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LCG Industry Interview

Angus Campbell, Head of Sales at LCG in London.

FSB: Suppose I receive a really bad fill by my spread betting company. Is there any way I can check if my fill was legitimate?

Angus: You can look at our chart which will show where the price was. If your still unsure you could check the underlying prints on a Reuters of Bloomberg.

FSB: Does your platform work on a MAC?

Angus: Yes, we have made our platform accessible on any computer which has a reliable internet connection and the latest version of Flash.

FSB: Do you offer the FTSE 250 as an index to open a position on?

Angus: Yes, we offer the FTSE 250 as a rolling contract.

FSB: You offer a very competitive 1 tick spread on FTSE and Dax rolling contracts. Are there any other markets which you offer where your spreads are distinctively competitive?

Angus: Brent is 5 points, gold is 5 points, the S+P is 4 and our FTSE 100 shares are 0.1% (that's 0.05% either side!).

FSB: You have recently extended your 24-hour trading to cover index markets like the Wall St Rolling Daily, Wall St Future Daily, S&P Rolling Daily, S&P Daily Future, S&P Future Monthly, Nasdaq Rolling Daily, Nasdaq Future Daily and Nasdaq Future Monthly. Does this mean that clients can now trade round-the-clock (as opposed to placing an order for it to execute when the market opens?)

Angus: These markets are now 24 hours and subject to our 24 hour rules, similar to our 24 FX markets. So clients can open new positions up to a maximum stake, but close any size they want, which means that stop losses will be filled during these hours.

FSB: If betting downwards on indices is OK, but betting downwards on individual stocks within certain sectors is barred - what is the situation with betting downwards on a group of barred stocks - i.e. betting downward on the sector index for banks or finance stocks?

Angus: We do not offer any sectors so I'm not sure but I would imagine that when the ban was in place this would not have been allowed.

FSB: LCG does not give credit - does this mean that you are less exposed to bad debts?

Angus: Not offering credit accounts has always been our policy and in light of the recent activity this policy has served us well leading to minimal bad debts. Our automatic stop loss policy also assists both us and our clients as it helps to mitigate any losses, although these stops are not guaranteed.

FSB: What prices are orders executed at?

Angus: All orders are executed at 'our quote' .

FSB: What prices will my stop loss orders be filled at?

Angus: All stop loss orders are filled at 'our quote'. The vast majority are filled at the price requested by the client but there is, obviously, occasional gapping...

FSB: Why is there an order placing distance?

Angus: Different markets have different minimum distances for placing orders which are usually in the region of a few points. For instance the minimum distance for a rolling FTSE order (our most popular market) is just one point from the current price. In our case the minimum order distance is generally measured by the volatility and liquidity of the underlying market.

FSB: Some traders worry that if stops are activated at the provider's prices this raises the potential for manipulation of prices. Please comment.

Angus: If we manipulated our prices then this would be in contravention of Mifid rules which insist that we have an order execution policy, stating that this manipulation doesn't take place. CS has NEVER manipulated prices for its own advantage.

FSB: Are stops activated at your price or the market price? If the former why? Are prices closed on the bid or the mid-price?

Angus: Stops are activated at our price as we feel we must be consistent. The position was opened on our price and therefore must be closed on it. In general the only rolling markets in which there is any adjustment is in the indices where there is no underlying market other than the futures contract. Prices are closed at either our bid or offer, depending on whether a client has bought or sold. I.e a stop sell is triggered by the bid and a stop buy by the offer.

FSB: How do you handle stray ticks? I've read a case where a BP spread better got stopped out as a result of a nanosecond blip/dip in share price (was at £5.50 or so, dipped to £3.80 for only the shortest of times). The spread betting provider (it wasn't LCG) said thank you very much... Please comment.

Angus: Unless it's a 'fat finger trade' that the underlying exchange nullifies, then the market is deemed to have traded at that price and so some unlucky clients who have stop losses may get filled. It can sometimes work in a client's favour if they had been working a limit order. It must be remembered that orders in spread betting betting companies are pretty much the same as any order in the underlying market. If a trader had a standing sell (or buy) order on the LSE in the share that you mentioned then it would be triggered on just such a 'blip' in the market. Spread Betting is just reflecting the real world. Of course a spread betting company may 'let you off' if the blip is particularly extreme. I can assure you that this would NOT be the case with the LSE. The trade would stand no matter how much you complained.

FSB: Can stop losses be moved or cancelled when the underlying markets are closed?

