Answers
Hi
I did originally post my own examples but realize that it is inflammatory so decided yet get rid of them...
This is a thread for discussing the various rumors and stigmas that are attached to financial spreadbetting and debating weather they are true or not.
1. Are they betting against individuals?
Not in the traditional way. In "Reminiscences of a Stock Operator", bucket shops are said to have their brokers go to the exchange and put through a very high (low) trade to stop out clients when the bucket shop had a large net short (long) position. I think that SB companies simply hedge net exposure and make money on the spreads.
2. Do they make money when you loose money?
Yes. However, the net long/short position is probably a lot smaller than you would think. Two views make a market, so they probably have very small net exposure compared to the spread income. I'm sure a lot of their profits come from small punters not knowing what they are doing, and repeatedly entering small positions (which don't affect the book risk enough to hedge) and then closing out at a loss. Wins also come out of the SB firms pocket. However, they make money on the spreads, and sometimes on the hedging, so I don't think it is in their interest to make punters lose money.
3. Do they treat clients differently depending on how much money they make?
Yes. They call it "dealer intervention" in the industry. Some firms are fairer in this than others. There are many reasons you can be put on dealer intervention, but firms are reluctant to disclose these reasons, and even more reluctant to discuss the matter with clients they have designated in this way. A non exhaustive list of what could get you flagged in this way includes "frequent" or "over trading", trading styles the firm does not like, making substantial profits, only holding very short term positions, or trying to trade on price lags. Bearing in mind that all platforms will have a lagging price from time to time, SB firms must be on the lookout for this. Generally they will err on the side of suspecting that a client is a scalper.
Dealer intervention can be fair or unfair, depending on the firm. Some firms simply use it to check that very active traders or suspected scalpers are only trading on fair prices. However, other firms who do not allow a client to cancel a pending order can use dealer confirm to make risk free money by only filling the orders which have moved against the client in the time it has taken for the dealer to see the order. With most firms, you can cancel a pending order if the price has moved against you.
4. Do they manipulate the market to hit stops? (baring in mind the price you get online is the same as everybody else who uses them... arb opportunity anyone?)
I've a slight suspicion that perhaps not every client gets the same price. However, in the main, SB firms quote a two way price, and therefore it is not in their interest to bias prices more than the spread. Biasing is a natural way to mitigate market and book risk, and MMs at the exchange do it all the time. Some SB firms do this, others do not. However, it is not in an SB firms interest to quote a price greater than the spread away from the underlying risk. In short, they don't care where the stops are, and only know where the stops are if they have hedged and have their own stops in the market.
Further, this stop hunting myth is made worse by the fact that there is a spread around the underlying mid price. In some instruments (the quarterlies for example), the spread is quite wide. Also, the average of the lowest bid / offer will not necessarily correspond to the print of the lowest trade. Add the spread to this, and people wonder why they were stopped out of their long at X when their Direct Access chart shows the lowest
trade price as being X+6.
5. Why would you use any other method of investing other than spreadbetting?
- You need an advisory service, not execution only
- You want to make the spread by buying the bid and selling the offer
- You are a very very frequent trader, and want lower commissions / spreads
- You want to trade commodities other than gold or crude, in which case the mini futures are more cost effective in some cases
- You don't trust the bucket shops
- You want to exercise voting rights, etc in a stock
- You don't want to use (or don't financially qualify for) margined trading
- You want to place large orders into the book (see also Eurex flipper)
- You want to bid for 50 S&P contracts
- You like paying tax
- You have a capital gain from the last tax year (or will be selling other investments for a capital gain this year), and want to speculate with the added benefit of being able to write off losses
- You don't like the word betting
- You used to work in a bucket shop
- The bucket shops don't offer the instrument you want to trade
- You don't know about spreadbetting
- You like to keep share certificates in your drawer
- For you, "investing" means buying treasuries, or long only equities if you are feeling adventurous
- You are an intermediate / professional customer and fear that the bucket shop will use this to give you short shrift (see also #5)
- You are Warren Buffet
- Spreadbetting firms "...don't take your business." (this happened to Livermore when he won too much)*
Now a reason for having a spreadbetting account - you have 25k of cash savings, and you realise that you have more protection in an interest bearing spreadbetting account (100% of the first ~30k under FSCS) than you have in the bank (100% of the first ~2k, 90% of the next ~30k). No longer applies thanks to the Rock debacle.
*
Then I saw a red-headed man just shove that clerk away from the counter. He leaned across and said to me, `Say, Livermore, you go back to Dolan's. We don't want your business." "Wait until I get my ticket," I said. "I just bought a little B. R. T." "You get no ticket here," he said. By this time other clerks had got behind him and were looking at me. "Don't ever come here to trade. We don't take your business. Understand?"
From
Reminiscences of a Stock Operator by Edwin Lefèvre.
