This week it is our pleasure to bring you an interview with an industry member who's been around for quite a while now in the spread betting marketplace: Angus Campbell, Head of Sales at LCG in London.
FSB: LCG is now over 10 years old. What have been the highlights so far?
Angus: Pretty much every day is exceptional in some form. The obvious highlights were our 'go live' date 16/10/03, our float date on the 22/12/05 and the 'fun and games' in the August to November period last year. LCG has gone from a tiny (and I mean tiny) room of three people on launch date to 60 people in a state of the art trading room.
FSB: What are your comments on the general boom in spread betting going on at the moment?
Angus: Trading volumes have been particularly high and that's mainly because of the volatility in the markets. Our KPIs remain strong with lots of people opening accounts and depositing money to trade. I believe that people have seen how the stock market over the last two years can really erode investments in shares and more people want to trade and invest on their own behalf. It also does not harm us that confidence in financial institutions is at an all time low and more and more people are deciding to 'do it themselves'. Spread Betting is a unique product that gives access to a massive array of global markets to the retail investor...
FSB: OK, getting straight to the point - now that the tax rate is capped at 18% does this make spread betting less attractive?
Angus: Spread betting is attractive for a number of reasons and not just because any capital gains are tax free under current UK legislation. The fact that you don't have to do any calculations or tax returns whether the rate was 1%, 18% or 40% is a benefit in itself i.e. you can enter an exit a market as many times as you want without paying commission and of course if you make money, you don't have tell anyone (or at least I wouldn't!). Whilst many people comment on the capital gains advantage the really important bonus is no Stamp Duty. The total bid-offer spread on LCG platform for FTSE 100 stocks is just 0.1pc around the underlying bid/offer. This is 0.4pc less than Stamp duty alone and this is before considering the savings on commissions etc as well.
FSB: Are there any other spread betting advantages (apart from the tax-free, the ability to go long or short and the gearing) which are not often mentioned and which you believe do make a difference?
Angus: I touched on that one above in that spread betting can take the hassle out of normal share dealing. Entry and exit to and from markets is simple, fast and reliable. Spread betting platforms are very advanced now with many new tools that were not available to clients a few years ago and from one trading account you have access to thousands of global markets and asset classes. Also, with a spread betting account you trade in one currency so for UK clients 99% of them will trade with stakes in pounds sterling which means they are not exposed to any currency fluctuations as all the profits and losses are in sterling. One advantage is the outright simplicity of the model. You buy or sell in a stake size and you make or lose that stake for each point move. Clear and simple.
FSB: What sort of people do you think should consider spread trading, and what sort of people shouldn't?.
Angus: Actually, as spread betting (especially with LCG) is usually cheaper than virtually any other form of financial dealing then the answer is 'anyone who has an interest in the financial markets'. Whilst LCG cannot actually stop someone from trading who wishes to do so I would always advise that monies risked should always be 'spare cash'. Do not stake next months mortgage payment on a move in the FTSE!
FSB: Why are spread betting and contracts for difference illegal in the USA?
Angus: Despite being regulated by the FCA in the UK, the US considers spread betting to be internet gambling which is forbidden, CFD's are a financial instrument that has not yet been approved (although there are rumours that this might be about to change).
FSB: We often hear clients criticising quote-driven platforms mostly directed to the synthetic nature of the products concerned. Please comment.
Angus: Spread betting is financial derivative i.e. our prices are derived from and directly reflect the underlying market or asset, so yes, you are not trading direct with the market, but advances in the platforms available to clients today means that the vast majority of trades are executed at the price you want within an acceptable time scale and if it isn't, you'll get a re-quote very quickly.
FSB: We know that most if not all spread betting providers provide a market maker platform (i.e. quote driven platform). What are the advantages of this platform as opposed to dealing directly on the market (i.e. direct market access)?
Angus: With Direct Market Access you have to adhere to minimum lot sizes depending on what product you are trading. This can mean trading the FTSE in a minimum of £10 per point and going up in increments of £10, so £20/£30 per point if you want to trade more, which is too large for the majority of spread betters out there - particularly in these volatile markets! Also, many DMA platforms tend to charge higher margins. The main benefit of spread betting over DMA is that often a client will be able to place a trade on a 1 point FTSE spread in a size that is larger than the market e.g. we might fill a client in £200 per point at 4500.0 when if they'd done it DMA their fill might be at a less attractive price. The spread is generally fixed as well even if the underlying market is showing a wider bid/offer spread the spread betting company will still be offering its set spread.
