charliechan
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lol. sb companies do nothing.
i have had various discussions with senior staff, directors etc at spread betting companies from industry contacts. spread betting companies know that the vast majority will lose anyway, so they just make a spread and take your money. no hedging, no nothing. they may sometimes join you in your direction if you are consistently profitable, that thats quite rare. they would rather widen the spread, put you on to phone broking or slow your price feed as there is less risk in doing that!
i have had various discussions with senior staff, directors etc at spread betting companies from industry contacts. spread betting companies know that the vast majority will lose anyway, so they just make a spread and take your money. no hedging, no nothing. they may sometimes join you in your direction if you are consistently profitable, that thats quite rare. they would rather widen the spread, put you on to phone broking or slow your price feed as there is less risk in doing that!
counter_violent
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If you know all the games they play .....it can work to your advantage.....not knowing on the other hand ....leaves you wide open to abuse.....as with all things in life ...naivety, lazy, sloppy thinking.....you will pay the price
Directional
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it is a common misconception that SB firms hedge their exposure.
this is not the case at all, simply because of the way UK based SB firms are taxed. If an SB firm hedges a clients trade, and makes a profit from that hedge, they will be taxed on the profits as cap gains. They cannot offset the profits from the hedge against the losses they make from the clients winning trade. it doesnt work like that.
So SB firms do not want clients to consistently win big, because they lose whether they are hedged or not.
this is not the case at all, simply because of the way UK based SB firms are taxed. If an SB firm hedges a clients trade, and makes a profit from that hedge, they will be taxed on the profits as cap gains. They cannot offset the profits from the hedge against the losses they make from the clients winning trade. it doesnt work like that.
So SB firms do not want clients to consistently win big, because they lose whether they are hedged or not.
LongandWrong
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JasonC2 said:
lol. just cos ur paranoid doesn't mean they ain't out to get you......
NotQuiteRandom
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Nonsense
Tuffty is right.
I have placed 1000s of spread bets over many years and have had very few problems. The assertion that they do not hedge is demonstrably fallacious.
Do not just take my word for it as someone who has enjoyed many conversation on setting risk limits, distributing capital for VaR models etc with several risk managers at spread betting firms. I, like those above, can not be relied upon - such is the nature of the anonymity of a public forum.
The empirical evidence however speaks for itself. Attached is IG Index's audited annual report. To suggest that the assertions contained herein are false would be a very serious charge against both them and their auditors. I invite you to search the document for the word "hedge" and read each paragraph which contains the word.
A randomly selected example of such text follows:
"The group does not take proprietary positions based on an expectation of market movements. The hedging policy includes limits, or a methodology for setting limits, for every single liquid financial market which the group trades, as well as certain groups of markets which the directors consider to be correlated. These limits determine the maximum net exposure arising from client
activity and hedging which the group is prepared to carry. IG’s systems allow it to continually monitor its exposure against these limits. If the group’s exposure exceeds these limits, the policy requires that sufficient hedging is carried out to bring the exposure back within the defined limit.
Changes to the hedging policy require approval by the group’s risk committee, which comprises the chief executive, the finance director and the head of risk. Changes to the hedging policy which may result in a significant increase in market risk require approval of the board."
Though you may charge me with generalising from a single case (IG) I can assure you that the same evidence exists for all publicly accountable participants in the space.
The spread betting firms all provide low cost (relative to the markets + tax) real time market access and a forum through which I am able to make a living having retired from formal business. They are welcome to the large interest spread that they earn on my money and it is this that I tend to regard as the non-standard brokerage charge that I pay to them.
These are reasonable and regulated people operating in a multi-billion pound industry within the financial markets; the quotes they provide reflect the liquidity in the underlying market. When dealing in size (like GBP 50 per point which, on the Dow, would be a circa GBP 600,000 notional value contract) one must expect a slightly wider spread. I fail to see how this could be construed as economically unreasonable.
NQR
Tuffty is right.
I have placed 1000s of spread bets over many years and have had very few problems. The assertion that they do not hedge is demonstrably fallacious.
