CSI - Spreadbetting

jkplay

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Hi

I did originally post my own examples but realize that it is inflammatory so decided yet get rid of them...

This is a thread for discussing the various rumors and stigmas that are attached to financial spreadbetting and debating weather they are true or not.

1. Are they betting against individuals?
2. Do they make money when you loose money?
3. Do they treat clients differently depending on how much money they make?
4. Do they manipulate the market to hit stops? (baring in mind the price you get online is the same as everybody else who uses them... arb opportunity anyone?)
5. Why would you use any other method of investing other than spreadbetting?

Please add more aswell...

I look forward to your thoughts.

JK
 
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On reflection picking apart opinions of members is bad form and you will notice I have changed both of those posts.

Fair enough and I will delete my previous post
 
The name of the company is none of your business but I work on the corporate dealing desk for an independent broker.

On reflection picking apart opinions of members is bad form and you will notice I have changed both of those posts.

JK

I've deleted my post too.

Still puzzled about the purpose of this thread................
 
Still puzzled about the purpose of this thread................

Simple... to answer the questions above, im sure we will get varied examples and views. If you have no interest in the answers or don't have an opinion then please don't continue to post.

I am sure most of the topics have been discussed on various threads but thought it would be a good idea to have it all in one post instead of scattered around the forum.

JK
 
This is a thread for discussing the various rumors and stigmas that are attached to financial spreadbetting and debating weather they are true or not.

1. Are they betting against individuals?
2. Do they make money when you loose money?
3. Do they treat clients differently depending on how much money they make?
4. Do they manipulate the market to hit stops? (baring in mind the price you get online is the same as everybody else who uses them... arb opportunity anyone?)
5. Why would you use any other method of investing other than spreadbetting?

JK

Ok, I see those questions haven't sparked the response I expected!!

Here is my opinion.

1. No they are not. They have no reason to do so. They make a market around the underlying instruments and accept orders. As their price moves up or down as does the underlying instrument and all that matters is that you guess in the right direction.

2. No they don't. Your order would make up a tiny part of an overall book that is hedged accordingly in the underlying markets. They want you to win money so you keep trading and keep paying the spread and overnight financing charges.

3. If you are fortunate enough to make a lot of money with them then it makes no dent in their pockets. As you are part of a very large book that is hedged overall their exposure is covered and the money you made is the same as the money they made in the market, just as the amount you loose is the same as how much they stand to loose in the underlying market.

4. Market maker manipulation is not something you can only blame sb companies for. The market makers they deal through could be manipulating the market and the SB firm has to mirror their movements. The price feed you get on your screen is the same as all of their clients and if they where to drop the market 50 points to hit your stop another trader would say ''thanks for the arbitrage opportunity!!''.

5. Well I honestly don't see any reason to use any other method. I do have a portfolio of stocks but they are a very long term investment. Anything under 3 months goes through the SB for me. I can understand why people use level 2 data for analysis as it is good to keep an eye on the order books. DMA CFD's are only worthwhile if you are trading ALOT of volume and need to have pure transparency when investing your money.

I look forward to your opinions.

JK
 
Answers

Hi

I did originally post my own examples but realize that it is inflammatory so decided yet get rid of them...

This is a thread for discussing the various rumors and stigmas that are attached to financial spreadbetting and debating weather they are true or not.

1. Are they betting against individuals?
Not in the traditional way. In "Reminiscences of a Stock Operator", bucket shops are said to have their brokers go to the exchange and put through a very high (low) trade to stop out clients when the bucket shop had a large net short (long) position. I think that SB companies simply hedge net exposure and make money on the spreads.

