Inside SPREAD The price of your home may be falling, but there is still a way to make money out of the BETTING market Page 4 FINANCIAL TIMES SPECIAL REPORT | Friday June 13 2008 www.ft.com/spreadbetjune2008 Look after your pennies Exchangetraded binary bets and a book on the finewine index offer a lowrisk way to make your small change work harder PLUS Fixedodds and binary betting explained 2 FINANCIAL TIMES FRIDAY JUNE 13 2008 Spread Betting AGENDA In This Issue Simpler bets with How to cushion the fall lower entry costs HOUSE PRICES Homeowners are having to face up to falling prices for their houses, are on offer, says but Sharlene Goff says there are ways to Matthew Vincent make money in a declining market Page 4 S pread-betting firms appear to have drawn on the advice of Wil- liam Lowndes, secre- tary to the Treasury in the 1690s, in devising their prod- ucts for 2008: “Take care of the pence, and the pounds will take care of themselves.” Among the latest offerings are exchange-traded binary bets from 10p a point, zero- Firms focus on just a few events spread FTSE 100 bets for as BEIJING OLYMPICS The sheer scale of the little as 50p a point, and – for competition has the expert spreadsetters those whose pounds have not feeling somewhat overstretched, writes yet taken care of themselves – trades on fine wine from Huw Richards Page 6 100p a point. Lowndes would no doubt have approved, especially as Food gives taste he was expressing concern about the cost of more nefari- of gain and pain ous trades in French wine SOFT COMMODITIES back in 1699. Rice and beans are Exchange-traded binary providing spice for bets on equity indices, cur- those brave enough rencies and interest rates are to bet on movements being offered by Tradefair, the online exchange that in the prices of aims to do for financial essential foods, spread betting what its par- writes Sharlene Goff ent, Betfair, has done for Page 8 sports betting. Tradefair already offers conventional financial spread betting, through its version Create a crisis from a calm of London Capital Group’s CUTTING RISK Fixedodds and binary service. But it is in financial betting can cut the downside as well binary betting that the firm as create volatility in a flat market. sees the potential to offer the competitive pricing and low Lucy WarwickChing explains how Page 10 entry levels that have made its sports betting exchange the site of choice for 1m reg- istered users. Financial binary bets are a simpler, limited-risk way of profiting from market move- ments: the spread quoted Betting firms represents the percentage likelihood of a market mov- ing in a particular direction within a specified timeframe. So the spread on a FTSE American poll offers closerun fun 100 daily “up” bet may be cover both ends US ELECTION The race has already supplied quoted at 66-67, but the bet plenty of thrills and spills – but it can still price can only ever settle at give avid punters much more in the way of 100 if the FTSE ends the day up, or 0 if it does not – irre- excitement, writes Huw Richards Page 11 spective of how many points the index actually rises or of the market falls. In this way, binary bets Claim a share of the profits are effectively like fixed-odds BETTING ON THE BETTERS Punters can win bets – traders know what back their losses by buying shares in spread their maximum profit or loss betting firms – or even spread betting on will be. Buying the FTSE bet them, says Alice Ross Page 12 at 67 would win (100-67) = 33x the stake if the index closes up on the day, or lose 66x the by IG Index, Tradefair to keep spreads wide. So, it points now with CMC. Even Front page illustration: Greg Meeson stake if it does not. believes that its exchange- will be an arms race. We so, he argues that conven- But unlike simple fixed- traded bets have additional already have the fastest tional spread betting will Contributors odds bets, binary bets offer two trading opportunities. attractions for new financial betters: quicker price reac- exchange, and as spreads get tighter, which of them can always be more popular, as it allows clients to trade on a Matthew Vincent Rohit Jaggi Traders can lay a bet on a tion, tighter spreads, plus the withstand the technological margin of 1-10 per cent of the Personal Finance Editor Commissioning Editor particular market movement ability to trade for as little as pressure?” value of their positions. Sharlene Goff Steven Bird not happening by posting 10p a point. CMC