For those of you who think that spread betting firms only make money if you lose.

[Hotch]

You really haven't thought much about it.

The common mistake is to forget that the world doesn't revolve around you, and that they have more than one customer.

Customer A goes long the FTSE @ 12pm @ £10/point, pays his £20 in spread charge.
Customer B goes short the FTSE @ 12pm @ £6/point, pays his £12 in spread charge.
Customer C goes short the FTSE @ 12pm @ £4/point, pays his £9 in spread charge.

Firm's up £41, when they close they'll be up another £41. The great thing is, they've got no exposure. If you're winning at spreadbetting, you're not taking it off the company, you're taking it off some other muppet.

You all seem to love your casino metaphors, so here goes:

You're playing against someone else at poker, all you do is pay the rake (spread) to the house (your spread betting company of choice).

Sure it's not always going to add up, but 99% of it is probably cancelled out by someone else, after all, that's how the market works, for every contract short there's one long. This leaves them with very little to hedge, and I would guess this is the grain of salt in the "they don't hedge 90% of their orders" line.

 

[gle101]

You really haven't thought much about it.

The common mistake is to forget that the world doesn't revolve around you, and that they have more than one customer.

Customer A goes long the FTSE @ 12pm @ £10/point, pays his £20 in spread charge.
Customer B goes short the FTSE @ 12pm @ £6/point, pays his £12 in spread charge.
Customer C goes short the FTSE @ 12pm @ £4/point, pays his £9 in spread charge.

Firm's up £41, when they close they'll be up another £41. The great thing is, they've got no exposure. If you're winning at spreadbetting, you're not taking it off the company, you're taking it off some other muppet.

You all seem to love your casino metaphors, so here goes:

You're playing against someone else at poker, all you do is pay the rake (spread) to the house (your spread betting company of choice).

Sure it's not always going to add up, but 99% of it is probably cancelled out by someone else, after all, that's how the market works, for every contract short there's one long. This leaves them with very little to hedge, and I would guess this is the grain of salt in the "they don't hedge 90% of their orders" line.

Yes I agree, the industry have changed quite a lot from the old days. However, insecure traders are still the same, they blame someone else for their trading failures, and this will probably not change as a lot of newbies is entering into the world of Financial Spread Betting.

____________
"Take control with Risk & Money Management"

 

[tar]

yeah they make money from the spread and from your losses as well , most clients lose anyway , longs and shorts are rarely balanced ...

Forex Open Position Ratios | OANDA fxTrade

 

[Ross Spur]

Did anyone say that SB firms only make money when you lose?

 

[TheBramble]

Did anyone say that SB firms only make money when you lose?

It has been said.

 

[donaldduke]

If you're winning at spreadbetting, you're not taking it off the company, you're taking it off some other muppet.

But by hedging the effects of your profitable trading the spread bet firm gets to keep that easy muppet money for itself.

If you are profitable and bet large enough, the the spread bet firm will try and hedge your bet in the underlying market, which may or may not even be possible at the price displayed if the market is moving fast.

 

[TheBramble]

Hotch makes a good point.

I’m not disputing the SBs may play games and may decide not to go flat if they have a conviction against their aggregate exposure, but that’s their business. Quite literally. If you buy into their business model from the other side you do so in the knowledge that such things are possible, and even likely. You take them into account, and if you’re smart, even use them for your own purposes.

The point OP was making was that even ‘just’ taking the spread, this was the SB equivalent to a casino’s edge, the zero (and double-zero) on the roulette wheel etc. The sit there all day (and night) checking their exposure laying off excess risk and taking the spread/edge. It’s enough to make the business viable. Extremely viable. Even without the additional fun & games….

The only difference between them is that the SB doesn’t give you free drinks.

 

[Hotch]

But by hedging the effects of your profitable trading the spread bet firm gets to keep that easy muppet money for itself.

If you are profitable and bet large enough, the the spread bet firm will try and hedge your bet in the underlying market, which may or may not even be possible at the price displayed if the market is moving fast.