FSB: You use a market maker platform - some critics have commented that market makers make spreads artificial and that you are generally betting against the house so have a direct conflict of interest with the spread betting company. Please comment.
Angus: When you say we 'use a market maker platform' I assume you mean we are a 'market maker'. It is correct in that we offer prices for clients to trade on and when a trade is placed we take the opposing position. LCG runs 'books' (just like any other Market Maker in any financial market across the globe) as clients buy and sell the overall risks to LCG changes. To continually hedge every risk as it arises would cost a fortune in broking and margin fees so LCG waits until each market reaches a limit and then we start to hedge. The point here is that we have absolutely no influence on the underlying market prices so that once a client has a position it is up to his skill and good fortune as to whether he makes a profit or loss it is nothing to do with anything that LCG does, or does not, do.
FSB: The growth of the spread betting and CFD markets are sometimes blamed for making traditional stock markets increasingly volatile. Do derivatives really amplify the share moves?
Angus: Not really. The Financial Conduct Authority almost proved this is the case when they banned short selling on a number of financial stocks with the result being a little rally for the FTSE followed by the mass selling we've experienced recently. Spread betting is really tiny in comparison with the underlying market and appeals to, in general, smaller scale clients. Spread trading accounts must in general also be Segregated Accounts so client funds must be held separate from the funds required to hedge a position. A spread betting company would rarely risk so much of its own capital in hedging a client position that was big enough to move the market. But in any case what is the difference to a CFD or spread bet moving the market as opposed to somebody buying or selling on a margin account in the usual fashion?
FSB: If the underlying has a spread and a spread bet (shadow) has a spread is it right to assume that a player pays twice the spread: the underlying has to move up both in its own spread and a spread of a spread bet for that player to earn any money? Please comment on the spreads.
Angus: This is not true. Only in equities do the spread betting companies quote a spread 'around' the underlying market and in any case for LCG as mentioned before this spread is actually far less than an old fashioned commission and Stamp Duty cost when trading with 'real' shares. In all other markets the spread betting companies quote a fixed spread. This spread is normally comparable to the underlying market (sometimes better/sometimes worse) but again there are no commissions or exchange fees to pay with the spread bet.
FSB: Is short selling really bad?
Angus: It certainly get a great deal of bad press! The majority of market participants (probably around 90%) will tell you that there's nothing wrong with it since for every buyer there has to be a seller and for every seller there has to be a buyer so net/net a stock price should reflect the true value of that asset whether short selling is allowed or not. What annoys me is that I own bank shares which I've wanted to sell in a spread bet as a hedge but I can't because it's banned! It is a legitimate form of trading.
FSB: Do you see any differences in trading when the stakes are raised? How do experienced traders behave in such situations vis-a-vis speculative traders?
Angus: Not really, clients who trade with bigger stakes tend to have deeper pockets but still have the same goal i.e. make x amount of points on this trade. It's difficult to distinguish between an experienced trader and a speculative trader - to me they are the same thing. If you mean between novice and professional it's often easy to see the difference i.e. a pro will trade a few markets they know very well with similar risk parameters each time whereas a novice will dabble across the board and usually risk all of their balance at a time.
FSB: A number of financial authorities around the globe have recently enforced a ban on short selling of financial stocks meaning that short selling via spread bets on financial instruments has been suspended for the time being. But we know that short selling and long buying are integral parts of spread betting. How do you see this influencing spread betting providers in the short term/long term. Do you envisage the suspension on short-selling to remain for the long term? Is there a risk that short selling in general might be completely banned?
Angus: It might be banned but short selling of individual stocks is just 0.25pc of our business. Almost all our business involves clients either being long of individual stocks or trading the futures related indices/commodities or the FX markets. There can be no shorting bans in these markets. I would expect the ban to remain in place until the first quarter of 2009 but the US has now removed most of their restrictions and the Short Selling ban has been seen to be totally ineffective in artificially propping up stock values.
FSB: Do you envisage that there will be major regulatory changes with regards to spread betting in the future?
Angus: No.
FSB: Recently we have seen spread betting providers upping margin requirements with little or no advance notice. What is LCG policy on margins? Is it fair to providers to move the goal posts with little or no advance notice?
