For those of you who think that spread betting firms only make money if you lose.

[TheBramble]

They will not (if they do, very low percentage) trade against the client in thinking they will win he will lose.

I'm not talking about them trading against their clients. I'm simply pointing out they don't need to in order to make risk free and instantaneous profit.

Regardless of volatility they can comfortably pocket the spread.

 

[TheBramble]

@ Hotch & Bramble
Does your hypothesis not hinge on punters' collective size weighted directional bias being random rather than skewed?

What hypothesis?

At any given time the SB’s aggregate outright exposure can be anywhere on the +/- spectrum. The reason it is whatever it is at any given time is irrelevant: Random, biased, skewed, market forces, human emotions. Doesn’t matter.

The SB will still have made the spread on every trade transacted.

The SB will have adjusted the spread to encompass volatility and will have done so at prices well outside those provided to it by its liquidity providers. Safe. Very safe.

Whether they choose to hedge all/part/none of any outright exposure will be a case-by-case decision based on whatever operational parameters that have in force at the time.

I suspect I missed your point.

 

[Ross Spur]

It's not just a matter of offsetting their overall position and hedging that with the underlying market. I suspect that the platforms analyse trade patterns to work out how/when/what/who to hedge.

 

[gle101]

I'm not talking about them trading against their clients. I'm simply pointing out they don't need to in order to make risk free and instantaneous profit.

Regardless of volatility they can comfortably pocket the spread.

Sorry, then I misunderstood your point.

____________
"Take control with Risk & Money Management"

 

[donaldduke]

You really haven't thought much about it.

The common mistake is to forget that the world doesn't revolve around you, and that they have more than one customer.

Customer A goes long the FTSE @ 12pm @ £10/point, pays his £20 in spread charge.
Customer B goes short the FTSE @ 12pm @ £6/point, pays his £12 in spread charge.
Customer C goes short the FTSE @ 12pm @ £4/point, pays his £9 in spread charge.

Firm's up £41, when they close they'll be up another £41. The great thing is, they've got no exposure. If you're winning at spreadbetting, you're not taking it off the company, you're taking it off some other muppet.

FTSE Market rallies 20pts from 12pm to 12:15pm, Customer A takes a 20 pip profit. The SB firm pays out £200.

Market then falls 40 pts, by 12:30pm. Customers B and C close out for a profit. The SB firm pay outs another £200.

SB firm collects £40 in spread but pays out £400 in p&l.

The trades were all closed out too quickly and the SB firm didnt have enough time to hedge the exposure.

 

[TheBramble]

It's not just a matter of offsetting their overall position and hedging that with the underlying market. I suspect that the platforms analyse trade patterns to work out how/when/what/who to hedge.

Yes, they do.

 

[gle101]

It's not just a matter of offsetting their overall position and hedging that with the underlying market. I suspect that the platforms analyse trade patterns to work out how/when/what/who to hedge.

I don't know, I think it is quite simple, when a certain percentage have not been hedge, the system will automatically hedge it in the real market.

____________
"Take control with Risk & Money Management"

 

[tar]

I don't know, I think it is quite simple, when a certain percentage have not been hedge, the system will automatically hedge it in the real market.

____________
"Take control with Risk & Money Management"

If you read my report link you will see that their market exposure is not zero or at least not always , they allow a market exposure up to a certain threshold , it depends on the market , in another words they are making money from clients losses like ladbrokes fact , if they hedge every trade then it will be called STP , which is not the case with SB brokers ...

 

[Hotch]

FTSE Market rallies 20pts from 12pm to 12:15pm, Customer A takes a 20 pip profit. The SB firm pays out £200.

Market then falls 40 pts, by 12:30pm. Customers B and C close out for a profit. The SB firm pay outs another £200.

SB firm collects £40 in spread but pays out £400 in p&l.

The trades were all closed out too quickly and the SB firm didnt have enough time to hedge the exposure.

Woosh!

 

[scose-no-doubt]

FTSE Market rallies 20pts from 12pm to 12:15pm, Customer A takes a 20 pip profit. The SB firm pays out £200.

Market then falls 40 pts, by 12:30pm. Customers B and C close out for a profit. The SB firm pay outs another £200.

SB firm collects £40 in spread but pays out £400 in p&l.

The trades were all closed out too quickly and the SB firm didnt have enough time to hedge the exposure.

This is what I was trying to get at. It all depends how the punters are positioned at any given time.

I would guess that the spread money is used as 1) a buffer to absorb volatility and 2) capital for leveraged up hedging/profit lock ins.
I don't think that the firms aim to make money off of the spread, I think they use spreads as working capital.

 

[donaldduke]

If you read my report link you will see that their market exposure is not zero or at least not always , they allow a market exposure up to a certain threshold , it depends on the market , in another words they are making money from clients losses like ladbrokes fact , if they hedge every trade then it will be called STP , which is not the case with SB brokers ...

Exactly, the SB often have a net exposure. They are happy with a net exposure as they know this exposure is dumb money (losing traders).

