Stops and Spread bets

[adrianallen99]

Stops and limits are very useful (stops are essential), but how much of this information is used by the spreadbetting company.

Placing a stop gives the spreadbetting company info about your strategy and a clear point at which they can take a profit. How often do there spreads shift so when the market is close to your stop, you get stopped out.

When pricing a stock or indices based on the underlying market price, how important is the stop information?

I was just curious as to what peoples opinions (if any) where on this.

 

[options]

I don't think they target individual stops, not until you get winner after winner or bet large size. But they will 'run' the stops where they know a large amount of stops are likely to be placed.

 

[Moriarty]

do you know this for a fact, and if this is true has anyone come up with a way around it?

 

[stevespray]

This is a subject I have raised with the FSA / Financial Ombudsman regarding the operations which go on inside a Spreadbetting Company, as of yet they have not commented directly on questioning.

In a traditional market all that is visible is the order book which obviously contains all the “bids” (below the current market) and all the “asks” (above the current market). These bids and asks also have volumes marked next to them.
If you use a direct access system your “Limit Orders” (ie bids and asks) are entered directly onto the order book and sit there in full view of anyone who happens to look. The same is not true of “Stop Orders”. “Stop Orders” are actually held on your direct access system until triggered at which point you broker will enter a “Market Order” into the market to buy or sell the relevant stock regardless of price (hence why you can get slippage). These “Stop Orders” are not visible or known by other market participants, all they can do is guess where these stops are. This is why we often hear people commenting that “the market is just moving around looking for stops”.

The story inside the spreadbet companies is different. They know where your stops are if You elect to tell them ! Many of the companies about employ a specific dealer to quote specific markets. The dealer may use any information available to him when pricing a particular market, this includes the order book which contains both limit and stop orders. This is clearly an advantage based on the fact that the companies reserve the right to vary the price of their instrument both away from, and, more than the underlying market on which the instrument is based. Therefore a situation clearly exists where it could be argued very strongly that the spreadbetting company has a clear advantage over its customers especially in the times of “Grey Market”. Add to this the fact that some companies even allow dealers to review customers incoming orders before deciding weather it is going to stand by its quoted prices.

As I have said before, there is little regulation in Spreadbetting at present because there are not enough regulators who understand the finite details surrounding the operations of these companies. Obviously some of the Spreadbet Co’s would fight tooth and nail if it thought that its operational practices were being directly challenged. The situation is therefore a difficult one which may take sometime to sort out.

Steve.

 

[capitalspreads]

At Capital Spreads our stops are run by a computer that just sits in the corner doing nothing until a stop or limit is hit at which point it is 'red lined' and then activated by a dealer. The stops are never activated unless our quote on the dealing platform reaches the designated level. I can assure all of our clients that we NEVER bias our prices at any time. Whether we are quoting or applying stops.

Simon

 

[TheBramble]

However, if you use mental stops you're certainly not giving any information to 'the other side'.

 

[capitalspreads]

but mental stops can so easily turn into hope.

Stops are not restrictive in any way.

For example if you say to yourself i want to make 15 points on this trade I am therefore not going to risk more than 15 as a loss and preferably less.

Your Stop levels should always be tighter than your profit levels. If you can really truthfully stick to this mantra then, in the long run, you should make money.

Simon

 

[grubs50]

Simon,
why is it not possible to move the stop on FTSE (which is not a particularly volatile index) to within less than 15 points of the actual price ( maybe to about 5 points like igindex) with capitalspreads . This is just to enable the locking in of profits easier on this rather slow index.

 

[capitalspreads]

we have moved it to 10 points. The minimum stop distance is generally to try to stop customers being constantly pipped in and out because at the end of the day SB does still have a spread around the market price so that if you move your stop too close you may get stopped out on a relatively small move.

How would limiting the stop distance to 10 or 15 improve our P/L ?

If we allowed stops very close we would then get more trades and more spread profit . At the end of the day very tight stops in SB are self defeating , as has been commented on many times in these discussion sheets SB is more suited to longer term position taking or portfolio management than intensive day trading.

Simon

 

[Zenda]

You should allow the stops to be a close as possible - its our choice especially when trading large sums - Trailing stops very close locks in our profits - but then SB companies do not like you to trade that way - it attracts too many good traders !! keep it at 10 or above we'll get some back syndrome - we dont want them to continually pick up small profits ..........

