Movin' on up from spreadbetting

[Riskybiscuit]

Hi,

What a great board!

I have been spreadbetting for a few months now using CityIndex and seem to be making some money. Having said that, with the market having gone all one way, I would have made far more had I just left my first bet open and gone on holiday for three months...but there you go. I am sure it is normally far harder than it is right now...

Anyway. Whether or not the spreadbetting companies manipulate prices, or crash on purpose (I assumed they crashed during high volatility because of greater trading volumes at the time overloading the system, but am agnostic about it really) the HUGE margins have been bugging me for some time.

I generally trade FTSE and DOW futures, sometimes closing the same day, sometimes within minutes or hours, sometimes leaving the trades for a few days. My bets go from £3- 20 a point, though on occasion I have bet up to £50 a point using several bets.

I am lucky enough to be in a position to bung £25k into one of these 'serious' accounts, and from what I have read on this board Interactive Brokers would pretty well cover my needs.

However, I still have a few questions and am still confused having read the board all morning, and would value your advice.

1) What kind of spreads do IB (and others) offer? Are there any additional charges to trade?

2) Can I trade in a similar way to City Index where, for example, they offer me Dow March at, say, 7950 - 7962 (HUUUUUGE margins, ouch!), I buy or sell, then do the same later on? I can adapt if necessary, but I am used to this sort of thing, and would find it easier to move platform if they did.

3) What kinds of hours do they remain open for? I find that there is often a lot of money to be made (or, indeed, lost) in out of hours trading, and particularly like the fact that with City Index I can start trading at 6.30 in the morning UK time and establish a postion before the 'real' traders have even got out of bed (on the Dow, natch).

4) On an unrelated point, should I really be trading S&P? Dow seems to move nice and fast, and seems to behave in a way that makes sense to me. Does S&P pretty well track it? If I move to the real Dow, as opposed to the spread betting dow, will I find it behaves differently?

Many thanks in anticipation for your answers - much appreciated.

Cheers!

RiskyX

 

[Skimbleshanks]

Welcome to T2W !

1) IB (Interactive Brokers) is an ordinary online brokerage, and therefore their spreads are the normal market spreads. For ES it is 0.25pt although sometimes in pre-market during a quiet patch you can get 0.50 spread. There is virtually no slippage (as long as you are quick with pressing the 'go' button).

2) yes. However, with IB you cannot trade the Dow itself (unlike with SB companies). You can, however, trade the emini Dow although this does not have such good liquidity as the emini S&P (ES).

3) they are open for market hours (both main maket and pre-market).

4) Unless you've got really deep pockets, you cannot trade the Dow proper. The emini S&P has the liquidity. On some days the Dow leads the S&P and Nasdaq. On other days the S&P leads or the Nasdaq leads. When you are trading Dow on SB you are in fact trading Dow futures, and I believe the SB companies incorporate the S&P futures into their prices.

 

[Helenqu]

Hi RB,

You might also like to check out trading the Eurostoxx50 futures contract. It's cheaper and moves better than the e-minis and the hours are 8-10am to 7pm. Spread is one point and commission is 4E per round trip with IB so you only need to make 1 point on a trade to covers costs. Contract price is 10E per point.

Cheers

 

[Helenqu]

Oh one "hidden" cost with IB is that you will have to pay the Exchange fee which for Eurostoxx is 8E a month. If you trade US futures and generate $30 commission a month you get the feed free though.

 

[JonnyT]

The mini Dow contract usually trades with a spread of 2. Yes 2 not the 12 you are paying with an SB Company.

IB will charge $2.45 per contract. The mini Dow is $5 per point i.e about £3 per point.

I would however recommend ES, as it is more liquid. So much so that 90% of the time you can avoid paying any spread simply by placing an order 0.25 below the current price.

JonnyT

 

[Riskybiscuit]

Wow! Dow spreads of 2 points? I'd save the Exchange fee on my first trade! (I am not given to overuse of exclamation marks, but here they seem more than called for).

