Get to know the nature of beast
As llew has pointed out, most of the spreadbetting companies about are different in nature and all operate in different ways. These differences can make a huge difference in both your ‘trading experience’ and your profit and loss. One of the most important aspects of trading is to remain calm and level headed. It is therefore important that what we could term ‘side issues’ don’t become big issues and upset our calmness. In my experience a loss of composure results in bad trading decisions. On this basis we need our broker (or spreadbetter) to be reliable, we don’t want them adding to list of reasons that cause us to lose our composure. Personally I hate having to trade via the telephone. Some people I know are completely unaffected by having to deal on the phone. On this issue there is a need to look at yourself to see how this may affect you. Internet reliability is a long standing issue with these spreadbetting firms and it is an issue I have raised a number of times. As others have pointed out from time to time, its very easy for the companies in question to ‘blame it on yer isp’, as a number of my American friends would say. I’ve been given this excuse several times in the past despite the fact that I’m running on 2mb broadband. I run an office network through my broadband connections which runs other stuff which is live. Some of this other software automatically monitors for lag. If my system lagged for more that a fraction of a second I’d know about it.
Once we get past the ISP issues we get onto the subject of general reliability. One or two have noted that certain companies remove internet dealing during sharply trending moves. This obviously removes the opportunity for customers to quickly trade in and out of markets when it is easiest to do so. On the basis that this appears to happen quite regularly with certain companies at certain times it is clear that they do it for a reason. Quite often, if you phone and ask them, they’ll tell you that it is for a ‘technical issue’ and that trading will resume ‘very shortly’. I am very sceptical about any broker / spreadbetter that consistently has technical issues especially when markets are moving quickly. I mainly use a direct access broker and I can’t remember the last time that I couldn't trade through them at the split second I wanted to. If direct access brokers and electronic exchanges can maintain such a high level of reliability then why are the spreadbet companies struggling to offer the same reliability ? One has to ask the question ‘is it in their interests to offer such a level of reliability ?’ or is it more financially viable to actually have a system which does struggle when markets are moving quickly and hence customers are unable to benefit from fast execution. From what I have read it would seem that Capital Spreads are better than most. However, I would suggest that there is an issue which needs addressing regarding delays in execution between submission and execution of orders. The problem appears to be rather similar to that suffered by one of two of the other spreadbetting companies in that market moves made in between submission and execution are taken into account when the dealer decides whether or not to except the trade. Obviously the market could move a good distance in just the few seconds which constitute the minimum time it takes to review an incoming trade. From what I have read plus my own experiences (which are quite limited) I would suggest that if Capital were to address this issue then they’d be onto a winner. In fast markets quick execution is king.
Obviously Finspreads system would work well in that situation because they continually supply you with a live price on which to trade but their system seems to fail far too easily in volatile situations.
As the title of this little passage suggests, its all about establishing the ‘nature of the beast’ and thus establishing whether certain companies services are suitable for you as an individual.
Direct Access Brokerage
I have never personally had any real problems with direct access. This is a very important aspect of my trading. If you are going to ‘day trade’, which seems to be the fad, then you have to consider a number of very important aspects. The amount of tax you are going to pay if you are successful should feature very low on your list in my opinion and therefore why consider spreadbetting in the first place ? When you set the possible tax savings aside it is considerably more expensive to spreadbet than it is to use a direct access broker. Buying 100 shares (or $1 per point in spreadbetting language) of Microsoft will incur you a dealing cost of precisely $1.00 (or 55 pence in sterling). For this 55p cost you get to deal at market spreads which is generally about 1 cent (but quite often zero). This is the most efficient type of dealing you will find anywhere in my opinion. When I deal the total costs are minimal. When you deal in this fashion stop losses become very easy to implement because you are far less attached to the position from a psychological point of view. In my opinion people attach themselves to spreadbet positions because they recognise the large costs involved in trading in an out of positions and therefore when they enter a position you feel like you want to get ‘value for money’ from your ‘ride’, this tends to lead to losses getting run up rather than closed off early.
Direct access also offers much cheaper access to the futures markets. It seems to me that more people play the futures via spreadbetting than anything else. Dow and S&P seem to get the most mentions. Generally the Dow Futures market has a spread of 1 point during normal US market hours. This spread does increase out of hours but this increase is never normally any bigger than the most competitive spreadbetting company’s quote.
S&P Futures are normally always on a spread of 0.25 points and this is for the quarterly contract, most spreadbet companies charge 4 or 5 times that.
The spread on Dax Futures is 0.5 points and likewise FTSE Futures are 0.5 as well. Obviously you have to consider dealing costs with a broker but these are generally very small and amount to no more than a dollar or two.
Another key factor which is possibly the most important thing is speed of execution. Direct Access is lightning quick. If you’ve not used it before then it will knock your socks off ! If you deal at market then you get the market price in an instant. Obviously if the market moves in that split second then you get the new price but 90% of the time I find I hit exactly the price I want and for the other 10% you get the next tick. This can work both ways. There is absolutely no pissing about waiting for conformations while dealers check prices and levels etc, its all done electronically in real time with no human intervention.
It’s not all bad news
Spreadbetting obviously does have some advantages if you have a trading system which is longer term. These will be strategies where fast execution is not that important. These will be strategies where the cost of opening and closing a position doesn't drastically reduce the profitability of overall trading.
Spreadbetting also allows the use of smaller stakes on futures products than the underlying market does and is therefore good for beginners who are learning about market characteristics and the various emotions that trading can trigger. It would seem that despite the fact that folk can use smaller stakes people still over commit on position size and it is this failure to apply sensible money management which puts pay to most peoples dreams of long term success. In essence double digit percentages of trading capital get swallowed up by losing trades promoting a cycle of irrecoverable draw down.
Good luck with whatever you choose, just be aware that is a vital part of your trading !
Stevie.
