Best Thread Spreadbetting, the myths and what is the reality?

1. 'you wont find much difference'. aah! thats the point. there may not be much difference, only a tick now and then against you, but all those ticks over the course of a year add up to a huge amount.

2. spread betters are not brokers. may be were misunderstanding each other here? sure a broker in a listed market will be best buddy if you're a winner, but a spread better will put you on phone orders, wider quotes etc. they do not want you to win. a winning customer to a spread better is a risk of doing business.

3. possibly. i'd say it would have a use if you're looking at long term speculations such as seasonal out right trade that you may hold for a few weeks or so. a few ticks against here and there isnt going to kill you there.

yep - they are a business, not a charity interested in your financial welfare.
 
charliechan said:
They get their income from 2 places: interest on customer deposits, and also from the eventual loss of customer funds. it can be no other way. every one knows the average customer lasts approx 6 months. similar to the average life of a t2w member! when you've cleaned those customers out, you put another flashy ad in the FT suggesting potential dreams and financial freedom to another bunch of mugs.
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This is the bit of the anti SB argument that fails to convince, IMO. I don't have the stat's to hand, but pretty well everyone accepts that finding new punters is a costly business. It's easier and cheaper to retain existing customers than it is to attract new ones. As more firms enter the SB arena offering bigger 'golden hellos' and tighter spreads etc., this business model outlined by charliechan - if it exists - must be running on very slim margins. And getting slimmer by the day. It doesn't bode well for the future for any SB company. In principle it must, surely, be better to win new customers and then do what every other business on the planet tries to do:- to retain them? A loyal customer who does well (perhaps having received some company education) will do two things:
A. Increase their position size which means bigger profits for the SB company.
B. Tell their friends / post on forums like this one etc. spreading (forgive the pun) the good news about the SB company.
This is a much better business model and one that enables both SB firm and punter to profit together. Obviously, the SB firms will say that I'm right and charliechan is wrong - but they would wouldn't they! So, I accept that I could well be wrong and that CC might be right but, until conclusive evidence is produced one way or the other, I think my explanation is more plausible and rather more probable.
Tim.
 
charliechan said:
not quite.

this is how it works:

1st, an algorithm is generating your quote. this is based on your current position. if you are short, the algo will quote 1-2 ticks higher than if you were long. therefore, you're getting fleeced there.

this is common sense if you think about it. as your broker is also your counter party, it's clearly in his interest to quote you to his advantage not yours. i'm sure you'd do the same if you could.

2nd, that algorithm knows where you put your stop that you believe is sound practise after the free 'education' they gave you. when the real market approaches your stop, your quotes will get skewed towards your stop.

3rd, look at a sb business model. where does it get it's income from? they dont charge commission, and they most certainly dont hedge each customers position. how could they hedge a 10p per point position (i guess thats a typical trader of a newbie whos been bleeding to death over the last 4 months) in a market that trades $10 per point?
They get their income from 2 places: interest on customer deposits, and also from the eventual loss of customer funds. it can be no other way. every one knows the average customer lasts approx 6 months. similar to the average life of a t2w member! when you've cleaned those customers out, you put another flashy ad in the FT suggesting potential dreams and financial freedom to another bunch of mugs.

4th there are plenty of stories about legendary traders from futures, stocks etc. ive never once heard about a successful sbread better who did it for longer than a few years.

face it. spread betting is for people who are too eager to get into the markets and get some action. thus they get taken to the cleaners and rightly so. they would be much better off by staying out of the market and keep learning/paper trading until they have the money for a proper account with a good broker to trade in a listed and regulated market like stocks or futures, but not fx, which is the same as spread betting in that you are trading against the same counterparty.

good trading is about managing probabilities. spread betting is not good trading in general as the probabilities are stacked against you even more so than in a regulated market place.
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Charlie boy,

If i want a flutter on the markets then SB is the way. What kind needs to pay for CQG and all that to take some money out of the markets?

The sameone who needs ultra tight prices because they are doing mega spins for thier employer.

DMA is just as much a game as SB.

Get real matey.
 
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timsk said:
This is the bit of the anti SB argument that fails to convince, IMO. I don't have the stat's to hand, but pretty well everyone accepts that finding new punters is a costly business. It's easier and cheaper to retain existing customers than it is to attract new ones. As more firms enter the SB arena offering bigger 'golden hellos' and tighter spreads etc., this business model outlined by charliechan - if it exists - must be running on very slim margins. And getting slimmer by the day. It doesn't bode well for the future for any SB company. In principle it must, surely, be better to win new customers and then do what every other business on the planet tries to do:- to retain them? A loyal customer who does well (perhaps having received some company education) will do two things:
A. Increase their position size which means bigger profits for the SB company.
B. Tell their friends / post on forums like this one etc. spreading (forgive the pun) the good news about the SB company.
This is a much better business model and one that enables both SB firm and punter to profit together. Obviously, the SB firms will say that I'm right and charliechan is wrong - but they would wouldn't they! So, I accept that I could well be wrong and that CC might be right but, until conclusive evidence is produced one way or the other, I think my explanation is more plausible and rather more probable.
Tim.
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tim - you raise some good points. I'd agree that for most business' it's better for both if the customers do well. could you also say that about a casino?