Angus: Our stop losses are mandatory, so they cannot be cancelled. They can be amended whenever you wish even when the underlying market is closed.

FSB: It is my understanding that LCG does not provide guaranteed stop losses on all instruments. This can expose clients to higher risks if they go short on a company like for instance what happened in the case of Volkswagen, VOW (which went up almost 93% on a short squeeze in a single day). Are there any measures which clients can adopt to mitigate the risk of sudden corporate actions (say takeover) in a shorting scenario (in the absence of GSL i.e.)?

Angus: They could take out a pair trade or if they're concerned that this might happen they could hedge a short rolling bet with a long quarterly bet for example.

FSB: Sam Dibb, a consultant at the UK hedge betting consultancy Certain Risk Management has stated that if I place a spread bet on a single stock, the spread betting firm will almost certainly hedge it using a CFD, and the firm offering the CFD will hedge it on the underlying. How correct is this statement? Does LCG hedge excess client exposure using CFD trades with other counter-parties?

Angus: If the positions were big enough then we would hedge using the underlying markets. Sometimes these are CFD's and sometimes the real equity. As our clients tend to trade in the larger indices stocks we will generally end up with most of the positions effectively creating their own 'tracker index' So we may hedge a sizeable proportion of our equity book by using FTSE 100/ Dow / Dax futures.

FSB: 'You trade our price and not the exchange although prices are derived from the exchange'. But how close do your prices mirror the underlying markets? This is a common trader's fear with using stop losses. If I set a stop loss and it is triggered by say a spike in your market maker platform which never took place in the real market will my position be reset to reflect the real market?

Angus: FSB is a derivative product. Our prices are derived from the underlying market. If the underlying market spikes, so does our price. If the underlying market doesn't spike and for some reason our price does, then your trade will be reset.

FSB: What sort of volumes are being traded in the credit crisis, compared to previous activity?

Angus: We have, obviously seen huge increases in activity. October saw record trades of 823,000 trades against 279,000 in '07. Overall we have seen significant increases in trading activity.

FSB: Is recent volatility in the market the best market environment for spread betting?

Angus: In general Volatility is BAD for trading but, that said, it certainly makes it more interesting. We find that many of our clients trade for the excitement value as much as for 'profits'. Last year was definitely exciting.

FSB: How can spread betters make the best use of volatile markets? (are there any strategies which may be more appropriate for really tumultuous markets? If so, can you describe a few?)

Angus: We are unable to advise clients about what to trade in but we can tell them how the product works and we have a comprehensive 'Learn' section online. From then on it is really up to them as to how to play these volatile markets but if it was me I would be dipping in and out of the market putting some tight stops in.

FSB: Is there a bearish or bullish sentiment among your users - i.e. do you have more 'punters' or 'hedgers'?

Angus: From a spreadbetting perspective 'bull' and 'bear' are very fluid descriptions. Clients can be heavily long of Indices at the start of a trading session and be heavily short by the end. In single stocks (Rio Tinto or Barclays for instance) clients are nearly always long generally to the tune of about 9 to 1. At the peak of the market in 2007 clients were long over 15 to 1 which (in hindsight) was a very good indication of a possible reversal!

FSB: Are spread betters contrarian by nature?

Angus: No, they are a mix of investors.

FSB: How can spread betting be used in risk management?

Angus: Clients can 'bet' in the opposite direction to an actual equity/fx/commodity exposure therefore taking out the risk of a short term market reversal. We have seen an increase in FX longterm position taking and we speculate that this is being used to 'hedge' the currency exposure of mortgages on property abroad.

FSB: Are there any sort of strategies which clients can apply to boost profits on a losing position? [i.e. apart from closing it i.e.]

Angus: Not sure how you can boost profits on a losing position. A loss is a loss! Many rule books say that you should never run your losses, cut them and certainly never average a losing trade.

FSB: Suppose I wanted to protect my GBP50,000 sterling share denominated portfolio against the possibility that the British Pound were to fall further against the EURO - can I do this with a currency spread bet? How cost effective is this (say for hedging over a yearly period). Please describe with an example

Angus: This would only be of interest if you were in a Euro domicile as otherwise what would you be hedging against? To hedge a Sterling Position versus another currency you would have to make a spread bet 'against' the currency at risk,.so if I was a UK citizen and I held a large portfolio in Euro Stocks my risk is if the Euro falls. So to protect this I would sell Euro/Sterling to the value of my portfolio. If my Euro portfolio was worth €50K and the cross price EUR/GBP was 0.9050 then you would need to make a £5 (50K/0.0001) sell bet on the EUR/GBP. If the value of the Euro fell to 0.7000 then you would lose £10,250 on the value of the portfolio but you would make £10,250 on your spread bet. (of course there are costs of carry involved here so you would not get an exact match).