Angus: LCG has not increased its margins at all over the past two years except in a few of the bank stocks. We retain our 3pc margin for the FTSE 100 and 5pc for the FTSE 250. In reality as these shares have all fallen significantly the actual margin is now less! Indices, Commodities, Bonds and FX have all remained at the very low levels in existence before all this chaos.
FSB: Are you making it clear enough to those getting into spread betting what the risks are? Do people understand those risks?
Angus: We are very tightly regulated by the FCA. Before anyone opens an account with us we ask them to ensure that they are aware of the risks and the risks are outline in our Risk Warning Notice. The Learn section of our site provides examples for potential customers and our real-time Demo Account gives newcomers the potential to try financial spread betting before they sign up for real. Although the Demo does not have all the markets we offer for trading on the live platform, it has all the functionality and therefore gives beginners the ability to really appreciate the risks involved before they have a go for real. We also provide seminars for newcomers which outline how the product works and what the risks are.
FSB: What happens if a client is margin called? How much time are clients allowed to meet the margin call before positions are liquidated?
Angus: We do not make margin calls. All positions have a stop associated with them and this stop must be placed within the funds available on the clients account. If the stop is hit the position is closed.
FSB: How safe are client funds? What is the situation regarding our funds deposited at LCG? Some spread betting providers have recently been circulating letters regarding the reduced segregation of clients funds. Clauses such as -:
1.) Funds that are being used as margin to support an open position will not be segregated from the company's own funds.
Angus: LCG defines ALL clients as retail and all their funds PLUS their winning bets are segregated from LCG's own monies.
2.) Funds may be held on clients' behalf with a bank located outside the European Economic Area meaning that in the event of insolvency of that bank may mean that the monies may not be as effectively protected as if the money were held with an equivalent bank or third party in the UK.
Angus: All LCG client funds are held within the European Economic Area (EEA).
3.) Accounts and monies are placed in segregated accounts so they are protected if the spread betting provider goes under. However each account does not have its own corresponding segregated account as the client funds are pooled together in the segregated accounts. So this seems to imply that our monies are held in a segregated account with other clients - should any of these clients default you may stand to lose some of that money effectively becoming an unsecured creditor for the balance.
Angus: As mentioned we do not give clients credit and so a client cannot 'default' on us. 'Total negative client balance for the year 2008 is under 0.25pc of profit.'
FSB: What is LCG policy regarding segregation of client funds? Are funds really ring-fenced?
Angus: All client funds are ring fenced.
FSB: Most brokers are required to maintain proper segregation of client funds but trading deposits are often held in just one segregated bank account. Please comment.
Angus: All our clients are classified as 'retail' which means that we hold their funds in a segregated bank account, separate from our own funds. This is a FCA requirement and means that a client's cash balance and any open profits are safe in the unlikely event that LCG goes under. We have some 45,000 clients if we had to open 45,000 different bank accounts for the clients the cost would be enormous and the level of KYC data required (to open an account in a third parties name) would also be prohibitive. The funds for each client are held electronically in individual internal accounts with LCG but the actual money is held with major retail banks..
FSB: What sort of stakes are your clients trading for? Where is the bulk of the action?
Angus: LCG quotes the DAX and FTSE on 1 pip price spreads so we see a huge amount of business in just these markets. The average stake for LCG is around £5.
FSB: We have recently seen volatility reaching record highs and the Wall Street index plummeting some 700 points in a day. Usually spread betting providers thrive on volatility but how is this massive volatility affecting trading activity?
Angus: Patchy...on some extreme days we see a huge increase in trading but on others clients put on their tin hats and go quiet. Overall volumes are much higher this year compared to this time last year.
FSB: Suppose I wanted to make a longer-term spread bet (3 to 6 months from today) on the shiny metal betting that gold will move from 600 to 800 dollars an ounce. Is this possible with LCG? How much margin would I need to place a spread bet to gain say $10 per each whole dollar movement? Please detail with an example and how you quote the gold price.
Angus: We quote our rolling gold (no expiry date) on a 0.4 dollar spread so if you were buying at 600 our quote would need to be 599.6-600.0. The pip/stake size is 0.1, so to make $10 per dollar move you would need to have a $1 bet (you would need a dollar account for this, most of our clients have Euro or Sterling accounts and in these cases you would be betting €1 of £1 for each 0.1dollar move). To make a $1 bet you would need at least $100 on your account. If the price moved from 600 to 800 you would make $2000 on a $1 bet.