See, if it were me , there's no way I wouldn't be hedging the losers, I prefer guaranteed, risk free money than gambling that a loser isn't going to get a lucky break.

As for hedging in quick markets, bar NFP & interest rates (when the spread is increased anyway), I don't think it's hard nowadays, the spread is pretty much 3x the underlying, your order to the exchange is a fraction of a second. They'll fluctuate in that time sure, but doubt they'd go through that spread most days.

 

[wallstreetwarrior87]

You really haven't thought much about it.

The common mistake is to forget that the world doesn't revolve around you, and that they have more than one customer.

Customer A goes long the FTSE @ 12pm @ £10/point, pays his £20 in spread charge.
Customer B goes short the FTSE @ 12pm @ £6/point, pays his £12 in spread charge.
Customer C goes short the FTSE @ 12pm @ £4/point, pays his £9 in spread charge.

Firm's up £41, when they close they'll be up another £41. The great thing is, they've got no exposure. If you're winning at spreadbetting, you're not taking it off the company, you're taking it off some other muppet.

Really?

The spread is the entry charge into the market place, not the exit charge. You dont pay 2 points to enter and 2 points to get out. It is 2 points fixed cost (SB companies keep the spread constant during market hours within reason). Can you imagine having to pay to get into a nightclub and having to pay to get out as well!

So the firm wont make another £41 (although I think you meant £40?) when they close.

The spread is 1 cost.

So in your scenario:

Trader A buys £10 @ 12 (spread is 10 -12) Cost = £20
Trader B Sells £6 @ 10 (spread is 10-12) Cost = £12
Trader C Sells £4 @ 10 (spread is 10-12) Cost = £8

SB frozen profit = £40. Thats it, they wont make another £40 when the positions are closed.

Here is why-

To close:

Price has now moved to 13-15

Trader A closes at 13 for + £10
Trader B closes at 15 for -£30
Trader C closes at 15 for - £20

The companies profit is still only £40, the same as when the positions were opened.

But apart from that, yes I agree with the fundamental point of your post. But mine also shows that there is still a lot of mis understanding about how the structure actually works.

Spreads are just a cost of doing business, an impact cost. As long as your business plan accounts for this, there will be no problems.

 

[gle101]

yeah they make money from the spread and from your losses as well , most clients lose anyway , longs and shorts are rarely balanced ...

Forex Open Position Ratios | OANDA fxTrade

So how many percentage of the positions is not balanced by the book do you think? I honestly don't know, but my guess is, very little, as they will not put the company on the line with speculation in which way the market is heading.

____________
"Take control with Risk & Money Management"

 

[gle101]

Really?

The spread is the entry charge into the market place, not the exit charge. You dont pay 2 points to enter and 2 points to get out. It is 2 points fixed cost (SB companies keep the spread constant during market hours within reason). Can you imagine having to pay to get into a nightclub and having to pay to get out as well!

So the firm wont make another £41 (although I think you meant £40?) when they close.

The spread is 1 cost.

So in your scenario:

Trader A buys £10 @ 12 (spread is 10 -12) Cost = £20
Trader B Sells £6 @ 10 (spread is 10-12) Cost = £12
Trader C Sells £4 @ 10 (spread is 10-12) Cost = £8

SB frozen profit = £40. Thats it, they wont make another £40 when the positions are closed.

Here is why-

To close:

Price has now moved to 13-15

Trader A closes at 13 for + £10
Trader B closes at 15 for -£30
Trader C closes at 15 for - £20

The companies profit is still only £40, the same as when the positions were opened.

But apart from that, yes I agree with the fundamental point of your post. But mine also shows that there is still a lot of mis understanding about how the structure actually works.

Spreads are just a cost of doing business, an impact cost. As long as your business plan accounts for this, there will be no problems.

There is a problem for the SB with fixed spread. If they are in a position that they must hedge quite a lot (the book in not balanced), and the spread you are quoting is in fact narrower compared to that of the underlying asset.

____________
"Take control with Risk & Money Management"

 

[TheBramble]

So how many percentage of the positions is not balanced by the book do you think? I honestly don't know, but my guess is, very little, as they will not put the company on the line with speculation in which way the market is heading.