FSB: Can you give me some idea of how much money should one risk on each trade?

Angus: We do not advise clients and there are lots of different rules out there. Market experts generally say you should not commit more than 3pc to any one trade. In spread betting, given the smaller margin requirements, you may wish to risk a bit more (maybe 5pc).

FSB: I was also interested to hear Gordon Brown state "Debt has been considerably lower than a decade ago, and lower than all G7 countries except Canada" If *all* the G7 countries are in significant debt .. to whom are they in debt to? And again, a similar concern... "where has all the money gone?" If the whole system is meant to be a zero sum game, with winners and losers.. .where and who are the winners in all of this?

Angus: mmmmmm interesting. The difference is that the UK spends its money on recurring expenditure. Hospitals and Schools are all very well but they will cost you just as much next year as this year (probably more). The last eleven years has seen a huge reduction in the really important new infrastructure spending (roads, rail, power, refining, airports). The UK's deficit is very much worse than France or Germany's if you look at the endemic deficit as opposed to the actual total. Also 'Our Gordon' has been the master of putting government liabilities 'off balance sheet'.

FSB: We are just three weeks removed from the worst level for the Dow Jones Industrial Average since 1987 and the future may be even grimmer. Is buy-and-hold investing dead? Do investors need to be more flexible?

Angus: Buy and hold investing certainly isn't dead but this time round you may have to hold on for a little long to make a return! Flexibility is key and it's a case of the same old adage 'don't have all your eggs in one basket'.

FSB: What does the future have in store for the financial spread betting sector?

Angus: The future is very exciting as we spread the product across the globe.

FSB: Where are your clients coming from - are they mostly based in the UK? How many of your clients are based outside the UK? Can spread betting find success in other overseas markets?

Angus: 85% of our clients are UK based and slowly but surely we are branching out into other jurisdictions. Mifid has given the green light to Euroland to market our product and more and more jurisdictions are opening to us using the spread trading format rather than spreadbetting.

FSB: What are some of the behaviors of successful traders?

Angus: It is more the other way round. How to avoid the behavioural pattern of unsuccessful traders. This is generally seen with a client who has a string of minor profits followed by a big loss in a single bet. The best bit of advice you can give is 'never fall in love with a position'.

FSB: Different sort of question, what sorts of capabilities do successful traders have, where have they picked up these skills?

Angus: Successful trading comes with time and patience. Successful traders don't always win and don't necessarily even have more winning than losing trades, but the important fact will be that the winning trades generate much bigger profits than the losing ones inflict losses. These are skills that are learnt over time with lots of practice and can take years to hone.

FSB: Are there any markets/indices (if any) which may be better suited for beginners (in your view) in terms of research and analysis? What advice would you give someone starting out?

Angus: Again this is more of a question about which markets a client should avoid. Markets which have repeated 'gaps' from close price on one session to opening price on the next should be avoided. Classic markets for this are Commodities which are traded in restricted time slots (copper, Heating oil, natural gas). Generally markets with very big absolute values coupled with generally high volatility are the riskiest (some US stocks like Google spring to mind) and best avoided unless your idea of fun is placing large sums on a 'roll of the dice'.

FSB: Some experienced traders recommend starting traders to trade the S&P not the Dow. Why is that?

Angus: The S&P is based on some 500 companies and is generally not subject to the influence of one individual stock doing something strange. The Dow seems to be much more of a 'rogue' index. Also the S&P futures are far more liquid than the Dow, usually around 1000 contracts 'a side' compared to the Dow (which often has only a handful).

FSB: Any remarkable incident/trade which occurred and you could share with us?

Angus: The markets have been so volatile recently that there isn't really any particular trade that stands out. Trade numbers have been going through the roof and I doubt the dealers will remember any particular trade as everything been rather a blur!

FSB: And what's next on the cards for LCG?

Angus: That would be telling! We're continually looking at improving our service to clients and 2009 will be no different. The spread betting arena has come a long way in the last 2 years with some fantastic trading tools available completely free. Expect more from LCG in 2009 as we have some exciting plans in the pipe line.

FSB: Thank you for such an insightful interview, Angus. I'm sure quite a few people have found it interesting. And that concludes our first interview with Angus Campbell of LCG.

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