Best Thread Capital Spreads

Kevin, I agree with what you say, especially the bit offering services at their own price but this in itself is 'grey area'. Obviously in this country alone there are numerous spreadbetting agents to choose from and all of them see the need to advertise. As with any product or service advertising will generally follow along certain ‘pre-defined’ lines. If you were selling a washing machine you might feel that you needed to draw customers attention to the fact that your machine had a fast spin speed or perhaps a good energy rating. The same is true within the field of advertising a spreadbetting company. The advertising will obviously focus on areas that the advertiser feels are important to any potential / current customer. In spreadbetting there would appear to be 3 or 4 obvious factors which an advertiser would want to promote. The biggest factor, in my opinion, are the spreads which the company offer, whenever people talk about a new company the question “What is the spread on XYZ” is almost always raised. Another big factor is speed of execution and also perhaps system stability. The spreadbet companies know all this and therefore base their adverts around these facts which people want to know about.
If we take our question on ‘spread’ and combine it with ‘speed of execution’ then we have, probably, about 99% of what people are really interested in when they enquire “How good is company ABC ?”.
So, having made these bold advertising claims the spreadbet companies are now faced with having to provide a service to customers which fits in with the service they advertise. This is where the problems can start for the punter. For example, I notice that from time to time CMC seem to attract criticism regarding re-quotes. If we take CMC’s US30 (their own Rolling Dow Cash based product) we see that it has a spread of just 5 points. This is obviously very competitive when compared to other companies where the spread can be as much as twice as big. However, people have questioned if the punter actually does have genuine dynamic access to a Dow based instrument with a spread of 5. They question this because orders are often delayed before filling during which time the market can move which can lead to a re-quote based upon where the market is at an unspecified time after the order has been placed. CMC are of course at liberty to re-quote as they see fit and many people claim that re-quotes do tend to favor CMC rather than the punter. This can result in CMC issuing a new price if it is beneficial to CMC and simply filling the order at the entered price if a re-quote would benefit the customer. Because of this you would have to regard the spread to be larger than the advertised 5 points. There is in essence a ‘stealth spread’ to consider which may not, at first, be very evident.
The same could be said of IG Index. Their website clearly makes some very bold claims about their trading platform which it would appear, when pushed, they are not able to support. Moreover, when pushed even further, they will quite happily send out a legal letter saying that they are not obliged to open / close any trade regardless.

Maybe the true fact is that there may not be enough money to be made by offering a trading platform that acts as they advertise. Companies may therefore be forced to act differently just to make their money and there lies the problem. Every new company squeezes the spreadbet market that little more. New companies arrive and make claims regarding their ‘new’ service, existing established companies re-vamp their platforms and re-launch them to keep the competition going still further, sooner or later a point has to be reached where it is not financially viable for a company to undercut anymore…..but what happens if a competitor does something to undercut you ? Surely you then reach a point where you have to ‘stretch’ you advertising further than perhaps you should, you cant afford to give anything more away in a financial sense but you have to appear to Joe Public that you are in someway improving your service which will benefit the punter. Obviously any ‘real’ improvement for the punter implies some kind of financial benefit which, based on zero sum game, will be to detriment of the spreadbet company concerned. So as you see a company is forced to make claims which it wont actually support because it is simply not financial viable to do so.

Further problems then arise for the punter when they seek to complain that the service is not up to the standard of that advertised or indicated. Most members of the public are not familiar with the in’s and out’s of legal jargon and most would appear to be unaware of their rights under contractual law. These rights clearly favor Joe Public but who ensures that these rules and regulations are followed ? In my experience complaining to a compliance department leads to stone-walling if your complaint has validity what-so-ever, they will not act in a neutral manner, their wages are paid by their company and you have to remember that, when push comes to shove the compliance department are after an easy ride and that basically means rejecting as many complaints as possible.

If you look outside the company for help then it becomes just as difficult. The Financial Ombudsman Service do seem very well run but in the back of one’s mind there is always a question mark over how well the people looking into your case know their subject area and this is especially true when you ask them to look into spreadbetting irregularities as some very finite issues exist which, if not fully understood, can vary the outcome of cases. It’s my belief that the spreadbet companies are very aware of this and this is how they get away with acting the way that they do.