2. Do they make money when you loose money?
Yes. However, the net long/short position is probably a lot smaller than you would think. Two views make a market, so they probably have very small net exposure compared to the spread income. I'm sure a lot of their profits come from small punters not knowing what they are doing, and repeatedly entering small positions (which don't affect the book risk enough to hedge) and then closing out at a loss. Wins also come out of the SB firms pocket. However, they make money on the spreads, and sometimes on the hedging, so I don't think it is in their interest to make punters lose money.
3. Do they treat clients differently depending on how much money they make?
Yes. They call it "dealer intervention" in the industry. Some firms are fairer in this than others. There are many reasons you can be put on dealer intervention, but firms are reluctant to disclose these reasons, and even more reluctant to discuss the matter with clients they have designated in this way. A non exhaustive list of what could get you flagged in this way includes "frequent" or "over trading", trading styles the firm does not like, making substantial profits, only holding very short term positions, or trying to trade on price lags. Bearing in mind that all platforms will have a lagging price from time to time, SB firms must be on the lookout for this. Generally they will err on the side of suspecting that a client is a scalper.

Dealer intervention can be fair or unfair, depending on the firm. Some firms simply use it to check that very active traders or suspected scalpers are only trading on fair prices. However, other firms who do not allow a client to cancel a pending order can use dealer confirm to make risk free money by only filling the orders which have moved against the client in the time it has taken for the dealer to see the order. With most firms, you can cancel a pending order if the price has moved against you.
4. Do they manipulate the market to hit stops? (baring in mind the price you get online is the same as everybody else who uses them... arb opportunity anyone?)
I've a slight suspicion that perhaps not every client gets the same price. However, in the main, SB firms quote a two way price, and therefore it is not in their interest to bias prices more than the spread. Biasing is a natural way to mitigate market and book risk, and MMs at the exchange do it all the time. Some SB firms do this, others do not. However, it is not in an SB firms interest to quote a price greater than the spread away from the underlying risk. In short, they don't care where the stops are, and only know where the stops are if they have hedged and have their own stops in the market.

Further, this stop hunting myth is made worse by the fact that there is a spread around the underlying mid price. In some instruments (the quarterlies for example), the spread is quite wide. Also, the average of the lowest bid / offer will not necessarily correspond to the print of the lowest trade. Add the spread to this, and people wonder why they were stopped out of their long at X when their Direct Access chart shows the lowest trade price as being X+6.

5. Why would you use any other method of investing other than spreadbetting?

  1. You need an advisory service, not execution only
  2. You want to make the spread by buying the bid and selling the offer
  3. You are a very very frequent trader, and want lower commissions / spreads
  4. You want to trade commodities other than gold or crude, in which case the mini futures are more cost effective in some cases
  5. You don't trust the bucket shops
  6. You want to exercise voting rights, etc in a stock
  7. You don't want to use (or don't financially qualify for) margined trading
  8. You want to place large orders into the book (see also Eurex flipper)
  9. You want to bid for 50 S&P contracts
  10. You like paying tax
  11. You have a capital gain from the last tax year (or will be selling other investments for a capital gain this year), and want to speculate with the added benefit of being able to write off losses
  12. You don't like the word betting
  13. You used to work in a bucket shop
  14. The bucket shops don't offer the instrument you want to trade
  15. You don't know about spreadbetting
  16. You like to keep share certificates in your drawer
  17. For you, "investing" means buying treasuries, or long only equities if you are feeling adventurous
  18. You are an intermediate / professional customer and fear that the bucket shop will use this to give you short shrift (see also #5)
  19. You are Warren Buffet
  20. Spreadbetting firms "...don't take your business." (this happened to Livermore when he won too much)*

Now a reason for having a spreadbetting account - you have 25k of cash savings, and you realise that you have more protection in an interest bearing spreadbetting account (100% of the first ~30k under FSCS) than you have in the bank (100% of the first ~2k, 90% of the next ~30k). No longer applies thanks to the Rock debacle.

* Then I saw a red-headed man just shove that clerk away from the counter. He leaned across and said to me, `Say, Livermore, you go back to Dolan's. We don't want your business." "Wait until I get my ticket," I said. "I just bought a little B. R. T." "You get no ticket here," he said. By this time other clerks had got behind him and were looking at me. "Don't ever come here to trade. We don't take your business. Understand?"

From Reminiscences of a Stock Operator by Edwin Lefèvre.
 
