Bradleyule
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What is the difference between the two and which one is better for a beginner?
Difference between spread betting and CFDs?
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timsk
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Hi Bradleyule,
Check out this FAQ: What are the Pros and Cons of Spread Betting Vs CFDs?
As a general rule of thumb in trading, there's seldom one market, instrument, time frame or, in this case, financial vehicle that's 'better' or 'easier' than another. Regardless of whether you're a complete beginner or a seasoned pro', you're always going to choose the combo' that's best for you, based on your personal circumstances, objectives and personality. So, you have to weigh everything up and make your own choices. That said, CFDs are a more sophisticated product and, all other things being equal, most members would probably advise you start with spread betting.
Tim.
Bradleyule
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Okay what I can find on a comparison between them is that spread betting is better for trading smaller amounts, is that right?
timsk
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That's news to me, but if that's you're understanding and you want to trade small amounts (highly advisable if you're starting out) - then SB is the way forward.
Tim.
luckystrike23
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Differences between spread betting and CFDs
http://www.contracts-for-difference.com/compare/cfds-vs-spread-betting.html
http://www.contracts-for-difference.com/compare/cfds-vs-spread-betting.html
MORRIS2001
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In a very simplistic answer there is no difference. They are the exact same OTC just that one is packaged to favour UK tax law on betting and so there are legacy differences in terminology and end structure. Having said that, almost all OTC brokers who have set up post circa 2005 and aren't a skin of an older broker just deliver the exact same product down the pipe and whether it is called a SpreadBet or a CFD is just a matter of the account type the client opened.
People say salt art with spread betting and this is correct in regards to that historically you were able to trade much smaller as a SpreadBet and so that is better for a beginner. However, the downside of spread betting lies in the nomenclature (£pp) which easily distorts and deceives the risk a newbie is taking on with each trade across a range of markets. Where traditionally packaged CFDs score is that they utilise true market terminology, contract structures and open charging. The clarity for a beginner is superior.
But, few firms offer CFDs in the original pure way as most never had the tech to do anything other than deliver spread products so the benefits are probably moot.
People say salt art with spread betting and this is correct in regards to that historically you were able to trade much smaller as a SpreadBet and so that is better for a beginner. However, the downside of spread betting lies in the nomenclature (£pp) which easily distorts and deceives the risk a newbie is taking on with each trade across a range of markets. Where traditionally packaged CFDs score is that they utilise true market terminology, contract structures and open charging. The clarity for a beginner is superior.
But, few firms offer CFDs in the original pure way as most never had the tech to do anything other than deliver spread products so the benefits are probably moot.
Well yes, there is relatively little difference when they're offered by firms taking the bucket shop approach i.e. where the firm will take the other side of your trade...
But there are CFD products where you can interact directly with the relevant exchange order book - both IG Markets and Interactive Brokers offer them. Interactive Brokers appears to be much better value.
But there are CFD products where you can interact directly with the relevant exchange order book - both IG Markets and Interactive Brokers offer them. Interactive Brokers appears to be much better value.
MORRIS2001
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Nope. Those are still OTC contracts and their structure is unchanged. Prior to deciding to take the marketing decision to roll out 'Dma' as a product it already had existed since the first doors opened. I'll give you a clue by telling you the system was originally called 'auto-hedge'
. But trading under the DMA concept isn't guaranteed better value. Firstly you are removing the advantage of execution tolerances which non DMA instruments all have to prevent requoting and secondly you are restricting your liquidity access to just that of an exchange. So it does depend on how you trade and what you are looking to achieve as to whether it is a product that helps or hinders. And again, the only reason that the DMA marketing concept wasn't rolled out for spread betting (and the reason why when a uk firms launches thinking its a great idea and then goes bust) is because of betting tax on gRoss profits meaning of you have no book gains then you have no money to pay that bill.
Hope this helps. Tim.
MORRIS2001
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Apologies. I thought that when you used the term 'relatively' you were implying that there were differences but there aren't. The mechanisms are singular and identical. Linking the hedging aspect away from the 'house' being the counterparty to a clearer doesn't change the structure. That's all.
sure it doesn't change the structure of the contract itself... it does have implications with regards to costs/execution though - as far as I'm aware there aren't similar services available for spreadbetting thus I was highlighting that this is an area where some CFD providers can differ
I think there was (or maybe still is) some provider in Gibraltar offering a sort of 'DMA' spread betting solution though it seems dubious - certainly I've seen screen prints showing supposed limit orders not being passed onto the exchange order book as the firm does match internally. I believe Kyte Group (as it was a few years ago) also offered (maybe still does) spread betting with DMA to various futures exchanges... thought I believe the individual traders were potentially liable for the gambling tax (this is also only really aimed at full time professionals).
Basically my point is that though CFDs and spreadbetting are for most purposes basically the same thing - if, as a retail trader, you don't want to trade with some bucketshop taking the other side then there are a couple of alternative options that exist for CFDs namely IG Markets and Interactive Brokers. Of those options Interactive brokers seems to offer the best value.
I think there was (or maybe still is) some provider in Gibraltar offering a sort of 'DMA' spread betting solution though it seems dubious - certainly I've seen screen prints showing supposed limit orders not being passed onto the exchange order book as the firm does match internally. I believe Kyte Group (as it was a few years ago) also offered (maybe still does) spread betting with DMA to various futures exchanges... thought I believe the individual traders were potentially liable for the gambling tax (this is also only really aimed at full time professionals).
