My concerns with spread betting or binary options

belt

Newbie
2 0
Hi everybody,

I want to start spread betting and maybe become an experienced trader and make some money from it. My question/objection regarding spread betting (and binary options too) that as far as I understand the money you make or lose comes from or goes to the broker company itself (if I win, they lose as there isn't a counter bet from an other user).
So in this case for them what is the point to keep the experienced, successful users? They would only lose money through them.
My concern is that if I become too good they would simply just get rid off me.
Do you people know people who have been making money for longer time from binary options?

Thanks
 

timsk

Legendary member
7,347 2,138
H belt,
Welcome to T2W.

There are numerous threads discussing this issue in depth here on T2W. I recommend you familarise yourself with all the arguments on both sides of this debate before deciding what action to take or not take - as the case may be.

As a starting point, check out the threads linked in this post: Best Threads In The 'Spread Betting & CFDs' Forum The other obvious thing to do is to phone a handful of SB firms yourself and put your concerns to them direct and listen to what they have to say. Additionally, check out the Broker Reviews section of T2W. As you'd expect, there are some highly critical reviews, but there's also some from members who have been with firms for a long time and are very happy with them.
Tim.
 

pboyles

Legendary member
8,072 1,302
You should also google 'virtual dealer plugin' and check out these press releases about companies being fined for defrauding customers.

Fxcm fined.

Forex Capital Markets LLC Ordered to Pay More Than $14.2 Million to Settle CFTC Charges Relating to Its Failure to Supervise Customer Accounts

Gain Capital (forex.com) fined

IKON fined $320,000 for Virtual Dealer @ Forex Factory

Ikon fined.

IKON fined $320,000 for Virtual Dealer | Forex Magnates

NFA investigating all its FX companies.

http://forexmagnates.com/nfa-to-investigate-all-forex-brokers-for-unfair-trading-practices/

There are more but this should give you an idea about what goes on.
 

donaldduke

Experienced member
1,665 257
Hi everybody,

I want to start spread betting and maybe become an experienced trader and make some money from it. My question/objection regarding spread betting (and binary options too) that as far as I understand the money you make or lose comes from or goes to the broker company itself (if I win, they lose as there isn't a counter bet from an other user).
So in this case for them what is the point to keep the experienced, successful users? They would only lose money through them.
My concern is that if I become too good they would simply just get rid off me.
Do you people know people who have been making money for longer time from binary options?

Thanks

Regarding binaries. they wont get rid of you.
They can always widen the spread on your favourite instruments, 10%+ spreads on some binaries. To the point where you will only make a very small amount of money after spread, so its really not worth the effort.

There really isnt any competition to tighten spreads in the binaries like there is in the underlying markets. So its easy to get ripped off without even knowing it.


Regarding normal spread betting. If you get good at it. You can always go direct market if you no longer get good fills from the spread bet companies.
 
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Hoggums

Senior member
2,176 878
IG index makes 50% of it's profits from 2% of their punters.

Do you think they would want to tell the successful 2% to **** off - or do you think they might hedge their trades so that they can keep capturing spread premium from them?
 
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Incerto

Junior member
13 7
For what I understand, any market maker makes money from the simple fact that he always buys at the bid price and sells at the ask price. Bid price is naturally always inferior to ask price.
You, the market participant, always buy at the ask price and always sell at the bid price. You have the bid-ask spread at your disadvantage, the MM has got it at his advantage. The more people trade, the more they gain.

Spread betting firms are not unlike market makers in general, with an important difference. They in principle don't buy and sell financial instruments. They accept bets on both sides of the event, and they "match" the side against each other, pocketing the spread. If there was a guarantee that the two sides of the bet are always balanced the SB firm would have no capital requirements, so to speak.

SB firms have, at any given moment, on any given instrument, as a result of the bets of their clients, some money at stake short and some money at stake long (actually they have at stake only the difference between the two).
Let's imagine that on aggregate, there are at a certain moment 100 betters active on a certain instrument and they collectively have at a certain moment £140 per pip long, and £140 per pip short. The SB firm just cashes the spread and has no risk at all because they are market-neutral.

Now let's imagine a few minutes later they have £140 per pip short, and £190 per pip long. The SB firm is, on aggregate, £50 pip short (the aggregate of the punters is £50 pip long and the SB firm is the other side of the bet).
The SB firm will - according to their own risk management rules - possibly bring this imbalance "to the market" to cover their risk. They will open a position of £50 long on the instrument, in the underlying "real market", in order to find themselves again market-neutral.

