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The Virgin Spreader chronicles my journey into the world of spread betting.

This spreadbetting blog starts from day one of a novice spreadbetting career. I intend to hunt down as much advice on spread betting as possible, talk to as many professional spread betters as possible and develop a winning spread betting strategy. And I will write it all down here. If you have anything you would like to contribute PLEASE get in touch!

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Home The Virgin Spreader The Virgin Spreader Questions asked of spread betting firms
Questions asked of spread betting firms PDF Print E-mail
Wednesday, 07 October 2009 13:01
The Virgin Spreader has over the course of the past week been trying to ascertain the mechanisms behind how spread betting providers operate.

Initially the debate was sparked on a Google finance forum - being new to spread betting anything that asked questions of spread betting providers immediately pricked my interest.

The question essentially being asked was how do spread betting firms operate?

Having talked to others spread betters and day traders I have come across many theories, one being that these firms 'hedge' themselves by taking the equivalent position on the market at a narrower spread to allow them to make their money on the spread.  

However - the reality is somewhat different to this.

It all comes down to the reality that spread betting is just that - it is betting.

Remember in a casino the house always wins, it all comes down to a question of odds.

Spread betters often behave more like a regular bookie service, or casino if you will; so placing a 'bet' on a financial instrument means you often in effect betting 'against the house'.

The average punter gets it wrong more than he gets it right and the spread betting provider can thereby make money without the need to hedge.

They would only hedge large positions or ones they cannot assess with confidence.

Remember the earlier post in which I referred to the massive position taken out by Mike Ashley, owner of Newcastle United? Ashley reportedly lost £300 million on a long bet on HBOS. If that had gone right though the spread betting firm would have needed some serious backing or parallel investment to payout.

But a forum member engaged in the debate on Google finance went as far as saying:

"As soon as you bet 'against the house' you open yourself up for some under-handed practice on their part. It has been known that mysterious 'problems' have occurred to account connectivity at critical times when the customer is well ahead - do note that this is
unsubstantiated, but you know the old adage about smoke and fire."

This may be an extreme case - but in answering a simple question such as 'how do spread betting companies work' some aspects are answered - but happily in this case a lot more questions are asked.

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Last Updated ( Monday, 19 October 2009 19:23 )