what other business model can a spread betting company use to make money? it's only income is customer deposits. the more the customer wins, the more the firm has to pay out. again, like a casino.

people will always believe 'its different for them' or 'lady luck is with them tonight' or the best one ever: 'i've got a system!' its no different from spread betting. there will always be another gordon gekko with £5,000 he has 'to play with', believing it's his turn in life to hit the big time, or 'ive backtested this for 5 years of data' blah blah blah.

one thing you cant deny - we would both be in agreement if we were talking about casino's being a negative return proposition, there would be no debate. however, simply because spread betting is a casino based on the seemingly intellectual 'market', some refuse to see the similarities, and worse, as you can read when ever the subject arises, others get very emotional indeed and refuse to see the truth that stares them in the face when you point out they are no different from someone putting £100 down on 23 red. at least in a casino you get free drinks!

so there we are - another flashy ad in the ft tomorrow morning to hook the next lot in. the gambling urge in humanity ensures a steady flow of revenue. there will ALWAYS be someone else ready to open account, and somebody willing to take their money
 
kimo'sabby said:
Charlie boy,

If i want a flutter on the markets then SB is the way. What kind needs to pay for CQG and all that to take some money out of the markets?

The sameone who needs ultra tight prices because they are doing mega spins for thier employer.

DMA is just as much a game as SB.

Get real matey.
Click to expand...

there's the difference.

someone who 'flutters' for a bit of fun, fine.

someone who needs to make a living has to have a professional attitude and cant afford to 'flutter'. he has to make informed decisions based off of accurate data.
 
charliechan said:
tim - you raise some good points. I'd agree that for most business' it's better for both if the customers do well. could you also say that about a casino?
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Hi cc,
Yes indeed, when it comes to casino's, we are in complete agreement. The 'house' has a positive expectancy and the source of their income is entirely from the punters who have a negative expectancy.

Although you present a strong case for aligning SB firms with casinos, I'm still not totally convinced by it! I should point out that I have no vested interest in SB firms or any reason to defend them. I do have a tiny 'play' account with ETX Capital which I rarely use, but my main trading account is with Infinity Futures - a DMA futures broker. So, as much as anything, I'm acting as devil's advocate.

Where the parallel between the two businesses breaks down is in the spread - or lack of one in the case of the casino. Their only means of profit is at the expense of the punters. However, the SB firms will argue that they make most of their profits from the spread. So, if customers can accommodate the spread in their strategies, both parties can profit. And the customer's profit doesn't come out of the pocket of the SB firm because their algorithms hedge their order book in the underlying market.

This business model is more sustainable in the long run and it allows both SB firm and their punters to profit - which is something that's not possible in games of chance such as roulette offered by the casinos.
Tim.
 
timsk said:
..............However, the SB firms will argue that they make most of their profits from the spread..............
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Tim

Yes, that's what they have always claimed. But their claim doesn't sit comfortably with the current "spread war" that's going on at the moment with many offering 1 point spreads on both ftse and dow, for example.

jon
 
charliechan said:
1st, an algorithm is generating your quote. this is based on your current position. if you are short, the algo will quote 1-2 ticks higher than if you were long. therefore, you're getting fleeced there.

2nd, that algorithm knows where you put your stop that you believe is sound practise after the free 'education' they gave you. when the real market approaches your stop, your quotes will get skewed towards your stop.

4th there are plenty of stories about legendary traders from futures, stocks etc. ive never once heard about a successful sbread better who did it for longer than a few years.
Click to expand...

1. - come on, do you really believe this? So let's say I want to go short £10 a point, then I should sell £5, ask for another quote and then hit the new, artificially high bid in £5 again? (or maybe the algorithm is adaptive based on your trading behaviour??)

2. I used IG to trade spot for a while and I never noticed this "price skewing". When my stops became close, I would watch the market from another source just to check for this.. there were instances when I was surprised that IG kept me in.. (I can't comment on how other S/B firms operate). In fact there was one instance when IG filled me 28 pips BETTER than my limit level, because spot had gapped higher on Monday morning.

4. "Legendary" traders need direct access to size and liquidity which spreadbet companies don't provide. If you're betting £20/point or less, it won't be an issue and the added benefit is your winnings are tax free (but regrettably your losses are not tax deductible either). Also, whilst I'm sure there have been some very successful scalpers out there, "legendary" trading usually implies keeping positions open for longer than a day, and spreadbet companies charge a roll fee for keeping positions open overnight, in FX this adds to 2 pct a year.

