Amateur does not mean 'mug' - our biggest winning client is a GP; our biggest losing client is a well-known name in the City
John Austin, director of new products and services at IG Index
Yankee, Lucky 63, Heinz and Goliath may or may not be familiar betting styles but the word on the street is that uk spread betting is on the rise. Indeed, as Lee Oliver reports, it is opening up the market for a wider variety of participants to trade binary options.
In the not too distant past, most people would have placed uk spread betting firmly on the fringes of what was considered the proper financial market place. People who used uk spread betting companies were seldom called investors or traders, but rather punters or worse, 'spivs'. Spread betting in the UK was undoubtedly regarded by many as the near perfect product for engaging in a little bit of no good, or dodgy dealing, based on factors such as a discrete 'nod and a wink' in a City bar.
Some of this reputation persists today, as evidenced in the saga surrounding the alleged antics of 'The Plumber', the nickname of UK entrepreneur Paul Davidson. He is currently appealing against a hefty £750,000 fine handed down by the UK's Financial Services Authority (FSA) for a spread bet apparently designed to boost the share price in the grey market of a company he was about to float on the stock exchange.
However, despite incidents of this nature attracting negative publicity for the spread betters, the fact that FSA has taken action does highlight the fact that it is a regulated industry. In other words, dodgy dealing through a spread better is as illegal as through a traditional stockbroker.
UK Spread betting has become a very popular activity. Numerous new companies have been attracted to the business over the last few years, including many associated with traditional money brokers, such as Cantor Fitzgerald's Cantor Index and Tradition's ETX Capital. The next entrant looks set to be a subsidiary of Man Group, one of the world's leading futures brokers, as well as a major provider of hedge fund products.
Many would claim that far from being 'spivvy' bit players, the spread betting firms in the UK have actually done the wider market place a huge service by taking what are still often seen as complicated instruments and repackaging them for a wider audience.
Virtually every product that exists in the mainstream market, plus several more that do not, are easily available in some shape or form through the spread betters. And, increasingly, an evolving diverse clientele is using these. 'Ten years ago, spread betting in the UK was limited to City professionals but now it is widespread among those who simply have an interest in the financial markets, rather than being actively employed in them,' says John Austin, director of new products and services at IG Index. A large majority of IG's clients fit this 'interested amateur' profile.
Amateur does not mean 'mug' - our biggest winning client is a GP; our biggest losing client is a well-known name in the City
|
John Austin, director of new products and services at IG Index |
Jayne Banks, communications officer at Deal4free.com, agrees that the spread betters' client base has widened: 'Well over 95% of our clients would be recognised as retail investors rather than professionals. They are often people who have had some experience in physical share trading but are looking for a more cost effective and flexible alternative. UK spread betting firms tend to have a short to medium term view on an instrument and are therefore quite active - some clients have been known to trade 500 times per day.'
This diversification of client base is something that the exchanges themselves have by and large failed to achieve. Despite numerous initiatives, the retail sector, especially in derivatives, does not appear to have come swarming into the mainstream market. Yet the uk spread betters all say that a vast amount of their business is now coming from 'the man in the street', rather than 'the man in the City'.
The internet has undoubtedly helped by providing a cheap distribution network. It has also helped add transparency and intense competition. The old claims that the spread betters tended to shade their prices too much when called by clients have virtually disappeared.There is simply too much choice for the clients, who are notoriously fickle and will apparently switch their business elsewhere with little consideration.
Another important factor behind why retail users have flocked to the uk spread betting companies at the expense of more traditional brokers is probably a result of the way the uk spread betting companies have repackaged the products they are offering.
A spread bet on the FTSE-100 is effectively nothing more than an OTC version of the futures contract that trades on Euronext Liffe, although many of its users may not know that. By making such products available in virtually any amount, the uk spread betting firms have arguably opened the market up to a far wider range of potential clients.
A good example of the repackaging of a complex product is the concept of binary bets. The spread betting firms in the UK have translated the probability factor in the option's price first into odds and then turned them effectively into a spread bet. These are, by all accounts, proving incredibly popular. Because of the way they settle, normally either at zero or 100, they are technically classed as a fixed-odds bet and so do not have to come under the jurisdiction of FSA.
At first glance, this seems a little strange. It is inconceivable that a retail client could ring up an investment bank and ask for a binary option on a market and take a position. But that is exactly what he can do through the spread betting firms in the UK. (or more accurately their subsidiaries).