Markets admits that “If you bet £5 a point then Deputy Personal Finance Designer their own prices on the David Jack, Tradefair competition from an you can make £500,” he Editor Greg Meeson exchange. Traders can also director, reckons that the exchange could benefit all points out. “If you bet fixed Elaine Moore Picture Editor close out bets before they set- speed of the exchange will traders. “It may develop fur- odds, on 100 per cent margin, Personal Finance Reporter tle at 100 or 0, to profit from ultimately lead to tighter ther keenness to spreads and then you’re betting £5 to win Lucy WarwickChing any price movement in the spreads from competing charges,” says Gary Thom- £10.” House and Home For advertising details, short term, or to stop their spread-betting firms. “One of son, head of sales trading. Still, Tradefair believes Reporter contact: Rachel Padhiar losses if the price moves the elements that determines He points out that competi- this difference is academic Alice Ross on +44 020 7873 3564, against them. price is ability to react very, tion has already brought for traders who are looking Personal Finance Reporter email@example.com, And although binary bets very quickly,” he says. “If spreads on FTSE rolling cash to limit their risk. “We want Huw Richards or your usual Financial have been available for some firms can’t react, they will be bets down from 15 points in to break the barrier between FT Contributor Times representative years, having been pioneered left exposed to risk and have the early 1990s to just 2 the margin and non-margin FINANCIAL TIMES FRIDAY JUNE 13 2008 3 Spread Betting Nevertheless, some rival won’t take delivery of actual Liv-ex 100 Performance of selected indices and gold firms have questioned the wine – although ODL may Benchmark fine wine index Per cent gain/loss pricing. City Index, which hedge its position by buying, (rebased Jan 2004=100) operates a two-point spread but not drinking, certain vin- Liv-ex 100 FTSE 100 S&P500 Nikkei 225 Gold on rolling FTSE 100 bets, has tages. 300 pointed out that ODL’s zero- Mr Anderson doesn’t see 2003 2.0 13.6 26.4 24.5 10.4 spread reverts to 6 points this as any hardship, though. 250 outside market hours and “It’s almost become too 2004 -3.0 7.5 9.0 7.6 -3.4 ODL, like most spread bet- expensive to drink – it’s mad- 200 2005 18.6 16.7 3.0 40.2 31.9 ting firms, is the counter- ness, like owning a vintage party to the trades. car that you can only look at. 2006 48.7 10.7 13.6 6.9 8.7 150 ”When you’re sitting at So if you can’t drink it, or home at night and there’s you can’t tell the difference 2007 40.4 3.8 3.5 -11.1 28.7 some dreadful news, you between Margaux and plonk, 100 need to know you can get out why not profit from it?” Year-to-date* 7.5 -3.7 -2.6 -8.8 7.2 – and that your provider is It is certainly an attractive 50 not making a price out of option for those who cannot Five year** 144.0 64.0 67.0 78.0 97.0 2004 05 06 07 08 any positions that they’ve afford to be penny-wise but got,” says Clive Cooke, chief pound-foolish. Note: the index is production and supply weighted * To April 30 2008 ** Dec 2002 to Dec 2007 Source: Liv-ex executive of City Index. But ODL other new offer- ing arguably makes your pennies work even harder, in terms of geared exposure to the high price of an underly- ing asset. From this week, it will be offering quarterly spread bets on the Liv-ex 100 index of fine wines. This represents the price movement of 100 of the most sought- ‘For junior clients, no spread means they’ll know exactly the amount they are risking’ after fine wines, some of which sell for prices in excess of £25,000 a case. But the spread bets can be opened for as little as £1 a point, giving low-cost expo- sure to one of the best-per- forming asset classes in the world right now. In March and April of this year, the Liv-ex 100 hit new record highs, having risen by more than 40 per cent in 2007 and 48 per cent in 2006. Buy- Fine wines: some are almost ers in the emerging markets too valuable to drink, so why of China and India have been not profit from them fuelling these rises, says instead? Eleanor Bentall/Corbis ODL. So, over five years, it has comf ortably outper- formed UK, US and Japanese product,” says Mr Jack. equities, and gold. “Binaries and spreads are ODL will quote prices for thought of as different prod- quarterly bets based on the ucts, but a stop-loss spread- Liv-ex settlement price and bet is more akin to a fixed- other