Financial Spread Betting - A Trader's Guide

Getting Started

Binary Bets

Binary bets are quite exciting but the prices can move so damn fast! Definitely not for the weak hearted. I've also noticed the spreads widening at times to almost 10 or 11 points. Might be a tad risky for most people. I've had some good and bad experiences with it. They are ideally suited to the short-term trader.

Bets settle at either 0 or 100, whatever the margin of success. A late market surge, or an injury-time winner, can make all the difference.

Binary Bets - Exclusive: An IG Index Interview

How does Binary Betting differ from fixed odds and spread betting?

Binary Bets combine the best features of both, offering a bet on a range of outcomes as a simple yes or no, with the amount you can win or lose known at the time you place your bet.

What rate of betting tax will be paid?

Binary Betting are effectively fixed odds bets, and so the rate of duty (tax) is the higher rate of 15% of gross profits, known as 15% GPT.

Is it regulated by the FSA?

As Binary Bets are effectively fixed odds bets, binarybet.com does not need to be subject to FSA regulation.

What does the FSA think?

We discussed Binary Bets with the FSA, and their view, with which we agree, was that they are fixed odds bets.

To whom do you think the bet will appeal most?

We believe BinaryBets will appeal to a wide range of people who are relatively experienced at betting, who will see this as a new, unique and fun way to bet on both financial and sports outcomes, without having to undertake the degree of risk that can be associated with spread betting.

How long have you been taking Binarybets?

We have offered Binary Bets since the end of May 2003, and they have been a big success.

Who else offers them?

Binarybets are not offered by any other UK fixed odds or spread betting bookmaker. (um what did I say about all of them wanting to make you believe they have an unique offering)

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Binary bets 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.

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.

John Austin
director of new products and services at IG Index.

What has been the clients' reaction?

The take up of Binary Betting by existing clients has been extremely positive, and we are pleased with the success.

Are you afraid of being copied?

IG Index has a history of product innovation, and sooner or later competitors start to copy us. However, we are confident in the exclusive nature of our product and the technology behind it, so it may prove difficult for them.

Why launch it now?

The bet had proved popular with existing clients, so there is an opportunity to offer it to a wider audience in an easy to do format.

Secondly, following our MBO, we are seeking to expand our business in a number of directions. In the coming months we plan to introduce a number of new business lines, of which this is the first.

Does this mean that there is no future for spread betting?

Not at all. The betting industry is becoming increasing segmented. It was not many years ago that we just had fixed odds betting; now we also have spread betting and exchanges. Likewise, casinos do not simply offer a single product. Binary Bets are, therefore, something new and different.

Why are BinaryBets available on igindex.co.uk?

Binary Bets were pioneered on this site, and a number of clients like to be able to place both spread and binary bets on financials, so it does not make sense to make life difficult for them. However, binarybet.com will be the home of all new Binary Bets, be they financial, sport, politics or entertainment.

Why stop betting at 4.29pm on the FTSE?

Our aim is for an almost 24 hour market. At the moment we stop at 4.29pm and restart again at about 5pm. We're looking to reduce the period where we are not quoting, stopping at 4.29pm and re-starting for the next day at 4.31pm. The "gap" is to eliminate any ambiguity about on which day a client is betting.

Why not launch on horse racing, when that's what most punters bet on?

Binarybets are ideally suited to fast moving prices and in running markets, and our experience is that clients looking to place these types of bets prefer ball sports, like football and rugby.

Rumours - What we have heard on Binary Betting - May 2007

Binary betting is a spread Betting ! They take a binary event (either 0 or 1) and convert it into a spread bet situation (its correct term is an 'index'), in IG's case its between 0 and 100. Pricing: They run a matched book at IG for the binaries so it is 100% supply and demand with a (fat) spread. Price is determined by an algorithm that auto adjusts it as a function of the orders in the system. I heard that they started out by trying to use a Monte Carlo with an interpolated over night vol input, but it didn't work so well as the returns had such a wide standard deviation due to the problem of hedging with vanillas / spot.