So, what are the downsides? Other than having to spend a bit of time getting to know the new indices and products (since the general view seems to be Dow eminis are not the way to go).

My trading strategy, if one can call it that, is taking a view on the short term (20 mins to three days) reaction of the market to news, whether economic or global/political. For the last few months the markets have been reacting pretty predictably (by predictably I mean that I get it right more often than I get it wrong, not that I get it right all of the time, far from it). I have also noticed that, with CityIndex at least, there tends to be a few minutes (between one and five, sometimes more) between news being announced and the reaction to it. Does anyone find that this sort of delay (which allows me to get in quick - in fact, one of my failures is that I get out too quick, I still cannot believe how *slow* the market is in reacting to this sort of news) also occurs when playing the markets themselves, or is this due to the spreadbetting system? I am assuming that the markets themselves act at that speed, otherwise the spreadbetting companies would lose a whole heap of money, but am interested to know your experiences with this. If any of you do this kind of trade - most people I have read on here are confirmed chartists.

Cheers!

RiskyX

 

[Helenqu]

So, what are the downsides?

I don't think there are any other than the one that means you can lose money FAST. But you can do that with spreadbets too

You have a transparent system, the fills are great and fast with IB, spreads are small and the broker takes their commission and nothing else. There is no bias. You can trade what you see on the chart not something filtered through the brokers software.

BUT if you have a longer term style you might still be better off with SBs see Chartmans post on this (not sure where it is). IF you are short term trader then futures are a better way of trading by far.

 

[Trader333]

Downside

The downside to joining IB is the amount of red tape involved. You have to take and pass an online test, you have to give proof of identity and there is a lot of online filling in of forms.

The other downside is that IB have poor telephone support when things go wrong. If you call them you will probably be redirected to somewhere in Europe and placed in a queue lasting upto 10 minutes or more which is a lifetime in fast moving markets. You will have to pay tax on any gains that you make using a broker where you dont with SB companies

They are also not particularly good at answering specific questions about their own products and systems. I asked for information on their Level 2 subscription and they were unable to give me any information at all that was of any use to me. All I asked was which ECNs are included in the subscription, ( a very basic and simple question), and no-one could answer.

That said they are very well priced and, as others have said, their spreads are minimal and often zero, with instant fills. Also with the right software package you can even get realtime charting, using their platform, effectively FOC.

I hope this helps


Paul

 

[mmillar]

I’m not sure the price difference between IB and SBs is that straightforward.

This maybe stuff that Chartman has already covered, but please bear with me – I’m trying to work this out for myself. If any of my calculations are wrong then please feel free to chime in and let me know. I will use the D4F spread – this is 5 points (or 0.5 depending on how you look at it) on the S&P cash.

Say the S&P is at 800.00 then falls to 790.00. The market has moved by 10 S&P points (or 100 D4F points).

If you sold at D4F (800.00 – 0.3 spread = 799.97) then bought back (790.00 + 0.2 spread = 790.20) you would make 9.5 S&P points (95 D4F points). There is no commission, so at £10 per point you would have made £950.

If you had done the same with IB (lets assume 0.25 slippage in total) you would make 800.00 – 799.25 = 9.75 S&P points. The equivalent of £10 per point is about 3 contracts = $150 per S&P point (or $15 per D4F point). So you would have made 9.75 x $150 = $1462.50. The total commission on IB would be $14.40, so your net profit is $1448.10.

I think £950 and $1448.10 are roughly the same so I’m not sure where the advantage of using IB is (in this particular example, anyway).

Maybe my calculations are wrong or maybe I’m just using a worst case example, but as I said please feel free to chime in with something different.



Just to answer the specific questions ‘what are the downsides?’ (my personal opinion or course)

1. SB companies allow you to trade a large array of markets and instruments very easily without paying extra commissions or exchange fees. If you are only going to trade the e-mini then I suppose that is irrelevant but if, like me, you take occasional pot shots at gold or forex having access to additional markets is an advantage.

2. If you thought D4Fs customer service was bad wait until you come into contact with IB!! Of course that’s specific to IB and I’m sure other brokers have good customer service.

