Latest news on WorldSpreads: Were 'zero spreads' behind demise? Simon Cawkwell really should have seen this coming!

Last Updated on Wednesday, 28 March 2012 12:36 Written by Will Peters Wednesday, 28 March 2012 12:34

One of the most high-profile losers in the whole WorldSpreads saga is Simon Cawkwell - who is also known in City circles as 'Evil Knievil' thanks to a love of shorting companies he believe are overvalued.

Evil is owed £150,000.

One would think that such a legendary shorter of rubbish company's would have had his own spread betting company on his short-list?

The Independent this morning points out that after KPMG are finished with the firm there will be even less cash in the kitty to pay account holders: 

"WorldSpreads says that the total amount owed to clients is £29.7m. It has cash balances of £16.6m, a figure that may be dipped into in order pay KPMG."

A piece in the Financial Times offers some great insight as to why the company failed (It's all about the incredible cost of marketing!).

"The company pumped much of the sale proceeds into expanding in southern Europe, while also fighting for a bigger share of the UK spread betting market. Its marketing expenditure increased from €580,000 to €3.2m between the 2010 and 2011 financial years, wiping out profits yet failing to produce the higher predicted revenues."

The piece also offers the following insight into how the offer of zero spreads could have aided in the company's demise:

For the last 18 months, Worldspreads had offered 'zero spreads' for some of the most popular bets, reflecting the company’s excessive risk appetite suggests Justin Bates, an analyst at Keefe, Bruyette & Woods.""

The FT notes:

"Spread betting companies typically hedge large exposures to their customers’ bets by taking offsetting positions in the market, while making money from the “spread” between the prices paid by customers to buy and sell a position.

"However, in the absence of a spread, Worldspreads could make money from its clients only by taking the other side of their bets – effectively adopting the traditional bookmaker’s model. In an extended market rally – such as the one early this year – a spreadbetting company with large unhedged exposure to its clients’ long positions is likely to face substantial losses. This may have been the final blow that forced Worldspreads to declare insolvency, Mr Bates says.