Tuffty said:
The options open to the bookie are:-
1) They could lay off the bets. This is expensive for them and assumes they can lay off the bet. My guess is that they don’t generally do this other than to make sure all bets as a whole are within risk tolerances.
It's my understanding that some of them do this - (I'm fairly sure that either IG or Fins (probably IG) have said publically that this is their policy) - ie they net off the trades internally and either carry the risk or hedge only the nett exposure. Obviously, it's a lot cheaper/easier for them to hedge just the nett risk than hedging every single position.
Implementing such a policy would also mean defining consistent winners, which would be difficult.
IMHO, that would be childishly easy to do, if their software was anything more than very rudimentary - would only need to define the rule(s) for "consistent winner".
If I were setting up a SB company, I would be certainly be tempted to do this - hedge the successful traders, and either nett the risk of the others, or carry the risk of the unsuccessful traders and nett the rest. Occasionally, one of the "duffers" will pull a rabbit out of the hat and you take a bath, but most of the time you will be coining it in - both from the gain on spreads and from the bets not hedged outside the company.
2) They could side with you as the Dr. said. I call this ‘front running’ and happens in ‘real’ markets too. It is an abuse of a broker’s or bookies position and is bad practice in my book. The fact that the Dr. mentioned a spread betting MD say that they would do this is worrying if they do it without your consent.
Dubious practise if they front-run the trade, not so dubious if they just place a matched trade - which is effectively just ensuring they hedge a successful trader
3) Normal trade size restrictions limit the spread betters exposure to very successful traders/strategies thus preventing a trader ever to make a ‘large’ amount of money.
Not convinced about this one - some of the SB companies allow huge trades - that story in the press about "The Plumber" a few months ago implied that he was running a spread bet of £several thousand pp (though it could be that the press got its facts twisted and that it was a CFD). However, even at the "normal user" limits, which I believe are £250pp on Fins and £500pp on IG, a few trades at that size can make a serious amount of money if you got a run in your favour.
4) Checking the profitability of instrument lines. If there are unprofitable instruments (meaning customers are finding real edges against the house) they would stop trading that instrument or adjust their pricing model (especially where there is no off setting market).
Damn sure that this happens - there were literally
months last year (or maybe the year before) where you couldn't trade AZN (and another major stock that I can't remember) online with FINS - when I phoned them, they said it was because it was "too volatile" (after I laughed off their original "there's a problem with the price feed" line of bull).
5) Review a customer’s profitability over time and place restrictions on successful traders. While there has been some evidence of this it doesn’t seem to be widespread otherwise these boards will be full of traders complaining.
Haven't heard this much about SB companies, but there's a lot of anecdotal evidence of D4F doing this - many many complaints on Hemscott and Advfn about this practise - slow quotes/requotes against you etc. I'm fairly sure I've read a couple of compaints on Advfn about users having SB accounts closed, allegedly because they were too successful.
Still not clear to me either what BBB means by managing the account though - look forward to some clarification/explanation of that.