stevespray
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I think that you will find that there are other threads already posted which cover most of what is being discussed here. Regardless I’ll throw in my two pence worth….
As people have pointed out, when you open a spreadbet you are betting against the ‘house’ or the firm – they are your counterparty. Whether the company chooses to lay the position off is down to them and there is no contractual obligation on their part to lay off the bet. My own research has determined that different companies have different approaches. If a company has very narrow spreads (or indeed spreads that reflect the underlying market) then there is obviously very little financial reward available to them if they completely hedge their risk – all they would be doing is locking in a breakeven and therefore they’d be offering a tax efficient + free dealing service. This means that, in order to make any money, they must take on counterparty risk and take opposing positions to clients.
Other companies with larger than market spreads have a little more choice in the matter. The law of mathematics gives them a larger edge over their clients in that they extract a little more ‘value’ from the client each time they open and close a position. This presents the company with a better set of choices. They can hedge the position and lock in the profit made from the spread or they can run the position against the client knowing that the market can move in the clients favour a small distance before the client even reaches breakeven.
I have gained direct knowledge from several senior dealing staff / traders at several spreadbetting companies to suggest that very little is actually hedged in the first instant.
As people have already mentioned, the companies know that most people are unsuccessful at financial market speculation and therefore, with all things considered, there is no real need to be in a hurry to hedge their exposure so long as most customers trading activity isn’t too aggressive.
This situation changes however if a customer develops some kind of edge. I’ve been openly told by a lead trader at a well know spreadbetting house that they can not afford to let a customer who is very successful go on unchecked if he is clearly being successful in the short term timeframe. He acknowledged that a customer doing that is simply bleeding them of cash. He suggested that people who wanted to trade in that manner should trade directly to the market.
A few years back I actually developed a very nice little method of trading RBS (Royal Bank of Scotland) intraday. It simply involved using Level 2 data to spot potential gaps in the order book whilst watching the underlying S&P Futures + FTSE Futures to get an edge on market direction. At the time a couple of the spreadbetting companies were offering RBS at market spreads (which was normally 1p / 2p). Obviously from a trading point of view it would be impossible to trade directly to market using this method due to the round trip dealing costs. Not so however by spreadbetting as there were in effect no dealing costs. This is probably why the method worked. In effect RBS would lag S&P Futures (during the overlap with US hours normally between 2.30pm and 4pm UK time). This meant that by using L2 you could time your entry almost to the second. Quite often you could open a trade and be at breakeven in 5 or 6 seconds. Over a period of months I built up to lot sizes of £25 per point. It was very successful and over time I built up a good size balance in my account. Then all of a sudden things changed. One spreadbetting firm suspended my account and the other introduced significant delays in dealing with my orders which lead to a constant flow of re-quotes which meant I could never use my edge on L2 / S&P Futures. Both companies then introduced an increase on the spread of RBS. This meant that the stock was now un-tradable in outlined fashion. The point is that, in this case, the companies in question could clearly see that a number of traders had devised a system which appeared to defeat the laws of averages or apparent ‘truths’ relating to short term trading. The result was a reaction by the company to effectively eradicate that type of trading by moving the goal posts because it wasn’t financially viable to continue as things were.
Other people that I know have had similar reactions from different companies when other types of systems appeared to work. I know of several people who have experienced considerable dealing difficulties after doing quite well on the digital options / binaries.
The companies which offer these products know that the speed of execution is critical on these high delta products. A number of people have commented that they have suddenly and unexpectedly found that their trades are not being processed instantly and instead find that they are being routed for manual execution. Manual execution normally leads to a dealer comparing the price of the order with the price of the currently quoted market rather than the price which the market was at when the order was submitted. They then appear to reject orders which have since moved back into the companies favour whilst accepting orders where the movement in price is now further favouring the customer. Obviously the result is that the customer never gets any value brought about by the delays in execution and the company benefits 100%.
These are all situations and risks which occur when dealing with spreadbetting companies.
Again, I think what people have already written covers most situations. If you only bet small then they’ll probably not worry very much. The problems come as you build up your bet size. Lots of people talk about the 95% of traders who fail at this. What that statistic doesn’t tell you is that the successful 5% bet in much bigger size. Therefore in ‘money terms’ the net fiscal statistic isn’t stacked in such a one sided manner. In my own opinion, and indeed my experience, if you start making too much money by trading in a certain fashion (normally short time frame) then it won’t be long before you get some treatment.
I personally feel that spreadbetting companies do have some uses especially when people are new to the game and need to experiment with trial and error. If people are serious about making money from day-trading then they need to migrate to direct access to stand any chance. You need to know that any system which you devise to earn a living isn’t going to just disappear over night because a spreadbetting company finds you a drain on its profitability. That is simply less likely to happen with direct access because no one can suddenly interfere with your order flow or delay you trades while they see which way the market is going to move.
Of course a different situation may exist for position or swing traders. Spreadbetting might be considerable more suitable for people like that as they can’t be defeated by simply not receiving instant executions. I did read however that a well known City Bear was forced out of a position spreadbet after the spreadbetting company decided that it wanted to withdraw its market in a certain instrument.
