Boydell: Binary or decimal? We know at IG Index you quote, say, 49-51 while the bookmakers make 2 to 1 and 3 to 1. Which is the easier one for a client to understand?
"The major selling point of binaries for private investors is that they provide volatility on unvolatile markets."
Moczulski, IG Index: They are identical in terms of potential profit or loss - it's just a different way of relating to clients our market on a particular outcome. I would say private investors are more familiar with the binary method but people who are more used to sports betting would generally go for the decimal.
IG Index is the only one that provides both so you can toggle between the two and decide which you prefer. The display can be in either.
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Sparke, City Index: Our prices at City Index are binary prices. We feel they are very transparent and that it is easier for the client, especially in financial markets, to understand a binary price rather than a fixed-odds price in a fraction format or decimal format.
With the binary price, how much you are winning and losing during the event is very clear, which isn't always as clear with a fixed-odds bet.
Calvin, Betfair: Betfair prices are purely decimal. We feel that's the easiest way. The profit and loss is easily displayed as you're trading events, so you're always aware of how much you'll lose in one eventuality and how much you'll win on another. No one else in the world uses fractional odds so we feel decimal is obviously the way to go . If you're having £100 on a 1.27 chance you know your return if that wins is £127 - it is very easy to do and very transparent.
Boydell: Take a punter who has just bought shares in the normal way over the years or has traded more familiar derivatives. Why would he want to get involved with binary betting?
Moczulski, IG Index: The major selling point of binaries for private investors is that they provide volatility on unvolatile markets. For example, a one-point move on a FTSE spread bet is only worth that, one point. A one-point move on the FTSE for a binary bet could easily be 50 points, so it's creating volatility where there isn't necessarily any there.
For anyone who is trading for capital gain, it does provide that now on the most sedate of markets 24 hours a day.
Sparke, City Index: With private investors looking to make an income over a 10 to 15-year period from dividend payments, binary betting is probably not the product they should consider. But if an investor is buying shares for short-term or mid-term capital gains, a low-volatility underlying market can become a very volatile binary market.
If you're going to bet on whether the FTSE is going to be up or down on a day and it's flat with five minutes to go, you know one thing with a binary product. It has to settle at nought or 100, so there's a nought to 100-point move on a one-point move of the market.
Added to that, with a binary format, unlike spread betting, your risk is always known in advance - you cannot bet with more than you have. If you've got £10 in your account and the market on a binary bet is offered at 20 and you want to buy at 20, you can't do that. At the same time, if you buy the market at 10 and you've got
£10 in your account, that's the limit to how much you can lose.
Boydell: I've heard that binary bets have variable spreads. Correct?
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"There are so many ways you can bet on an exchange that the types of punter we have are very varied"
Sparke, City Index: They can do. It really depends on the liquidity. If there is a high amount of liquidity on a market - usually a market close to settling - liquidity increases and the spreads tighten. On other occasions, there are markets that have little interest, whether it's to do with a lack of volatility or whether interest is elsewhere, and spreads can be slightly wider. Essentially, though, we are always looking to maximise liquidity as the greater the liquidity, the tighter the price will be.
Calvin, Betfair: What would be an acceptable spread - one you're happy with?
Sparke, City Index: It's up to the market maker but on a binary market we would rarely have a spread wider than four or five.
Calvin, Betfair: Presumably that would allow you to lay any bet in size?
Sparke, City Index: Yes. The market maker displays the size as well on the exchange so the size is always clear.
Moczulski, IG Index: Spread is important to binaries but it's nowhere near as important as it would be with a conventional spread bet or a conventional share trade. Remember, the spread of the binary bet has very little to do with the underlying market itself.
If you're spread betting or trading shares conventionally, the reason why spread is important is the amount you have to beat to make a profit. That is not the case with a binary bet - the market itself only has to move one point. The spread that you paid on the binary bet is irrelevant.
For example, using absolutely ridiculous numbers, our spread could be 30 at 50 on a binary bet for the FTSE to finish up on the day when it was unchanged. If the FTSE only moves one point but ends up in positive territory, it still makes up at 100.
Boydell: How do most of your clients trade? Are they day traders, short-term traders, long-term traders?
Calvin, Betfair: There are so many ways you can bet on an exchange that the types of punter we have are very varied. We have the gamblers, people who strike one bet, sit down in front of the telly and let it ride. If it comes up, fine. They won't react to events happening in front of them, they'll just sit there and suffer or celebrate.
Then you have the traders who will take a position pre-event and trade that position - that is continue to back and lay throughout the event, trying to maximize their best return and hopefully trade themselves into a position where they can't lose and, best-case scenario, win on both eventualities.
If you call the market right early on in a golfing tournament or a football match, you can get yourself into what we call an all-green book, that's a no-lose scenario where you win on both eventualities.
We also get the hedgers - people who will call the market right and just cut out so they minimise any
losses they may incur - or the arbitrageurs. I'm sure they're very established in any other walk of betting. A
punter might take 8/1 in the betting shop and if there's a big gamble on that horse be able to lay it back at 5/1.
Certain people will only bet in-running. These are people who are very good at, say, judging a horse's style of running or maybe know how a jockey rides. Some jockeys are very deceptive - the horse looks to be going badly but the jockey is just building up a momentum.
Moczulski, IG Index: Most of our clients are short-term. We do some end-of-year contracts but holding a position for more than a couple of days is quite rare.
The obvious reason for this is volatility. The volatility of binary bets is produced by its short-term nature. People enjoy the volatile aspects of them. For example, if the FTSE today goes down 100 points and
tomorrow goes up by 50 points, it doesn't really bear any relevance to what is going to happen in two months' time. Many financial traders on IG Index are trading within five minutes and very few people are trading any longer than a day.