To conclude, it’s my opinion that the only way that the spreadbetting industry can correctly regulated is by an independent body within the Financial Ombudsman. The body would contain people who only adjudicate on spreadbetting matters and therefore these people would quickly develop their specialist knowledge to such a degree where they would easily spot sharp practices and misleading adverting, not to mention failure to correctly follow Terms and Conditions.

Steve.
 
I quite agree with you, the net result is that for a serious would be trader the answer is to move away should the SB practise impact on your trading results.

Thus far that has not yet happened however I have had to reduce my stake size to ensure instant fills without re-quote, although I am able to doi this so far at a level that is still worthwhile. While longer term positions offer more upside when SB it is still costly due to the re-quote if you wish to trade above £30 point on the FTSE.

Because I am yet to go full time I have so far had to tailor my trading strategy to work within the boundaries of SB practises rather than trade freely. Personally the whole matter of spreadbetting is the offer of lower tax and costs, but if hidden costs associated through SB start to appear I will just move entirely to direct access and share dealing.

Kevin
 
As I consumer I can simply rely on your advertising claims made about the service you offer, advertising which goes to great lengths to asure me that I will have "Genuine one click dealing", "Live tradable prices" and that "the price I see is the price I get". Thats all I need mate.
Click to expand...


This statement is probably true for 98% or more of customers...

For the 2% or less who make short term profits (via arbing
or otherwise) probably not.

(Im assuming only 5% of IG customers are profitable over
the long run and half of these are short term traders)

So are IG justified in making these claims, if the vast majority
of customers do get this service than i would say they probably
are???
 
I think the SB market is still dominated by a few big players i.e IGINDEX, CMC, CITYindex (all of whom r exploiting their monopoly to d max) but things would improve as more and more competition develops with the advent of new SB companies offering better and new products/ platforms...............so IMO the future looks bright.
 
Donaldduke - Even if it was true for 98% or more of customers the remaining 2% would clearly have a gripe.
I own my own business and we deal directly with end consumers. If I were to advertise some washing machines for sale and described them as “1400 RPM Spin Zanussi’s for £299” how would you feel if you ordered one from us and when we arrived and installed it you noticed that it was a lower down the range 800 spin machine. Would you be justified in complaining ? Would I be able defend myself by claiming that “X percent of customers have received the machine that was advertised” ? Of course you’d be justified in complaining and your complaint would be totally valid. Of course in ‘the real world’ I would never attempt anything like I’ve outlined because you’d soon get a reputation as a shark. IG Index have at no point stopped to inform me that they are offering a service any different to the one advertised. The Terms and Condition appear to fully support the service they advertise but they aren’t following the T&C. The Customer Agreement is a contract between IG Index and the customer, it clearly states how business will be conducted between IG Index and the customer, IG are therefore contractually obliged to follow the rules as laid out.

Grubs – As stated in my post above. There is only a limited amount of business available to the spreadbetting companies. I’m not sure if more competition will actually help. As I have already said, it’s my opinion that the present competition is driving profits lower amongst the spreadbetters, this is, perhaps, leading to companies making advertising claims that are pure and simply not true. This is all brought about by need to make their service more appealing than that of a competitor.

Steve.

PS Our man from IG Index has gone rather quiet ??
 
well guys I thought I would put my little bit in here.

I didnt realise IG were commenting on this bulletin board but I thought he could reap the whirlwind before I made any further comments.

I know it sounds odd but at CS we really do like winners they give us a feel for the markets (something that is difficult when you are having to watch 2000 products at the same time) the spread we quote, whilst narrower than the other comparible SB companies gives us the oportunity to hedge virtually any position and even if we lose a few pips on the way in we have another chance when the customer closes to get them back. If the client makes £2000 on a trade as long as I make £2020 on the hedge I am happy (and my staff get paid)

Sometimes, of course, because of delays in price distibution we will not take trades but the customer will know within a few seconds if that is the case. But in the real markets the same thing happens (sometimes somebody is just faster than you and gets the trade you were going for or the market moves before you can trade etc)

If customers wish to trade on our competitors prices then I cannot, obviously, stop them all I can do is offer an alternative.

