T2W Trading Community

1. Introduction

At first sight, a spread bet appears to be very similar to a CFD. The crucial difference is that, whereas CFDs are derivatives transacted though margin brokers, financial spread-bets are legally enforceable wagers between punters and licensed bookmakers. As such, spread betting gains are not liable to capital gains tax.

Spread betting is an attractive alternative to trading currencies in the spot or derivatives markets. Apart from the ability to profit in falling and rising markets and the benefits (and risks) of margin trading, currency spread betting has the following additional attractions: -

• Low minimum transactions sizes
• CGT-free gains
• Settlement in multiple currencies including sterling

2. The bookies

There are currently six online spread betting bookmakers making bets on a wide range of wager-able instruments. You can spread bet on individual shares, market indices and spot currencies, as well as on futures and options in equities, indices, interest rates, commodities and currencies.

3. The system

3.1 The spread

A bookmaker makes up a “spread” (i.e. the difference between the buy and sell exchange rate) based on such considerations as the current spot or futures rate, the liquidity of the underlying currency, the bet size and the term to expiry, as well as spreads quoted by rival bookmakers. Spreads will be wider than those in the spot or derivatives forex markets.

Buy and sell prices should be consistent across competing bookmakers or else the punters will be able to arbitrage, making riskless profits through simultaneous bets with different brokers.

3.2 The betting

Bets are traded on a daily, weekly, monthly or quarterly basis (March, June, September and December) and either settled on the last day or rolled over.

The punter places an “up-bet” (buy bet) or “down-bet” (sell bet) at a specified “stake” per point. Minimum and maximum stakes will vary between bookmakers.

Up-bets are made from the top of the bookmaker’s spread (the ‘buy’ rate). Down-bets are made from the bottom of the spread (the ’sell’ rate).

3.3 Margin

The bookmaker’s required margin is usually a Notional Trading Requirement (NTR) multiple of the betting stake. The NTR factor varies across different currency pairings, according to the liquidity of the particular market. For example, on CMC/Deal4free, the NTR factor for EUR/USD (spot) is 200 while the GBP/EUR NTR factor is only 100.

For example, if you are betting £5 per point on EUR/GBP, then your initial margin is 100 X £5 = £500.

Open positions are “marked to the market” every day and the paper profits and losses are posted to the margin account. Where margin is insufficient to support open positions, the bookmaker may make a “margin call”.

3. 4 Cost of carry

Where a spread bet is based on spot currency rates, the punter incurs an interest charge on the long position and receives an interest credit on the mirror short position. The cost of carry is therefore based on the interest rate differential.

On currency futures spread bets, there is no explicit interest debit or credit because cost of carry is already reflected in currency futures rates of exchange.

3.5 The finish

Unlike CFDs which are open-ended contracts, spread bets have expiry dates. Spread-betting positions, however, can usually be rolled over.

The close-out price at expiry will be an official “settlement price” calculated by the bookmaker using a formula set out in the customer agreement

Gains/losses will be the points difference between the settlement price and the opening buy/sell price times the stake per point.

3.6 Bolting

So you want to cut and run before expiry? An up-bet is closed out pre-expiry by placing an equivalent down-bet from the sell rate at the time. A down-bet is closed out by placing an equivalent up-bet from the buy rate at the time.

Profit/loss is based on the relative buy/sell prices at commencement and closure.