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Q.93: What are the differences between the Daily Cash indices and Daily Rolling?

Because I know that daily rolling means you can roll bets over to the next day but how does stopping daily cash indices stop arbitrageurs?

A: The Daily Cash contracts are priced based on a fair value relationship with the Futures price. The daily cash price is determined by taking the Futures price received and discounting this price to give a daily cash market. For instance, today the FTSE 100 Daily Cash is set 21 points lower than the December Futures contract. While this tends to resemble the actual cash Index - for example the FTSE Index or Dow Jones Index it will not be exact. However, usually a spread betting company will settle the Daily Cash contracts based on the actual official Index closing settlement figure of the day.

The only difference between a daily cash and a rolling is the fact that a daily cash will expire when the market expires, whilst a rolling will roll over every day until you close the position or do not have the margin to cover the position. You will note how both markets have exactly the same price.

So the Daily cash closes out at the 4:30 post auction price whilst the rolling rolls and doesn't close.

If Cantor Index quote you 6124-6125 and IG quote you 6126 - 6128 you can buy with Cantor and sell with IG. You are guaranteed to make 1 tick at expiry on the cash contract. If you placed a trade on the rolling contract you would simply be rolled into the next days contract and if you wanted to close this out, you would have to pay a closing spread i.e. no arb.

 

Q.94 I am with Finspreads as you know and when betting the FTSE100 what exactly am I trading? It seems like Finspreads' own FTSE100 and not the actual index itself. I get the impression I am betting against others betting on the FTSE!

A: Regarding your impression of betting against other punters, well yes you are in effect; if you win you take money from the losers and vici versa. If you win you take a portion of the pool of money deposited with your broker by all traders. If you lose you add to the pool of money deposited by all traders. I try not to think of it like that, I think of it as my strategy against the movement of the price, whether I'm trading in the right direction or not. The broker always takes the spread over into their own pool of money. Your broker must cover the net asset value of all accounts under management.

However, in essence you are betting against the spread betting company itself. There have been many arguments about this on here about whether they hedge all bets. In my view this is highly unlikely as evidenced by one spread betting shareholder report that stated profits were less than anticipated because clients had been more lucky than was anticipated and that this anomaly was unlikely to continue.

Q.95: Will spreadbetting companies cancel your account if you are too successful?

A: This question was asked to Mr Simon Denham, Managing Director of Capital Spreads.

Simon - No...at Capital Spreads we have never closed / put to telephone only/deliberately delayed/changed your status or whatever.

I wish I could legally print the names of accounts who have made tens of thousands of pounds trading on our platform and whom we restrict not one jot. If we closed winning accounts don't you think you would have heard all about it on the Internet. I have never hidden the fact that spread betting is a dangerous pass-time (it says it all over our platform). One of the big US futures exchanges did a survey about the profitability of 'Private investors' on the futures exchanges (as opposed to the institutional traders) and they came up with the fact that some 80% lost money, this figure almost exactly matches ours. As I point out at our seminars.

The ones that I find annoying are the ones that attribute nefarious motives to everything we do.. but I suppose it comes with the territory. In reality if you are a good trader/investor you will make much more money on our SB platform (overall) than going direct access... with the (possible) exception of FX. Although we have a bunch of traders who we call 'the cable club' who trade a GBP/USD system with us that makes them a lot of money...very simple very controlled very profitable.

The same question was posed to Charlene from Finspreads as they are known to have actually banned a user (Mr Chris Kobewka) from using their site at one point. Her reply was:

"We do reserve the right to close any account should we deem anyone to be profiting unfairly by abusing our system and software or taking advantage of erroneous markets and prices.

Whether a client wins or loses makes little difference to us. Generally a winning client will give us return business and so this is very good for us in the long run. We do not have a policy of closing down legitimate winning clients."

Of course asking the managing director of Capital Spreads or Charlene (Finspreads) about company policy and expecting anything other than a sales pitch is a bit like asking a fox about chicken-coup security! I do know of some people who have had their account closed...(because 'it is not in the best interests of the the company to continue in this manner'), however this rarely happens and most tricks are attempted by clients not by the companies (who, after all, do have the FSA and the financial ombudsman looking over their shoulders).

It is the fact that spread betting companies do not let clients get up to 'tricks' that seems to grate. A client finds a little edge because of an incorrect price or a delayed feed or somesuch...the spread betting company cottons on to that clients activities and then 'bosh' he can no longer do it. They may in some instances just stop you from trading over the internet and put you on telephone trading only. 
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Q.96: Do spread betting firms hedge their customers' bets?

A: Yes...although don't think that as soon as you place an up bet for 888 at GBP20 per point, the spread betting provider is going to rush out and buy a two and half grand CFD to hedge the position. What's the point of this if 30 seconds later someone having the opposite view as you will go short on 888. So is there any point for a company to hedge?

For one thing there's the size - for hedging small bets the costs of hedging will offset the benefit of the hedge so the provider is more likely to let the bet running without hedging. It makes more sense that the spread betting firm will want to hedge the NET positions of its clients on a rolling basis, rather than hedge each bet individually. This is a complex area where the risk manager will not only look at the net long or short positions but also at the correlation between the different instruments. So yes, they do hedge, but not as much as everyone believes.