The rather short term view of churning customers and hoping for losers is false merely from the point of view of cost of client aquisition. Advertising is a massive part of our expenditure and one that we would, frankly, love to cut. If we could get a core of winning clients who regularly trade we would be in clover.

At the end of the day we are in reality Market Makers in a vast number of markets. Clients win or lose, that is their risk, we do nothing to increase the risk of losses (in fact with our mandatory stop policy we do our best to limit client losses) or to reduce the chances of winning, in the end it is the clients skill against the market with occasionally a bit of luck thrown in.

Simon
 
Afternoon Simon, It’s good to have your continued input.

I understand what you are saying about offering an alternative but it must p*ss you off when you spot that a competitor is advertising a service that you know it can’t realistically offer. Because of this a customer is, initially, likely to be drawn to your competitors service before yours. As I have said before, the companies would appear to know what customers want to hear / read and therefore they make their advertised service as appealing as possible. My guess is that if I was to open a spread betting firm tomorrow which advertised “Trade Dow Daily Cash on a spread of 3” and “The price you see is the price You get” then I would quite quickly become very popular with people who trade the Dow on an intra-day basis because its my belief that I would advertising facts that I feel would be very important to those clients.

The subject of hedging is an interesting one. Of course in the end it makes no difference to the customer if you hedge their position or not, the punter still wins or loses just the same. The hedging issue can of course be used by the S/B co’s to try to show that “we do like winners” and “we want all our customers to win” etc etc.

I can see where you are coming from when you say that you would like your customer base to revolve around a core of winning customers. You business could then take more of the form of a traditional brokerage rather than that of a spreadbetting company. You would in effect make you money purely based on the size of the orders, therefore a series of big orders from a string of established winning customers would net you easy money purely based on the fact that you could hedge the whole position into the market at a price better than the price you are offering the customer.

You also mention the fact that you are “Market Makers” – I would question this. Even though you are offering a market your prices are, as you have pointed out, obtained from another source, they are not ‘made’ by you and therefore the balance of buyers and sellers is not established by you to point where your market becomes balanced and therefore a fair price established. This in itself opens up a number of interesting questions, for example, most spreadbet companies T&C state something along the lines of “Customers should be aware that they are betting on our markets and not the underlying markets and that ZXY Spreadbet reserves the right to vary the price of our market away from that of the underlying”, however, they then claim at another point in the T&C that “If we allow a bet to open at an incorrect price then we reserve the right to cancel the bet or alter the opening price of the bet”. So my question is this, how does the customer tell the difference between a price which is ‘varying from the underlying’ and a price which is ‘incorrect’ ? If as you claim, you are indeed a market maker, then there is nothing to stop a customer from trading on an incorrect price as you are perfectly entitled to offer any market you please at any price you please, this is the basis of a ‘free market’, its just the same as me offering a washing machine or a fridge for £50 less that anyone else, its up to the customer to decide what a fair valuation is.
A number of issues are also thrown up when trading shares, especially the less liquid FTSE stocks. A number of friends have problems with CMC on this issue. Imagine that you attempt to sell £10pp of BOC and there are 1000 shares on the bid at price X. You enter the trade and it is excepted. You then wait a minute or so and notice that the 1000 shares are still on the bid at price X. (In other words your first position would appear to have not been hedged) . Is it now acceptable to sell another £10pp repeating the process until the price moves ? People I know who have done that have had trades reversed but the question is a valid one as CMC claim to be ‘market makers’.

Steve.
 
There are quite a few valid points in your comments which I would like to reply to.