3. With IB you either have to have a US$ account or have your profits paid in US$. Personally I think this is taking on unnecessary currency risk. With SBs you deal in your home currency (sterling) so no currency issues.

4. IB don’t provide any charting. Though D4F’s charting isn’t great so maybe not such a big deal.

5. Do IB pay interest on +ve balances? Certainly D4F do, but I haven't had my IB account long enough to know.

6. Totally agree with the above points about form filling. Total pain in the a*se and took them 2 weeks to get my account open. D4F opened my account in 24 hours.

7. I believe the margin requirements for IB are much higher. A £10 per point bet on D4F requires £3500 margin. I believe a 3 contract trade requires about $10k margin with IB.

 

[JonnyT]

Hi mmillar,

It is well known round here that the benefit of futures is not for the bigger trades like 10 points, but more the shorter term trades like 1,2,3,4 points.

With the futures you virtually never get any slippage (if you use limit and stop orders) and 90% of the time you need not pay a spread. It is very realistic to just pay IBs charges which is effectively less than 0.1 when compared to Deal4Free's 0.5.

The margin requirement with IB is less than $1000 per contract during normal trading hours.

You also know that when the market is moving fast the prices are not going to be loaded against you, like they are with Deal4Free.

In my view you need futures for effective day trading, whilst SBs are equally effective for swing trades.

JonnyT

 

[mmillar]

Hi JonnyT,

I agree (we agree on something ) that profits look better with IB the smaller the points gain - indeed that is why I have an IB account; to get those smaller trades.

Just checking the IB website it says margin requirements for the ES are 1781 for 'Intraday Initial' and 1425 for 'Intraday Maintenance'. I have no idea what that means but it is more than $1000 - but also a lot less than the $10k I mentioned in my earlier post. Overnight margins on IB are quoted as 3563 and 2850. To compare properly you need to times those margin requirements by three, so it looks like the margin requirements are roughly the same during the day but more expensive with IB overnight.

I think you’re being unfair in your comparison of slippage between IB and D4F. If you use stops and limits to get the exact price you want on IB why can’t you do the same with D4F. That is what I do and I always get the price and never get requoted.

As usual we are going to have to agree to disagree on statements like ‘loaded against you’. And spreadbetting is futures trading.

cheers

mmillar

 

[ChartMan]

One major point you've all forgotten........ Spreadbetting in general has NO tax on wins and losses.
Trading with IB will attract income tax at the normal bands on your net earnings for the year. However, The gain to be had from the minimum spread may well cover any tax to pay so perhaps even steven at the end of the year....but the bigger the move and the longer you hold it, the more disadvantage you have with IB. IB is for scalpers taking multiple small moves which is impossible with SB.
So. taking multiple small moves may net you 30 points in a day on ES whereas a couple of trades with SB may only net you 10-15 points. The rest of the calculations you can do foryourself.
This assumes you are of the right mind set to scalp as opposed to a longer buy and hold.
Take the best of both worlds. Use SB for a longer term bet, say a long. Use IB to short scalp every down move.......

 

[Skimbleshanks]

Don't forget that everyone normally has an annual tax exemption of £7,700 against capital gains (for the year 2002-2003).

So as long as you are not clocked up capital gains from other sources, you can offset this amount against your trading profits. In an ideal world you gain your £7,700 and then use spreadbetting to continue the tax free jolly.

Surprisingly, only about 110,000 people in the UK actually pay CGT.

 

[JonnyT]

Remeber that IB uses 50% margin during normal trading hours...

i.e less than $900 per contract

JonnyT

 

[mmillar]

In that case...

8. It is very difficult with IB to work out what the hell they are on about. As well as the four margin requirements I quoted from their website, there is also, as JonnyT says, a statement about 50% margin hours. BUT under that statement there is another statement about requiring 125% of futures margin! I just don't know.


