Providers and Spreads in Retrospection

It all started when Stuart Wheeler, an entrepreneur and keen gambler founded IG Index in 1974 from his home in Clapham with a 5,000 pounds loan, to enable UK residents to speculate on the price of gold at a time when exchange controls prevented them from buying it, except at a premium. Business wasn't good then and in fact he later admitted that 'things were going very badly'. A friend advised him to 'chuck in IG and get a normal job' but he ignored this advice and turned IG into one of the fastest growing companies with a current market capitalization of over £1 billion. He branched out into taking bets on the FTSE and the Dow Jones, and virtually created a new industry of spread betting. In fact, the history of spread betting is really the history of Stuart Wheeler as he practically invented spread betting.

For a few years IG had the spread betting market to itself, but it was eventually joined by City Index and Sporting Index. In subsequent years Spreadex and Cantor Index have joined the fray. Spreadex offered telephone trading but their spreads were about the same as the original 3. They all had quite large spreads on the instruments they offered but with the introduction of CMC Markets (Deal4Free) which entered the industry providing online trading with real-time charts, the claim of much narrower spreads and lower margin requirements was the start of a changing tide.

At first CMC did not have a great impact on the business of the other original providers. Although CMC attracted many new clients the overall service was seen as a lower standard. While spreads were lower, often dealing size was restricted by re-quotes. It has been suggested this was a measure adopted by the company to put off scalpers and try to attract traders who wanted to trade for longer periods. CMC also had some wild swings on the prices and this impacted on stops which some found hard to accept. Nevertheless with the lower funding requirements and tight spreads CMC customers' base grew.

Next, came Finspreads who although not offering the spreads as tight as CMC were still lower than the original 3. At first the site had some problems and moans of not getting a fill at the price displayed. However they have prospered and added pressure on the others to offer the same sort of service. Margins and spreads started to reduce.

Next, ETX Capital came onto the scene. ETX Capital fell into the category of Finspreads but both were unable to match CMC spreads.

The launch of Capital Spreads in 2003 started to put pressure on CMC as to the claim of the tightest spreads which saw CMC reduce the FTSE spread from 4 to 3 and then 2 points. The others followed suit and now the FTSE rolling day instrument is offered by the vast majority of companies with a good value spread of 2 points (for spreadbetting). Even IG Index and CityIndex started offering it with a 2 point spread.

Then in 2005 came a new provider; WorldSpreads (no longer in business) which started offering 1 point FTSE spreads, Capital Spreads quickly followed and 1 point spreads are now the industry norm.

What appears to be taking place now is some consolidation. There have been some recent additions to this industry over the past 2 years with the likes of GFT UK, MF Global Spreads, Delta Index, ODL Markets and the most recent FinoSpread...etc Also, Finspreads was taken over by City Index in the fourth quarter of 2006 and the two companies have now started streamlining certain back office and middle office divisions.

Traditional private-client brokers have also realized that there is a demand for spread betting from their clients and are joining the sway - for instance Barclays Spreadbetting, Hargreaves Lansdown Spread Betting and TD Waterhouse are all white-labelled versions of City Index.

While the likes of IG Index, Cantor, CityIndex and CMC remain as they are Capital Spreads which is part of the London Capital Group provides the trading service for Etrade. Likewise Finspreads appear to be linked with Easy2spreadbet, MF Global Spreads, and iii.co.uk with the trading platforms, charts and product information and requirements apparently exactly the same in most cases.

Several high profile brands have in the past couple of years also launched services in this category. For instance, Trade Fair from Betfair, Paddy Power and Saxo Bank have launched a white-label service from London Capital Group while PartyGaming has partnered with City Index to produce PartyMarkets. With major consumer and B2C brands putting their existing customer bases in front of these services, are these traditionally specialist products destined to become even more mainstream?

In general the charting (although of course it does not compare to professional real time programmes but at no cost what you get is IMHO very good) and overall service has improved so the competition has been good for the customer. It would seem that most if not all the charting within the UK spreadbetting industry is provided by a company called It Finance.

To conclude while the spreads through spreadbetting will never be as tight as the real market instruments they have vastly improved over the last 8 years narrowing the gap on the service provided by share brokers, CFDs, Futures and Options. To get this into perspective just imagine that a decade ago, a spreadbet on the FTSE 100 index would have cost you around 10 points, which would equate to £50 for someone using a sizeable stake. Now it would generally be possible to open the same position for just 1 point. Today, we can say that transaction speeds and costs, as well as the bid-offer spreads have all been slashed as providers become more efficient and competitive online and online trading has helped private traders gain easier access and control.

'One of the biggest changes I've seen is the increase in the number of trades being placed online as opposed to over the phone, with most companies seeing at least 50 to 75 per cent of their business come in this way,' says Martin Slaney, head of derivatives at GFT. 'This has been accompanied by a dramatic expansion in the range of markets that people can trade.'

Internet Stock Brokers

Many believe that the speed with which spread betting companies have embraced the web has caught some stockbrokers on the hop. The significant investments spread betting companies have made in IT systems has enabled them to offer betters real-time trades and numerous trading strategies.

The response from stockbrokers has been to follow suit. Several established stockbroking firms, from Brewin Dolphin and Barclays to TD Waterhouse and Etrade, have launched spread betting services for their customers by teaming up with the established spread betting companies.

"Stockbrokers have woken up to the fact that derivatives are not going to go away," says David Buik at Cantor Index.

This expansion is benefiting spread betting companies in two ways. For those that are providing the engine for these services it is allowing them to access a new array of customers. But the arrival of established stockbrokers on to the spread betting scene is also giving this industry an added layer of respectability.

With the spread betting industry experiencing such strong growth, the key challenge for most is how best to respond. One solution is to secure a tie-up with stockbrokers. Another is to merge.

In 2006, City Index took over Finspreads and there is already talk of further consolidation this year in this sector. "It is inevitable that as the industry becomes more competitive [more companies] will look to merge and acquire others," argues Angus Campbell, head of UK sales at City Index.

Some are spreading their wings internationally. Spurred on by the stellar growth at home, many are looking abroad for new opportunities. City Index has a solid presence in Australia, an office in Singapore and a presence in Germany.

CMC is also big in Australia with three offices there, and it has been winning customers in Germany, too. Mr Jones at CMC says its revenues from overseas are "significant". Cantor Index is also looking abroad at markets in Germany and Italy and IG Index has recently opened offices in France and Spain.

But, despite this bullish environment, there are some risks to this industry. Despite the ability for spread betters to go short on markets, commodities or individual stocks, one of the drivers of the recent strong growth has been the bull market in equities. As Cantor's David Buik explains: "People feel more comfortable in a bull market."

A correction could lead to some of the growing armies of spread betters retreating back into their shells. Indeed in the recent stock market correction which reared its head at the end of February, some spread betting companies are believed to have experienced record levels of "margin calls", where they called on their customers to liquidate holdings elsewhere to cover their losses.

This is of course all part of the spread betting game. The challenge for spread betting companies is to educate their customers so that when bets do move against them the losses are manageable and not too much of a nasty shock.