The main reason for the line that the SB reserves the right to terminate a trade due to incorrect price levels are not because they may be a few pence out but because they may have made a material error in quoting. There are three main areas for this

1) in telephone trading the dealer may mishear his salesman and give him the price in the wrong product or in the right product but the wrong month. (for this reason many SB companies refer to the december quarter as 'christmas' because in a busy room it is easy to mistake 'september FTSE with 'december FTSE')

2) in computer trading the live feed may be down but the system is still quoting the last price and the dealer is unaware that this has happened until he/she tries to hedge. Alternatively it may be that somebody has input the wrong RIC code for the product thus giving the customer a price in XYZ company when he meant to quote YXZ.

3) with shares, the SB company may have missed a dividend date between now and the expiry of the contract which can have a major difference on the price that should be quoted. It must be remenbered that whereas the clients may be concentrating on just a few products the SB company is quoting on thousands.

This last reason is the most common and happens quite frequently.

In the real trading world Market Makers in illiquid equities are often not as firm on the bid as we might wish. I cannot comment on CMC's practises but I know that if we are trying to hedge a bet in equities and I can see a firm bid (maybe with a little depth as well) we may offer at a more advantagous price and try to make a little more on the deal. So in that scenario I suppose it might be a bit irritating when you are trying to offer in the market you suddenly find that your position has been doubled by the same client.(ouch).

Simon
 
Morning Simon, Some interesting and well thought out replies (as normal !). I would, in essence agree with most of what you say in your reply but would like to raise a number of further issues based on a few of the comments.

Obviously what you say regarding telephone dealing is completely true, if it’s a genuine error caused by the quoting of the wrong product then its clearly going to be a palpable error and I don’t think many people would argue with that. I tend not to do much phone dealing, with the number of companies available it’s normally easier just to trade with a different company if someone goes ‘phone only’. Needless to say, when you do phone and ask for a quote on a particular product most people would have a fairly good idea of the quote they are about to receive. There are however people who do, from time to time, ring to check position status based on the fact that they are away from their dealing screens. This is where possible problems could occur. If a quote was given and excepted by a client on this basis then it could be argued by the client that his decision to buy or sell was directly influenced by the quote he received, add to this a situation where you might then be unable to re-contact that client for several hours to outline your mistake. The result is that either the client or yourselves are exposed as the market could do anything in the time it takes you to re-establish communication with the client.

This situation of incorrect prices being quoted and excepted via the internet is a slightly different situation. Obviously someone trading via the internet would normally have full access to the underlying price of the product they are trading in. However, it could still be argued by the customer that, as spreadbet co’s describe themselves as market makers their prices may vary from prices offered by other market makers, because that is in essence what happens in the real market and hence why prices move.

As for the third situation in your reply I think you would find great difficulty in altering customers opening prices in products which you have miscalculated. The products I assume you are writing about are futures instruments based on individual stocks ? If this is the case then I’d have to suggest that these products were your individual instruments and ‘priced’ by yourselves as you saw fit at the time. If during this ‘pricing’ an error was made and you failed to consider a factor then it would be wrong to adjust customers opening prices based on your error. It would appear that the spreadbet companies will try and do all they can to ensure that their errors don’t cost them. I would suggest that this differs from the ‘real market’ where such errors will cost you money. I have read many books relating to trading. These books are either interviews or biographies of some of the ‘worlds best traders’. In some of these books these ‘top traders’ lay out the pit falls of setting up and running a trading operation. Several times what they term as ‘back office errors’ crop up. These errors range from incorrect calculations when pricing instruments to failing to ensure staff follow the correct procedures when exercising options listed on various exchanges. The reasons for such errors occurring are equally as numerous but if my memory serves me correctly one book mentions that most are avoidable human errors and are mainly due to either, staff inexperience, incorrect management and supervision or staff being overly familiar with their job leading to complacency. The bottom line is that most of these traders make a point and that point is that losses will occur due to human errors and these losses need to be quantified in order to establish a working trading model. My point is therefore, losses suffered due to mis-pricing and other such human errors are clearly a fact of life across the market as a whole and as such have to be deemed “the nature of the business”. With this in mind a spreadbet company is, in effect, gaining an advantage over its customers (an advantage which is clearly not there in the real market) if the spreadbet company is at liberty to alter or cancel trades after such trades have been accepted.
I also take on board your point surrounding the number of markets offered. You are of course correct when you state that a particular company may offer many markets while individual customers may study just a few. This again raises some interesting points. I have personally noticed that my trading performance drops drastically when I have too many positions open. This is largely because I can not correctly manage them. This is especially true around the open on US Stocks when stocks going against you can run away from you very quickly. The problem I suffer is that the average loss on losing trades increases when I have too many positions open. This is because I react more slowly to losing trades due to the larger number I am trying to monitor. This is not uncommon amongst traders which I speak to. So the point I again make is the one of being “the nature of the business”. No one tells the spreadbetting or cfd company how many markets it must offer, it is of their own choosing – they should choose a sensible number which they can reasonably monitor – they are a market participant just like I am and should act accordingly.