Basically my point is that though CFDs and spreadbetting are for most purposes basically the same thing - if, as a retail trader, you don't want to trade with some bucketshop taking the other side then there are a couple of alternative options that exist for CFDs namely IG Markets and Interactive Brokers. Of those options Interactive brokers seems to offer the best value.
MORRIS2001
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Yes. The Gib firm is ProSpreads. They can offer a 'DMA' style product due to not being subject to UK gaming tax which is what halts it as a marketing tool here.
Semantically, there is no such thing as a DMA CFD as they are still OTCs where the counter party is the issuer of the OTC. They are identical in structure to all other types of CFD or SpreadBet OTC only that the hedging element is done with a clearer instead of the broker either netting off against other flows or deciding to run the exposure. The key here is that this is not catagorically either good or bad. Having access to a firms additional liquidity can often be hugely beneficial. A good example would be trading indices out of hours where non DMA instruments will by their nature have superior liquidity and with the right firm better amalgamated pricing as a result.
As an aside, I suspect that few have read the true terms of 'DMA' execution for the firms that offer this auto hedging tool because the advent of dark pools has lead to an interesting change whereby a firms own book is classed as a liquidity pool. Not that OTC DMA has actually ever been true DMA. The brokers aren't hedging with physical delivery but with CFDs written by the clearer of choice (IB may be using physical as they certainly used to only offer margin at 50% but lower margins, ie smaller balance sheet demands, require the use of CFDs). And those clearers are under no obligation to back that CFD with physical but can choose to take the other side of it suits their book.
But the point that I was making in my original post is that most traders seem to think that these are all structurally different instruments when they are in fact all the same product that is just packaged differently on reselling to cater for different marketing requirements.
Semantically, there is no such thing as a DMA CFD as they are still OTCs where the counter party is the issuer of the OTC. They are identical in structure to all other types of CFD or SpreadBet OTC only that the hedging element is done with a clearer instead of the broker either netting off against other flows or deciding to run the exposure. The key here is that this is not catagorically either good or bad. Having access to a firms additional liquidity can often be hugely beneficial. A good example would be trading indices out of hours where non DMA instruments will by their nature have superior liquidity and with the right firm better amalgamated pricing as a result.
As an aside, I suspect that few have read the true terms of 'DMA' execution for the firms that offer this auto hedging tool because the advent of dark pools has lead to an interesting change whereby a firms own book is classed as a liquidity pool. Not that OTC DMA has actually ever been true DMA. The brokers aren't hedging with physical delivery but with CFDs written by the clearer of choice (IB may be using physical as they certainly used to only offer margin at 50% but lower margins, ie smaller balance sheet demands, require the use of CFDs). And those clearers are under no obligation to back that CFD with physical but can choose to take the other side of it suits their book.
But the point that I was making in my original post is that most traders seem to think that these are all structurally different instruments when they are in fact all the same product that is just packaged differently on reselling to cater for different marketing requirements.
the contract itself might not be different but the way they are executed is and the way you interact with the markets is very very different - trading against a bucket shop vs interacting with an exchange orderbook.
Whether they implement any internal matching on market orders is not really a big deal so long as limit orders are passed directly to the orderbook. The obvious conflicts of interests certainly don't apply in the same way - timber hill(interactive brokers) are an options marketmaker and will match some market orders internally via their dynamic order routing algo, but they're only taking those orders internally when they want/need them otherwise they're routed to the exchange as per any limit orders. You have the option to turn this feature off when trading in cash equities (I'd assume it would be available for CFDs too though I'm not sure) but tbh.. best execution still applies and it ought to generally improve the price you get slightly.
You mention 'additional liquidity' as provided by the bucketshops and did allude to it previously but I'd be pretty skeptical of any claims that you're going to get better execution from a firm taking the other side of your trade and then hedging its net exposure in the markets than you would from interacting with the markets yourself. Certainly the idea of 'additional liquidity' being available from them is very dubious in most circumstance. After hours trading is perhaps one advantage you could cite though.
Overall the costs are significantly higher trading via a bucketshop - being forced to cross a spread (that may well be larger than the underlying), higher interest charges, generally worse slippage and all the inherent conflicts of interest you get when some bucketshop takes the other side of your order.
Whether they implement any internal matching on market orders is not really a big deal so long as limit orders are passed directly to the orderbook. The obvious conflicts of interests certainly don't apply in the same way - timber hill(interactive brokers) are an options marketmaker and will match some market orders internally via their dynamic order routing algo, but they're only taking those orders internally when they want/need them otherwise they're routed to the exchange as per any limit orders. You have the option to turn this feature off when trading in cash equities (I'd assume it would be available for CFDs too though I'm not sure) but tbh.. best execution still applies and it ought to generally improve the price you get slightly.
You mention 'additional liquidity' as provided by the bucketshops and did allude to it previously but I'd be pretty skeptical of any claims that you're going to get better execution from a firm taking the other side of your trade and then hedging its net exposure in the markets than you would from interacting with the markets yourself. Certainly the idea of 'additional liquidity' being available from them is very dubious in most circumstance. After hours trading is perhaps one advantage you could cite though.
Overall the costs are significantly higher trading via a bucketshop - being forced to cross a spread (that may well be larger than the underlying), higher interest charges, generally worse slippage and all the inherent conflicts of interest you get when some bucketshop takes the other side of your order.