It's often a good idea to listen to the brokers who get a good snapshot of how all their clients are performing. And in this case IG index say it's the ones who tend to buy 'cheap' Binary Bets or sell short 'expensive' ones that on the whole get better profit and loss profiles than clients doing other strategies. Of course picking your spots comes into the equation, as well as realising that the bid-offer spread on a Binary Bet is not cheap at around 5 points.

Hedging/Pricing:

Firstly, from the research I have carried out it appears that the Binaries (BB's) are priced through a method of simple probabilities based on previous market activity. I'll try and explain. Obviously the prices we see may have several factors taken into consideration but the main considerations are clearly "what are the odds of the particular event in question occurring ?" and "how long until expiry". As I write (13.55pm) FTSE is up about 25 and IG are quoting 94.4/97.6 for the "FTSE to finish up" binary. The mid is therefore 96.5 so therefore I think we can assume that IG feel that from the current position the FTSE would finish up on 96.5 days out of 100. The exact odds may of course be skewed slightly by the positions that customers already have having a direct influence on the quoted price but the essence of IG's view is clear. It's quite straight forward really. From what I can gather it would be very hard to hedge these bets into the underlying markets. The spread on options would be massive and it would require the company to trade in and out of them on an intra-day basis, it just isn't cost effective. I would have thought that IG would shoulder the whole risk themselves, if they don't then I'd love to know how the hedge the risk in such a short term timeframe.

Secondly, when it comes to trading the Binary bets I would have thought that it would pay to look for opportunities where there is a high chance of disruption in IG's probability maps. If they are indeed based on history (what else can they be based on) then they need to calculate several parameters in order to produce the correctly balanced price. BB's are obviously priced in a very similar manner to the pricing used in options and therefore volatility plays a very big factor especially when there is a high proportion of time still left until final expiry. The spreadbet company therefore has to calculate a volatility factor to use in their calculations and one imagines that this is a simple historical calculation based on the market movement over the last X number of days - a form of moving average if you will. If we can therefore spot times when we might be able to determine that volatility has a high likelihood of being higher or lower than normal then sometimes trading opportunities reveal themselves. For example, a few Mondays back it was Presidents Day in the US and the markets were mostly closed. I suggested to a couple of people that the FTSE binary bets would be worth playing on that day for the simple reason that the FTSE was very unlikely to move to any great degree between 1.30pm and its expiry at 4.30pm based on the fact that the US was closed. Low and behold that afternoon the FTSE kept a fairly narrow range and it was easy to pick off a few nice trades. Likewise when there is very sensitive data due, the likelihood of volatility increase. This means that we can do the reverse. We can trade the fact that there is a drastic increase in the chances of a large move. For example that FTSE I wrote about above, its 94.4 bid, if we had some economic data due that the market was hanging on then the chances of the FTSE not finishing positive increase somewhat and we are only risking 5.6 points to bet on it. It's my opinion that the Binary Bets are priced using averages to calculate volitility. If we deliberately attempt to trade during times when the short term volatility has a high likelihood of moving away from its average then we seriously increase our chances of making money because there is a good chance that our bookmaker hasn't factored it in.

IG Index will remove trading rights once you are seen as a consistent winner: is there any truth in this?

They won't stop you trading or ban you.

But are they delaying your orders yet?

In the beginning you get instant fills but after a while your fills might start taking over a minute to execute. If the market moves a lot during this time they are holding your order (a lot depends on the market you are trading) then your order risks being refused.

This might be a problem if you want to get out of position fast, u wont be able too.. And you will have to resubmit your order and the market could have moved 20 points by time that one gets filled! From my knowledge or binaries i believe they can move really fast!!

I think they are within their rights to do this and after all they have to make a profit too.

Binary Bets are Binary options also referred to as Digital Options or Digital Bets

Binary options are options with binary or discontinuous payoffs.

For example, a cash-or-nothing call (put), pays off a fixed cash amount if the underlying asset price is above (below) a fixed level and otherwise has a zero payoff.

Asset-or-nothing calls (puts) deliver the underlying asset (or its cash value) on the expiration date if the underlying asset price is above (below) a fixed level and otherwise has a zero payoff.

Binary options are also known as "digital options" or "bet options". Cash-or-nothing options and asset-or-nothing options are also known as "all-or-nothing options."

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