With the ever-increasing growth in the spread trading industry, spread betting brokers are now dealing with different types of people starting from starter investors to highly active traders. For this reason, the offering has to be relatively broad to appeal to different kind of clients.
The spread betting market has also become very competitive over the last years, with an increasing number of providers offering very tight spreads which reduces broker margins meaning that revenue per trade is lower and cost of client recruitment increases accordingly. There is less differentiation between firms and unique selling propositions are harder to find – online spread betting today is no longer simply about giving clients with the access to the market and the platform to trade; it’s about providing much more in the way of tools and information and education and services.
Clients are also demanding more – today clients aren’t satisfied with tight spreads and the ability to act quickly on market opportunities, traders and investors today are also demanding more research, and on a bigger range of shares. Investors today want research, stock trading ideas, alerts on stocks whose price and volume are behaving unusually. And while the law doesn’t allow spread betting providers to give advice, they can definitely provide trading ideas.
The general level of education and market awareness and about how things work is also quite higher than it was 5 years back. For instance, these days I hear people saying that when they’re looking at a particular share, they will mention the management team: ‘I like this share because the management team has past experience, and they’ve done this and that’, or ‘This guy has come to this company, he’s had a lot of experience in this industry’. That’s not how normal people think; that’s how hedge fund managers think!
‘In reality only 8% of all our trades are in equities…the vast majority (82% of all trades) are in just nine markets [FTSE, Dax, Dow, S&P, Gold, Oil, GBP/USD, EUR/USD, USD/YEN]. Hardly sophisticated instruments! They either go up or they they go down!’ – Spread Betting Insider
Volatility on the Decline
As the volatility in the markets subsides betting patterns are again returning to more usual levels with the average stake sizes again increasing as the markets stabilise and volatility dies down. Index markets like the Dow for instance have stopped moving some 200 points per day and the daily trading range has tightened to less than 100 points. Longer term swing trading (as opposed to day trading) is also becoming more popular once again.
Regulation
“The FCA has taken steps to force the industry to take a more responsible approach to its promotions, particularly those targeting novice spread betters, by ensuring risks are not under-played at the expense of benefits such as winnings free of capital gain tax.
“Several years ago, it levied hefty fines on two established SB firms which had fallen short of these rules aimed at protecting consumers.”
I find this very interesting and new spread betting firms are likely to repeat these mistakes while on the hunt for new customers. Some might already have and haven’t been taken to account.
Astonishingly, approximately 90% of spread betting trades are buy positions.
To buy or not to buy? Is that the question?
Astonishingly, approximately 90% of spread betting trades are “buy” positions. What could the reason for this be, as we’re frequently told one of the main advantages of spread betting is that you can bet on the direction of the market, regardless of whether it’s moving up or down. Some of the popular explanations include:
Inexperience
Speaking with professional traders, some suggested inexperience may result in the high trend to “buy” positions, possibly that novices aren’t comfortable selling something they don’t own. If we consider the typical demographic of spread betters as “high net worth males with previous investment experience”, it would seem to be selling spread betters short to suggest they can’t grasp the concept of the market going down as well as up. Although the previous investment experience may have conditioned betters to the notion of buying only.
Risk
Do inexperienced spread betters feel that buying positions are less risky? Surely our greatest fear is for the market to gap and as recent events with Northern Rock have shown, unexpected news stories are more likely to result in share prices sharply hitting the floor, rather than dramatically rising. Hence being short a position should have less negative exposure to market gapping – so quashing this theory.
Tips
A quick poll of the major “tipping” press showed that approximately 2/3rds of tips were “buy” tips (Money Week, Investors Chronicle). This press aren’t geared solely to spread betters; yet presumably this audience also takes advantage of these tips – and hence are perhaps 66% more inclined to go long.
Personality
I think the reason that most spread bets are “buy” is due to a far more fundamental personality trait. As a quick experiment, answer the following question: “What percentage of spread betters lose money?” Psychological research (Seligman) suggests that optimists are less likely to guess a probability of an occurrence correctly; whilst pessimists are more accurate – estimating closer to reality.
Alarmingly, the correct answer is about 80% of spread betters lose money.
If you guessed close to this figure, the theory would suggest that you’re a pessimist; and the surmise would be that a pessimist can envisage the movement of a market in a negative direction to a greater extent than an optimist; so being more inclined to “sell” positions.
If your estimate differed wildly from the answer; or indeed if you knew the answer but continues to spread bet; it would suggest that you happily predict good news and bullish markets, hence having a tendency to go long. By the very high risk nature of spread betting, I think we can predict the vast majority of traders are optimists to believe we can make money this way, and hence the skew to “buying” positions.
Therefore, perhaps the question we ask ourselves should not be “to buy, or not to buy”, but rather “to buy, or to sell?” We can at least be sure that as we ponder this decision, our glass is more likely to be half full!
