Spread Betting vs Trading - which really is the most profitable ?

[Charlton]

Yesterday I attended a seminar at the LSE, jointly hosted by Interactive Brokers.

IB questioned whether Spread Betting was more or less profitable than traditional trading. They provided an alogrithm, which I didn't write down, showing the profit available on trading 100 shares in one particular FTSE company (again I didn't write this down) and assuming it made just one point.

It showed the round-trip costs charged by themselves and assumed capital gains tax would be paid.

They also stated how it was so much easier to make one point than 3, 4, 10 etc points - obvious really. They mentioned the, typically larger, spreads on spread betting.

So looking at different tax situations, different fees, different holding sizes, timescales, spreads, whether trading on margin or not and all the other variables which is the most profitable ?

Also how would you factor risk into the equation ?

Charlton

 

[CityTrader]

Don't know too much about IB, but it's safe to assume they don't make a living by providing Spread Bets? Funny how their statistics showed traditional trading to be more profitable!!

CT

 

[nine]

There is no simple answer.

For brits spreadbetting can be tax free so you have a "less tax" vs "higher fees" equation and you must work it out for yourself.

 

[apples10]

Any algorithm on this will depend on factor x.

Factor x is the ability of the trader to make money.

If factor x is negative, then SB or IB will have same result, depression!

If factor x is positive, depends on what instrument, but I'd generally concur with IB that they have the edge. With SB its just nice to stop Mr Brown getting some of the spoils!.

Personally I use normal broker until tax-free CGT limit reached then use more SB.

 

[hungvir]

I think it also depends on how big your stakes are and what stocks you trade. If you trade FTSE 250 shares, then the spread can be 20 points plus. If you multiply this to your stake of say 10 quids, you're down 200 pounds as soon as your position is open while if you buy shares the round trip cost is only around 20 pounds. Of course your initial outlay is much bigger.

 

[the blades]

I think it also depends on how big your stakes are and what stocks you trade. If you trade FTSE 250 shares, then the spread can be 20 points plus. If you multiply this to your stake of say 10 quids, you're down 200 pounds as soon as your position is open while if you buy shares the round trip cost is only around 20 pounds. Of course your initial outlay is much bigger.

I'm using CMC at the moment and rarely get an additional charge above 0.5% for FTSE 350 stocks - less than the stamp duty invloved from holding the shares outright. Factor in CGT which I'd be paying at 40%, add in brokerage fees and it isn't even close - (for my situation).

Cheers,
UTB

 

[hungvir]

I'm using CMC at the moment and rarely get an additional charge above 0.5% for FTSE 350 stocks - less than the stamp duty invloved from holding the shares outright. Factor in CGT which I'd be paying at 40%, add in brokerage fees and it isn't even close - (for my situation).

Cheers,
UTB

Hi UTB,

I am a CMC 'cash cow' as well Went long Caledonion Investments with them the other day and the quote was 1905-1929. And the nearest stop loss allowed was 1889 or something.

I also find it frustrating that stop loss can't be placed under the underlying share price but rather on the futures one.

Cheers,

Hung

 

[the blades]

Hi UTB,

I am a CMC 'cash cow' as well Went long Caledonion Investments with them the other day and the quote was 1905-1929. And the nearest stop loss allowed was 1889 or something.

I also find it frustrating that stop loss can't be placed under the underlying share price but rather on the futures one.

Cheers,

Hung

Hello Hung,

You state a spread of 14pts, but how much of this was the market spread at the time? I tend to find they add between 0 to 0.5% of the price (on top of market), but for more "thinly" traded stocks they may go up to 2%!!! (I switch to Fins or IG at this point). Thankfully, this is the exception to the rule.

As for the stops - their price on the stock is the underlying market plus finance charge. No issue if you use the size of stop that I do, but probably a bugger in your case . Fins allow stops on market prices, but less competative spreads.

Cheers,
UTB

 

[Charlton]

Any algorithm on this will depend on factor x.

Factor x is the ability of the trader to make money.

If factor x is negative, then SB or IB will have same result, depression!
.

I couldn't agree with you more on that sentiment

If factor x is positive, depends on what instrument, but I'd generally concur with IB that they have the edge. With SB its just nice to stop Mr Brown getting some of the spoils!.

Personally I use normal broker until tax-free CGT limit reached then use more SB.