They will go on monitoring the aggregate result of the bets, and keep themselves "covered" in general if the imbalance goes beyond a certain threshold.

Naturally all these market operations have a cost. The SB will probably not cover any minimum imbalance instantly, they will cover balances beyond a certain threshold, and they will act with a certain time delay, and choose to keep at home a certain level of risk.

That's why SB firms, for what I understand, do NOT welcome high frequency traders. Those players who open and close a position within a few seconds, maybe with a large stake, will make it difficult for the SB firm to bring the imbalance to the market. The SB will be playing against the punter and, basically, they don't want. They basically want to bring the imbalance to the market, and live out of the spread on the punts, which they pocket continuously (what they bring to the market is obviously normally a small part of the total of the stakes as long and short position would tend to balance themselves on aggregate).

It is on the other hand a known fact of life that the vast majority of inexperienced day-traders tend to lose money. The SB firm could treat this as a statistical "high probability bet" and decide not to bring to the market the aggregate positions of the (supposed to be) inexperienced traders knowing that, on aggregate, it is better to be on the other side of those transactions.

My point of view: if you bet £1 per pip with round-trips that take minutes, or hours, to complete, the SB firm will have nothing to lose from your behaviour. They will actually be glad when you win. Remember you pay the spread (to the SB firm) also when you win!.

The idea that the SB firm wins only when you lose is totally wrong. If you pay £500 as margin, and lose it in a month, and stop trading, even if the SB firm did not cover your punts, they will have cashed £500 and that's it. And they cannot rely for their long-term survival as a firm on the fact that there will always be a fresh supply of inexperienced traders.

If you pay £500 as margin, and you win let's say £2000 per year, and you go on betting, you can easily calculate how much the SB firm gained by summing all the spread from all your trades (good ones and bad ones) and that will be a nice amount. Remember: the SB firms pockets basically all the spread (they don't pocket only that percentage of punts that they bring to the market). They gain at each trade, whichever the result for the punter. And if you are successful you will go on making money to them. The long-term interest of the betting community and of the SB firms are, in fact, aligned.

If you play £50 per pip in rounds that last for a few seconds the SB firm will begin getting nervous. Besides, the nature of the SB business is such that the quotation often cannot be "instantly" equal to the underlying market. Sometimes the underlying market (in Forex for instance) does not exist as a unique bid-ask price couple. That will lead to price discrepancies, price uncertainties, or time delays that will be very relevant to a "scalper" and that can cause big losses to a SB firms if the punter exploits the imperfections and delays of the SB price formation process to game the system.

If the punter earns from this price discrepancy the SB firm will find a way to stop him. If the SB loses he will write some conspiracy complaint in fora like this one. Mostly, the punter should understand that a SB firm is not there to benefit the punters.

If one bets large stakes for a very short time, the place to be is the market itself, a real Direct Market Access.
If one bets small stakes for a decently long round-trip duration, then SB firms can offer tax-free profits (if any), a large number of instruments tradeable from the same account, a relative protection (from what I gather) from anomalous market price spikes due to "fat finger" mistakes, small stakes and a general convenience.

Another important difference: when you use DMA you pay a smaller spread and a fixed commission. When you use a SB firm you don't have a commission but you pay, I say this in general, a larger spread.
That means that for small stakes the SB firm can be cheaper, and for larger stakes the DMA tends to be cheaper.

Finally, some SB firms offer you "more-or-less fixed spreads" and "protected stop-losses" that might be useful for certain styles of trade and I don't think they are available with DMA (correct me if untrue).

In very short terms: it is very sensible to begin with a SB firm, relaxed strategy and small stakes. If and when you one feels he can make a living out of day trading, and/or wants to trade at high frequency, with higher stakes etc. then DMA is definitely the way to go.
 
Last edited:

belt

Newbie
2 0
Thanks for the replies and links I have looked at them.

Seeing the ads some of these spreadbetting/binary options brokers come up with offering you welcome bonuses of 100s and 1000s just make me more distrustful.
I have been investing in shares for a couple of years. I'm not the daytrader type investor I hold my shares usually at least for a few months before I sell. Recently I was thinking to do some short term investing in large US listed banks' shares like Citigroup, JPM, BoA etc and try to gain from the daily 0.5% price movements. The problem is that the fees would take most of the profit if I buy these shares.
Spreadbetting would fit my needs nicely but I am not convinced that these companies play fair.
If anybody could offer me any kind of substitute for spreadbetting (or binary options) would help me as I wasn't interested in the leveraged products until recently and I don't have much information about this.