So spread betting providers offset their clients' exposure in two ways -:
  1. If a customer places a bet, and another customer has placed a bet in the opposite direction (i.e. if one customer buys £10/point of share X and another customer has already sold £10/point of share X) then the two bets cancel each other out. In this example the spread betting provider is exposed to no risk, and makes a profit from each customer off the spread (the difference between the buy and sell price) multiplied by the stake (in this case £10/point.
  2. Alternatively, if lots of clients are betting in the same direction, and a new bet cannot be hedged internally, then the spread betting firm will hedge the bet in the underlying market. For example, if more clients are wanting to buy share X than sell share X, the spread betting firm will go into the underlying market and buy shares in company X. If share X rises in value, then the spread betting provider’s clients who have bet on it to rise will have made a profit. As the spread betting provider also owns shares in company X then it has also made money, this profit covers the payments made to the clients that have won money. As the spread betting firm is also charging a spread to the clients that have won money, this is how the provider makes money in this instance.

Q.96.1 What if my spread betting provider goes bankrupt!?


I have heard of Global Trader going into financial difficulties just on the exposure of one client - so suppose I open an account with a spread betting firm how safe are my monies? - what happens in the situation that a provider becomes insolvent?

A: The FSA has strict rules covering the spread betting providers conduct of business and financial adequacy.

Regulatory capital: All FSA regulated firms are required to carry out daily Financial Resource calculations to ensure the providers have adequate regulatory capital at all times.

Compensation scheme: In the unlikely event the firm was to go into liquidation individual clients are covered by the Financial Services Compensation Scheme (FSCS). Clients receive the first £30,000 in full + 90% of the next £20,000. Maximum payout per client if the firm goes bankrupt is £48,000.

Segregation of client funds: is available to retail and certain professional clients and involves the company placing client funds in a separate bank account to the firm’s own money. In the event of default by a spread betting provider the bank acknowledges that there is no right of offset between the firm’s funds and the clients. Should the Firm’s bank account become overdrawn, the bank cannot use client funds.

So would any unrealized profits/losses also be respected in the event of unsolvency? The answer to this would be that your positions would be closed at the prevailing market rate and your funds returned back to the original source.

And what if the provider was located in Ireland? Well, I asked this question to Delta Index who are based in Ireland and their reply was as below -:

'Thank you for your enquiry, we currently stand authorized by the Irish Financial regulator and In relation to the safeguarding of client monies, we are already operating exactly as we expect to be when fully regulated. All client bank accounts are specifically named “Delta Index Section 52* client asset accounts”. In this regard it is clear that the assets do not belong to the firm and are subject to the requirements to the Financial Regulator’s Client Asset Requirements under S.I. No. 60 of 2007, the European Communities (Markets in Financial Instruments) Regulations 2007 (MiFID).'

Q.97: Are spread prices ever skewed?

A: This is one of the main concerns with many spread bettors. Some believe that the firms will skew their prices in line with market trends - adding to the offer price when the customers are going long and lowering the bid when they are going short. This is particularly worrying if you are trying to exit in a hurry.

Theoretically, if you read the small print, most spread betting providers are entitled to change their spreads as they see fit. This is in effect what bookies do to hedge their books - they will shorten or lengthen the odds as the punters place their bets to discourage or encourage further 'action'. However with increasing competition and increased sophistication amongst the customers this is not quite as simple as it may sound - such a skew in spreads would open up arbitrage opportunities between the different providers which a sharp spread bettor could instantly take advantage of for a risk-free return. The solution for the spread trader is to have more than one spread betting account to retain flexibility. However, with the passing iof the Markets in Financial Instruments Directive (MIFID) in November 2007 spread betting companies are now obliged to offer best execution meaning that companies cannot make their own prices for shares.

Q.98 Do spread betting companies move the spread around to advantage themselves?


I would like to know if spread betting companies shift bets and spreads to balance (hedge) client positions? In other words will a spread position always follow the share or do they 'shift' the spread to encourage/discourage further 'action' [i.e. like a sportsbook hedges its positions] - and if so won't this open arbitrage opportunities with other spread betting companies?

Is this Myth or Reality?

If an underlying stock trades with a spread of, say, six points, you would have thought that if the share price was at, say 5000, the spread would be sell at 4997, buy at 5003. This is often not the case. The share price could be at 5000, but if the spread trading provider believes the market will move up, they might set the spread to be say sell at 5001, buy at 5007. As the market moves up to, say, 5008, you might have thought that you would have won. However, now if the bookies think the market will stall, or fall, they may move the spread to sell at 5004, buy at 5010. So, even though the market has moved in your favour if you bought it when it was at 5000, you would find yourself on the end of a 3 point loss. So you might decide to hang on, but then if the market falls and they move the spread to their advantage to below the price of the underlying security. Now, if the security falls back to 5000, but they have moved the, now falling, spread to sell at 4994 buy at 5000, you'll find that if you come out, you're looking at a loss of 13 points, when the market has not actually gone down from when you placed the bet. Admittedly this example is a bit of a worst case to illustrate what can happen.

