Several people on this thread suggest going direct access. Can somebody tell how I could do this, what is the minimum I would need to be betting to make it worthwhile, would I pay commission, and will I always get the price I see? Does anyone know of a website I could visit to see this in operation?
stevespray
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I should like to suggest that everybody has a read about Jessie L Livermore and his experiences with the ‘Bucket Shops’ in the late 1800’s / early 1900’s. Direct comparisons can be made between the modern day Spreadbetting Companies and the Bucket Shops. It’s a similar pattern of evolution which is simply taking place 100 years later. It is another example of a cycle repeating itself.
The fact is that computers could match and process deals far quicker than the human intervention that many of the spreadbetting companies use. Computers are also much cheaper, don’t demand a salary and don’t take lunch breaks. Staff are paid to process orders because it is financially viable for them to do so. Experienced customers will always be able to take advantage of certain market conditions if they are allowed to do so. By this I mean that fast execution does, under certain circumstances, benefit the customer which is of course to the detriment of the company offering the market.
This is where the delay in execution is particularly useful to the spreadbetting company. While your order is waiting to be executed the dealer effectively has the gift of hindsight in deciding whether to allow your order to pass at the originally quoted level. In effect this advantage, over a period of time, has the effect of making the spread slightly larger than is quoted. The obvious result is an increase in the cost of trading which is a cost shouldered purely by the customer.
I notice also that a debate has blown up again over the subject of hedging. Over the years I have spoken to many of the different companies about this. It is my opinion that only a very small percentage of bets are hedged. Most companies will have a limit set for their order book for certain markets. That means that they will always try to hedge anything which takes their order book beyond that limit. The big companies will hedge very little in their main markets. Most of their profits are derived from customers who ‘get it wrong’. Some markets are very hard to hedge. Think of house prices / binaries etc – it’s my guess that this exposure is completely unhedged. If you become effective in making money in a market which isn’t easily hedged then it makes financial sense for the book maker to drive you away. (re Livermore and the Bucket Shops). In that sense we’re talking about shorter time frame bets rather than longer swing or position trades lasting weeks.
Direct Access is certainly the best way forward. Once you try it you’ll never go back.
Steve.
The fact is that computers could match and process deals far quicker than the human intervention that many of the spreadbetting companies use. Computers are also much cheaper, don’t demand a salary and don’t take lunch breaks. Staff are paid to process orders because it is financially viable for them to do so. Experienced customers will always be able to take advantage of certain market conditions if they are allowed to do so. By this I mean that fast execution does, under certain circumstances, benefit the customer which is of course to the detriment of the company offering the market.
This is where the delay in execution is particularly useful to the spreadbetting company. While your order is waiting to be executed the dealer effectively has the gift of hindsight in deciding whether to allow your order to pass at the originally quoted level. In effect this advantage, over a period of time, has the effect of making the spread slightly larger than is quoted. The obvious result is an increase in the cost of trading which is a cost shouldered purely by the customer.
I notice also that a debate has blown up again over the subject of hedging. Over the years I have spoken to many of the different companies about this. It is my opinion that only a very small percentage of bets are hedged. Most companies will have a limit set for their order book for certain markets. That means that they will always try to hedge anything which takes their order book beyond that limit. The big companies will hedge very little in their main markets. Most of their profits are derived from customers who ‘get it wrong’. Some markets are very hard to hedge. Think of house prices / binaries etc – it’s my guess that this exposure is completely unhedged. If you become effective in making money in a market which isn’t easily hedged then it makes financial sense for the book maker to drive you away. (re Livermore and the Bucket Shops). In that sense we’re talking about shorter time frame bets rather than longer swing or position trades lasting weeks.
Direct Access is certainly the best way forward. Once you try it you’ll never go back.
Steve.
the blades
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the thing that I can never get my head around - one thing just about everyone agrees on - 90% of traders lose money. Even 90% of fund managers, with vast resources, fail to beat the index. And the SB companies benefit from this.
Then come along the 10% - a rare breed (we all agree?). You run a SB company and have two choices;
1 - freeze out these rare individuals som they go elsewhere and impart their wisdom on another "victim".
2 - either mirror or hedge their trades and profit from them, after all, you've got the stats to back up that their system is profitable, rather than advertising speel.
Why would anyone choose option 1?
For me, the facts are straight forward. The tax I would pay on my profits are greater than the entire cost of spread from the market or SB company. Until I suffer the ills suggested in the thread, SB is definitely the way forward for me.
