spread Vs tax

[Vaco]

I know this has been done to death and i'm not trying to reignite the spreadbet vs dma argument but i would like some feedback on the following sums. i posted this on the futuresbetting thread but i now wish it to reach the wider community. PLease let me know your views.

The spreadbetting company used is only relevent with regard to the spread and its impact on the calculations. I do not want this thread to discuss any other potential issues with spreadbetting i simply wish to calculate and discuss which route is more profitable for someone tht can afford future contract sizes.

Lets break this down as i dont believe size matters. more importantly how many points you ave per trade after losses

Lets use ym as a simple example with 1 contract. futuresbetting commission is $20 r/t vs $3.50 as in your example.

if you ave 10 points per trade (after losses) then you have made $50 per trade.

take away the commision from futuresbetting and u are left with $30.

if you were dma it would be $50 -$3.5 =$46.5 minus 40% CGT ($18.60) and you are left with $27.90.

Lets now say tht you are trading 10 contracts, futuresbetting commission is now $200 r/t vs $3.50.

10 pts per trade = $500 - commision leaves you with $300

dma $500 -$3.5 = $496.5 - CGT ($198.60)

lets look at what happens when you ave 20 points per trade, 1 contract to keep it simple.

20*5 = $100 minus comms $20 leaves $80 if with FB

$100 - $3.5 = $96.5 - CGT ($38.6) leaves $57.9

The above is a very crude example done for my benefit as much as everyone elses, other factors such as the 8k tax allowence and reducing tax further by offsetting profits against other costs will make the comparison more favourable for dma.

So how to decide which way to go. well lets say you have a system tht gives you a 50% win rate and a risk reward of of 1:2 profit is 20 points per trade loss is 10. this would give you an ave of 5 points per trade so i would say dma. even if your doing 40 points a winner 20 points a loser with a 50% this would only give you an ave of 10 points per trade. I would still favour dma at this point.

Any system generating better then 40 points per trade i would probably go with FB.

However heres where it gets confusing the above is based on the assumption that you will be able to make the extra 4 points out of the market tht you would lose to fb if you were going dma. if you use set point targets/stoploss then the above is not so relevent as you are making the same no of points.

so if i make make 10 points with a spreadbetting account i've made $50 and thts the end of my costs as the commission is built into the spread.

However with Dma you still have to take out comms and tax.

 

[timsk]

Hi Elefteros,
It strikes me that there are too many variables and too many unknowns to be able to make the kind of in depth comparison which would enable one to conclude which of the two routes is the most economical. Nonetheless, I applaud your efforts! I suppose one could take a statistically significant body of trades (> 100?) and work out whether one would be better off going the SB route or DMA. But even this is flawed, if only because it assumes exactly the same fills at the same prices and the same amount (or lack of, hopefully) slippage etc., etc. In your example, you mention CGT but don't appear to allow for the first £18k that's exempt? Depending on your yearly profits, CGT might not be as big an issue as your calculations imply. Also, I was surprised to see your DMA broker charging the same flat rate commission of $3.50 per RT regardless of size? Can you tell me which one does this please because, all other things being equal, that's the broker for me!

Tim.

 

[Vaco]

the rt rate is just what i got off the ib website, not sure how it is affected by size, It was a very crude calculation and going dma came out to be the better route so was no need to complicate by adding the exemption but i did mention it in the original post(although it was 8K at the time of writing)

pro spreads is dma so difference in slippage/fills was a non variable.

rtc should reduce with size, trader funding give their prop guys $1.38 rtc on s&p. good examples of here :https://www.traderfunding.co.uk/costcomparison.pdf

If this is your sole source of income other considerations are:

spread bet means no tax returns or constant searching how to reduce your tax bill

but getting a mortgage or other finance might be tricky.

let us know which way you decide to go.

 

[Technically Fundamental]

I didn't bother to read all of that but Capital Gains is 18% and your fist 10k is tax free. If you see a legal accountant you it may be possible to somehow slip proceeds into the bracket of entrepreneurs relief but I can't find a way at the moment. Maybe a limited company that holds a portfolio in the balance sheet and you could sell the company... I'm trailing off so I'll stop.

Also did yo consider DMA account costs?

 

[Vaco]

when i wrote it cgt was 40% i am aware that the law has changed since then

 

[Technically Fundamental]

Wasnt

 

[Vaco]

Wasnt

fine it wasn't still means dma is the favourable option so long as you pay cgt and not income tax.

 

[Technically Fundamental]

I'll worry about that when I start making money lol. Good luck to you though.

 

[Vaco]

if you look at the link i supplied you might find that you might start making money sooner if you were using dma.

 

[Crawsthorne]

the rt rate is just what i got off the ib website, not sure how it is affected by size, It was a very crude calculation and going dma came out to be the better route so was no need to complicate by adding the exemption but i did mention it in the original post(although it was 8K at the time of writing)

pro spreads is dma so difference in slippage/fills was a non variable.

rtc should reduce with size, trader funding give their prop guys $1.38 rtc on s&p. good examples of here :https://www.traderfunding.co.uk/costcomparison.pdf

If this is your sole source of income other considerations are:

spread bet means no tax returns or constant searching how to reduce your tax bill

but getting a mortgage or other finance might be tricky.

let us know which way you decide to go.

Surely another point is that with prospreads/direct access, it is possible to enter at the price you want while my experience of spread betting is that the price can change a lot as you hit it. This would have the effect of reducing the spread?

 

[Vaco]

At the end of the day the only reason to spread bet rather then go the dma route is if you dont have enough funds to trade dma.

prospreads is a bit of a halfway house as you have none of the nonsence you get with other spreadbet firms, a lower spread but margin requirements are about half whats required with dma.

when you have the funds to trade dma trade dma you will save a bundle.

 

[N Rothschild]

dma all the way, spreadbetting is for amatures

 

[steelhead]

on spread betting an instrument where there's 2 pts to enter and 2 pts to exit on a $5 a point position, equivalent to 1 lot on say the mini dow, this equates to a cost per trade of $20 ( 5 * 4 pts ).

If the DMA charges 18% CGT on profits then DMA is worse when the profit per trade exceeds $114.61
and better when the profit per trade is below $114.61 ( $20 / .18 + 3.50 = 114.61 ).
i.e $20 equals 18 percent of $111.11, which is $114.61 minus the upfront $3.50 charge.

So DMA is more suited where the per profit trades are below $114.61 on average, and alternatively SB at a fixed $20, for those lucky/skillful enough to make on average more per trade. DMA then would appear to be more cost effective for scalpers whose approach of quick small profit taking, due to the smaller charge incurred when the per trade profits are on average below $114.61.

Also DMA seems more suitable from the view of execution speed, lower restriction on size, and less chance of being requoted.

Is this reasoning correct ?