They are classified as fixed odds because that's mathematically what they are
|
IG Index's Austin |
IG index's Austin does not see this as a problem. "They are classified as fixed odds because that's mathematically what they are. We would much rather classify them as spread bets, as the betting duty would be lower," he says. "The audience for them is a mixture of spread betting clients, who find the binary pricing scale intuitive and very easy to understand, and fixed-odds clients. There is no simpler concept in speculation than a straightforward 'yes/no' proposition, and this is what a binary bet represents and also why they are so popular," he adds. In other words, unlike with normal spread bets, clients using binaries know exactly how much they stand to lose (or make) as soon as they take their position.
With their wide range of products and increasingly diverse clientele, it seems the uk spread betting companies have moved mainstream. This raises the issue of how much competition they pose to not only traditional brokers but also, perhaps, to the main markets themselves.
Austin, however, is more direct. "During the market slump between 2000 and 2003, uk spread betting companies continued to grow while stock brokers had a horrible time. In terms of competing for the business of the active trader, there is no comparison: the gearing, the ability to go short and the freedom from stamp duty and capital gains tax make spread betting in the uk a much more attractive way of playing the market for everyone except the riskaverse and the long term investor. And there's also the convenience of being able to trade everything, shares, fx, futures, options, binaries, even sports events, from a single, cross-margined account."
Deal4Free's Banks agrees: "For active traders spread betting in the uk is already viewed as mainstream. The active traders are the high value clients that are moving from brokers and physical shares across to the executiononly derivatives providers. Traditional brokers are recognising that to keep their most valuable clients happy, they need to offer more cost effective and flexible products. That is probably why we've seen a steady stream of companies introducing spread betting and contracts for difference (CFDs) to their range [of products] over the past year.
"Spread betting in the uk is attracting the most active clients away from the traditional brokers, so it is attacking their revenue stream. It is possible for the two products to work in tandem as clients use different products for different strategies. It is likely that more brokers and banks will recognize that they need to introduce spread betting and CFDs in the uk to keep the active clients' trades in their domain and not lose them to the competition."
Traditional brokers will never be made redundant because people as a whole are still adverse to change. Financial spread betting still holds negative connotations but the uk spread betting industry has definitely moved mainstream. Hundreds of our clients share trade solely through us as they used to with traditional stockbrokers and so we are becoming more competitors rather than complementary |
Angus Campbell head of sales and marketing at FinSpreads |
Nonetheless, the UK spread betting firms do not see themselves as a threat to exchanges, even if they strive to maintain as much of their business in-house to keep the spread for themselves as profit.
"The majority of business that we take is hedged in the market and so it does flow onto London Stock Exchange [and other exchanges]," says Campbell. "Our business does not challenge the position of the exchanges."
Banks adds: "Deal4free.com does not directly back every position off in the marketplace. However, we manage our risk through portfolio hedging, which means placing large volume trades into the market on a daily basis. I would estimate that a large number of trades being transacted across the physical exchanges can be attributed to the spread betting and CFD industry, so we are helping to bolster the exchanges rather than threaten them."
Austin states categorically that the spread betting firms will not challenge the position of the exchanges. "The liquidity on established financial exchanges, like LSE, is a reflection of a vast global game. Whether and how much the uk spread betting companies choose to hedge is never going to make much of an impact,"he says."In terms of starting up direct rivals to the exchanges I would say that, although there have been a couple of attempts to start new betting exchanges recently, for both binary bets and conventional spread bets, the size of the UK retail speculation market is probably not sufficient to generate sustainable liquidity in any but a couple of the simplest and least volatile instruments. None of the recent start-ups show any sign of real success."
Although, this is not strictly true, as Austin explains: "There's only one example of a retail speculative platform achieving genuine liquidity, and that's the sports betting department of Betfair. It was able to achieve liquidity because it was up against the lumbering dinosaurs of the established fixed-odds gambling industry."
Looking ahead, it seems likely that uk spread betting will continue to grow in popularity because the companies that offer them have effectively made many markets extremely accessible. But, like any trading instrument, they may not be suitable for all types of investors, even if they are proving increasingly popular with participants across the whole of the market.
"Spread betting is at the high-risk end of the spectrum - it is highly geared, and is economically similar to trading futures. At IG we make it clear in our risk warnings that clients should only speculate with money they could afford to lose if the worst came to the worst," says Austin. Banks concurs:"Spread betting is high risk and it is very important to understand the nature of the product, how it works and what the risks involved are. The uk spread betting companies offer seminars and education in spread betting. We want our clients to be successful as we want them to keep on trading with us."
Please do not copy/paste this content without permission. If you want to use any of it on your website contact us via email traderATfinancial-spread-betting.com (remove the AT and substitute by @).