But we're all different as they say.
UTB
Then come along the 10% - a rare breed (we all agree?). You run a SB company and have two choices;
1 - freeze out these rare individuals som they go elsewhere and impart their wisdom on another "victim".
2 - either mirror or hedge their trades and profit from them, after all, you've got the stats to back up that their system is profitable, rather than advertising speel.
Why would anyone choose option 1?
For me, the facts are straight forward. The tax I would pay on my profits are greater than the entire cost of spread from the market or SB company. Until I suffer the ills suggested in the thread, SB is definitely the way forward for me.
But we're all different as they say.
UTB
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stevespray
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The Blades….
I’ll try and answer a few of your questions.
Firstly I would point out that the same arguments could have been levelled at the Bucket Shops in Livermore’s time – Why didn't they simply copy cat Livermore’s instructions not only to an extend where they were hedged but to a point where the Bucket Shop was positioned with Livermore – the fact is that they didn't, most likely because that wasn’t in their business model.
My guess is that the same could be true of some of the Spreadbetting companies. There are also a number of other points. The companies which offer very tight spreads would find it more or less impossible to make any money if they hedged positions. Quite often the companies quote is the same as the underlying market. It is also possible that they may not be able to hedge quickly enough. Some folks for example are experts at reading L2 in certain stocks. Quite often they will spot a cascading price and join it quickly, quite often it is not possible for the company to take a similar position in the time available. By that I mean that in the time it takes for the punter to open his bet the position is already showing a breakeven or a profit. There is where the problem lies when a spreadbetting company takes on an experienced market participant who trades in such a manner. He or she may be an expert in only a few markets which they watch for many hours a day and also monitor with expensive software. The spreadbetting company however makes thousands of different prices and can not therefore be an expert in them all. The net result is that, in some cases, the company finds it necessary to manually process certain customers orders in certain markets. This manual process adds time to execution which gives them time to inspect the order. For example, if an ‘OBL has been found’ rumour broke then it would be ‘sensible’ for a certain company to slow down its order flow in many of its markets purely because the market would suddenly make a very easy long. I hope that you get the picture. The bottom line is that split second timing can, in certain cases, make the difference between a successful trade and a losing one. The spreadbet companies are very aware of that.
You comments also fail to cover the ‘grey markets’ which many of the companies offer. In a grey market the spreadbetting company is your direct counterpart. Things like digital options (or binaries as they are often called) and also out of hours index quotes can not be hedged as there is no underlying market in which to hedge. This means that the winning punter directly costs the bookie.
You mention that spreadbetting is ‘the way forward’ for yourself personally. This may be very true. You need to remember that the path that a successful trader takes is one of continual evolution. As you point out, you would re-evaluate this situation if something nasty happened or you were mistreated. In my opinion, the longer you trade and the larger your size gets, the more likely that it is that you will start to suffer. The same rule could be applied to the tax scenario which you briefly cover. When you bet small and use the winnings to supplement a proper taxable income the tax man is unlikely to be interested. My personal accountant (plus casual enquiries of a senior tax inspector at my local Bristol Tax Office) have both suggested that you can be placed under the status of ‘Professional Gambler’. There are people in the UK currently taxed under this status. I have been advised that if you were to move into a situation where your winnings from spreadbetting were you only income then you would be soon risk being investigated as your Income Tax contributions would drop to zero. Obviously I am neither a tax inspector or an accountant, I am purely passing on information which has be revealed to me.
I take you point regarding tax but would point out that it is not as simple as ‘paying the extra spread’ in order to remove tax liability. There are some pretty large psychological issues also involved. With larger spreads the cost of trading increases dramatically, as does the will power required to close losing trades quickly (hence losing the large spread). This is where Direct Access scores its biggest advantage for me personally. The cost of opening a trade is tiny, often on Dow and S&P Emini’s it is actually only the cost of the brokerage (about $1.60 per contract). This extremely low cost makes it psychologically very easy to close bad trades very quickly. When I trade short term moves, looking at Dow for moves of between 6 and 20 odd points, I use time as a key factor in determining if I should run or close the position. Quite often I will close a trade for a loss of a few ticks after only being in the trade for 7 or 8 minutes. On that basis spreadbetting would be completely unsuitable for my short term trading methods as a losing trade would set me back a minimum of 10 points. The tight spreads and rapid executions are the key to success of that particular system.
