Industry Update
February 10, 2005admin No Comments »The spread betting industry is being closely watched by the Financial
Services Authority (FSA) as its appeal to investors soars. Following last
December’s £70,000 fine against Cantor Index, spread betting firms are
under pressure to ensure their advertising is up to scratch. Cantor was fined because
the regulator said it failed to warn consumers adequately about the risks of spread
betting in a promotion that promised a hand-held computer to new customers. In a
sector starting to look over-crowded, other firms can ill afford to make the same
mistake.
You can often sense an industry is coming of age when the regulator starts to pay
close attention to it. Demand has never been higher for spread betting as investors are
waking up to the fact there are short-term gains to be had from falling shares and
sideways markets. But the FSA is right to ensure that investors understand the pitfalls,
as the glamourous advertising can be very appealing until you see the risk warning
tucked away in the corner. New customers should not be allowed to deal unless they
can grasp the concept of gearing and realise they are at risk of losing far more than their
investment.
Indeed, it is estimated that around 80% of traders lose money. Active spread betters
are now thought to total around 100,000, a figure growing at about 25% a year. So you
don’t need to be a rocket scientist to work out why there is huge investor interest in
the sector of late. Last week’s news that IG Index was looking to float on the stock
exchange again caused shares in IFX, the only listed spread betting company, to jump
15% in two days. The company was forced to comment, saying it had received a
takeover offer at less than its share price.
There are now around a dozen spread betting firms, with only four or five thought
to be profitable – big guns such as IG, City and Cantor. Insiders reckon the sector is ripe
for consolidation, which would significantly boost profits. Spread-betting firms have
been substantially re-rated in recent weeks in expectation of mergers in the sector.
Spread betting is more volatile than traditional share-broking. Short-term traders
are not the most loyal of customers and tend to shop around for the best available
spreads. But this is made up for by volume, as spread betters deal more frequently and
their numbers are growing. Whether investors are shunning equities for margin
trading remains to be seen, but there is no doubt that spread betting is now seen as a
viable, cost-effective alternative. Not just a much riskier one.
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