This is good advice

Charlton

 

[Charlton]

Hello Hung,

You state a spread of 14pts, but how much of this was the market spread at the time? I tend to find they add between 0 to 0.5% of the price (on top of market), but for more "thinly" traded stocks they may go up to 2%!!! (I switch to Fins or IG at this point). Thankfully, this is the exception to the rule.

Cheers,
UTB

Yes UTB - this was the point that IB was trying to make. If 0.5% to 2% is the additional spread then clearly that equates to an extra couple of points or whatever depending upon the price. Their argument was that its relatively easy to make 1 point, but as you require more points just to beat the spread then the chances of achieving that increase markedly. Thus they argue that you could make more money by more numerous equity trades than by SB.

I'm not a spreadbetter (at present) and I do not use IB (but may do). Frankly I found their claim unlikely to be true, but it is an interesting angle on things, which is why I started the thread. I know that many have complained on T2W about wide spreads and inability to fulfill stops and clearly these need to be factored in when considering the different instruments.

If any IB employees are reading these messages I would love them to reproduce the example provided by their MD on Tuesday. There are clearly a lot of other factors to take into account such as attitude to risk, finance charges and position size, but it would be interesting to read IBs example again in order to attempt this comparison.

Thanks to all those who responded

Charlton

 

[the blades]

Yes UTB - this was the point that IB was trying to make. If 0.5% to 2% is the additional spread then clearly that equates to an extra couple of points or whatever depending upon the price. Their argument was that its relatively easy to make 1 point, but as you require more points just to beat the spread then the chances of achieving that increase markedly. Thus they argue that you could make more money by more numerous equity trades than by SB.

I'm not a spreadbetter (at present) and I do not use IB (but may do). Frankly I found their claim unlikely to be true, but it is an interesting angle on things, which is why I started the thread. I know that many have complained on T2W about wide spreads and inability to fulfill stops and clearly these need to be factored in when considering the different instruments.

If any IB employees are reading these messages I would love them to reproduce the example provided by their MD on Tuesday. There are clearly a lot of other factors to take into account such as attitude to risk, finance charges and position size, but it would be interesting to read IBs example again in order to attempt this comparison.

Thanks to all those who responded

Charlton

Hello Charlton,

The reference to the higher percentages would only effect about 10% of quotes (In my experience), and then only 0.5 - 1% additional spread. The "2%" is one quote i received (for Ashtead several months ago) that always sticks in my mind. It isn't the norm.

I have to say that I don't spreadbet for the margin. My initial trading pot is more than I currently have on the table. If it were cheaper, I'd have no barriers to using a traditional broker. It is, however, an additional advantage that the finance charge on the bets is less than the benefit I get on offsetting the mortgage with the money that isn't tied up.

Even if spreadbeting wasn't tax free (and I'm benefiting from this), I would still use it as it would work out cheaper than applying stamp duty and brokerage fees (for me).

All the best,
UTB

 

[hungvir]

Hello Hung,

You state a spread of 14pts, but how much of this was the market spread at the time? I tend to find they add between 0 to 0.5% of the price (on top of market), but for more "thinly" traded stocks they may go up to 2%!!! (I switch to Fins or IG at this point). Thankfully, this is the exception to the rule.

As for the stops - their price on the stock is the underlying market plus finance charge. No issue if you use the size of stop that I do, but probably a bugger in your case . Fins allow stops on market prices, but less competative spreads.

Cheers,
UTB

Hi UTB,

Thanks for the post. I actually did not think about the market spread. Should have.

I also have an account with Fins but haven't traded with them.

Later,

Hung

 

[Jack o'Clubs]

Hi UTB,

Thanks for the post. I actually did not think about the market spread. Should have.

I also have an account with Fins but haven't traded with them.

Later,

Hung

I own Caledonian stock and the market spread (as I write) is 14p, and is usually of that order. On a £19 stock, that is less than 0.75% which is perfectly acceptable.

As a couple of posters have noted, the outcome of S/B versus outright is totally dependent on personal circumstances. However, I have noticed that competition between the S/B firms is driving more competitive pricing. e.g. Cantor are now offering daily roll-over stock bets at LIBOR+2.5%, whereas CMC are 3% . I also noticed yesterday that Cantor's quoted spread on Caledonian was inside the market spread!