Do not just take my word for it as someone who has enjoyed many conversation on setting risk limits, distributing capital for VaR models etc with several risk managers at spread betting firms. I, like those above, can not be relied upon - such is the nature of the anonymity of a public forum.
The empirical evidence however speaks for itself. Attached is IG Index's audited annual report. To suggest that the assertions contained herein are false would be a very serious charge against both them and their auditors. I invite you to search the document for the word "hedge" and read each paragraph which contains the word.
A randomly selected example of such text follows:
"The group does not take proprietary positions based on an expectation of market movements. The hedging policy includes limits, or a methodology for setting limits, for every single liquid financial market which the group trades, as well as certain groups of markets which the directors consider to be correlated. These limits determine the maximum net exposure arising from client
activity and hedging which the group is prepared to carry. IG’s systems allow it to continually monitor its exposure against these limits. If the group’s exposure exceeds these limits, the policy requires that sufficient hedging is carried out to bring the exposure back within the defined limit.
Changes to the hedging policy require approval by the group’s risk committee, which comprises the chief executive, the finance director and the head of risk. Changes to the hedging policy which may result in a significant increase in market risk require approval of the board."
Though you may charge me with generalising from a single case (IG) I can assure you that the same evidence exists for all publicly accountable participants in the space.
The spread betting firms all provide low cost (relative to the markets + tax) real time market access and a forum through which I am able to make a living having retired from formal business. They are welcome to the large interest spread that they earn on my money and it is this that I tend to regard as the non-standard brokerage charge that I pay to them.
These are reasonable and regulated people operating in a multi-billion pound industry within the financial markets; the quotes they provide reflect the liquidity in the underlying market. When dealing in size (like GBP 50 per point which, on the Dow, would be a circa GBP 600,000 notional value contract) one must expect a slightly wider spread. I fail to see how this could be construed as economically unreasonable.
NQR
the blades
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Good post NQR.
At the risk of being accused of being a lazy thinker (actually, that's quite true );
Who cares what the SB company does with the opposite side of your bet?
Who cares if they actually want you to lose? - I'm sure they do, though they'd easily follow a profitable client (scalpers aside who probably shouldn't spreadbet) given the fact that profitable traders are quite rare.
What matters is that you are offered a fair price at both ends of the deaL.....No?
One question that someone may answer - if prices are skewed, which way do they skew them? Is it accepted that they have a better angle on market direction and if so, why not make money in the markets rather than wasting time offering a book?
UTB
At the risk of being accused of being a lazy thinker (actually, that's quite true
);Who cares what the SB company does with the opposite side of your bet?
Who cares if they actually want you to lose? - I'm sure they do, though they'd easily follow a profitable client (scalpers aside who probably shouldn't spreadbet) given the fact that profitable traders are quite rare.
What matters is that you are offered a fair price at both ends of the deaL.....No?
One question that someone may answer - if prices are skewed, which way do they skew them? Is it accepted that they have a better angle on market direction and if so, why not make money in the markets rather than wasting time offering a book?
UTB
Directional
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I'll clarify the statement I made earlier that the line SB firms feed to punters "we dont care if you win or lose because we're always hedged" is a misnomer that SB firms feed to punters who dont really know what they do.
I've been to IG floor and seen their "exposure-o-meter" which indicates whether they have a net long or net short position on the sum of all bets on any particular market. if it passes a limit in one or other direction, they start looking to hedge off excess exposure, but they told me that most exposure is "hedged" by other punters and rarely would they look to offset in the underlying markets because they seldom need to.
Bearing in mind that when they hedge in the underlying, they cannot truly hedge exposure because they will pay tax on hedge profits. If they were to compensate by taking a larger position to make up for the tax, it wouldnt be a true hedge because if the market ran against their hedged "leg" in the underlying they would lose more in the underlying than they would make from the open bets.
