The Blades….
I’ll try and answer a few of your questions.
Firstly I would point out that the same arguments could have been levelled at the Bucket Shops in Livermore’s time – Why didn't they simply copy cat Livermore’s instructions not only to an extend where they were hedged but to a point where the Bucket Shop was positioned with Livermore – the fact is that they didn't, most likely because that wasn’t in their business model.
My guess is that the same could be true of some of the Spreadbetting companies. There are also a number of other points. The companies which offer very tight spreads would find it more or less impossible to make any money if they hedged positions. Quite often the companies quote is the same as the underlying market. It is also possible that they may not be able to hedge quickly enough. Some folks for example are experts at reading L2 in certain stocks. Quite often they will spot a cascading price and join it quickly, quite often it is not possible for the company to take a similar position in the time available. By that I mean that in the time it takes for the punter to open his bet the position is already showing a breakeven or a profit. There is where the problem lies when a spreadbetting company takes on an experienced market participant who trades in such a manner. He or she may be an expert in only a few markets which they watch for many hours a day and also monitor with expensive software. The spreadbetting company however makes thousands of different prices and can not therefore be an expert in them all. The net result is that, in some cases, the company finds it necessary to manually process certain customers orders in certain markets. This manual process adds time to execution which gives them time to inspect the order. For example, if an ‘OBL has been found’ rumour broke then it would be ‘sensible’ for a certain company to slow down its order flow in many of its markets purely because the market would suddenly make a very easy long. I hope that you get the picture. The bottom line is that split second timing can, in certain cases, make the difference between a successful trade and a losing one. The spreadbet companies are very aware of that.
You comments also fail to cover the ‘grey markets’ which many of the companies offer. In a grey market the spreadbetting company is your direct counterpart. Things like digital options (or binaries as they are often called) and also out of hours index quotes can not be hedged as there is no underlying market in which to hedge. This means that the winning punter directly costs the bookie.
You mention that spreadbetting is ‘the way forward’ for yourself personally. This may be very true. You need to remember that the path that a successful trader takes is one of continual evolution. As you point out, you would re-evaluate this situation if something nasty happened or you were mistreated. In my opinion, the longer you trade and the larger your size gets, the more likely that it is that you will start to suffer. The same rule could be applied to the tax scenario which you briefly cover. When you bet small and use the winnings to supplement a proper taxable income the tax man is unlikely to be interested. My personal accountant (plus casual enquiries of a senior tax inspector at my local Bristol Tax Office) have both suggested that you can be placed under the status of ‘Professional Gambler’. There are people in the UK currently taxed under this status. I have been advised that if you were to move into a situation where your winnings from spreadbetting were you only income then you would be soon risk being investigated as your Income Tax contributions would drop to zero. Obviously I am neither a tax inspector or an accountant, I am purely passing on information which has be revealed to me.
I take you point regarding tax but would point out that it is not as simple as ‘paying the extra spread’ in order to remove tax liability. There are some pretty large psychological issues also involved. With larger spreads the cost of trading increases dramatically, as does the will power required to close losing trades quickly (hence losing the large spread). This is where Direct Access scores its biggest advantage for me personally. The cost of opening a trade is tiny, often on Dow and S&P Emini’s it is actually only the cost of the brokerage (about $1.60 per contract). This extremely low cost makes it psychologically very easy to close bad trades very quickly. When I trade short term moves, looking at Dow for moves of between 6 and 20 odd points, I use time as a key factor in determining if I should run or close the position. Quite often I will close a trade for a loss of a few ticks after only being in the trade for 7 or 8 minutes. On that basis spreadbetting would be completely unsuitable for my short term trading methods as a losing trade would set me back a minimum of 10 points. The tight spreads and rapid executions are the key to success of that particular system.
Hope this helps,
Steve.