One of the notable differences between conventional share dealing and spread betting is that with financial spread betting, you do not actually buy or sell the underlying shares. Instead, you are simply speculating that their price will rise or fall, with the spread betting provider acting as a kind of financial bookmaker. Now, since spread betting companies set their own quotes, this can lead to one quoting a more favourable bid-offer price than another for the same product. This is because while the price quoted on spread betting sites do mirror the real movements in the underlying market, they are not always exactly identical. This provides 'arbitrage opportunities' where traders can pocket the difference by buying one quote and selling the other. Interestingly, if you can pull off an arbitrage spread bet, then there is no risk of loss. You're making money at the expense of the spread betting companies, so you can expect them to be less than happy, but there's nothing illegal about it.
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Online trading has made it easier to compare quotes from different providers although arbitrage opportunities are few and far between. Most spread betting involves the underlying market which gives a baseline for the spread betting companies to create their prices, and you are unlikely to find much variation. Bear in mind that you need to make up the spread before you start to profit, so you are looking for price ranges from two different companies that do not overlap in any way.
Naturally, spread betting providers are keen to prevent this from happening, so they keep a keen eye on the quotes of other spread betting brokers, and are quick to correct their prices in the event of arbitrages. Successful arbitrage requires you to be signed up at several different spread betting providers and to move quickly, as differences usually do not last for long. Finance houses have computers programmed to look for minute differences between markets in the financial securities they trade and act instantly to make arbitrage profits. And they tend to use vast amounts of money to capitalize fully on a small pricing discrepancy. This sort of arbitrage is not for the fainthearted, and probably not viable for the individual trader. But the principles still apply.
If you cannot understand the workings of arbitrage and how you can get a risk-free profit, here's a couple of examples to explain how it works. For instance, let's suppose one spread betting provider is offering a buy price for Vodafone of 122p and a sell price of 117p (117-122), and another firm is quoting Vodafone for a buy price of 112p and a sell price of 107p (107-112). Since the sell price with the first spread betting firm is higher than the buy price with the other, you can secure a gain as long as you place a 'sell' spreadbet with the higher priced firm and a 'buy' spreadbet with the lower priced provider. In a nutshell, if you can buy at 112p and sell at 117p, you will be guaranteed a profit. So, if Vodafone were to rise in value, you would lose your sell bet and win your buy bet, and the gains from the buy bet would offset the loss from the sell bet. Similarly, if Vodafone were to fall in value, your sell bet would net you more than you would lose with the buy bet, due to the price differential. Obviously, this is an extreme example and price differentials are likely to be much less in practice, but it serves to illustrate the point.
Say you're looking at the price of JKL Excavation on two different spread betting sites, and notice a discrepancy in the quotes. Dealer 1 is quoting a spread of 315 to 320, and dealer 2 has it priced at 325 to 328. This is an arbitrage opportunity.
All you have to do is make a bet at 320 with dealer 1 that the shares will go up, and another spread bet with dealer 2 that it will go down below 325. Say you bet £100 per point with each. You really don't mind where the price goes; you have just guaranteed yourself a £500 risk-free profit.
Say JKL Excavation goes up to 350. That's 30 points, so you win £3000 from dealer 1. Against that, you lost your bet with dealer 2 to the tune of 25 points, which means you lost £2500. Overall, you have made £500 profit. But if JKL Excavation goes down, you don't mind either. Say it hits 312. That means you lose eight points to dealer 1, and lose £800. But your bet with dealer 2 wins, and you make 13 points times £100, which is £1300. Again, you come out £500 ahead. If you can do it, this is risk free. However, if you place one spread bet, and the price from the other provider is corrected before you place the bet with them, you would be left with a net long or short position.
Naturally, you won't often get an opportunity to make a profit like this and you have to keep a sharp eye out for price differentials. The brokers tend to keep their numbers in line, and modern Internet and networking make it much easier for them to do so. However, it is not illegal to take advantage of an arbitrage, and you will not suffer any penalties for doing so. If you're involved in spread betting on something which is not as clear-cut as a share price, you may find more opportunity for arbitrage. Perhaps you'll spot a discrepancy and arbitrage chance when looking at the quote for an out of hours security, as these can sometimes drift without any active trading. The price is set by spread betting company on the basis of what they think the next day's opening will be.
Obviously while the lack of opportunity hardly makes this a viable regular income generator, it does happen from time to time and it's worth keeping a watch out for the occasional arbitrage prospect, and knowing what to do if you see one. Guaranteed profits are not exactly what one calls an everyday experience!
Still new to spread betting and want to read more? - get a free copy of Michelle Baltazar's book by applying for a ETX Capital Account by clicking here This book a offers a decent overview of spread betting (even if basic) and the ETX Capital simulator account should prove useful for experimenting.
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