How do they know this?. Because they have different order handling criteria for their large size profitable punters ie Those clients can be hedged (in the underlying market) on every trade they make (there aren't that many of them after all)

 

[tar]

How do they know this?. Because they have different order handling criteria for large profitable punters ie Those clients can be hedged on every trade they make (there aren't that many of them after all)

I wouldn't be surprised if clients are connected to different servers based on their profitability ...

 

[Sidekicker]

FTSE Market rallies 20pts from 12pm to 12:15pm, Customer A takes a 20 pip profit. The SB firm pays out £200.

Market then falls 40 pts, by 12:30pm. Customers B and C close out for a profit. The SB firm pay outs another £200.

SB firm collects £40 in spread but pays out £400 in p&l.

The trades were all closed out too quickly and the SB firm didnt have enough time to hedge the exposure.

Lol! they hedge the exposure within milliseconds, you think 15mins is not long enough!!!!
Look up HFT, this is all done by computers. Regardless, if the trades are matched within their own system then they pay out nothing, ie in your examples the firm is the other side of every trade whereas in fact the trade may be matched Customer A with Customer B. Hedges only need to be done if their client net is skewed one way or the other.

 

[TheBramble]

FTSE Market rallies 20pts from 12pm to 12:15pm, Customer A takes a 20 pip profit. The SB firm pays out £200.

Market then falls 40 pts, by 12:30pm. Customers B and C close out for a profit. The SB firm pay outs another £200.

SB firm collects £40 in spread but pays out £400 in p&l.

The trades were all closed out too quickly and the SB firm didnt have enough time to hedge the exposure.

This is over simplifies to the point of absurdity. You can't focus on any one or any N trades and determine the SBs overall position.

For each punter closing out at a profit the are X times as many punters being closed out at a loss or going deeper into loss.

You also ignore the wider spreads (which provide the SB with instantaneous and risk free profit) that will generally have been applied during higher volatility trading. The result of which will also have incidentally taken the tight stop traders out for a loss as well as bringing the rather excited (and unusually) in profit traders and eager expectant new traders to deal with the sudden and inexplicable lack of ability to get their trades on/off at all, let alone at anywhere near the price they’d like.

 

[tar]

BTW re spreads , most of them offer tight fixed spreads on indices 1 point or even 0.7 point ! , and it is fixed during market hours ...

 

[donaldduke]

The spreadbet firms make money on:

#1.Spread.
#2.Slippage added on to client orders.
#3.Client losses where the sb takes the other side of the trade and has net exposure.

What share of profits come from each of these?

As spreads get tighter and tighter i can only see profits from #1 reducing and profits from #2 and 3 going up in share.

The big spread bet firms have the highest volumes and might be able to turn a profit on the spread alone (i even doubt this given the monster overheads these firms have), but how do the smaller spread bet firms compete?

The answer is they do what the firm offering zero spreads does, they give up completely on #1 and try make the money from #2 and #3.

 

[Sidekicker]

The spreadbet firms make money on:

1.Spread.
2.Slippage passed on to client orders.
2.Client losses where the sb takes the other side of the trade and has net exposure.

What share of profits come from each of these?

As spreads get tighter and tighter i can only see #1 reducing and #2 and 3 going up in share.

The big spread bet firms have the highest volumes and might be able to turn a profit on the spread alone (i even doubt this given the monster overheads these firms have), but how do the smaller spread bet firms compete?

#2 is usually a function of poor IT systems and delays within rather than any effort to screw the trader. For example, if price moves 1 pip while they are waiting for a computer trade to fill and reply to their own in house system before filling you, then you will be slipped, it's not to make a profit, it's to avoid a loss and to ensure the trades are matched up correctly between their hedging system and you.

Have you though that if #1 reduces, the amount of customers might increase actually keeping the overall profit the same?

#3 is a business choice.

The firm offering zero spreads is a marketing choice as they then get spread from other instruments.

 

[uk dave]

#2 is usually a function of poor IT systems and delays within rather than any effort to screw the trader. For example, if price moves 1 pip while they are waiting for a computer trade to fill and reply to their own in house system before filling you, then you will be slipped, it's not to make a profit, it's to avoid a loss and to ensure the trades are matched up correctly between their hedging system and you.

Have you though that if #1 reduces, the amount of customers might increase actually keeping the overall profit the same?

#3 is a business choice.n

The firm offering zero spreads is a marketing choice as they then get spread from other instruments.

You need to read up on how sb firms operate then trade with your own money. Then you will realise they profit from our losses and slippage..

 

[Sidekicker]

You need to read up on how sb firms operate then trade with your own money. Then you will realise they profit from our losses and slippage..

yeah, that must be it.
Slippage exists in direct market access also - who profits from that and what happens to your losses there?
Go directly to this post: http://www.trade2win.com/boards/spr...-only-make-money-if-you-lose.html#post1693354 and do not pass go until you have paid the release fine.

 

[pboyles]

#2 is usually a function of poor IT systems and delays within rather than any effort to screw the trader.

I seriously doubt that, in fact in retail forex it has been proven that companies were using software to ensure that slippage was always against the client. Given that some of the companies also provide SBing its inconceivable that they arent doing the same thing on SB as well.