Back in the 1980s, spread betting was little more than a fun sideline for City traders, but today this business offers a well-established form of alternative investment. Its unique selling point is that any gains are tax free, and this has prompted a rapid expansion with insiders putting the number of actively traded accounts in the UK at around 150,000.

The growing pool of spread betting clients has attracted more companies into this market, which has meant greater choice and competition. In all, there are now around a dozen direct providers, as well as the numerous white-labelled services they offer, via familiar names such as Hargreaves Lansdown, Barclays and TD Waterhouse.

Patrick Latchford, MD for the UK & Ireland at CMC Markets, says that five years
ago spread betting was a niche business, but it is now starting to become more of a mass-market product. ‘The industry is growing at a compound rate of 40 per cent to 50 per cent per annum and I suspect that this will continue for the foreseeable future. In five years’ time, there could easily be 400,000 to 500,000 actively traded spread betting accounts in the UK and Ireland.’

The largest company in the industry is IG Index, which is listed on the LSE with a market value of around £1.1 billion. It now has 72,000 clients worldwide, making approximately one million transactions a month – over 90 per cent of them online.

‘The biggest difference between spread betting services now and those of a few years ago is that the spreads are much tighter,’ says David Jones, the company’s chief market strategist. ‘The increased competition in the industry has forced costs down, which is good news for clients as their break-even point is now that much lower.’

Ten years ago, a spread bet on the FTSE 100 index might have cost ten points, which would equate to £50 for someone using a sizeable stake. Now it would generally be possible to open the same position for two points.

Improving technology

Another important development has been the improvement in technology. This has made it feasible for spread betting platforms to deliver the same sort of information to clients that is available to City traders, so they can do their research and place their trades online. Most of these facilities are also now accessible via a mobile phone. ‘The technology has come on in leaps and bounds in the past few years,’ says Jones. ‘This has enabled a whole host of new facilities to be developed, such as trailing stops and dealing through charts that allow clients to place their orders direct from the price chart.’

The second-largest provider is thought to be CMC Markets, although as a private company it is under no obligation to publish its financial results. CMC was founded by its executive chairman, Peter Cruddas, and he and his family still control approximately 85 per cent of the business. In August, the company announced 130 redundancies at its London office, which represents about ten per cent of the UK workforce, but industry insiders suggest that this was because CMC had become too top heavy compared with its competitors.

CMC is particularly noted for the quality of its bespoke Marketmaker software, which provides live prices on thousands of different markets together with sophisticated charting and analysis. The company also has a reputation for offering tight spreads and was the first to develop rolling cash bets, which many people find easier to understand than bets based on the quarterly futures.

‘Marketmaker is different from all the other platforms and offers clients what they really want,’ says Latchford. ‘We have an application-based version that people can upload onto their home PC. There is also a slimmed-down online alternative that they can access from any computer and a mobile platform for those on the move.’

Two of the longest established competitors are Cantor Index and City Index. The former
is part of the Cantor Fitzgerald Group, a global financial services provider, while the latter forms a component of IPGL, a privately owned company with a substantial shareholding in the world’s leading derivatives broker ICAP.

New entrants

In the past five years, the sector has experienced a rapid expansion that began with the launch of Capital Spreads in 2003, followed by Worldspreads in 2005. Both these companies are extremely competitive and their introduction has helped to lower spreads right across the board. More recent entrants include GFT, which is related to US-based currency dealer Global Forex Trading, ODL Markets and Finospread.

‘One of the biggest changes I’ve seen is the increase in the number of trades being placed online as opposed to over the phone, with most companies seeing at least 50 to 75 per cent of their business come in this way,’ says Martin Slaney, head of derivatives at GFT. ‘This has been accompanied by a dramatic expansion in the range of markets that people can trade.’

Most spread betting providers offer access to UK and overseas shares, stock indices, commodities and currencies. These can all be traded through one account, thereby allowing clients to diversify their portfolio across just about every asset class imaginable. There has also been a lot of innovation in terms of the different types of bets available.

The main cost associated with a spread bet is the difference between the buying and selling price, which means for people to make money the market needs to move outside of this spread and in the direction they are expecting.

‘Volatility is always good for companies like us as clients want to trade markets that move around,’ says Jones. ‘That said, volatility is a double-edged sword and the recent big moves make it more important than ever for spread betters to consider their trade size and the positioning of their stop losses.’

Spread bets are traded on margin, which means that those who get it right can make large tax-free gains from a relatively small capital outlay. The downside is that anyone
who doesn’t manage the risks could just as easily run up a large loss.

‘The increase in volatility has been very popular among our clients, with new account openings at record levels. But anyone looking to take advantage of the conditions needs to have a watertight trading strategy,’ says Slaney. ‘In this respect, our clients find it extremely useful to be able to trade round the clock. When important news breaks in the evening they can act immediately without having to wait for their provider to re-open the next day.’

The aspect of spread betting that has attracted most attention of late is the facility
to short sell. Shorting is simply the reverse of buying an exposure that is expected to rise in price, the aim being to sell the exposure high and then close the position at a profit by buying it back when it is cheaper.

Media war

Short sellers have had a bad press recently with the regulator blaming the practice for the collapse in the prices of banking shares and banning it in respect of UK financial companies until mid-January. Even the archbishops of York and Canterbury have jumped on the bandwagon and condemned the activity.

The ban on short selling is limited and doesn’t affect the majority of the markets. Outside of financial stocks, shorting remains a perfectly legitimate strategy. It is one of the few ways to make money when prices are falling.

Mic Mills, a trader at ETX Capital, says he can understand why the government has banned short selling financial stocks, but he says it was a case of slamming the stable door after the horse had bolted. ‘The problem is not the people sitting at home spread betting, it is the rumour mongers who start the scare stories and then trade on the back of them. If the government had intervened after Northern Rock, then HBOS would still be intact today.’

ETX Capital, which was formerly known as TradIndex.com, is a privately owned business that changed hands last year. The new owners have recently broadened the platform to appeal to more sophisticated spread betters as well as those just starting out.
‘The key point when spread betting in these markets is that traders should set a maximum loss and then stick to it,’ says Mills. ‘Lots of people don’t have that discipline.’

It remains to be seen where the industry will go from here but the acquisition of Finspreads by City Index suggests that further consolidation is a distinct possibility. Even if this turns out to be the case, investors are still likely to enjoy greater choice as more big brand financial firms take advantage of the white-labelled services to bring spread betting to an ever wider audience.