costs of wine investing. odds product. Some custom- “For example, at 4.30pm on ers start with one product 31 December when Liv-ex and migrate.” comes out with settlement ODL Markets has decided price, we open a price on the to cut its spreads to zero on March contract, which FTSE 100 rolling cash bets, reflects the financing cost, for traders who want to start and replicates other costs, with a margin-trading prod- such as storage, to create fair uct immediately but bet as value,” explains Duncan little as 50p a point. Anderson, senior manager of On its entry-level Discover spread betting. account, traders will be Initially, ODL will quote quoted a “flat” price for buy- prices with a spread of 5 ing and selling within mar- ticks – so, if the index settles ket hours of 8am to 4.30pm. near its current level, the James Parker, ODL’s head quoted spread may be 270-275 of spread betting, says this is – and will accept bets of £1 a the first time that zero point with exposure per cli- spreads have been offered for ent limited to £10,000. an unlimited period, with However, as more trades free guaranteed stop-losses to flow through, potentially help manage exposure. from wine merchants and “For junior clients, 50p a wine funds, it expects liquid- point movement and no ity will improve and the min- spread whatsoever means imum bet size will move to they’ll know exactly what £5 a point. Bets will not be they are risking.” physically settled, so clients 4 FINANCIAL TIMES FRIDAY JUNE 13 2008 Spread Betting Go from puppet to player on rates Most homeowners with a UK interest rates mortgage would love to Bank of England bank rate (%) know what will happen to interest rates over the next 5.8 year. Rates have been falling, 5.7 but inflation worries may well 5.6 prompt a rise. 5.5 Rather than sitting around fretting, though, investors 5.4 could make money by 5.3 backing their hunches on 5.2 where they think interest 5.1 rates will go. 5.0 The most direct way to bet on interest rates is on Jan 2007 08 Jun the announcements Source: Thomson Datastream themselves. ODL Markets gives the Spreads quotes the March following example. If it 2009 short sterling contract believes the next cut will be at 94.15. So, if you think 25 basis points, it could interest rates will be lower quote a spread based on a than 5.85 per cent at that cut of 24/26. The client time, you could buy the might expect 50 bps, and so interest rate future in a buy the bet at 26 points at spread bet. Gilt trading is £10 a point. also a way to spread bet on If there is a 25 bps cut, longerterm interest rates. the client loses £10 – the Such trades are likely to difference of 26 to 25. If appeal to those happy to there is a 50 bps cut, the hold their position for longer client makes £240 – the periods. difference of 26 to 50, or 24 Marc O’Brien at Barclays points at £10. But if there is Stockbrokers says: “Traders no rate cut, the client loses of interestrate movements £260 – the difference of 26 should remember to be Signs of the times: investors with big buytolet portfolios are more vulnerable to falling prices Christopher Furlong/Getty Images to 0, or 26 points at £10. patient, perhaps holding a A more common way to position for many months. It How to cushion the fall bet on interest rates is via is a slightly different gilts or short sterling discipline from your typical contracts, which are directly daytrading spread better.” affected by interest rate An even less direct way to movements. bet on interest rates is by CMC Markets quotes a betting on currency pairs. number of Treasury This takes a view on the HOUSE PRICES price index, with a view to those already buying and bet. Generally, betters would instruments, including the relative performance of a “buying” it back at a lower selling in the market. have to put up 10-20 per cent short sterling contract, as pair, such as the pound There are ways to price in the future. If you “Unsurprisingly in the cur- of the value of the position. both a contract for versus the euro, rather than make money in a think average prices will rise, you do the opposite. rent climate, the [bet] prices are factoring in lower house Hedging against the value of a house therefore requires difference and a spread bet. These bets try to predict how the rate will move from its current level. declining market, “Spread betting on house prices,” says John Prior, significant capital. where interest rates will be Currencies are greatly says Sharlene