Gapping on SB prices

[Phil Mibbutz]

Can anyone tell me if SB quotes on FX do actually 'gap', i.e. jump from one level to a significantly different price, at times of major news? It seems to me that the quotes are continuous, as per the relevant tick charts supplied, even if the 'in-between' figures are only displayed fleetingly when the real market gaps. Possibly this enables them to minimise losses incurred, by filling limit orders ASAP. At the same time, they apparently always apply maximum slippage to stop losses, even though this is obviously completely unfair.

 

[JTrader]

In my experience, SB prices with worldspreads have always mirrored the prices provided by my retail spot forex data source charts, fairly closely. This includes at news times. WS base thier SB prices on bloomberg and reuters data.

There isn't really a significant distinction between SB spot fx quotes from WS or CMC, and retail spot fx quotes from eg. CMS, GFT etc. - They are all market makers!

 

[Phil Mibbutz]

... at the retail level you will neither know which of these has happened nor notice much difference to your trading day so I wouldn't worry about it (and of course neither of these constitute any sort of sharp practice by your bookie - it's just the way the market is).

GJ

Thanks. I worry about it if SB cos have a policy of filling limits at exactly the set level, but using the gap excuse to fill stops tens of pips away, even though their quote ran smoothly between two levels. On the one hand, they stress that you're always betting against their quotes, then they fill orders at the 'real market' price, but only when it's in their favour. Seems like sharp practice to me!

 

[stevespray]

Thanks. I worry about it if SB cos have a policy of filling limits at exactly the set level, but using the gap excuse to fill stops tens of pips away, even though their quote ran smoothly between two levels. On the one hand, they stress that you're always betting against their quotes, then they fill orders at the 'real market' price, but only when it's in their favour. Seems like sharp practice to me!

Phil....

In the real market limit orders always get filled at the level you set since they are an offer to buy or sell which is entered into the market orderbook either below the market (in the case of a limit buy) or above the market (in the case of a limit sell). "Limit Orders" are effectively 'the market' as you see it - ie two sides of the market order book with people below wanting to buy at lower prices and people above wanting to sell at higher prices. Stop orders are not really stop orders - they are 'market orders' entered into the market, by your broker or your software, at the moment you stop order is breached. Therefore there is no way of defining your stop level since you can not know what orders will be in the marker at the moment that your market order (triggered by your stop level) hits the market. That is why limits never 'slip' and stops do.

Obviously with spreadbetting you are in the hands of a firm who can act in their best interest. They have time after your order is triggered to calculate the best outcome from their point of view.

I notice from time to time that there are quite a few stop based strats doing the rounds on ebay and the such. These strats wouldnt work very well in the real markets. This means that people who play these strats on their spreadbetting / cfd firms are looking for free cash of sorts.

Steve.

 

[stevespray]

Filling limit orders is easy to do because you can leave bids / offers in another system. When all the world is trying to buy EUR/USD it's easy to step in and be a seller. Filling stops is harder because when the market gaps there may be no way to get anything done at the price you specified. A stoploss order is simply an at best order with a trigger level attached - there is no such thing in reality as a guaranteed stop - any broker that offers one is doing so with the risk that they get hung, and as they're not in the business of handing over free money, you need to be aware of that and not expect the impossible.

Not to say sharp practice never goes on at the bookies, but it's just not anywhere near as prevalent as you think, and the situation is more complicated.

GJ

edit: sorry Steve - was typing a similar response to you at the time, then my head of trading walked over to me and wanted to talk about, ironically, our handling of limit orders ;-)

Didn't mean to tread on your toes

GJ - Well said and a good post.

The fact is that there is no hard and fast set of rules which the spreadbet co's can apply with regard to FX since there is no 'one market' which defines the price at a particular time. This is the reverse of futures and stock markets which have time and sales data.

As a rule, sharp moves in price leave intermediate market makers (like s/b and cfd co's) in a very tricky situation. This is why they impliment a number of tactics during periods of higher volitility such as slowing down quotes and executions. Obviously, during normal market conditions, the spreads offer the firms a clear advantage over clients, a kind of head start in any deal. This edge becomes practically zero in fast markets where clients want to trade in an instant. The advantage of a spread is lost and the advantage of fast trends becomes the friend of the clients. If people can jump in and out in a matter of minutes then it is at the firms cost hence why they try and slow things down.

I guess how a firm treats an individual might come down to how he or she trades. If you've been in a position for hours / days then they might not slip you in the same manner they would if you just purely tried to trade around data times by placing 'stops to open' seconds before the data was due. If a dealer spots a client doing that on a regular basis then I guess he might put you in the 'free lunch' bracket and then give you a crappy slip just to tell you to 'get lost'.

Steve.