A: The short answer is that this is a myth. Moving the spread would not only open up arbitrage opportunities between the different spread betting companies (which bookies generally hate), but also with the Markets in Financial Instruments Directive (MIFID) passed last November spread betting companies are now obliged to offer best execution. Lastly, remember that the companies are OBLIGED to trade the actual price of the security at the end of the life of the bet. I've even posed this question to the big gun asking for their comments and their replies are given below:

City Index -> 'Please be advised that our spreads always follow the market. If you have a rolling position this will continue until you decide to close it or until the underlying instrument stops trading. If you have a March, June or quarterly bet, the you trade will close on the expiry date at the official expiry price or when you decide to close it, whichever is first.'

IG Index -> 'I would like to assure you that we do not shift bets and spreads to balance our clients positions. To make our prices we simply wrap our spread around the market spread, and add on the premiums when dealing with futures contracts. However, you are always trading on our price rather than any price in the underlying market. When the bet expires the bet will settle as per terms of the specific market, i.e at the official closing price on the day of expiry.'

WorldSpreads -> 'We marginally shift our prices, when I say marginally I mean on say the FTSE 1 to 2 points. In market hours at most we would move them by a point. This is because we are following the market and not making our own, after all a) we don't expect the rest of the market to follow us and thus b) being too far away from the market means we leave ourselves open to be arbitraged.'

Capital Spreads -> 'In response to your question we do not shift bets and spreads to balance client positions. We place our spread around the price in the underlying market, which is derived from regulated exchanges.'

Q.99 Obviously the betting company wants my money and would love the share to start to dropping...


My concerns are if I open a long position for example take BYG at £50 per point £5.50. That would give me an exposure of £27,500 or the equivalent of this amount of shares. When I place my bet does the company actually purchase the shares? Obviously the betting company wants my money and would love the share to start to dropping, so do they have the means to make this happen i.e. start to sell big chunks of BYG shares?

A: The spread betting firm makes money whichever way the share moves - by charging you a wider spread than they can get themselves - so there is no advantage to them in trying to push an entire market in one direction for the sake of screwing one punter. They don't need to. They profit every time regardless.

As for whether they actually trade the stock for real in the market in a quantity that matches your trade - they might or they might not. They will initially aggregate all bets - if there is a mix of up bets and down bets on a particular stock, those may mostly balance each other out, and it's only the remaining one-way bet they need to consider hedging. In which case the trade they place in the market may not tally with a particular one you just opened.

So they make their money on the direct market access and turn of the spread. That is just my understanding. In addition, I did once read an article that if they are dealing with a particular poor performing account they "hedge" buy even less so they make even more.

Q.99.1 What happens if everybody on earth simply spread traded – wouldn’t the markets not stop moving?


If everybody on earth simply spread traded would the markets not stop moving altogether if nobody actually bought the underlying asset?

A: Spread betting can only work as a concept if there is volatility in the market. Therefore if large numbers of people spread betting caused the markets to slow down, people would stop spread betting as there would no longer be an incentive to do so.

For large shares, there will always be a large number of people wanting to buy or sell at a particular price, meaning that one client’s actions are unlikely to effect the underlying market price. Most spread betting providers have a policy of never owning more than a certain percentage (say 2%) of a stock. This ensures that the actions of their clients do not have a meaningful impact on the underlying market price.

Also, a provider may potentially offer a limited size in which to trade especially for illiquid stocks. Many illiquid stocks (in the open market) have a number of market makers that offer prices, but again, only in a certain size (normal market size - NMS). The normal rule of thumb would be that the provider is able to offer the equivalent as a spread bet so that that they can cover that bet fully (and not over-expose themselves).

Q.100: Looks like Finspreads, smells like Finspreads, but it's called Easy2Spreadbet! (huh?)

A: Easy2Spreadbet uses the Finspreads platform so the spreads and markets available will be the same; in fact they share the same staff. Same goes for Capital Spreads and the numerous white-labelled London Capital Group brands like dealingdesk.co.uk, webtradeindia.com, chspreads.co.za, bullbearspreads.com, mdsspreads.com, finansbet.com, financialspreads.com and equityspreads.com...

My guess is it works like this: Two experienced punters have decided they can do some marketing and get clients signed up to trade CFDs, Forex or spreads. They approached Finspreads for a commission and wanted to label the finspreads platform. All work would be done by Finspreads except that the 'experienced traders' would market the new brand. In return they will receive a commission on the spread from Finspreads.

This is not uncommon and Capital Spreads will also do it if you have an active client base. If I were a UK broker and losing clients to CFDs and spreads I would actually do the same to protect my income stream and in fact this is what E*trade have done with EtradeSpreadBetting (a clone of Capital Spreads - same markets and spreads as both companies are run by London Capital Group).

If I were someone like Vince Stanzione with 'thousands of happy clients' this would be a great little earner if you can direct all the new punters to trade with your firm. And same goes with World Spreads and its host of clones including ixspreads.com, alpeshpatelspreads.com, twowayspreads.com and portspreadbetting.com!

 ...Continues here - More General Stock Market Questions & Answers (page 14)




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