The situation surrounding the quoting of stocks is, in my opinion, the greyest of grey areas. You have obviously tried to address the brief points I raised in my earlier post and of course I can, at least to some extent, see the points you are making but they don’t really get anywhere near the heart of the matter. (This is not a criticism of Capital Spreads by the way, I’m just making a point of how the customer has no black and white guidelines on how they or the spreadbet company can act when dealing on stocks where volume could be considered an issue)
For example, in your reply, you suggest that a client doubling his position wouldn’t be very nice in a stock where volume was an issue. How would you therefore view a different client making the same trade ? Surely having two clients taking similar positions is the same as having one client taking double the position ? For that matter you could have ten clients all doing the same thing and it would be difficult for you to refuse any one of them as the order book supports each of their individual trades which is what several of the leading companies state as being criteria for a deal being excepted.
The same problems could occur when unwinding a bigger position. In such circumstance it is prudent to unwind the position slowly in smaller blocks over a period of time rather than just dumping the whole lot at once. Again, I know that certain companies complain when customers attempt to do this. A friend of mine was even informed by one company that “When you are closing out your position you must close it in one go so we can fairly calculate a volume weighted price” – To my knowledge that is an ‘execution only broker’ advising a customer on trading strategy which is not allowed under FSA regulations. If you are trading in the ‘real market’ aren’t you allowed to un-wind positions in this manner or must you do it all in one go ?
As I have already pointed out, most of these type of problems occur because the spreadbet or cfd company don’t hedge the position and therefore the state of the underlying market doesn’t change accordingly. This is always going to be a major problem for the companies concerned because their prices are based on the underlying market but their book activity doesn’t directly effect the underlying.
What do you think would happen if more and more of stock market activity was routed through to Spreadbet and CFD providers instead of going onto the main ? We’d reach a point where the pricing of stocks was purely down to the percentage of trade which went through the main exchange regardless of how much went on the books of ‘parallel markets’. Could this effect the fundamental workings of the market ? Out of interest I wonder what percentage of trade does go through ‘external markets’ ?

Steve.
 
Steve

I must congratulate you on a very interesting topic. I feel that until the SB and CFD's run by SB companies follow the real market in all transactions accept for the wider fixed spread they offer on any instrument, then there will always be grey areas.

Such grey areas do lead customers taking the view that the SB company is taking advantage of their position. I do not fully understand the mechanics of how the SB's will manage there company, but I do feel that if they are making on the spread on each deal they accept then why all these other issues. Why can they not perform the same service provided within the 'real market' and accept the profit from both ends of a round trip.

It does seem as if they must create a trading environment where the playing rules become stacked up against the trader.

I would be interested in both Simon's and your view on this.

Kevin
 
Re Hedging and Risk controls.

Most SB companies have limits on positions allowed in each product and they will not hedge anything up to that limit and will then hedge everything over it.

Thus if for instance the SB has a limit of £100 a point in the Wall Street contracts it will not hedge anything so long as the total position stays within 100 long or short. As soon as the position goes out of the range the SB will hedge.

This is based upon the truism that most people will run thier loses and take their profits so the SB company knows that even if they have a loss making position they will be taken out of it by the traders who are making money taking their profits and the SB will be left with the loss makers. This is also compounded be the natural belief that all major moves have gone too far aand that the market will reverse in the near term, this generally means that in the event of a long term trend in any market the SB companies generally make a great deal of money. Of course this is also helped by the fact that most people want to trade in the market that is having the biggest moves at that time .