There are pros and cons to spreadbetting, but this idea that they're "out to get you" is daft. They make money on volume and spread, and charging for rolling positions.
 
so would a company make their money on the spread by hedging a position? please folks, think about the mechanics of doing this for every size of bet and for every customer out there. work it through and see that it doesn't make sense.

the point about charging a 'roll fee' for keeping a position overnight made me laugh! i wasnt aware they did this, but is just another example of another very small edge they have on you. look after the pennies and the pounds will look after them selves.

as for the skews and stop running, im not saying this happens all the time, but it does happen from time to time - enough to be disregarded as 'slippage' by the unaware.

remember spread betting is just the modern day, electronic version of what livermore wrote about in roaso. but because its electronic, it can be more controlled, faster, and easily calculated.

face it. spread betting = casino. as ive said else where before, i believe what i have said is true from talking with fairly senior directors at one or 2 of the main sb companies, and also the company who writes the spread betting engines. cant remember if this was the firm, but i wonder what a 'nudge interface' does? http://www.arielcommunications.co.uk/solutions.htm

roll fee. lol. i've heard it all now. roflmao!!
 
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charliechan said:
................so would a company make their money on the spread by hedging a position? please folks, think about the mechanics of doing this for every size of bet and for every customer out there. work it through and see that it doesn't make sense...........
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cc

I don't think it's that difficult. Aside from the really big players where they may or may not hedge individually, I would assume that their computer system gives them their aggregate net position on each instrument as well as their aggregate net profit/loss overall. Simple task then to decide if and where to hedge.

jon
 
charliechan said:
so would a company make their money on the spread by hedging a position? please folks, think about the mechanics of doing this for every size of bet and for every customer out there. work it through and see that it doesn't make sense.

the point about charging a 'roll fee' for keeping a position overnight made me laugh! i wasnt aware they did this, but is just another example of another very small edge they have on you. look after the pennies and the pounds will look after them selves.

as for the skews and stop running, im not saying this happens all the time, but it does happen from time to time - enough to be disregarded as 'slippage' by the unaware.

remember spread betting is just the modern day, electronic version of what livermore wrote about in roaso. but because its electronic, it can be more controlled, faster, and easily calculated.

face it. spread betting = casino. as ive said else where before, i believe what i have said is true from talking with fairly senior directors at one or 2 of the main sb companies, and also the company who writes the spread betting engines. cant remember if this was the firm, but i wonder what a 'nudge interface' does? http://www.arielcommunications.co.uk/solutions.htm

roll fee. lol. i've heard it all now. roflmao!!
Click to expand...
You seem to have lost touch on how the SB industry is operating today.:)
 
Hi cc,
I was just about to reply to your point to find that Jon's taken the words out of my mouth and beaten me to it!

Depending upon who you talk to and, more importantly, who you believe - some SB firms will (allegedly) look at their overall net position and maybe trade against the consensus view of their client base. If they get it right - they clean up big time. However, if they get it wrong . . . That said, I imagine they pay some quant' silly money to design an algorithm to do this at times when the risk to them is minimal and the probability of success is very high indeed. Add to this the interest on deposits as meanreversion mentioned earlier, along with all those lovely spreads and they've got enough ways to turn a profit without resorting to your business model. I'm still not saying you're wrong - but I remain unconvinced that you're right.
Tim.
 
When we visited the offices of IG in 2001, we were shown a screen , which had some sort of a meter.

I cant remember the exact colours, etc, but basically the trader was telling us, when they see danger ( i.e. meter out of the green zone), they would go out on the open market and hedge their bets;

Dont ask me the technicallities, but that was the case.

Al
 
barjon said:
cc

I don't think it's that difficult. Aside from the really big players where they may or may not hedge individually, I would assume that their computer system gives them their aggregate net position on each instrument as well as their aggregate net profit/loss overall. Simple task then to decide if and where to hedge.

jon
Click to expand...

so, lets say the computer says hedge at 457.25. but hang on, the markets now at 359.89. holy sh!t batman, were never gunna get the hedge on right!! better use options and go in at the closest strike i guess? nope, that wont work either because the amount of exposure isnt divisible by the contract specs. damn! generally, any hedge has to be calculated before the principal leg is executed. hedging on the fly is extremely difficult, especially if you are trying to hedge a book that is constantly changing its volatility surface.

for a spread better, what would a hedge look like anyway? as the customers loss is his gain, a hedge would actually mean taking the same side as the customer. to hedge against the customers position would mean he now has twice the exposure.

about the best hedge the spread better has is to look at his book and see has 1mil in long s&p, 2mil short ftse, and using correlation figuring out he is say 0.5mil overexposed on the short side of the ftse. the ftse is falling badly.

so, is he going to hedge his ftse by going short? hmmm. that would require taking a position on his own book. as he's regulated by the fsa, is he allowed to do this? (i honestly dont know. i know brokers never take a position in the market and thats fsa regs, unless they are a bank)

ask yourself this: are the majority of people on this web site who use spread betting firms long time winners? would you be willing to take the other side of their trades? remember the average 'punter' can call the right direction most of the time, but fails to make money because of long term impact of transaction costs (worse with big spreads), the use of tight stops, and generally poor trade management.

i would.
 
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This thing on hedging positions... they don't hedge positions, they hedge risk... you're starting from a false premise cc...

You can try a very similar thing yourself. Go direct market on anything reasonbly unvolatile, and sit on bids and offers. If risk gets too large reduce it by paying up. You will make money, surprisingly... it's basically what I do all day... I like to think that it isn't, but in reality it is :)
 
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