Goff prices has attracted lots of interest in recent months, as director at Killik Capital. As people tend to be IG says this type of spread bet is a crude way to hedge when the contract expires. For example, in January, affected by monetary policy and Mr Campbell points to the housing market has fal- exposed to falling prices the price of a property,as it is when investor sentiment was examples where a lot of H o m e o w n e r s tered,” says Alexis Webster, because they own a house, based on an average house particularly gloomy, the June money could have been around the coun- commercial development there are typically many price, which may not be a 2008 short sterling contract made on a spread bet. try are finally director at City Index, the more sellers of the index fair reflection of a single at Capital Spreads was For example in 2000, US having to face up spread betting firm. than buyers. Mr Prior says property. trading at about 95, meaning base rates were 6 per cent. to the fact that house prices “For those taking a short- this forces the price down There are some alterna- that betters thought interest But they went down to 1 per are falling. term view on house prices – further and makes it less tives to hedging against resi- rates would be 5 per cent by cent within three years, while All the main indices agree. a few weeks or months – attractive as a means of pro- dential property if investors the summer. the euro/dollar exchange Halifax and Nationwide spread betting is straightfor- tecting against falling house are willing to take a less But now the price is rate went from 0.95 to 1.25. reported monthly falls in ward and cost-effective.” values. direct approach. around 94.10, meaning the A client could have bought a excess of 2 per cent in May, Housing spread bets are For example, IG Index’s Paul Chesterton, a senior market thinks that UK euro/dollar pair for £10 a and even some of the most priced according to what the sales trader at CMC Markets, interest rates will be about point at about 0.95 and sold bullish commentators are average house price is says there has been a strong 5.9 per cent at the end of it three years later at about expecting lower prices by the expected to be at specified ‘It would only be correlation between the June. 1.25, making a profit of end of the year. points in the future. Betting movement in the Halifax Paul Jackson, a senior about £30,000. But while investors have firms typically use data from worth considering index and the performance of foreign exchange dealer at Tim Hughes, head of sales long been able to take short the monthly Halifax index, as a hedge if you house builders. CMC Markets, says: “The trading at IG Index, warns positions in equities, com- as well as other economic Investors wanting to man- short sterling contract that currency markets do not modities and bonds, similar data. They tend to offer believed prices age house price risk could typically responds well to just react to interest rate strategies have not developed as fast for residential prop- spreads on the average house price for the UK as a whole would fall a long trade shares in construction or real estate companies. news that influences interest rates, with a higher price expectations. In general, if the likelihood erty – largely because prices and also just for London. way very quickly’ CMC packages baskets of suggesting a softer monetary of UK rate increases goes up have been rising for years. Prices are generally availa- stocks around these sectors, policy will be adopted and a – or the likelihood of Most investors have a big ble only for the next two which investors can buy – or lower price suggesting a previously hopedfor rate exposure to property, simply quarters, so this type of spread for house prices in sell if they think prices will more hawkish view.” cuts falls – holding sterling through their main resi- spread bet is geared towards June is 180.4-183.4. This fall. Mr Chesterton says There is considerable becomes more attractive, so dence, so are sensitive to short-term investors. reflects an average house these are priced constantly, opportunity to spread bet on the currency’s value rises. price falls. Those who have “It would only be worth price of £180,400-£183,400. The unlike the house price index, interest rates in the current However, Jason Gibson, second homes or portfolios of considering as a house price latest figures from Halifax which is calculated once a economic