For me the calculation is simple. Buying stock costs 0.5% stamp duty plus commissions. On my typical trade of £10k that is equivalent to 0.64% on top of the market spread. I'm a position trader so I'll typically hold a stock for, say, 3 months. A daily rollover with Cantor for three months costs me the quoted spread plus 0.5375% (ie the difference between LIBOR+2.5% and the 4.85% my 10k could be earning in a savings account if I trade on margin, for three months). Change any of the variables that are specific to my case, and the outcome/decision changes.

If owning the stock is cheaper I'll buy stock, if S/B cheaper I'll run the bet. Until recently it was almost always cheaper to own the stock, but over the last few months, S/B's have been getting increasingly competitive. As the year progresses there's also the consideration of CGT - I'll take a slightly worse price on the S/B when I'm near or through my CGT limits for the year, especially as I'm a higher rate tax payer.

But the bottom line is that it is not possible for anyone to definitively say one is cheaper than the other as it totally depends on individual trading styles, strategies and instruments. But it is easy to work out for yourself which is likely to be the most cost effective method for you.

 

[the blades]

I own Caledonian stock and the market spread (as I write) is 14p, and is usually of that order. On a £19 stock, that is less than 0.75% which is perfectly acceptable.

As a couple of posters have noted, the outcome of S/B versus outright is totally dependent on personal circumstances. However, I have noticed that competition between the S/B firms is driving more competitive pricing. e.g. Cantor are now offering daily roll-over stock bets at LIBOR+2.5%, whereas CMC are 3% . I also noticed yesterday that Cantor's quoted spread on Caledonian was inside the market spread!

For me the calculation is simple. Buying stock costs 0.5% stamp duty plus commissions. On my typical trade of £10k that is equivalent to 0.64% on top of the market spread. I'm a position trader so I'll typically hold a stock for, say, 3 months. A daily rollover with Cantor for three months costs me the quoted spread plus 0.5375% (ie the difference between LIBOR+2.5% and the 4.85% my 10k could be earning in a savings account if I trade on margin, for three months). Change any of the variables that are specific to my case, and the outcome/decision changes.

If owning the stock is cheaper I'll buy stock, if S/B cheaper I'll run the bet. Until recently it was almost always cheaper to own the stock, but over the last few months, S/B's have been getting increasingly competitive. As the year progresses there's also the consideration of CGT - I'll take a slightly worse price on the S/B when I'm near or through my CGT limits for the year, especially as I'm a higher rate tax payer.

But the bottom line is that it is not possible for anyone to definitively say one is cheaper than the other as it totally depends on individual trading styles, strategies and instruments. But it is easy to work out for yourself which is likely to be the most cost effective method for you.

Hello JOC,

Why do use daily bets for 3 month holds? Surely the quarterlies are better, unless my maths have failed?

Cheers,
UTB

 

[Jack o'Clubs]

Hello JOC,

Why do use daily bets for 3 month holds? Surely the quarterlies are better, unless my maths have failed?

Cheers,
UTB

The extra spread on the quarterlies can negate the financing charges of a daily, in my experience. I have a little spreadsheet set up for each trade I'm considering, and the inputs are the bid/offer on the stock and from each of the three S/B firms I have accounts with, in the latter case for their rolling daily (for CMC and Cantor) and the next quarterlies. Then some simple maths as per the example I gave above, works out which is the cheapest way of buying the stock. It does vary! By way of example, I've got 26 stock positions open at the moment: 15 are stocks, 8 are S/B quarterlies and 3 are rolling. To be honest, the differences are not huge and do assume that the spreads stay constant for the period of the trade, but at least I feel there's a bit of science to where I put my trade!

 

[pboi]

Out of interest..do you notice any difference between the dailys and wuarterly in volatility...

The reason I ask is my Ig index broker said the rolling dails prices are made up from future prices... I look to hold for around 4 days, and still unsure as whether to take dailys for the smaller sparead, or futures, for the possible lower volatility.

 

[the blades]

JOC,

fair point, I use CMC for most quartelies but if their additional spread is too great, I use Fins or IG (0.8% additional, equivalant to a quarterly finance charge of 2.4%, so still cheaper than CMC's 3% extra charge - no?), whereas you use the rolling product. Probably not a lot in it. Either way, it seems you've got your sums / methods worked out so who am I to question?

Pboi,

I use the daily price to calculate the quarterly price, before it's quoted. I then check the actaul deals placed at the time (using iii trades data), and within a very small margin of error everything ties up. This suggests to me that both prices are derived from the daily market price, not the futures.

All the best,
UTB