 

[Phil Mibbutz]

All interesting points, thanks, GJ and Steve. Don't the SB providers have another advantage in that they only need to hedge their overall position against the 'real' market, with clients' trades tending to balance out much of the time, hence the potential to make even more profit on alleged slippage, by using delays and/or skewing quotes as required?

 

[stevespray]

All interesting points, thanks, GJ and Steve. Don't the SB providers have another advantage in that they only need to hedge their overall position against the 'real' market, with clients' trades tending to balance out much of the time, hence the potential to make even more profit on alleged slippage, by using delays and/or skewing quotes as required?

A s/b or cfd firm can go into a data release perfectly net flat - this is not the issue. The issue is the mass of limit and stop orders sitting on the sidelines which become 'in play' if the market moves quickly. The firms net position, although flat going into data, becomes biased, one way or the other, the moment that limits or stops get hit and then filled. If the market moves say 80 pips (USDGBP) in 10 seconds then they could end up with a massively unblanced book if they fill at set limit / stop prices. Due to the size of the trades at retail level it is pretty difficult for the firms to match clients orders to the orders which they can place in the market themselves. This creates a potential 'black hole anomoly' where its pretty much impossible for the firm to simulate 'real' market fills and slips since most of that is down to luck more than judgement.

You say that it will even out but it doesnt. Where money is concerned it never does. Take any of the retail FX specialists who offered guarenteed stops (on all stop orders) a couple of years back and you will see that they have changed the rules or removed them completely. Some just make the spreads bigger post data release. There's a big reason for that. It's because people who know what they are doing can and will make money using methods which take advantage of such generous offers. An experienced market participant who reads "Guarenteed Stops" will instantly think....."Oh Free Money".

Steve.

 

[Phil Mibbutz]

A s/b or cfd firm can go into a data release perfectly net flat - this is not the issue. The issue is the mass of limit and stop orders sitting on the sidelines which become 'in play' if the market moves quickly. The firms net position, although flat going into data, becomes biased, one way or the other, the moment that limits or stops get hit and then filled. If the market moves say 80 pips (USDGBP) in 10 seconds then they could end up with a massively unblanced book if they fill at set limit / stop prices.
Steve.

Yes, but if they fill all the limits instantly and wait a few minutes, 40pips, or whatever, to fill the stops on the spike, won't the imbalance normally just result in yet more profit for them?

 

[Phil Mibbutz]

My experience is that most bookies do treat you fairly most of the time, and have no need to be evil to make plenty of profit. However, I still think they should only quote prices that they can actually provide. Despite their theoretical or potential risk if a market suddenly moves due to a news announcement, I suspect that they almost invariably do very well out of punters at these times.

 

[wasp]

I did it once with capitalspreads... it was out of hours, or late in the evening, price shot up 250 and I was already long so I took the profit knowing exactly what was going on and then sold every pound and penny I had to margin and jumped off again as it came back inline. Quickest cash I'd ever made... Next day it vanished, I wasn't going to argue, it wasn't the real market... Yes, they should have better feeds and platform so it shouldn't happen but end of the day, I didn't really expect them to honour it.

Like GJ's analogy in that other thread, if a TV was labeled incorrectly for a tenth of the price, you still won't get it at that price, despite all the arguments under the sun!

 

[stevespray]

The problem is that the rules (and, more importantly, the law) doesn’t take into consideration the kinds of intermediate markets which we are discussing here.

I don’t want to get on my high horse over this because it’s been discussed before but there are a number of brief point well worth raising.

Firstly, when you read the T&C of most of the spreadbetting / cfd firms you will find that they have the right to price their markets as they see fit. They reserve the right to vary their markets away from the level of the underlying on which the market is based. The condition is made generally for the firms benefit. They profit from being able to do this. Therefore one could clearly argue that it is a case of ‘live by the sword and die by the sword’. In my experience what many of the firms want is a ‘best of both worlds’ scenario. They want to be able to bias their quotes when the moment suits them whilst at the same time be able to cancel quotes when their markets became ‘varied’ when they didn’t mean them to.

Secondly, on a few points of law…. If a spreadbetting company enters into a trade with you they can not just cancel it. Generally the contract (the T&C) sets out the moment that a contract is formed. Normally it is the moment that a contract note is produced ie when the trade is accepted. Most of the firms have some kind of caveat which, they claim, allows them to reverse trades (ie break a contract) but, if the matter came to court, they would be very unlikely to be able to enforce. The law is clear;

Offer + Acceptance = Contract

Legally speaking the ‘consideration’ must come before ‘acceptance’ – once the ‘acceptance’ has occurred a contract has been formed.
The Financial Services and Markets Act of 2000 supports this point and states that contracts entered into, with regard to spreadbetting, are completely enforceable by either party. In terms of law, if a set of spreadbetting T&C are contradicted by the Markets Act, the Markets Act will prevail – some spreadbetting T&C actually mention this. So the power is actually with the client. People who say “Oh some trades disappeared” actually have the right to have them enforce them if they wish. Of course your bookmaker might close your account when you do that but that is a different matter.

