frugi
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A most enlightening thread, thank you everyone. Totally agree that spread firms are most suited to position trading and IB/Level 2 etc. for daytrading.
In regard to spreadbet firms bias, I have cut and pasted the following, with thanks to and copyright tradingspreads.com.
The Dow is sitting at a level of 10,000. The Spreadbet Company quote is 9,997 to sell and 10,003 to buy. You decide to buy and the Dow moves upwards over a period to 10,025. The quote from the SB company is now 10,222/10,228 (ie. 10,222 to sell and 10,228 to buy). You sell the Dow to close the Buy trade and realise a profit of 19 points (10,222 - 10,003). This is an idealised situation, you have called the direction correctly and the SB company quote straddles the current value of the Dow. In practice it is not often that the SB company quote will nicely straddle the current value and so it is unlikely that you would get two good quotes (one for the entry and one for the exit). The SB company will bias the price they quote and this can have a significant effect upon your potential gains and losses.
The first point to make here is that even though the Dow moved 25 points you will only have realised 19 of them. The other 6 points have paid for the spread.
Using the above example you have probably entered the trade because the Dow is going up. This being the case the SB company will probably have noticed this as well. They will bias their quote to reflect this upward movement and so, even though the current level is 10,000, their quote will probably be 10,000/10,006 (or higher). So, your buy price would be 10,006. When you decide to close the trade you have probably made this decision because the index seems to have reached its high for the moment and your view is that it is more likely to go backwards than forwards now. Again, the SB company will probably have a similar view and will bias their prices accordingly. So, the actual is now 10,025 but the SB quote 10,019/10,025 (or lower). To close the buy trade you will now sell at 10,019 to achieve a profit of 13 points (10,019 - 10,006). This would be a typical trade, the Dow has moved 25 points in your favour but you have only managed to bank 13 points. You have given away 12 points in spread and bias.
In the above example you can quickly see that had you got the direction wrong and the Dow had gone down that your loss would have quickly been very large as the SB company moved from a positive bias to a negative bias.
Spreadbet Company Price Bias
It is widely accepted and known (the obvious exception being SB company glossy promotional literature) that the SB companies quote, whilst being based on the underlying instrument, can be heavily biased in the current direction of movement or in an anticipated direction of movement. This is most obvious immediately before, at and immediately after the open of the days trading. It can occur frequently during the trading day as the SB company anticipates movements and attempts to balance their quote taking into consideration, amongst other factors, the Futures price and other SB companies prices. This bias can be very significant and can make the difference between a profitable trade or a trade that loses even though you have called the direction correctly. When the quote is significantly out of step with the actual level of the Dow then do not trade it. Every point of bias that you give away is a point you need to get back to be in a winning position for the trade. I have seen the quote as much as 50 points away from the actual and 6 to 12 points is not uncommon.
When the current level is 10,000 and the spread is 6 points and the SB company price to buy is 10,006 ie. 6 points above the current level (not uncommon) then a small reversal on the actual or a change of sentiment could cause the SB company to reverse the bias. It is unusual that they would do this in one step but it can be done in two or three quick steps which would not be uncommon. The position you are in now is that the original bet would have cost you 6 points to close if you had closed it as soon as you had opened it (ie. the spread). Your new position is that the actual index has reversed by one point but the SB company has reversed its bias and is now quoting 9,999 to buy and 9,993 to sell. You now have a loss of 13 points if you close at this point.
Taking another view, the SB company can also let the actual catch up with their quote. This means that if you had bought at 10,006 when the actual was 10,000 and the actual now moves up to 10,006 the SB company may not move its quote. So, the index has moved in your favour but to close you will still have a 6 point loss. This is not uncommon and can be seen a number of times a day when trading the Dow.
The bias is an aspect of spreadbetting that is not discussed very often but you need to be aware of it if you are to maximise your gains and minimise your losses when trading the Dow using spreadbets.
Cheers,
Frugi
In regard to spreadbet firms bias, I have cut and pasted the following, with thanks to and copyright tradingspreads.com.
The Dow is sitting at a level of 10,000. The Spreadbet Company quote is 9,997 to sell and 10,003 to buy. You decide to buy and the Dow moves upwards over a period to 10,025. The quote from the SB company is now 10,222/10,228 (ie. 10,222 to sell and 10,228 to buy). You sell the Dow to close the Buy trade and realise a profit of 19 points (10,222 - 10,003). This is an idealised situation, you have called the direction correctly and the SB company quote straddles the current value of the Dow. In practice it is not often that the SB company quote will nicely straddle the current value and so it is unlikely that you would get two good quotes (one for the entry and one for the exit). The SB company will bias the price they quote and this can have a significant effect upon your potential gains and losses.
The first point to make here is that even though the Dow moved 25 points you will only have realised 19 of them. The other 6 points have paid for the spread.
Using the above example you have probably entered the trade because the Dow is going up. This being the case the SB company will probably have noticed this as well. They will bias their quote to reflect this upward movement and so, even though the current level is 10,000, their quote will probably be 10,000/10,006 (or higher). So, your buy price would be 10,006. When you decide to close the trade you have probably made this decision because the index seems to have reached its high for the moment and your view is that it is more likely to go backwards than forwards now. Again, the SB company will probably have a similar view and will bias their prices accordingly. So, the actual is now 10,025 but the SB quote 10,019/10,025 (or lower). To close the buy trade you will now sell at 10,019 to achieve a profit of 13 points (10,019 - 10,006). This would be a typical trade, the Dow has moved 25 points in your favour but you have only managed to bank 13 points. You have given away 12 points in spread and bias.
In the above example you can quickly see that had you got the direction wrong and the Dow had gone down that your loss would have quickly been very large as the SB company moved from a positive bias to a negative bias.
Spreadbet Company Price Bias
It is widely accepted and known (the obvious exception being SB company glossy promotional literature) that the SB companies quote, whilst being based on the underlying instrument, can be heavily biased in the current direction of movement or in an anticipated direction of movement. This is most obvious immediately before, at and immediately after the open of the days trading. It can occur frequently during the trading day as the SB company anticipates movements and attempts to balance their quote taking into consideration, amongst other factors, the Futures price and other SB companies prices. This bias can be very significant and can make the difference between a profitable trade or a trade that loses even though you have called the direction correctly. When the quote is significantly out of step with the actual level of the Dow then do not trade it. Every point of bias that you give away is a point you need to get back to be in a winning position for the trade. I have seen the quote as much as 50 points away from the actual and 6 to 12 points is not uncommon.
When the current level is 10,000 and the spread is 6 points and the SB company price to buy is 10,006 ie. 6 points above the current level (not uncommon) then a small reversal on the actual or a change of sentiment could cause the SB company to reverse the bias. It is unusual that they would do this in one step but it can be done in two or three quick steps which would not be uncommon. The position you are in now is that the original bet would have cost you 6 points to close if you had closed it as soon as you had opened it (ie. the spread). Your new position is that the actual index has reversed by one point but the SB company has reversed its bias and is now quoting 9,999 to buy and 9,993 to sell. You now have a loss of 13 points if you close at this point.
Taking another view, the SB company can also let the actual catch up with their quote. This means that if you had bought at 10,006 when the actual was 10,000 and the actual now moves up to 10,006 the SB company may not move its quote. So, the index has moved in your favour but to close you will still have a 6 point loss. This is not uncommon and can be seen a number of times a day when trading the Dow.
The bias is an aspect of spreadbetting that is not discussed very often but you need to be aware of it if you are to maximise your gains and minimise your losses when trading the Dow using spreadbets.
Cheers,
Frugi