Thanks again
 

Jason Rogers

Senior member
2,768 92
Hi everybody,

I want to start spread betting and maybe become an experienced trader and make some money from it. My question/objection regarding spread betting (and binary options too) that as far as I understand the money you make or lose comes from or goes to the broker company itself (if I win, they lose as there isn't a counter bet from an other user).
So in this case for them what is the point to keep the experienced, successful users? They would only lose money through them.
My concern is that if I become too good they would simply just get rid off me.
Do you people know people who have been making money for longer time from binary options?

Thanks

Hi Belt,

Great question! What you've described is a potential conflict of interest that can exist with brokers that use a dealing desk execution model. The broker's dealing desk has to manage the risk on the other side of your trades. They can do this by offsetting your orders internally with other traders on their platform, or they can offset your orders with a liquidity provider such as a bank. The problem that can arise is if the market price moves in favor of your position before they've had a chance to offset their market risk. Should that happen, any profit you make would mean a loss for them.

However, there is an alternative. On a No Dealing Desk (NDD) execution model, a broker makes its money off your trading volume. As the name describes, such a broker does not have its own dealing desk taking the market risk on the other side of your trades. When you place any orders, they are immediately offset with one of the broker's competing liquidity providers, whichever one is providing you with the best price at that time. The broker makes it's profit by charging you a commission, or by adding a fixed pip markup to the prices they receive from their liquidity providers. The result is that the potential conflict of interest between your profitability and the broker's is eliminated. In fact, it's in the best interest of brokers using the No Dealing Desk execution model that you be profitable, so you will continue to give them more trading volume.

You asked for info regarding trader profitability. I can't speak for binary options trading, but here are some stats compiled by our DailyFX research team that you may find interesting: Building a Better Wheel: Incorporating Profitability Statistics | DailyFX

Welcome to the forum :)

Jason
 

pboyles

Legendary member
8,072 1,302
Thanks for the replies and links I have looked at them.

Seeing the ads some of these spreadbetting/binary options brokers come up with offering you welcome bonuses of 100s and 1000s just make me more distrustful.
I have been investing in shares for a couple of years. I'm not the daytrader type investor I hold my shares usually at least for a few months before I sell. Recently I was thinking to do some short term investing in large US listed banks' shares like Citigroup, JPM, BoA etc and try to gain from the daily 0.5% price movements. The problem is that the fees would take most of the profit if I buy these shares.
Spreadbetting would fit my needs nicely but I am not convinced that these companies play fair.
If anybody could offer me any kind of substitute for spreadbetting (or binary options) would help me as I wasn't interested in the leveraged products until recently and I don't have much information about this.

Thanks again

You can rest assured they do not play fair. Look at how the same companies were defrauding people with slippage in forex trades, do you really think it never occurred to them to do the same with spread betting accounts?
 

Splitlink

Legendary member
10,850 1,233
Thanks for the replies and links I have looked at them.

Seeing the ads some of these spreadbetting/binary options brokers come up with offering you welcome bonuses of 100s and 1000s just make me more distrustful.
I have been investing in shares for a couple of years. I'm not the daytrader type investor I hold my shares usually at least for a few months before I sell. Recently I was thinking to do some short term investing in large US listed banks' shares like Citigroup, JPM, BoA etc and try to gain from the daily 0.5% price movements. The problem is that the fees would take most of the profit if I buy these shares.
Spreadbetting would fit my needs nicely but I am not convinced that these companies play fair.
If anybody could offer me any kind of substitute for spreadbetting (or binary options) would help me as I wasn't interested in the leveraged products until recently and I don't have much information about this.

Thanks again

I have never had a trading dispute with my SB firm and have been with the same one since it started up, before online, when it was telephone.

I never read the email accounts of my trades because the financial details are posted on the screen, so there is no need.

Having said that, I cannot guarantee that all are above board, you'll have to check them out.

I believe that most of the complaints are from losers. I would, also, say that, as the name suggests, they are "bookies" and deal with a motley crowd. If they were stupid they would soon be out of business, but keep a straight record with them over the years and they are as good to deal with as any other business.
 

Splitlink

Legendary member
10,850 1,233
You can rest assured they do not play fair. Look at how the same companies were defrauding people with slippage in forex trades, do you really think it never occurred to them to do the same with spread betting accounts?

What is "fair"? It's a very relative expression and extends over the whole of the business spectrum.

I can only go by personal experience and I believe that those well known companies, in the SB world, are just as fair as the high street banks who have been forced to pay back illegal mortgage insurance.

My Word! What a "fair" world we live in!
 
 
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