Just following through on my calculations above. I have used IBs current $/£ exchange rate of 1.6316, used 3 emini contracts and recalculated the bet you need with D4F (£9.19 per point) so that it is the exact $ equivalent as the IB trade. Apologies to Chartman if he has already done this stuff.

Market Points ¦ D4F Profit ¦ IB Profit

10 ¦ £873.05 ¦ £910.52

5 ¦ £413.55 ¦ £450.85

2 ¦ £137.85 ¦ £175.04

1 ¦ £45.95 ¦ £83.11

0.5 ¦ £0 ¦ £37.14

So trading through IB is more profitable than D4F. And by using the same calculations you can show that if the market went against you you will lose less money with IB.

But as Chartman and Skimbleshanks point out the picture is then complicated by tax issues.

 

[JonnyT]

I trade ES and need less than $1000 per contract during normal market hours...

 

[GreyingSurfer]

JT,

I'm sure you know this, but it's worth reminding others in case they get caught out, that the 50% margin requitement moves to 100% 15 min before the end of normal market hours, so it moves up to $1800 before the close.

 

[NickW]

Hey Riskybiscuit a word of warning is that you need to be careful of beginners luck. It's quite bequiling, a couple of wins at £50 puts you on top of the world, then one day the market will take it back from you, then your problems start as you start trading madly oversize to get it back. Honestly you need a better strategy than the one you're using now.

"margin requirements for the ES are 1781 for 'Intraday Initial' and 1425 for 'Intraday Maintenance'. I have no idea what that means"

It means that to initiate a buy or sell on one contract during regular trading hours you need $1781. If the trade goes against you so that cash in your account falls to the maintenance level of $1425 per contract you must then top up your account again back to the initial margin level per contract or they will start closing your position. If you hold a contract open overnight the margin values double.

Both the tick size and spread on an ES contract is 0.25. So one tick and your even.

As mmillar correctly says if you trade a SB cash bet you are in fact trading the future which is being adjusted by fair value to approximate the index. In real life it is not possible to trade an index - all an index is the sum of the prices of the stocks in the index, its a measurement not a product. If you start to believe that a junior trader at the SB Co. can predict the market and print a worse quote (bias) every few seconds to outwit you then you will be trading with a mental disadvantage. However the worse and more real problem is requotes during fast markets. Everytime I've been requoted and check the charts it is almost always the worst possible printed price they could give you. So you need to use limit orders to defeat this problem.

I have a D4F account and an IB account. The D4F S&P 500 futures prices track the ES prices tighter than a ducks underside oriface except their spreads are roughly 0.25 worse either side, and then rounded to 1dp. This comparison to the ES is not perfect because the D4F underlying is the full SP contract - however this tracks the ES almost exactly. The main reason why both the D4F cash and future products exist seems to be to offer two products with different cost of carry rules.

IMHO you should move on from trading the Dow, it is a price weighted index of 30 stocks. So smaller companies can move the Dow to a much larger extent than a big company just because their stock price is larger, regarless of how many shares they have issued. So single stock news stories unequitably affect the Dow. Whereas the S&P is a market cap weighted index of 500 stocks, a much better product to trade. The reason why the Dow gets all the attention is because thats what the media has followed since Rupert Murdoch was in nappies, however after a while trading you'll realise that hardly any professional day traders trade the dow.

Opening an account with IB is torture, and then your next problem is charts, however once you solve these problems you'll never look back. The account opening and trading costs aren't a million miles apart, however if you can make money spreadbetting then be prepared to make much more trading futures, to me thats worth paying taxes for.

 

[JonnyT]

Hi Neil,

The margin rates are 50% of what you quoted for normal market hours...

(except the last 15 mins)

JonnyT

 

[Skimbleshanks]

Opening an account with IB is torture,

Actually, opening any US-based brokerage account is torture, not just with IB (Interactive Brokers).

The procedures were doubly tightened up after the events of September11th, and the brokerage has to have proof that you are who you say you are, by law.

And even if you already have an account with a US broker, and want to open another account in the same name with the same broker, you still have to repeat the whole process from scratch including providing proof of residency/nationality.