The Extraordinary Cost of Spreadbetting Futures

[Jack o'Clubs]

For the last few months I've been paper-trading a new idea I've had for futures. Rather than have to open a new account with a futures broker, it was easier to run it through the prices from my existing spreadbetting accounts.

With CMC, IG and Finspreads all offering a pretty good range of futures spreadbets, I've just gone through an exercise to work out what the effective round-turn commissions are for a bet of the equivalent size of one contract - after all it's worth a slightly higher comm for the tax saving isn't it?

Er, no... The costs are extraordinary. CMC's spread (the lowest!) on Wheat for example is equivalent to a $150 commission for a contract. Given that the Wheat contract is pretty small and I might trade two or three of these... 😱 .

I only worked this out when I couldn't see why my P&L taken from spreadbet quotes was wildly adrift from that taking the future's price and adding a commission. It's obvious when you think about it - a 2.5 point spread for Corn, when the contract's worth $50 a point...

The details will depend on each traders' style, but for me I'm far better off paying top-rate CGT than trying to trade through a spreadbet - and that's before you consider the other pros and cons of betting against the house through spreadbetting.

I've cut and paste some details below - in each case I've taken the narrowest spread from CMC, IG and Fins:

Effective RT Comm $
(per contract - based on narrowest spread)
Dow 40
S&P 50
NAS100 60

Bonds 60
Euro 100
Yen 100

Crude Oil 60
Heating Oil 252 😱
Unleaded Gas 252 😱

Gold 100
Silver 300 😱
Copper 150

Corn 125
Beans 50
Bean Meal 100
Bean Oil 48
Wheat 150
Cotton 200 😱
Sugar 112
Cocoa 80

I really hope no-one's trading these.... Now, where's that IB application form??!

 

[Directional]

Good post JOC. good info for people to make an informed choice

with only a $2000 account minimum at interactive brokers, there is no reason not to trade the underlying through a broker if you're looking at comparable contract size bets.

Unless you're trading 50p a point that is, but even then... :cheesy:

If you've got enough to stump up the £5k for an account with two way futures, you can have the tax free benefits AND direct access however - best of both worlds 😆

 

[Pippppin]

it also goes a long way towards showing why 80-90% of punters lose spreadbetting - trying to beat the market and paying such a high "commission" to the spreadbetting companies almost guarantees failure

 

[Jack o'Clubs]

I agree on TwoWayFutures - already trade with them, and it's win/win (God, I hate that expression) - it's a shame they don't really do much in the way of commodities, otherwise I'd have no need of the IB application form I'm currently printing off!

 

[andycan]

One other small factor, i traded wheat, beans,corn US bonds and spx via cmc and not only was the spread bad in comparison to the true futures but i also noticed that the spread betting companies quotations was not a true reflection of the real market and this seemed to happen when there was a large volume order. many times the spx via cmc would drop 2c but the true sp would go down 1/2 a cent so if you had a stop order reflecting the real market 2c from that point with cmc you are stopped out but in the real markets you would still be in, that is another cost that is hidden but very real

 

[Directional]

remember that unlike the real market, the SB firms know where your stop is. If they can make an excuse to trigger it... your losses are their profit.

and dont forget they have smart software that intelligently allocates negative slippage against you - remember you arent dealing with the underlying market with conventional SB firms - so why should you get slippage if you're dealing directly with the market-maker?

Coz they thought of an excuse, and the more slippage you get, the more money they make.

"oh.. it was a fast market when you got stopped out"

So not only do they get to stop you out if the market never traded at your stop-price, they also get to give you slippage on your stop when the real market probably wouldnt. Ka-Ching!

 

[Phil Mibbutz]

Interesting stuff, but how about Worldspreads and their 1pt spreads on Dow, DAX, CAC and FTSE. Surely that works out cheaper than paying a commission if you're on small stakes?

