Cantor, Finspreads Say Stock Volatility Helps `Spread Betting’

The month long slump in global stock markets has been a boon to U.K. speculators who prefer betting to trading, and to the companies that help them bet.

The surge in market volatility since prices peaked has meant more opportunities for short-term traders who use “spread betting,” or gambles on moves in financial markets. The winnings from such wagers aren’t taxed in the U.K., unlike the profit from the gain on a security purchase.

“It has been a dream market if you know how to benefit from it,” said Nick Macdonald, 26, an independent trader in London who said he has made money betting on fluctuations in currencies and U.K. and U.S. equities since stocks peaked. “When the market turned, it was absolutely golden.”

Companies that are profiting include London spread-betting firms Finspreads, owned by the U.K.’s IFX Group Plc, IG Index, a unit of IG Group Holdings Plc, and Cantor Fitzgerald LP’s Cantor Index Ltd. Business soared amid the volatility, the firms said.

Stocks globally plummeted as much as 12 percent from a six- year peak set May 9, based on a Morgan Stanley Capital International Index as of June 16. The U.K.’s FTSE 100 Index lost as much as 10 percent from its recent high and the MSCI Emerging Markets Index sank 25 percent. Spread bettors can also wager on commodities too. The Reuters/Jefferies CRB Index of 19 commodities dropped as much as 9.6 percent from its record set on May 11.

Price Moves

Spread bettors, who gamble on stock moves over the course of hours or a few days, have had more opportunities to trade on abrupt swings. For example, shares of Lonmin Plc, a London-based platinum producer that Macdonald bet on last week, rose or fell 4 percent or more 19 times in the past month. In the previous month, it moved by that amount only eight times.

Measures of expected price swings in the U.S. Standard & Poor’s 500 Index and Germany’s DAX Index, standard gauges of market volatility, jumped to the highest since August 2004.

“Bet numbers have increased by 50 percent; it’s been pretty unbelievable,” said Angus Campbell, head of sales and marketing at Finspreads. “We have seen unprecedented levels of business going through.”

IG and Cantor declined to quantify how much betting has increased. The Financial Services Authority, the U.K. market regulator, doesn’t track such statistics, said spokesman David Cliffe in London.

IFX, the parent of Finspreads, said in a statement last week that its daily bet numbers, average stake values and customer funds increased in the year ended March 31. The company had 8,279 customers, up 13 percent. The new financial year has begun “very strongly,” with profits “very substantially ahead of management’s expectations,” the company said last week.

Beating the Market

IG Group said last month that revenue in the year ended May 31 probably rose 37 percent after the company won new customers and more bets were placed.

IFX shares are up 31 percent this year and IG has gained 13 percent, while the FTSE All-Share Index has risen 0.6 percent. New York-based Cantor Fitzgerald is closely held.

Unlike a stock trader, a spread bettor who wagers that a stock price will rise or fall never takes ownership of a security. All that’s required is a deposit of a small percentage of the bet’s value, making the wagers riskier than a stock purchase. If the bet loses money, the firm through which it was placed will demand more money to cover the losses.

The risk of trading with what is effectively borrowed money means spread betting isn’t for the faint of heart.

“It is just another form of gambling,” said Charles Geisst, author of “Wheels of Fortune: The History of Speculation From Scandal to Respectability” (Wiley, 368 pages, $16.95). “Most people who use this are just in it for fun and games. I think it has more elements of gambling than a legitimate form of hedging because of the leverage involved.”

Bucket Shops

Bettors pay no commission, as they would with a trade through a brokerage. As with futures and options contracts, some investors use spread bets as a hedge to offset some of the risk in their stock portfolios.

Spread betting isn’t new. Stuart Wheeler founded IG Index in 1974 in the U.K. to speculate on the price of gold.

In the U.S. in the late 19th century, similar betting operations, known as “bucket shops,” cropped up in New York and Chicago, enabling the working class to place bets on live prices from stock exchanges, said Geisst, a professor of economics at Manhattan College in New York. By the 1930s, bucket shops were forced out of business after new securities regulations were introduced following the 1929 market crash, he said.

The current market pullback falls far short of the crash that sent the U.S. plunging into the Great Depression. The biggest risk to spread betting firms now may be that market volatility subsides again.

“We have done loads of business,” said David Buik, a manager at Cantor. “People who have been betting on the market over the last 4 1/2 weeks have been very successful.”

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