Hi Jimmy,
Have a feeling this will be a long answer so here goes.
Firstly, if you look at the flows of a spread bet company the major flows of trades are in non marketable amounts, if somebody does a £1 pp on the UK 100 then we cannot hedge that even if we wanted to so we have no choice. we have to aggregate. If we aggregate then there is no guarantee we will make on that aggregated position. However, against that aggregated position we have resting orders that can off set our losses and cap our profits so we can build our risk profile around the aggregated position, against our resting stops and limits and our real time trading clients.
As the markets move the aggregated position will just keep getting bigger and smaller and eventually once it gets to size we can and do hedge it. It is impossible for us to hedge every individual trade primarily because of the size.
If we have a big winning client and lets say he is seller of UK 100 and our aggregated position is made up of buyers then we use the big winning client to hedge our aggregated position. if the big winning client is going the same way as our aggregated position we simply dma the trade or cover it in the markets.
I do not know how some of the smaller companies operate and I have no interest. What we do is operate a flow model. The bigger the flows the less the risk, the more our positions get netted off naturally and the more resting orders we get to offset any upside or down side.
amongst our aggregated positions we have winning clients and we have losing clients. we do not care, we really only care about our aggregated positions, our risk reward against the markets and against our resting orders.
I can tell you that two days ago we handled around 200,000 orders in one day resulting in around 160,000 trades. Most of those trades were non marketable amounts. but we love the flows and being an ex forex trader to me all I want are flows, flows and more flows.
I am one of the few ex bank traders that is running a spread bet company and that is how I have set this company up.
If you ask me do I want winning clients or losing clients, I will answer you honestly.
Every time i would want WINNING clients. Why? because I can manage their flows to make money, I could buy positions ahead of the flows, I can manage the resting orders and if clients make money then they trade more and more and more.
That is the truth of it all. If you look at it we are offering our clients an outstanding service. We supply,
1. 0.7 spreads on non-marketable amounts
2. low margins
3. real time trading software,
4. real time back office,
5. real time charts, news, 24 hour access.
By managing flows we need automated execution, non dealer intervention and aggregation software to measure var and resting orders. A lot of our risk management is automatic.
At the end of the day this company is run by an ex trader from a banking back ground.
The more flow we get the more money we make and at the end of the day so long as that aggregated position keeps moving up and down we can make our money. Do I care whether our clients win or lose. Yes I prefer them to win. see above.
At the end of the day, does it really matter to you as a client what the sb company does with your flows. you are taking on the markets, we are delivering tight real time spreads, automated execution. so long as you are happy with that, then concentrate on the markets and make money.
remember spread betting is a leveraged product, you should understand the risk before trading.
thanks pc