Why do Spread Betting firms insist on not allowing third-party trading platforms?

[MORRIS2001]

ibetfinancials is an sb firm. They use CQG and other platforms.

But are they actually offering spread bets?

Kyte offer DMA. As such, you can easily offer third party front ends as all you are doing is routing to exchanges. This is very easy.

However, there is a mechanic of spread betting which has led all previous DMA spread bet firms to locate outside of the UK. Betting tax.

If as a firm betting tax is levied on you, how do you pay this substantial tax if you are giving away 100% of your client losses to other users on the central exchange?

The big evolution in 3rd party front ends and APIs will come when SB firms begin to look at themselves as exchanges rather than brokers.

 

[MORRIS2001]

Quite a few of these platforms were originally from Ariel Comms, I think, who used to brag about the 'adjustable slippage' facility.

Most still are. In terms of vols it's probably a volume level on par with PureDeal at a guesstimate.

But bringing it inhouse is an investment of millions with huge ongoing running costs. Unless you are extremely confident of the business uplift it usually isn't a comer iCal deal that stacks up.

But don't forget that MT4 comes with a back end and that is optimised for book running

 

[The Leopard]

But are they actually offering spread bets?

Kyte offer DMA. As such, you can easily offer third party front ends as all you are doing is routing to exchanges. This is very easy.

However, there is a mechanic of spread betting which has led all previous DMA spread bet firms to locate outside of the UK. Betting tax.

If as a firm betting tax is levied on you based on client losses, ie your gross gain, how do you pay this substantial tax if you are giving away 100% of your client losses to other users on the central exchange?

The big evolution in 3rd party front ends and APIs will come when SB firms begin to look at themselves as exchanges rather than brokers.

Well, they say they do.

Algorithmic Trading and Clearing House for Futures Forex Equities and Options Traders

I'm not sure about the betting duty - 3% of net client losses I believe - as I don't use them. Their commissions are a good bit higher than those of a regular futures broker.

I would imagine though that most of their clients are profitable - there really would be no point in trading with them if you weren't. You've got 400 quid a month or so for CQG plus higher commissions. If tax wasn't an issue (that is, if you weren't profitable) I guess you'd just go to someone like Velocity and get x-trader for free and lower commissions.

FP Markets offer a similar model. However, they make a charge on net losses quarterly to cover betting duty, although they have their own platform and don't allow external ones. Their commissions are also higher than those of a regular futures broker of course. Again though, why use them if you're not profitable?

 

[MORRIS2001]

Those would be the solutions.

One of those models though does raise the issue of professional traders and whether spread bet gains would be tax free of not. That has been a grey area for years and I am not aware if it has actually ever been tested in financial betting unlike sports betting.

It also has the downside, if it remains untaxable of not being able to carry losses forward through a year or just as importantly being able to screen your personal default risk via a limited liability vehicle.

Fundamentally spread betting is dearer than physical DMA trading but you are buying some useful advantages that can be crucial and highly convenient to many types of traders.

Margin requirements tend to be much lower, lot sizes are fractions of the physical lot size, out of exchange hours trading, zero tax liability, multi asset class account and platform and then a series of minor functionalities supplied by the spread bet firm which are unsupported on the underlying exchanges like trailing stops.

These are all huge advantages that help to counter the disadvantages one of which is that if you aren't just order routing onto an exchange or into a clearer it is far more complex and also risky to run and manage the API essential for 3rd party platform connections.

 

[The Leopard]

Those would be the solutions.

One of those models though does raise the issue of professional traders and whether spread bet gains would be tax free of not. That has been a grey area for years and I am not aware if it has actually ever been tested in financial betting unlike sports betting.

My understanding is that it is.

 

[Ross Spur]

Shouldn't this thread be in the Spread Betting section, Mr Mod?

 

[MORRIS2001]

My understanding is that it is.

That's interesting. I'm certainly not 100% up to date on the tax law element and haven't been aware of any case law on this element. In the current environment I can't see the HMRC drawing a favourable conclusion on a professional trader avoiding income tax.

But then I've been surprised by the willingness of many firms to adjust the funding part to be a separate element which also contravenes the original essence of what defines a 'bet'. i.e no separate charges and all costs wrapped into the opening bargain.

But certainly the position of UK betting tax plays a role in why it is far more complex for a SB firm to allow 3rd party platforms readily.

The next couple of years will see this side of the market evolve though as OTC brokers learn how (more importantly build the massive tech required) to deliver pricing and account data reliably and safely to and from platforms into their books.

At present the White Label model is still the core system to deliver your prices in exchange for flow to an external client base but the market has been trying to evolve from this for several years.