 

[adrianallen99]

I guess it depends on your strategy, but it would be nice to have the option in certain circumstances, even it if meant having 2 stops A guaranteed and a non-guaranteed (The non guaranteed being the close stop.

 

[grubs50]

Simon, i was referring to the individual trader (locking in profits) not ur company.

 

[capitalspreads]

sorry grubs misunderstood your final point.

Often the reason that an SB company will not allow stops very tight in large size, is that there is just not that kind of size in the market. Love them or loath them SB companies will often add a great deal of liquidity to the market. Even as a small company we often accept trades in 100s of pounds a point in markets where you could not get that kind of size away in the underlying contracts. If we were to allow stops very close we may find that traders are dilberately putting stops in to trigger a move in the underlying that they could take advantage of elsewhere. (with another SB co or in the future itself).

Also customers will happily put very close market ordes in just before a big number and then complain that they did not get a fill at their desired level when the market has moved 100 points in five seconds. In the real world you would (as a market order in the futures market) be at the back of the queue for filling and be filled at awful levels. The SB companies will in general fill 'new' orders at much more favorable prices.

I know this all sound like us carping but nowadays the SB market is becoming a significant player in the total volumes (especially in pre market trading (wall street, S&P) ) so itself becomes vulnerable to the sharp market practices that can occur.

And to be honest if you wish to place a market stop that close I have to assume that you are actually following the market very closely so rather than risk a tiny tick move taking you out on an SB stop, you would be trading out yourself.

Zenda

i am sorry but you are wrong, if you keep trading taking small profits with tight stops, if your size was reasonable, every SB company would love you because we would be taking the spread over and over again. And frankly SB does not lend itself to small profit targets because due to the spread you would have to win five times in six to make up for every time your stop gets hit. And if you were that good in short term trading you would be very rich indeed and every dealing room in the city would want you.

Simon

 

[cshieldsx]

slightly unrelated question but I cant find the answer anywhere and its sort of on topic. With stop losses is it better to pay to make it guaranteed or just go non-guaranteed and save the money ? If the price does "gap-through" the non-guaranteed stop loss , realistically how long will it be until it is stopped ? Are we talking a few extra seconds, minutes, or hours or what ?! Thanks

What do all you guys do ? You always guarantee your stop loss ?

Thanks

 

[Splitlink]

slightly unrelated question but I cant find the answer anywhere and its sort of on topic. With stop losses is it better to pay to make it guaranteed or just go non-guaranteed and save the money ? If the price does "gap-through" the non-guaranteed stop loss , realistically how long will it be until it is stopped ? Are we talking a few extra seconds, minutes, or hours or what ?! Thanks

What do all you guys do ? You always guarantee your stop loss ?

Thanks

So far, I have always been stopped out at my price but I find it better not to be watching the screen when the stop is taking place, because it takes several minutes before it gets filled. When it does get filled, it seems to me that the price is on the way up, again, after having been a few points below. This should not matter to me, because I have , so far, always got my price. Nevertheless, I ask myself if it is their policy to trigger the stops at their convenience while they wait to see what the price is going to do. If the price was to keep falling and not return what would my trade get stopped at? Frankly, I don't know what is best, but I put a stop on much lower than I intend to close, for emergencies, and then close earlier, manually. I prefer that way. Yesterday morning my area was plagued with power cuts, which emphasizes the need to have a stop somewhere.

Personally, though, I have never felt the need for guaranteed stops

Regards, Split

 

[Riverland]

I think it also depends on what you trade and how likely it is to gap down. I've had my bacon saved a few times with a guaranteed stops on small caps that unexpectedly announce profit warnings. Small companies will sometimes open over 50% down on even slightly bad news. Of course this is unlikely to happen with larger companies, which is why the guaranteed stop premium is much lower with large caps than small caps.

It's also possible to use guaranteed stops in a hedging strategy. For example when news is expected that will significantly move the market in one direction or another. Open both buy and sell positions with tight guaranteed stops and your profit should exceed the loss.

 

[cshieldsx]

thanks for your opinion. I guess the only unanswered question is whether anyone knows the speed at which a non-guaranteed stop loss realises its been gapped ? How long does it take to register the fact the price is already gone past the non-guaranteed stop loss, and stop it ?