Sparke, City Index: The binary product is conducive to short-term trading. The fact that it creates a volatility that isn't there in the underlying market is precisely because of the time delay. Our clients at City Index always prefer the shorter-term markets. We do offer slightly longer-term bets - you can bet on whether the FTSE is going to be up or down in a week and there is some interest there but it is not big.
Calvin, Betfair: That's very true of Betfair as well. The closer you get to an event the more money and interest there is in that market. If you're talking about who's going to win the World Cup 2006, there is a market there but there's not nearly as much interest. If you place a bet now, you have to put your money up front so you're tying up those funds for maybe the best part of a year.
While punters do tend to be more short-term, though, sometimes you'll find that the prices are so good in the long-term market that they are willing to tie up their money.
Boydell: Are there any tax benefits with binary betting?
Moczulski, IG Index: Every trade that you do is completely and utterly tax-free.
Sparke, City Index: Yes, but for people betting abroad it is their responsibility to check their own tax status.
Boydell: Is there commission to pay and if so, how is it calculated?
Sparke, City Index: Commission at City Index is linked to the risk per point and not to the winnings. All we say is that it is half your risk per point on the open and half your risk per point on the close.
If I were to bet £5 I'd be charged £2.50 for the open side of that and when I closed the bet and I sold £5 I'd be charged £2.50 for that as well. It's half a tick charged for opening and closing on your risk per point.
Calvin, Betfair: At Betfair, we match bets through punters and we take a 2% to 5% commission from the winning punter. Obviously you don't pay any commission on losing bets so if you win we take 2% to 5% off.
The more activity you have on the site, the less commission you pay. So our most active users would only pay 2%. The commission isn't a problem for them for the simple reason that, according to an independent survey, Betfair offers on average 20% better odds in the market place than anywhere else.
Boydell: Does your commission structure also depend on the type of event?
Calvin, Betfair: We have what we call a market base rate. If a market is underperforming, if, for example - we feel it should be doing more trade than it is - we have the facility to lower the rate.
Boydell: Your commission rate is 2% to 5%...
Calvin, Betfair: Yes, but there's a lot of scope for improvement. We might go to users and say: 'If it was a flat rate 1% would you use it more?'
Moczulski, IG Index: It doesn't make any difference because we have absolutely no commissions whatsoever at IG Index - zero. Your profit is yours to keep.
Boydell: On a betting exchange, rather than buying and selling shares you bet on whether stocks or indices will close higher or lower at a particular time. How does this work and how can I close out before the event finishes?
Calvin, Betfair: If you take the FTSE market, it will it be up or down by the end of the day. If you've taken a price in the morning, say £500 even money (or two in decimal terms), you would win £500 if that bet came to fruition or lose £500 if you were wrong.
If the market then moves so much in your favour that towards close of day that basically it is a 1.02 chance - 1.01 to back and 1.02 to lay - you could lay £1,000 back at 1.02. So you'd be risking £20 to win £1,000. As you've already won £500 because your bet is right, if you did close out for that thousand at 1.02 you would be winning £480 of your bet and £500 the other way. So no matter what happens in those last minutes of trading you are guaranteed a £480 win on one eventuality and a £500 on another.
In that respect, if you call the market correctly in Betfair you can always close out and take your profit there and a lot of people do. They like to have the peace of mind - take their money, sit back and see the last 10 minutes of trading.
Boydell: How do I place the trade? Is there a limit to a buyer who wants to trade over the phone or online.
Moczulski, IG Index: We don't accept trades over the phone - it's such a fast moving market that the five seconds it takes to relay a price to a client over the phone means it's potentially not valid any more. If the system ever were to go down, there are facilities in place to cover that, with more than 50 dealers available immediately. For people on the move, we have a dealing platform available for mobile phones.
Sparke, City Index: Ditto to that. Even if we offered the services we do over the phone, which we won't, you would still probably see no one call up.
Calvin, Betfair: Betfair is an online-based betting product. However, we have got an extensive telephone centre so you can bet over the phone. We have two call centres and about 75 telephone operators. It's a very clean and efficient thing to do online but, say you're at the racecourse, you can ring up for a price and bet as you would online.
Boydell: Is it possible to set stop losses?
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Boydell: What is your minimum bet size?
Sparke, City Index: £1 a point.
Boydell: So your stop loss really is £100 basically.
Sparke, City Index: It depends the price you bet at. Let's not forget the leverage of the product means if you buy £1 at three you know you can't lose more than £3 but you can make £97. Conversely, if you buy £1 at 90 you know you can win £10 but you can lose £90. Those figures are all set in stone in advance, you know them before the bet is placed.
Calvin, Betfair: Stop loss is not a term that is particularly relevant to binary exchanges. Obviously you take a position and you can close on that position in a fast-flowing market any time you want, so in that respect you can cut and run. There's no real stop loss as such but obviously the ultimate stop loss is going in there, reversing your position, taking your profit or whatever. And punters will do that because the market is so tight and favourable that they don't have to pay a lot to get out of a bet - it's not like you pay a big spread price.
"If two exceptionally wealthy people want to match on the exchange, then it is unlimited how much you can win. You're not a bookmaker on an exchange, it's client-to-client matching so there is the potential to win thousands and thousands of pounds"
Boydell: What is the most I am likely to make or lose?
Calvin, Betfair: Basically, if you have £1,000 in your account, you can lose that £1,000. However, if you keep on calling markets right, that can build very quickly.
There's no shortage of people willing to risk £100 to win £1. If you take these guys on and you're right twice out of 100, you can turn that thousand into many