I am constantly amazed by the number of spreadbetting firms who either don’t know the law, their own T&C or The Financial Services and Markets Act of 2000. This even relates to compliance staff.

With regard to the “TV at the tenth of the price”… if you take it to the counter and the sales person processes the sale then the TV is yours! Full stop. What you must bear in mind is that a price ticket on an item is not an ‘offer’ to trade at that price. It is an ‘Invitation to treat’. It is generally regarded that, when you buy something in a shop, the customer is the one making the offer to buy at the stated price. It is up to the shop keeper or his appointed representative as to whether your offer is ‘accepted’ or rejected. Once that offer is accepted and payment is taken then it is considered that a contract has been formed. Basically, in law, the pivotal issue is always the point of contract. So, with regard to the TV, if you were loading it into your boot having paid for it then it is yours and you are free to do so as you wish. If the shop keeper approached you and claimed a mistake then it would be down to you as to whether you accepted his explanation and returned the TV. If however the shop keeper spotted the error inside the store prior to you actually paying for it and being issued with a receipt then he would be perfectly entitled to refuse your ‘offer’ to contract at the level indicated on the price ticket.



Phil….

You ask a couple of questions.

In post #13 you ask if the imbalance between limits and stops will balance itself out. In simple terms it will not as money is involved. If firms just filled limit and stops regardless then people who straddle stop orders on data would be drawn to that firm thus causing a significant imbalance. Secondly, half the reason that markets move on data is because people pull their orders from the market. It’s not always the fact that trade occurs, although it clearly does looking at the volume candles, but more a fact to do with ‘ease of movement’ due to a large lack of liquidity. Also, as I mentioned before, trade breeds price movement which in turn breeds more trade as people react to price movement.

GJ….

I don’t have a massive problem with people ‘picking off bookies’ since the bookie essentially makes his money by selling contracts to people for more than they are worth or buying contracts from people for less than they are worth – essentially, just like in the real market, its two party’s trying to catch each other out. At the end of the day, for the bookie to make his money, someone (other than him) has to get it wrong.
At the end of the day the spreadbetting and cfd business is a rather funny one. They base their prices on the prices produced by another market rather than activity in their own market – that will always be a really strange concept to me. What would happen if 80% of the world were spreadbetting? Only 20% of the trading activity would pass through the exchange! Suddenly the tail is wagging the donkey. I hope you see what I mean.

Steve.

 

[trader_dante]

GammaJammer,

It was me that posted about my GBP/JPY trades on the other thread and the reason I did that is that I have been doing this for almost two years now and I have NEVER had my trades revoked. Admittedly, I never took £1,000 in just 10 minutes before but I have taken a huge deal more than this over a slightly longer period (weeks).

In my opinion, if they are mispricing then they should have procedures in place to pick up on the volatility and take appropriate action such as switching to phone only trading or manually rerouting to a dealer that can check the accuracy of the price and if necessary, pull the market. I've seen this done with other SB brokers and I've also seen the order unfilled and the message on the screen saying "The quote has moved on, please request a quote again" which usually happens in a fast market.

I don't consider it fair, to have my orders confirmed on screen, contract notifications emailed to me and also a note on my account telling me the dealers name that confirmed the order and the price executed, be allowed to keep the money for 12 hours and then have it automatically debited from my account in the morning without so much as a courtesy phonecall for an explanation.

I suspect this company is trying its luck not me. By coincidence I know another trader who also made money in the same trade on the same night. He was told by the dealers that he could keep some of the money he made because they were allowing a period at the beginning of the spiking where the client could trade on the mispricings but then they had to enforce a "cut-off" period. Why? Because they lost so much money?!

I soon realised this was bullsh*t by the traders over there when I found that they let me keep £26 of the money I made in the period when his trades were being revoked.

You said in your other post - stop hunting for a free lunch. Actually I position/swing trade but I sometimes wonder why I go to the effort because to be honest with you, these companies give it away.

I don't even monitor the markets actively since I have an 8am - 6pm office job (in an unrelated field) and I spot so many opportunities to make cash it's ridiculous. I got up this morning, quick check on the Bund and guess what, it's being called a whole 20 points out from the market price. You would be surprised how little money you need in an account with my broker to hit that ask at £200 a tick.

If I really have legal redress in this situation and from the post above, it looks like I might then I won't use it this time. Because next time I won't take it lightly at £1 or £2 a tick.