Do spread betting companies cover my position on the open market?

Written by Will Peters Tuesday, 25 October 2011 15:01

Answering a common questioned pondered by those involved in the spread betting game.

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Do spread betting companies trade against me?

Do spread betting companies take a similar position to me on the markets?

These are two common questions we have often heard regarding the technical and operational practices of spread betting companies.

A note from Edison Investment Research into one of the UKs more prominent spread betting companies (World Spreads) has shed some light on the matter.

This is what Edison say about the World Spreads model:

"Every time a customer trades, it creates a position for the spread betting company. However, significant numbers of trades offset each other and hedging is only required against net exposures (overall cost c 6-7% of revenue). World Spreads has a set of limits based off maximum loss for each instrument class (ie a set pound loss per one point movement on FTSE or Dax), which are then aggregated into groups (eg all indices) and monitored real time.

"It does not use statistical models such as Value at Risk, believing they add little to the control of positions and are over-reliant on historic assumptions that do not reflect market experience. There are 14 stress tests, agreed by the risk committee, which consider the impact on capital, including regulatory capital impact, against the Internal Capital Adequacy Plan.

"Spread betting companies also segments its customer base into three categories and is more active in hedging positions from its largest (c 20) clients. Hedging by product line is highest in specific equities (can be 75%) as trading by customers tends to be long only. In other products customer trading is very two-way  requiring little external hedging."