Hope this helps,
Steve.
I’ll try and answer a few of your questions.
Firstly I would point out that the same arguments could have been levelled at the Bucket Shops in Livermore’s time – Why didn't they simply copy cat Livermore’s instructions not only to an extend where they were hedged but to a point where the Bucket Shop was positioned with Livermore – the fact is that they didn't, most likely because that wasn’t in their business model.
My guess is that the same could be true of some of the Spreadbetting companies. There are also a number of other points. The companies which offer very tight spreads would find it more or less impossible to make any money if they hedged positions. Quite often the companies quote is the same as the underlying market. It is also possible that they may not be able to hedge quickly enough. Some folks for example are experts at reading L2 in certain stocks. Quite often they will spot a cascading price and join it quickly, quite often it is not possible for the company to take a similar position in the time available. By that I mean that in the time it takes for the punter to open his bet the position is already showing a breakeven or a profit. There is where the problem lies when a spreadbetting company takes on an experienced market participant who trades in such a manner. He or she may be an expert in only a few markets which they watch for many hours a day and also monitor with expensive software. The spreadbetting company however makes thousands of different prices and can not therefore be an expert in them all. The net result is that, in some cases, the company finds it necessary to manually process certain customers orders in certain markets. This manual process adds time to execution which gives them time to inspect the order. For example, if an ‘OBL has been found’ rumour broke then it would be ‘sensible’ for a certain company to slow down its order flow in many of its markets purely because the market would suddenly make a very easy long. I hope that you get the picture. The bottom line is that split second timing can, in certain cases, make the difference between a successful trade and a losing one. The spreadbet companies are very aware of that.
You comments also fail to cover the ‘grey markets’ which many of the companies offer. In a grey market the spreadbetting company is your direct counterpart. Things like digital options (or binaries as they are often called) and also out of hours index quotes can not be hedged as there is no underlying market in which to hedge. This means that the winning punter directly costs the bookie.
You mention that spreadbetting is ‘the way forward’ for yourself personally. This may be very true. You need to remember that the path that a successful trader takes is one of continual evolution. As you point out, you would re-evaluate this situation if something nasty happened or you were mistreated. In my opinion, the longer you trade and the larger your size gets, the more likely that it is that you will start to suffer. The same rule could be applied to the tax scenario which you briefly cover. When you bet small and use the winnings to supplement a proper taxable income the tax man is unlikely to be interested. My personal accountant (plus casual enquiries of a senior tax inspector at my local Bristol Tax Office) have both suggested that you can be placed under the status of ‘Professional Gambler’. There are people in the UK currently taxed under this status. I have been advised that if you were to move into a situation where your winnings from spreadbetting were you only income then you would be soon risk being investigated as your Income Tax contributions would drop to zero. Obviously I am neither a tax inspector or an accountant, I am purely passing on information which has be revealed to me.
I take you point regarding tax but would point out that it is not as simple as ‘paying the extra spread’ in order to remove tax liability. There are some pretty large psychological issues also involved. With larger spreads the cost of trading increases dramatically, as does the will power required to close losing trades quickly (hence losing the large spread). This is where Direct Access scores its biggest advantage for me personally. The cost of opening a trade is tiny, often on Dow and S&P Emini’s it is actually only the cost of the brokerage (about $1.60 per contract). This extremely low cost makes it psychologically very easy to close bad trades very quickly. When I trade short term moves, looking at Dow for moves of between 6 and 20 odd points, I use time as a key factor in determining if I should run or close the position. Quite often I will close a trade for a loss of a few ticks after only being in the trade for 7 or 8 minutes. On that basis spreadbetting would be completely unsuitable for my short term trading methods as a losing trade would set me back a minimum of 10 points. The tight spreads and rapid executions are the key to success of that particular system.
Hope this helps,
Steve.
starspacer
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Good posts Stevespray. Personally, I have found a certain D4* to take forever accepting the order, so I use them less and less. Occasionally, I will 'sting' them in quiet markets and get some satisfaction from this, but by and large, they usually get a couple of pips more out of me than the spread.
As you rightly say, Direct Access is the way, particularly for day traders. SBing just stacks the odds against the day trader.
Having said that, I have never had a problem with CS, so perhaps they are the exception.
As you rightly say, Direct Access is the way, particularly for day traders. SBing just stacks the odds against the day trader.
