Whilst it is more than possible to whip in and out of the financial betting market in less than a day, some traders opt to roll their bets over to maximise their chances of getting a good return. This can be a good strategy, but extending the term of the bet can involve financing charges and these need to be taken into account when calculating potential gains or losses.
The Cost of Trading Overnight
Financial bets that are opened and closed on the same day do not attract a finance charge and all of the commission payment is included in the spread. However, if you opt to hold your position overnight, if you have gone long, you are effectively ‘borrowing’ money from your broker and they charge you for the privilege.
For a financial bet that is being rolled over daily, the charge will be applied for every overnight session you opt to hold your position. For long positions you will face a debit, but if you have gone short, your account will actually be credited. There are some exceptions to this rule; if LIBOR is running at a particularly low level, the finance debit will apply to both long and short positions.
The exception to the rolling charges is for quarterly bets; these already have the fees for rolling over incorporated. Why not simply plump for a quarterly bet and just close out whenever you want, you may ask yourself? Unfortunately, the spreads are far tighter on a daily bet compared to the quarterlies, so it’s a case of balancing the charges against the gain and calculating which way you would be better off.
Overnight Financing Charges
How it’s Worked Out
In financial betting, daily finance costs are usually around 2.5-3%, so if you plan to roll over your position regularly it’s important to factor in the charge. Some providers have a minimum fee, depending on the market being traded.
The rollover charge is calculated by adding the rate from the broker to SONIA (Sterling Overnight Index Average) or SOFR (U.S. dollar-based products) and applying this percentage to the final price your investment closed at and then dividing by 365. This figure is then calculated against your stake to get your daily cost. Conversely, if you had opted to go short the same formula would apply in order to work out what would be credited to your trade. We address some common questions regarding spread betting financing charges here.
Spread betting companies and other financial institutions have transitioned from using LIBOR (London Interbank Offered Rate) to alternative benchmark rates due to LIBOR’s phase-out. In the spread betting industry, which involves derivatives tied to financial markets, the replacement of LIBOR depends on the underlying asset or market. Here’s what they’re generally using:
Common LIBOR Replacements in Spread Betting:
- SOFR (Secured Overnight Financing Rate):
- Used for U.S. dollar-based products.
- SOFR is widely adopted in the U.S. and is a risk-free rate based on overnight secured lending.
- SONIA (Sterling Overnight Index Average):
- Used for UK pound sterling-based products.
- SONIA, administered by the Bank of England, is based on actual overnight unsecured transactions in the Sterling market.
- €STR (Euro Short-Term Rate):
- Used for euro-denominated products.
- €STR, introduced by the European Central Bank, reflects the wholesale euro unsecured overnight borrowing costs.
- TONA (Tokyo Overnight Average Rate):
- Used for Japanese yen-based products.
- TONA is the Japanese risk-free rate, calculated from overnight uncollateralized transactions.
- SARON (Swiss Average Rate Overnight):
- Used for Swiss franc-based products.
- SARON is the Swiss risk-free rate derived from transactions in the Swiss repo market.
Impact on Spread Betting:
- Interest Rate Adjustments: Spread betting companies typically factor financing costs (often referred to as “overnight financing charges”) into their product pricing. With LIBOR gone, these costs are now calculated using the relevant risk-free rates (e.g., SOFR, SONIA) plus a margin to account for credit risk and profit.
- Transparency: The new benchmarks, being transaction-based, are more transparent and robust compared to LIBOR.
Bookmakers love a roll over
Financial betting has the advantage over other similar types of trading such as contracts for difference and futures because the Financial Conduct Authority, whilst regulating the activity, consider it to be technically gambling and therefore allow individuals to keep any profits without deducting Capital Gains Tax or stamp duty. However, the daily finance costs of holding a position open for too long can wipe out the tax benefits, so it is important to ensure you know how much you will pay for longer term trades.
If you plan on holding your position for a substantial period of time, an alternative approach to minimise the amount of money you have to cough up in charges may be better, unless you are very fond of your bookmaker and don’t mind them taking an increasing chunk of your earnings… In this respect I like Trade Nation due to the competitive financing rates.
Finance costs may not sound like a lot when you look at the percentages but for large positions that are going to be rolled over repeatedly, the charges can quickly mount up. This doesn’t mean that all bets should be restricted to within a day, but it is worth keeping an eye on both sides of the scale when weighing up whether to roll over or hold a position.
