Brokers punt on growth of demand for spread betting

Stockbrokers are muscling in on the financial spread betting market, in a move that could entice mainstream investors into this risky arena.

TD Waterhouse, one of the UK’s largest discount brokers, has launched a spread betting service in response to some of its customers placing spread bets with specialist providers.

Michael Foulkes, chief executive of the broker’s European arm, said: “We’re focused on the needs of active traders, who have needs beyond straight equity trading and custody.

“We’re trying to service their needs across different types of transactions. You can’t have a void in your product line or customers will go elsewhere.”

Mr Foulkes said rival discount brokers – which buy and sell shares for clients without providing research and investment advice – were also moving into spread betting. “It has been coming to the mainstream of the industry over July and August,” he said.

David Buik, head of public relations at Cantor Index, one of the biggest spread betting specialists, said the arrival of discount brokers could lead to tighter spreads. This would mean a better deal for customers, as a tighter spread is the equivalent of a bookmaker offering better odds.

Other brokers providing spread bets include E*Trade, the online broker, and Man Financial, the brokerage arm of Man Group. Until now financial spread betting has been a niche activity. Mr Buik said the market has about 800,000 participants and is growing at about 20 per cent a year. With spreads tightening and the minimum bet size falling, the market is becoming more accessible.

Most spread bets are placed online, which could give an advantage to brokers with a strong internet presence such as E*Trade and TD Waterhouse. IG Index, the biggest financial spread betting specialist, says 90 per cent of its bets are now placed online, compared with 50 per cent four years ago.

Spread betting is a high-risk activity that sits in a grey area bordering financial speculation and outright gambling. Punters can bet that an equity index will rise or fall over a given period, which varies from days to months. For example, they may bet £10 pounds per point that the FTSE 100 will rise above a certain level over the next 30 days. If the index falls, they must pay £10 per point. Because punters only put a small amount upfront, they can lose much more than their original stake.

However, investors can use spread bets to hedge their portfolios: someone with large exposure to UK equities could place a spread bet that the FTSE 100 index will fall, thus providing protection from a downturn.

A bet’s losses can be limited by placing a stop loss, which closes out the bet when the loss reaches a given size. Mr Foulkes at TD Waterhouse said: “The first line of defence is making sure customers are well informed. But we also offer a stop loss, and the customer can set the level.”

Tax advantages are another attraction of spread betting. Spread bets and contracts for difference (CFDs) are both ways of gaining exposure to share prices without buying actual shares, and both are exempt from the stamp duty applied to share purchases. Spread bets, unlike CFDs, are exempt from capital gains tax.

Mr Foulkes said: “This is clearly an anomaly in the [tax] legislation. Spread betting’s heritage is in the gaming industry, which is not subject to the same kind of taxation, and has been very successful in keeping it that way because it can threaten to move offshore.”

Tags: brokers, spread betting

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