 

[andycan]

to be honest i gave up on spread betting about 3 years ago to trade futures
but about 2 years ago one company i cant remember offered me one free bet on the ftse
so i thought i have a look i compared the true ftse futures to the ftse they had. even though their bid/ask was really tight and at the time the ftse was getting hammered the bid ask for the spread company was more than 3 points below the actual ftse then it stalled and jumped 2 points above the ftse so there was a 5 point move by the spread when in reality the ftse did not move
IMHO a scalper will get cruxified, a swing trader could make it work if he/she can put up with the spread betting companies underhand methods

Andy

 

[Visaria]

to be honest i gave up on spread betting about 3 years ago to trade futures
but about 2 years ago one company i cant remember offered me one free bet on the ftse
so i thought i have a look i compared the true ftse futures to the ftse they had. even though their bid/ask was really tight and at the time the ftse was getting hammered the bid ask for the spread company was more than 3 points below the actual ftse then it stalled and jumped 2 points above the ftse so there was a 5 point move by the spread when in reality the ftse did not move
IMHO a scalper will get cruxified, a swing trader could make it work if he/she can put up with the spread betting companies underhand methods

Andy

I think you're not comparing like with like. If the underlying FTSE future went one way, the FTSE future offered by SBs moves in exactly the same way otherwise we would fall over ourselves to arb it. In fact, in the example you give, there appeared to be a 3 point arb - you should have traded it! Perhaps you're comparing the FTSE cash with futures...

One other small factor, i traded wheat, beans,corn US bonds and spx via cmc and not only was the spread bad in comparison to the true futures but i also noticed that the spread betting companies quotations was not a true reflection of the real market and this seemed to happen when there was a large volume order. many times the spx via cmc would drop 2c but the true sp would go down 1/2 a cent so if you had a stop order reflecting the real market 2c from that point with cmc you are stopped out but in the real markets you would still be in, that is another cost that is hidden but very real

Again, there seems to be some confusion, perhaps between the cash and the futures markets. If you're dealing with S&P futures with CMC, then all stops are trigggered on the basis of the underlying Globex (or what ever its called these days) E-mini S&P. If you are trading cash S&P with CMC, then stops are triggered by the CMC prices. You can take your choice - I never have and never would place stops triggered by the SB price, it should be obvious you're then at their mercy.

 

[Visaria]

remember that unlike the real market, the SB firms know where your stop is. If they can make an excuse to trigger it... your losses are their profit.

and dont forget they have smart software that intelligently allocates negative slippage against you - remember you arent dealing with the underlying market with conventional SB firms - so why should you get slippage if you're dealing directly with the market-maker?

Coz they thought of an excuse, and the more slippage you get, the more money they make.

"oh.. it was a fast market when you got stopped out"

So not only do they get to stop you out if the market never traded at your stop-price, they also get to give you slippage on your stop when the real market probably wouldnt. Ka-Ching!

Again, if your stop is worked on the underlying market, they can't take you out unless the underlying actually trades there (or past there).. To qualify this,, there have been occasional times when CMC have stopped me out and the underlying was very close (say 1 pip) to the price of the stoploss but never actually reached there. I've simply called them up and asked them to check on Bloomberg whether that price was traded. They do take their time, but they do reinstate the position when they realise they've made an error.

 

[LevII]

If you've got enough to stump up the £5k for an account with two way futures, you can have the tax free benefits AND direct access however - best of both worlds 😆

But their spread is huge - on stocks 7c commission per share compared with IB @ 1/2 c per share - or have I got it round my neck?

 

[andycan]

visaria,
i am comparing like for like i do know the difference between cash and futures
the comparison was the futures to futures, never trader the ftse via SB until that occasion so im not saying that happens all the time, BUT my experience on US markets was that when ever the es moved in a direction with volume thats when the SB played silly buggers with the quotation and that was my experience with CMC

there have been occasional times when CMC have stopped me out and the underlying was very close (say 1 pip) to the price of the stoploss but never actually reached there. I've simply called them up and asked them to check on Bloomberg whether that price was traded. They do take their time, but they do reinstate the position when they realise they've made an error

i had similar experiences with CMC at first i excepted this was a mistake but after trading with them for over 1.5 years and this kept happening over and over again. i dont know how people view trading but i do it for a living and i take it very serious and to me its just blatant disregard from CMC and unprofessional these and a whole array of things is why i dont use SB companies but i stress these are issues that many have experienced i know a lot of traders who use SB to trade some except it others dont, I DONT


Andy

 

[anley]

Good work Jack, you've got to do the research and look at the figures in this business if you want to find the true story.