I've been to IG floor and seen their "exposure-o-meter" which indicates whether they have a net long or net short position on the sum of all bets on any particular market. if it passes a limit in one or other direction, they start looking to hedge off excess exposure, but they told me that most exposure is "hedged" by other punters and rarely would they look to offset in the underlying markets because they seldom need to.
Bearing in mind that when they hedge in the underlying, they cannot truly hedge exposure because they will pay tax on hedge profits. If they were to compensate by taking a larger position to make up for the tax, it wouldnt be a true hedge because if the market ran against their hedged "leg" in the underlying they would lose more in the underlying than they would make from the open bets.
NotQuiteRandom
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Arbitrager, I agree that your analysis is valid.
Tax distorts their position relative to their client's and they do a lot of offsetting from client A to client B.
With respect, I think that your commentary (notably use of the word 'seldom') implies a lower amount of hedging than is the case. Without the data to quantify it precisely we can not objectify the correct strength of language to apply to the frequency of hedging. However, I note from their report that they have GBP 121.8657million in working capital and that, according to the note to that entry in the accounts:
"One of the main elements of working capital is amounts due from the brokers and other counterparties with whom the group hedges its financial business. The group places cash or treasury bills with these brokers in order to provide initial and variation margin to support its positions. This has increased significantly in the year under review as the magnitude of client positions has increased."
As they don't tell us how much they keep on deposit as margin with their brokers and only say that it is a "main element" of the GBP 122 million we can not be certain as to the notional value of their hedges. It is certain however that, assuming normal leverage in the futures markets in which they hedge there is quite some size being done.
In short, I think that it is clear that they do participate in a sizable way in the underlying markets in order to hedge but, in the long term, most retail clients lose as they don't have the money or skills not to.
The nature of gamblers is such that they have a very strong tendency to play a game to its conclusion, as a consequence of their inherently optimistic demeanour. This assumption allows one to calculate the "market's" advantage against each individual trader.
If one trader's capital is c and another player's is C, then the probability that the player who began with c runs his account down to zero in a fair game played to conclusion is C/(c+C) and therefore that the probability that he will ruin his opponent is c/(C+c). Not pretty for Joe Public with little or no edge!
The hedging enables the SB firms to keep a low variance of returns but, in the long term, is rarely a mathematical necessity.
Tax distorts their position relative to their client's and they do a lot of offsetting from client A to client B.
With respect, I think that your commentary (notably use of the word 'seldom') implies a lower amount of hedging than is the case. Without the data to quantify it precisely we can not objectify the correct strength of language to apply to the frequency of hedging. However, I note from their report that they have GBP 121.8657million in working capital and that, according to the note to that entry in the accounts:
"One of the main elements of working capital is amounts due from the brokers and other counterparties with whom the group hedges its financial business. The group places cash or treasury bills with these brokers in order to provide initial and variation margin to support its positions. This has increased significantly in the year under review as the magnitude of client positions has increased."
As they don't tell us how much they keep on deposit as margin with their brokers and only say that it is a "main element" of the GBP 122 million we can not be certain as to the notional value of their hedges. It is certain however that, assuming normal leverage in the futures markets in which they hedge there is quite some size being done.
In short, I think that it is clear that they do participate in a sizable way in the underlying markets in order to hedge but, in the long term, most retail clients lose as they don't have the money or skills not to.
The nature of gamblers is such that they have a very strong tendency to play a game to its conclusion, as a consequence of their inherently optimistic demeanour. This assumption allows one to calculate the "market's" advantage against each individual trader.
If one trader's capital is c and another player's is C, then the probability that the player who began with c runs his account down to zero in a fair game played to conclusion is C/(c+C) and therefore that the probability that he will ruin his opponent is c/(C+c). Not pretty for Joe Public with little or no edge!
The hedging enables the SB firms to keep a low variance of returns but, in the long term, is rarely a mathematical necessity.
the blades
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Arbitrageur said:
Thanks for the clarification. The above paragraph surely nails the myth that they would need to squash any winners. Whatever their opinion on winners and losers, they always profit from the spread. Assuming their clients hedge each other, then they have a sound business model without the need to price customers out of the business.