Hope this all helps,
Steve.
As people have pointed out, when you open a spreadbet you are betting against the ‘house’ or the firm – they are your counterparty. Whether the company chooses to lay the position off is down to them and there is no contractual obligation on their part to lay off the bet. My own research has determined that different companies have different approaches. If a company has very narrow spreads (or indeed spreads that reflect the underlying market) then there is obviously very little financial reward available to them if they completely hedge their risk – all they would be doing is locking in a breakeven and therefore they’d be offering a tax efficient + free dealing service. This means that, in order to make any money, they must take on counterparty risk and take opposing positions to clients.
Other companies with larger than market spreads have a little more choice in the matter. The law of mathematics gives them a larger edge over their clients in that they extract a little more ‘value’ from the client each time they open and close a position. This presents the company with a better set of choices. They can hedge the position and lock in the profit made from the spread or they can run the position against the client knowing that the market can move in the clients favour a small distance before the client even reaches breakeven.
I have gained direct knowledge from several senior dealing staff / traders at several spreadbetting companies to suggest that very little is actually hedged in the first instant.
As people have already mentioned, the companies know that most people are unsuccessful at financial market speculation and therefore, with all things considered, there is no real need to be in a hurry to hedge their exposure so long as most customers trading activity isn’t too aggressive.
This situation changes however if a customer develops some kind of edge. I’ve been openly told by a lead trader at a well know spreadbetting house that they can not afford to let a customer who is very successful go on unchecked if he is clearly being successful in the short term timeframe. He acknowledged that a customer doing that is simply bleeding them of cash. He suggested that people who wanted to trade in that manner should trade directly to the market.
A few years back I actually developed a very nice little method of trading RBS (Royal Bank of Scotland) intraday. It simply involved using Level 2 data to spot potential gaps in the order book whilst watching the underlying S&P Futures + FTSE Futures to get an edge on market direction. At the time a couple of the spreadbetting companies were offering RBS at market spreads (which was normally 1p / 2p). Obviously from a trading point of view it would be impossible to trade directly to market using this method due to the round trip dealing costs. Not so however by spreadbetting as there were in effect no dealing costs. This is probably why the method worked. In effect RBS would lag S&P Futures (during the overlap with US hours normally between 2.30pm and 4pm UK time). This meant that by using L2 you could time your entry almost to the second. Quite often you could open a trade and be at breakeven in 5 or 6 seconds. Over a period of months I built up to lot sizes of £25 per point. It was very successful and over time I built up a good size balance in my account. Then all of a sudden things changed. One spreadbetting firm suspended my account and the other introduced significant delays in dealing with my orders which lead to a constant flow of re-quotes which meant I could never use my edge on L2 / S&P Futures. Both companies then introduced an increase on the spread of RBS. This meant that the stock was now un-tradable in outlined fashion. The point is that, in this case, the companies in question could clearly see that a number of traders had devised a system which appeared to defeat the laws of averages or apparent ‘truths’ relating to short term trading. The result was a reaction by the company to effectively eradicate that type of trading by moving the goal posts because it wasn’t financially viable to continue as things were.
Other people that I know have had similar reactions from different companies when other types of systems appeared to work. I know of several people who have experienced considerable dealing difficulties after doing quite well on the digital options / binaries.
The companies which offer these products know that the speed of execution is critical on these high delta products. A number of people have commented that they have suddenly and unexpectedly found that their trades are not being processed instantly and instead find that they are being routed for manual execution. Manual execution normally leads to a dealer comparing the price of the order with the price of the currently quoted market rather than the price which the market was at when the order was submitted. They then appear to reject orders which have since moved back into the companies favour whilst accepting orders where the movement in price is now further favouring the customer. Obviously the result is that the customer never gets any value brought about by the delays in execution and the company benefits 100%.
These are all situations and risks which occur when dealing with spreadbetting companies.
Again, I think what people have already written covers most situations. If you only bet small then they’ll probably not worry very much. The problems come as you build up your bet size. Lots of people talk about the 95% of traders who fail at this. What that statistic doesn’t tell you is that the successful 5% bet in much bigger size. Therefore in ‘money terms’ the net fiscal statistic isn’t stacked in such a one sided manner. In my own opinion, and indeed my experience, if you start making too much money by trading in a certain fashion (normally short time frame) then it won’t be long before you get some treatment.
I personally feel that spreadbetting companies do have some uses especially when people are new to the game and need to experiment with trial and error. If people are serious about making money from day-trading then they need to migrate to direct access to stand any chance. You need to know that any system which you devise to earn a living isn’t going to just disappear over night because a spreadbetting company finds you a drain on its profitability. That is simply less likely to happen with direct access because no one can suddenly interfere with your order flow or delay you trades while they see which way the market is going to move.
Of course a different situation may exist for position or swing traders. Spreadbetting might be considerable more suitable for people like that as they can’t be defeated by simply not receiving instant executions. I did read however that a well known City Bear was forced out of a position spreadbet after the spreadbetting company decided that it wanted to withdraw its market in a certain instrument.
Hope this all helps,
Steve.