Most people however get sucked into the marketing and never realise that costs are often the number one factor of whether a traded makes or loses.

 

[Splitlink]

For the last few months I've been paper-trading a new idea I've had for futures. Rather than have to open a new account with a futures broker, it was easier to run it through the prices from my existing spreadbetting accounts.

Dow 40


I really hope no-one's trading these.... Now, where's that IB application form??!

Yes, those spreads are fierce. On the other hand Fins has a 2 point spread on the Dow and FTSE Rolling bet which should be taken very seriously for those who do not want to play heavily with IB.

I have started trading Footsie and post on "Day Trade the Footsie" thread (UK Indices) along with posters who trade with brokers.I have pulled in 69 points this week by only trading the mornings and not trading on Tuesday and losing 9 points today. This compares very favourably with direct dealing posters profits and there is no tax.. The future FT is wide- 9 points against their 0.5 point but, using the rolling bet, I have been managing very well. My profit yesterday was 27 points in the morning which they seemed to suggest was pretty much par for the course. They are, of course better traders than me- but that is another story!

So, anyone fancying to trade those indices on Fins should have no worries and can trade smaller amounts. The spreads you quote- I agree with you, they are too wide, but I have been told that spreadbetting indices was a mug's game and that it was next to impossible to day trade. I can assure anyone reading this that that is simply untrue. BUT MY EXPERIENCE IS ONLY WITH FOOTSIE ROLLING. I want that to be clear.

A problem, I think, with complaining (used in a friendly sense, for want of a better word) about spreadbetters spreads is that newcomers reading the posts will consider going to IB and suchlike, before they are ready to trade with that kind of money. It's very expensive to go into a company like that half-cocked.

Split

 

[gc1]

It's obviously not in the SB co's interest to offer narrower futures spreads - much better for them to encourage punters to use rolling cash bets (with narrower spreads) so that the huge cost of rolling from one day to the next (typically 2% pa on the underlying position full value) is partly hidden from the punter.

 

[minx]

You are leaving out one of the major advantages of Spreadbetting- Its Tax Free!
If you're paying $30 spread in Bunds and making $1000 then its a worthwhile journey, you'll save $370+ in taxes.

 

[Splitlink]

Sorry. I said on my post 14 that Fins traded a 2 point spread on the Dow. Not so, I see it is trading a 4 point spread today. Footsie, yes. 2 points

Regards Split

 

[Jack o'Clubs]

Just (another) example: this morning wanted to short a December copper contract. Looked at CMC out of interest. Spread is 0.6, so equivalent to a $150 comm. Fine, but the NYMEX quote is 333.50, the CMC quote 328.2. Clearly CMC positioning on the short side of the market (fine if you want to go long), but an extra cost of $1325 on the short side!!! 😱

 

[capitalspreads]

cost of spreadbetting.

maybe if you would like to look at equity pricing we may be able to redress the balance somewhat. CS quote a spread of just 0.1% around FTSE 100 shares and 0.25% around FTSE 250 stock with no further commission or brokerage and on just 3 to 5% margin. Compare this to buying the real thing, 0.5% stamp duty (our gordon must have his slice!), brokerage on the deal (generally about £10 in AND out).. 100% of the money up front and then capital gains tax if you make a profit.
On this calculation SB is far cheaper than the Direct Access that seems to be beloved of so many commentators.

Odd commodity markets are very difficult to price because many of them are 'open outcry' markets where the bid/offer last trade that you see on your screens is just information and not actually real prices. And the electronic 'out of hours' markets are typically very, very thin. The SB company must take this into account when pricing what are after all not the most popular markets on the board. Generally you will find that oil and rolling gold are much more realistically priced because they are much more liquid and now have a good electronic data feed from which to price.

simon