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One thing I will say is that they don't treat clients differently depending on how much money they make, being put on dealer intervention is a result of ''scapling''.

If you keep taking profitable high stake positions for a very short period of time then this would cause suspicion and probably result with you being put on dealer intervention (we are talking less than 5 mins here). If hold your positions for a reasonable amount of time then dealer intervention shouldn't occur, regardless of how profitable you are.

JK
 
In regards to the fact you suspect they give different prices to different clients.. I don't believe this would be in the interest of the firms. They wouldn't do it because it would take somebody on the dealing team to physically manipulate the price feed for certain clients and this would have to be updated constantly... not worthwile.

I found an interesting interview with some of the top guy's - a bit old though! (lot's more interesting articles on fsb.com aswell!).

http://www.financial-spread-betting.com/Spread-betting-firms.html

JK
 
One thing I will say is that they don't treat clients differently depending on how much money they make, being put on dealer intervention is a result of ''scapling''.

If you keep taking profitable high stake positions for a very short period of time then this would cause suspicion and probably result with you being put on dealer intervention (we are talking less than 5 mins here). If hold your positions for a reasonable amount of time then dealer intervention shouldn't occur, regardless of how profitable you are.

JK

Scalping...that ambiguous term. In DA, it means buying on the bid and selling on the offer if I understand correctly. In SB, it means trading on a latent price.

In my case, I was trading quite regularly in the Dow, at fair size (nothing huge, but enough to make good profits). However, every trade was done on a fair price - I know this because I had a live YM feed running and I was keeping an eye on the best bids and offers - not only because I use order book and time and sales in my trading, but also to make sure the SB firm wasn't skewing their quote!

Perhaps I was suspected of scalping. Doesn't really matter as I use a different firm now. YMMV, DYOR, etc.
 
In regards to the fact you suspect they give different prices to different clients.. I don't believe this would be in the interest of the firms. They wouldn't do it because it would take somebody on the dealing team to physically manipulate the price feed for certain clients and this would have to be updated constantly... not worthwile.

I found an interesting interview with some of the top guy's - a bit old though! (lot's more interesting articles on fsb.com aswell!).

http://www.financial-spread-betting.com/Spread-betting-firms.html

JK

Yeah, I agree with that. I've just heard some real horror stories about SB firms. Sometimes you do wonder...

Logistically it would be a nightmare to do this, however does anyone remember the website of a software company which provides SB firms with their platforms? There was something on the features list which said something along the lines of:

"make extra pips by setting slippage based on market, size, and client type"

It was discussed on T2W at some point. Maybe someone could find the link.
 
Scalping...that ambiguous term. In DA, it means buying on the bid and selling on the offer if I understand correctly. In SB, it means trading on a latent price.

In my case, I was trading quite regularly in the Dow, at fair size (nothing huge, but enough to make good profits). However, every trade was done on a fair price - I know this because I had a live YM feed running and I was keeping an eye on the best bids and offers - not only because I use order book and time and sales in my trading, but also to make sure the SB firm wasn't skewing their quote!

Perhaps I was suspected of scalping. Doesn't really matter as I use a different firm now. YMMV, DYOR, etc.

Fair enough tom. I don't know which firm you where using but I suspect that you where in and out of positions very quickly on a daily basis (with relatively high stakes) and if you kept making money then I can see why they suspected you of scalping.

I think your fair price issue if fine but on a daily basis, with say 25 trades in and out on the dow (I obviously don't know how many you where doing), I think putting you on dealer intervention is justifiable (IMHO)

JK
 
Yeah, I agree with that. I've just heard some real horror stories about SB firms. Sometimes you do wonder...

Logistically it would be a nightmare to do this, however does anyone remember the website of a software company which provides SB firms with their platforms? There was something on the features list which said something along the lines of:

"make extra pips by setting slippage based on market, size, and client type"

It was discussed on T2W at some point. Maybe someone could find the link.

http://www.arielcommunications.co.uk/products.htm
 
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