The classic example of this is the current trading where at least a quarter of our trades are in currencies. A year ago SB companies hardly had any FX trades in relation to Wall Street and FTSE.

The worst type of market for the SB companies is when the market occilates in a reasonaly narrow range (say 100 points in the Dow) where the market move is not enough to hit stop levels but ranges up and down allowing all clients to take profits, whether long or short. Thus the SB company will get hammered by their own rules

Whether we hedge or not, as long as we have quoted a fair price and continue to do so is all that should concern the client base.

We do not actually run any positions of note in any markets but we may attempt to get better fills on our hedges than are available at that moment in time.

Simon
 
Afternoon Simon, Are those limits you mention (in the 'thus for instance' para) purely down to each company or do the FSA make any kind of demands regarding them ie tell you what you maximum allowable exposure is ?

You also mention that you may attempt to get better fills on hedges that are available at a particular momment - doenst this introduce quite a big element of risk on your part ?

Steve.
 
Steve

as I have said we do not run positions against our clients. But SB companies are not in the habit of over commiting themselves to any one position (unlike, unfortunately, some clients)

I cannot comment on FSA policy. But they do ask us questions which are generally well informed and pertinent to most of the issues raised in these boards.

As I stated we may look for a better fill if there is sufficient depth to warrent it so the answer would be no there is not a great deal of risk. If I am trying to sell 50,000 shares and there are 400,000 on the bid with a further 300,000 one pip back there is not a great deal of risk in working an order.

Simon
 
Charts on Capital Spreads site

Simon - any more info on your delayed charts package been upgraded to a live chart? There are plenty of people I know who are looking at your site right now as they are just about through with Fins and the mysterious 'technical errors' but its the same comment time after time, delayed charts. They are not much use to anyone really. What are your plans for am improved charts package?

Thanks, Kevin.
 
SB firms are only limited by the capital adequacy ratio. FSA stipulates that a firm MM in derivatives has to have 8% (may now be lower) in the bank of all such positions. So they do not have to hedge anything.

To be honest most firms do not hedge positions and are directly competing against the client. This is why the FSA is not too concerned with these firms as they act as bookmakers.
 
CAPITOL SPREADS

Today your spreads have been biased by 10 to 11 pts on the daily dow. This is a difficult enough game at the best of times but with bias like that it makes it near impossible. It does seem as though you are taking the pxxs out of your clients, please tell me this isnt the case.
 
Simon

Are there any plans to offer an API for your trading platform
surley this would give your company an edge over the competition
 
We never bias any market I can only assume that you are looking at the Cash Dow price on bloomberg or somesuch and expecting our price to be around this.

This is not the case (except for times when the market is quiet)

We quote the Wall Street all day long as a difference from the Front futures contract.

Today the front Wall Street future is the June Contract and we quote the Mid Point on the Daily Dow 24 points higher than this.

You will notice that the mid point between the March Jun and Daily Wall Street does not change all day.

If we quoted a price 11 points wrong all day we would just get hundreds of trades one way as people arbed us with the market or with another SB company.

Your comments are a common misconception of SB clients who expect the price that they can see on thier cash Dow Ticker. There is no such tradable instrument as the dow 30 index, to replicate it you would have to trade in all 30 stocks. What governs the movement of the Dow is the Futures which move much more quickly than the actual index (which has to wait for all 30 shares to trade and then be put through a pricing engine to come up with a new level)

By the way, as we only quote 5 points wide, if you felt we were 11 points biased why did you not trade on that price and cover yourself with a daily future? Or get another trade off with a competitor SB company in the Daily Dow. Thus locking in a profit.

Simon
 
I can validate Simons answer

I compared the futures price from CBOT and in a 5 hour period there was only a 2 point variation between the futures and CS price.

During the same period the cash and CS price showed 14 points variation.

So CS prices do indeed follow the near futures price, if they did not, how would they be able to quote pre-market.
 
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