SBs (and OANDA for that matter) set the spread well away from the levels as which they are able to transact with their liquidity providers.

On increasing volatility, they widen the spread (disagreeing with WSW87’s view on the fixed nature of spreads here) to ensure they have a very comfortable safety net, so what exactly would be ‘on the line’ even if they did chose to expose themselves to excess directional risk? Very little indeed.

 

[tar]

IG group report , check pages 110-112

http://www.iggroup.com/content/files/annual_report_11.pdf

 

[wallstreetwarrior87]

There is a problem for the SB with fixed spread. If they are in a position that they must hedge quite a lot (the book in not balanced), and the spread you are quoting is in fact narrower compared to that of the underlying asset.

____________
"Take control with Risk & Money Management"

Hi,

The spread is just an example. It may as well be a 10 point spread. The case will still be the same. SB profits are made on the opening of positions. The profits dont increase if the buyers and sellers open and close at the same time.

Work it out with a 10 point spread, the result is exactly the same.

 

[TheBramble]

SB profits are made on the opening of positions. The profits dont increase if the buyers and sellers open and close at the same time.

The SBs buy and sell at rates different (and well inside) to those offered to their clients. Forget the aggregation and offsetting and hedging.

Every transaction they make is a profit. Forget whether it’s buying or selling and whether it’s another physical trader on the other side of your trade. Makes no difference.

 

[scose-no-doubt]

@ Hotch & Bramble
Does your hypothesis not hinge on punters' collective size weighted directional bias being random rather than skewed?

 

[Hotch]

Really?

The spread is the entry charge into the market place, not the exit charge. You dont pay 2 points to enter and 2 points to get out. It is 2 points fixed cost (SB companies keep the spread constant during market hours within reason). Can you imagine having to pay to get into a nightclub and having to pay to get out as well!

So the firm wont make another £41 (although I think you meant £40?) when they close.

The spread is 1 cost.

So in your scenario:

Trader A buys £10 @ 12 (spread is 10 -12) Cost = £20
Trader B Sells £6 @ 10 (spread is 10-12) Cost = £12
Trader C Sells £4 @ 10 (spread is 10-12) Cost = £8

SB frozen profit = £40. Thats it, they wont make another £40 when the positions are closed.

Here is why-

To close:

Price has now moved to 13-15

Trader A closes at 13 for + £10
Trader B closes at 15 for -£30
Trader C closes at 15 for - £20

The companies profit is still only £40, the same as when the positions were opened.

But apart from that, yes I agree with the fundamental point of your post. But mine also shows that there is still a lot of mis understanding about how the structure actually works.

Spreads are just a cost of doing business, an impact cost. As long as your business plan accounts for this, there will be no problems.

Lol, my bad, tiring day

 

[Hotch]

@ Hotch & Bramble
Does your hypothesis not hinge on punters' collective size weighted directional bias being random rather than skewed?

I'm not saying it all cancels out perfectly, but I would expect most of it is. Meaning hedging costs are a lot lower then lots of people seem to assume.

I'm not sure about the Oanda, but I know the fxcm SSI thing only shows # of positions, not size. If Oanda does the same it's possible that the 68% short USDCAD precisely cancel out the 32% who are long.

I don't really know what hypothesis you're referring to? I was just pointing out that £1 long cancels out £1 short with no exposure for the bookie, but that's fact, not a hypothesis.

 

[wallstreetwarrior87]

Lol, my bad, tiring day

All forgiven

 

[gle101]

SBs (and OANDA for that matter) set the spread well away from the levels as which they are able to transact with their liquidity providers.

On increasing volatility, they widen the spread (disagreeing with WSW87’s view on the fixed nature of spreads here) to ensure they have a very comfortable safety net, so what exactly would be ‘on the line’ even if they did chose to expose themselves to excess directional risk? Very little indeed.

They will not (if they do, very low percentage) trade against the client in thinking they will win he will lose.

____________
"Take control with Risk & Money Management"