FSB: Are there any advantages to using spread betting to speculate on the price of gold as opposed to futures contracts or Exchange Traded Funds?
Angus: The main advantages are the margin, bid/offer spread, commission free and liquidity available in spread betting. So pretty much everything is to the advantage of a trader using a Spread Bet as above the instruments mentioned.
FSB: Suppose I wanted to make a longer-term spread bet (6 months from today) on the price of oil betting that brent oil will move from $63 to over $100 a barrel. Is this possible with LCG? How much margin would I need to place a spread bet to gain say $10 per each whole dollar movement? Please detail with an example and explain how you quote the oil price.
Angus: The example above for Gold can be used for Brent. The only differences are that Oil is quotes in cent moves and LCG quotes a spread of 5 cents (i.e. 47.65-47.70) and Oil is quoted in Monthly expiries so you would need to close your bet each month and move into the next contract. The minimum margin for Oil is $150 for a $1 bet. If you bought at 63.00 and sold at 100.00 you would make $3700 on a $1 bet.
FSB: Suppose I wanted to place a pairs spread bet on a company out-performing say the UK FTSE All Share index or FTSE 250 index. Is this possible with LCG? Please outline with an example - say 10,000 shares in DRAGON OIL (Public, LON:DGO) against the FTSE 250 index.
Angus: This trade is possible with LCG and can be done by simply trading the same total notional for each position. Trading 10,000 shares in Dragon Oil is the same as making a £100 bet in the stock and is quoted at around 138p. The FTSE 250 is currently at 5840. A 10pc move in Dragon Oil would make/lose you £1,380. So how big would your bet have to be if the FTSE 250 move 10pc to match £1,380? A 10pc move would be 584 points and so your bet size to match a £100 buy bet in Dragon Oil would be approximately a £2 sell bet in the FTSE 25.
FSB: Please describe some other interesting strategies which clients can use to minimise the risk and yet still be able to take a position in the market...
Angus: Pair trading (as described above) is certainly one strategy and it can be applied to other markets too. For example someone who's bullish of oil may look to take a long position in Brent, but sell BP as a hedge. Spread betting accounts are sometimes used by clients who hold underlying assets and they sell these in a spread bet as a hedge. If an investor has a high yielding stock they are reluctant to sell because they want to hold onto it for the long term, they could take a sell position to protect against any big falls in the value of the share (unless of course it's a banking stocks where short selling is currently banned!).
FSB: We're obviously going through an interesting time in trading, what sort of strategies work now?
Angus: Until very recently 'trading the ranges' has proved to be a very successful strategy for our clients with most of the popular markets proving to be very constrained. While there has been some break out in the last week or so there does not seem to be a big follow through and so a new group of ranges may well emerge in the near term.
FSB: Do you have any tips for clients on how to deal with the current hyper-volatile market conditions?
Angus: We are not allowed to advise our clients but if it was me trading I would be using a smaller stake than normal, staying in the market for a shorter space of time and keeping my stops close.
FSB: A city analyst has recently stated that less than 3% of clients open short positions. Does this mean that your clients have been mostly losing in this bear market? Are clients still betting a lot or has activity slowed down due to the chaotic market conditions?
Angus: As regards equities we do see that on average for every 10 buyers 1 or 2 clients will go short - it is just a very unnatural thing to do for clients going short individual stocks. On other markets e.g. indices, the clients' positions can change on a daily basis so some days you'll see clients long and other days they'll be short. Clients are much more comfortable selling a currency or index than with an individual stock. At LCG less than 7pc of our business is in single stocks so the falls have not been so heavily reflected in losses. (But at least with Spread Betting you CAN take advantage of a bear market).
FSB: Most of the time I prefer spread betting the futures as opposed to rolling daily bets. With futures one does not have to pay financing everyday (which helps from a psychological angle) and the cost of carry is included in the future. Do rolling dailies have a cost of carry? Please comment on the differences and relative advantages between futures and rolling daily bets
Angus: Rolling contracts do have a cost of carry due to the daily financing element. They are more popular than the futures because the quotes are much tighter. Now with interest rates hitting the floor financing of rolling contracts will also decrease. Of course if you are short of a rolling contract then we will pay YOU every day.
>> Page 2 - LCG Angus' Interview Continues Here
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