. If you don't care about taxes or if you are hedging taxable exposures, you should use a future or CFD. As to why you should use iDealing, we are a very low-cost broker, that's where we try to position ourselves, and we have an intense focus on execution.

Jones: Finally, Charles - why Berkeley?

De Roeper, Berkeley Futures: Making money is the most important factor, as far as I can see. You only pay tax with the futures if you make money, so let's try and make it in the first place. The easiest way to make money, apart from obviously getting the direction of the underlying future or spreadbet that you're doing right, is to do it cheaply. Therefore you look for a cheap method to trade, an efficient method to trade and I believe that the futures contracts offer that to the investor. Transparency is important, speed of execution is important, and those are offered by exchange-dealt products. So I would use futures contracts over spreadbetting, certainly if I was a short-term trader. I'd use a firm like Berkeley because we are there to help and aid that customer in his efforts to try and make money.

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