I wonder how many spreadbetters (let's face it, it will attract a higher percentage of new starters) fail because they have no edge to overcome the spread, or their emotions? Throw in a more complicated pricing structure (cost of carry, dividends, market spread, SB spread) and you have a slightly different price to blame the spreadbet company for when you lose. After all, it couldn't possibly be your inability, could it?
UTB
NotQuiteRandom
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Indeed 'the blades' hits on an interesting and increasingly popular sociological phenomenon characterised in the following phrases:
"It's not my fault"
"I was cheated"
"How could I have made a poor decision? Not possible"
"If John can trade profitably, so can I"
A poor tradesman blames his tools and some people are just not up to the task of profitable trading. It is not easy as it requires a lot of research and discipline. Still, if it goes wrong, you can always blame your broker despite all evidence of blame being to the contrary.
NQR
"It's not my fault"
"I was cheated"
"How could I have made a poor decision? Not possible"
"If John can trade profitably, so can I"
A poor tradesman blames his tools and some people are just not up to the task of profitable trading. It is not easy as it requires a lot of research and discipline. Still, if it goes wrong, you can always blame your broker despite all evidence of blame being to the contrary.
NQR
Directional
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NotQuiteRandom said:
this, and the rest of your post and the prior one too, is great info! cheers!
NotQuiteRandom
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A little reality, if nothing else.
Connie Brown
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Quite possibly, but the quoted text you provide is no such demonstration.NotQuiteRandom said:
Without a full disclosure on what these limits might be for each of the liquid financial markets which the company trades, there is no way to tell at what level hedging operations are initiated or to what extent. Or indeed, ever have been.NotQuiteRandom said:
Perhaps this detail is buried elsewhere in the document you attach which I admit to not yet having had the time to review.
I agree with other posters that it should not make a great deal of difference to the client how the company chooses to allocate and maintain its risk at any given time (other than when they get it badly wrong of course), providing they are offering their service within agreed guidelines. Similarly those that choose to use these types of companies have the same options as others so we can assume they have had the same opportunities to thoroughly research alternatives and have found an SB meets a part or the entirety of their trading needs.
Your comment on those who would blame the SB for their own lack of success is as valid with these types of company as with any form of brokerage. That has always been the case and human nature will ensure it will continue to be so. But it is interesting that regardless of any validity to claims of underhand manipulation of clients by the SBs, they (the SBs) do seem to attract a disproportionate amount of negative comment compared with other forms of trading operations facilitation. This is less likely to be related to numbers of clients and much more possibly due to the relatively low capital base of the average SB player - and the resultant probability for their long-term success this implies.
NotQuiteRandom
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Read the document, consider the size of funds on deposit with brokers / OTC counterparties and consider the nature of the author of negative commentary. The quoted text is only indicative of the fuller content of the material.
I do not have sufficient time to walk you through the details of the documents or those available at http://www.iggroup.com/content/ii_index.html but I am confident that any sensible analysis of the available material will yield my conclusions. Note also that I have placed many thousands of spread bets over many years.
I am sure that there are people from spreadbetting companies present on these forums who will validate all of my analysis above.
NQR
I do not have sufficient time to walk you through the details of the documents or those available at http://www.iggroup.com/content/ii_index.html but I am confident that any sensible analysis of the available material will yield my conclusions. Note also that I have placed many thousands of spread bets over many years.
I am sure that there are people from spreadbetting companies present on these forums who will validate all of my analysis above.
NQR
NotQuiteRandom
Thanks for attaching the annual report for IG, which was an interesting read. A few of the threads on this board refer to the document they published when coming back to market which details theire specific strategy RE hedging - I have searched to no avail and cannot find it. DO you have a copy or know where I might locate one?
Thanks in advance
Matt
Thanks for attaching the annual report for IG, which was an interesting read. A few of the threads on this board refer to the document they published when coming back to market which details theire specific strategy RE hedging - I have searched to no avail and cannot find it. DO you have a copy or know where I might locate one?
Thanks in advance
Matt