Having said that, I have never had a problem with CS, so perhaps they are the exception.
the blades
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Steve,
thanks for the reply.
Regarding the costs of hedging - surely 90% wouldn't need hedging? And would you not overtrade in the direction of winning traders and profit further (other than the split second decisions, to which I take your point)? Regarding the grey market - I wouldn't know to be honest. I'm sure they really do stack the odds against you here, but that doesn't matter in my situation.
To be honest, I've no way of knowing how the SB co's operate and what they may or may not try to do. I can't ignore anecdotal evidence that suggests they make life difficult for winners. I've been profitable for several years, yet only recently have started "trading" with a size of pot that may cause them concern.
Time will tell - but I also can't ignore the facts that I would pay tax on my gains and the tax free element outweighs all other factors for me. One day I will have to answer the sole income question, though I have some ideas as to how you could work around this.
I hold for several months with larger profit per trade ratio's so larger spreads do not hit me as hard - I couldn't imagine short term trading (shares) through SB, though some do I believe.
As for the size of my trades - my system generates many signals (quantity not quality?)so it's easy for me to hold more positions than only a few larger ones. I'd hazard a guess that I trade well above the average pot size, albeit made up from many smaller positions, again without problem up to now.
But I have no hidden agenda in defending SB co's. At the moment it is the most cost effective way for me to trade. If that situation changes, so will my instrument (ooh err).
All the best,
the blades
PS - what's the record for the lowest number of stars?
thanks for the reply.
Regarding the costs of hedging - surely 90% wouldn't need hedging? And would you not overtrade in the direction of winning traders and profit further (other than the split second decisions, to which I take your point)? Regarding the grey market - I wouldn't know to be honest. I'm sure they really do stack the odds against you here, but that doesn't matter in my situation.
To be honest, I've no way of knowing how the SB co's operate and what they may or may not try to do. I can't ignore anecdotal evidence that suggests they make life difficult for winners. I've been profitable for several years, yet only recently have started "trading" with a size of pot that may cause them concern.
Time will tell - but I also can't ignore the facts that I would pay tax on my gains and the tax free element outweighs all other factors for me. One day I will have to answer the sole income question, though I have some ideas as to how you could work around this.
I hold for several months with larger profit per trade ratio's so larger spreads do not hit me as hard - I couldn't imagine short term trading (shares) through SB, though some do I believe.
As for the size of my trades - my system generates many signals (quantity not quality?)so it's easy for me to hold more positions than only a few larger ones. I'd hazard a guess that I trade well above the average pot size, albeit made up from many smaller positions, again without problem up to now.
But I have no hidden agenda in defending SB co's. At the moment it is the most cost effective way for me to trade. If that situation changes, so will my instrument (ooh err).
All the best,
the blades
PS - what's the record for the lowest number of stars?
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compters are not 100% customer friendly , one may have a bigger advantage using the phone sometimes.
that's why you get delays and such on the screen price , if they don't like it , gives them time to change it.
whereas on the phone , you can't do that unless you want to risk lying barefaced over a tape recorder.
I gurantee you that most SB's don't hedge the majority of bets - this is a old debate - use search.
and sometimes they ride winners but usually they won't , why ? well why risk anything when you can get it free ? riding someone else still has risk to it , albeit a small one. far better to wait for the next sucker who buys highs and sells lows.
that's why you get delays and such on the screen price , if they don't like it , gives them time to change it.
whereas on the phone , you can't do that unless you want to risk lying barefaced over a tape recorder.
I gurantee you that most SB's don't hedge the majority of bets - this is a old debate - use search.
and sometimes they ride winners but usually they won't , why ? well why risk anything when you can get it free ? riding someone else still has risk to it , albeit a small one. far better to wait for the next sucker who buys highs and sells lows.
Hi juanbyte,
What is your opinon on trading with interactive brokerages (DA?) considering you
lose the tax-free benefits of spreadbetting?
Are you happy for the Inland revenue to take 20-40% capital gains tax in favor
of really tight .5pt -1.0pt spreads? and presumably an easier way to profit?
(I'm referring to FTSE trading in particular)
Ash.
What is your opinon on trading with interactive brokerages (DA?) considering you
lose the tax-free benefits of spreadbetting?
Are you happy for the Inland revenue to take 20-40% capital gains tax in favor
of really tight .5pt -1.0pt spreads? and presumably an easier way to profit?
(I'm referring to FTSE trading in particular)
Ash.
