Financial spread betting is without doubt a City success story. Its rise is an example of what London’s financial district does best. The industry is innovative, competitive and smart…and the marketplace is getting saturated. There was a time when financial spread betting was just a way to “punt” on the financial markets, purely a gambling product with wide spreads and odds firmly in the bookmaker’s favour.
Origins and Evolution
- Origins: Spread betting started as a gambling product in the UK in 1964 under Coral Index, taking advantage of the 1960 Betting and Gaming Act.
- Early Challenges: Initially, spread betting was risky for operators, as they directly bet against their clients, leading to financial losses (e.g., Coral’s early struggles).
- Transformation: IG (established in 1974) introduced hedging strategies, reducing risks by offsetting bets in the market, leading to a more sustainable business model.
- Shift to Regulation: Spread betting transitioned from being a gambling product to a financial instrument after the 1986 Big Bang deregulation in the UK.
Connection to Gambling
- Gambling Roots: Spread betting is deeply tied to gambling concepts, with operators acting as counterparties to bets, similar to bookmakers.
- Misconceptions: Novice traders often mistake spread betting for investing in underlying assets, while it’s actually betting on price movements.
- Criticism: Spread betting and similar products are sometimes criticized as “casino capitalism,” blurring lines between gambling and finance.
Technological Advancements
- Internet Boom: The rise of electronic trading platforms and internet access in the 2000s democratized spread betting, making it accessible to retail traders worldwide.
- Global Expansion: Spread betting gained popularity beyond the UK through related instruments like Contracts for Difference (CFDs), though it remains illegal in the US.
Regulatory and Tax Advantages
- Key Court Case: The 1991 Leslie v. City Index case solidified spread betting as an investment product under the Financial Services Act.
- Tax Benefits: Spread betting remains free from capital gains tax for UK taxpayers, a major incentive compared to other financial products.
- Regulatory Exploits: Spread betting companies capitalized on regulatory opportunities to establish themselves as legitimate financial institutions.
Industry Growth and Market Dynamics
- Market Leader: IG Group dominates the spread betting market, holding 44% market share.
- Volatility-Driven Profits: Spread betting companies, especially IG, benefit from market volatility, which drives increased trading activity.
- Competitive Landscape: While competition grew post-2000, IG’s hedging practices and diversification solidified its position.
Broader Implications
- Legitimacy and Criticism: Despite its gambling origins, spread betting has been embraced as a legitimate financial product, prompting debates about its role in “productive” finance.
- Cultural and Financial Overlap: Spread betting highlights the interplay between gambling culture and financial markets, challenging perceptions of both sectors
There was a time when financial spread betting was just a way to “punt” on the financial markets, purely a gambling product with wide spreads and odds firmly in the bookmaker’s favour.
But the last years have witnessed a revolution, spurring a big growth in the number of traders declaring themselves spread betters. Speak to a typical spread betting company and they’ll tell you their clients are from every walk of life. No longer are they exclusively from the Square Mile, escaping the frenzy of the trading floor to punt their own money for fun.
It started when financial spreadbetting hit the internet. Quick execution on a vast array of global financial instruments fired the imagination of the more active private investors. Add to this the potential to make money in a falling equity market, and the fact that spread bets are exempt from capital gains tax, and you see a winning formula.
But what really shifted opinion was the introduction of more transparent pricing. Spread betting companies recognised that spread betting was a cheap, flexible way to play the financial markets, but the instruments remained bound by pricing associated with betting. The true evolution of spread betting occurred with the introduction of more transparent pricing, allowing retail investors to make judgments based on the cash market price in common with the physical trading of shares or contracts for difference (CFDs). This coupled with more competitive dealing spreads, means betting on the financial markets has become a serious way to trade.
Daily spread bets and rolling cash bets have been introduced by a number of the spread betting companies including CMC Markets, IG Index and Financial Spreads. Bets of these types offer a product based upon the underlying cash price rather than the traditional futures price, allowing traders to relate prices to the tangible cash market.
Traders no longer use spread betting simply for speculation. Its flexibility makes it ideal for hedging and particularly useful with sophisticated strategies such as pairs trading. Traders with a significant share portfolio are turning to spread betting when market prices are going down to lock in profit. Having pricing closer to the underlying cash price and competitive spreads is vital to ensure hedging is effective in achieving a market neutral position.
Trading strategies that have become increasingly popular are pairs trades on both individual shares and indices. A pairs trade usually compares the performance of one share against another linked share. For example they are in the same industry. Should an investor believe that Shell would outperform BP, he buys Shell and sells BP in equivalent amounts, looking to exploit a diverging correlation between the two stocks. This type of trade relies on specific company data and is popular when earnings results are expected. An example of pairs trading using Indices would be if a trader felt that Vodafone would outperform the blue chip market. In this instance the trader would buy Vodafone and simultaneously sell the equivalent value of the FTSE 100 Index.
Many people are using spreadbetting as their initiation to the financial markets. Many say spread betting offers much more for much less. Of course spread betting is best suited to short to medium- term trading strategies, but rolling cash and daily bets mean spread betting should be included as a weapon in the armoury of any investor, whether for speculation or risk management.
What really shifted opinion was the introduction of more transparent pricing. Spread betting companies recognised that spread betting was a cheap, flexible way to play the financial markets, but the instruments remained bound by pricing associated with betting. The true evolution of spread betting occurred with the introduction of more transparent pricing, allowing retail investors to make judgments based on the cash market price in common with the physical trading of shares or contracts for difference (CFDs). This coupled with more competitive dealing spreads, means betting on the financial markets has become a serious way to trade.
Many people are using spread betting as their initiation to the financial markets. Many say spread betting offers much more for much less. Of course spread betting is best suited to short to medium- term trading strategies, but rolling cash and daily bets mean spread betting should be included as a weapon in the armoury of any investor, whether for speculation or risk management.
