What’s Your Cost of Financing?

When I wrote my article The Long Term Spread Bettors’ Wish List I glossed over the issue of overnight financing charges on rolling spread bets, even though this is perhaps the most important factor for the longer-term spread bettor. I glossed over it because, now that ShortsandLongs has been absorbed into its mother company SpreadEx, there seemed to be no spread betting companies levying out-of-the-ordinary financing charges.

An email from Selftrade yesterday prompted me to re-examine the issue of overnight financing. In a nutshell, the email told me that…

“As from 3rd February 2012, the financing charge will increase from 1.5% to 2.25% above the local market benchmark interest rate e.g. for UK trades, the financing fee will be LIBOR +2.25%.”

A Cursory Examination of Current Financing Costs

Just to remind you, the financing cost is the amount charged by the spread betting company each evening to keep your long rolling spread bets in play. It’s their fee for lending you the additional leveraged money on top of your much smaller margin deposit. A quick run around some of the spread betting providers’ web site FAQs reveals the following rates:

Capital Spreads charges 2% above the Relevant Funding Rate (RFR)

Gekko Global Markets charges BASE RATE + 2%

Cantor Index charges LIBOR + 2.5%

IG Index charges One Month LIBOR + 2.5%

SpreadEx charges One Month LIBOR + 3%

While the terminology used for the reference base rate differs between the providers — is it LIBOR, One Month LIBOR, ‘base rate’ or a ‘relevant funding rate’? — if we assume the underlying rates to be comparable (and it might be an assumption too far*) then what is important is the provider’s ‘haircut’ of anywhere between 2% and 3% on top.

* Note the difference between the 1 Month LIBOR Rate and the 1 Year LIBOR Rate at bankrate.com.

What about short bets?

The rates given above refer to long spread bets, and theoretically on short bets you get paid something like LIBOR – 2% to hold them. It’s great when interest rates are at 6%, but not so great in the current low interest rate environment. Assuming a LIBOR of 1%, you would find that you were paying about 1% to hold even those short bets; because you would be paid 1% -2% = -1%.

Does it matter?

Every little helps, of course, but we should take the relative financing rates into context along with the other features of each spread betting platform. While Capital Spreads appears to levy a lower charge than IG Index (for example), the latter offers some individual equities that you simply can’t trade on the former. So you pay the higher rate, or you don’t trade those markets at all.

What matters most to me is that that none of the spread betting companies get too far out of kilter with the consensus by an order of magnitude, which I believe used to be the case with Shorts and Longs. And in the context of looking for possible multi-bagging gains, does a small percentage difference really make much difference? You decide.

Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.