climate. Angus senior manager for spread buy-to-let properties are even hedge if you believed prices show an average price of month. Campbell, head of sales at betting at ODL Markets, more vulnerable. would fall a long way very £184,111. If you expect prices “The impact of speculators Capital Spreads, says: “With says: “Investors have to The only real option for quickly,” says Mr Webster. to fall further you can “sell” is therefore far less noticea- the recent bout of high factor in that the market those wanting to hedge “Although it is perfectly at 180.4. The minimum bet is ble and spread betting pro- inflationary data in the UK, may have already priced in against property they own – possible to use a spread bet £10 a point and the maxi- viders are unable to call the short sterling futures have an interest movement and or even just to profit from a to hedge against falls in the mum is £250. price lower,” he says. been rather volatile” – and hence they may find no falling market – is to place a value of your own property, For September, IG is quot- Housebuilding stocks have rather popular with clients. value in placing a spread spread bet on the Halifax for most people it’s not that ing a price of 169.6-173.2, sug- dropped in recent months, Trades on interest rate bet.” house price index. simple,” says Mr Webster. gesting a fairly sharp drop and already price in a signifi- futures can also be made If you think house prices One issue is that the prices over the next three months. cant downturn, so it is uncer- over longer periods. Capital Alice Ross will fall over a certain time- quoted by betting firms take Another hurdle is the capi- tain how much further they frame you “sell” the house into account the views of tal needed to place a spread have to fall. FINANCIAL TIMES FRIDAY JUNE 13 2008 5 6 FINANCIAL TIMES FRIDAY JUNE 13 2008 Spread Betting The focus is on a few events OLYMPICS “It is by far the biggest bet- British medal hopefuls, such spokesman for IG Index, compete in more than one ting event of the entire as 400 metre runners Chris- says: “The Olympics is sim- event, such as Phelps or US The sheer scale of games. Any event that has a tine Ohuruogu and Nicola ply too big and diverse. athlete Allyson Felix, world- the competition has British interest pulls in more business, but whether or not Sanders, heptathlete Kelly Southerton, triple-jumper There are huge numbers of events that not many people class at every distance from 100 to 400 metres and so also the experts beaten, there is a British finalist, we Phillips Odowu, marathoner know much about. I haven’t a potential runner in two says Huw Richards would expect about 90 per cent of our Olympics trade to Paula Radcliffe and various rowing combinations whose for instance the slightest idea about how you would go relays – which along with the sprints are the events most be on the 100 metres.” form and fitness become mat- about setting the odds on companies expect to price. W hen the Jamai- Sporting Index expects to ters of national conversation. synchronised swimming.” “We’d certainly look at can sprinter run about seven markets on You might expect the Many of these events only markets based on a perform- Usain Bolt ran the event. Olympics to be as big an attract attention every four ance index with a certain the 100 metres By taking an unprecented event for the spread betting years, a hopeless handicap number of points for each in 9.72 seconds in New York chunk out of 10 seconds, the for an industry that relies on gold, silver or bronze medal,” on the last day in May, eras- aptly named Bolt is likely to the regular battle of wits he says. ing the previous world record have moved the opening ‘We don’t want to between its spread-setters Sporting Index, which of 9.74 seconds set last year prices on one of the most and committed punters who often leads in quirky bets, by his compatriot Asafa Pow- popular bets, which offers a quote on things fancy their own expertise. seems likely to play it pretty ell, it was not only Powell spread for the total hundreds where we are short Chris Houston, trading straight at the Olympics. and the other men cherish- of seconds by which 10 sec- manager at spread betting Mr Suntay thinks it is ing ambitions of Olympic onds will be beaten in the of specialised exchange Spreadfair, says: unlikely to offer indexes on gold in Beijing in August who sat up and took notice. heats, semi-finals and final of the 100 metres at Beijing. If expertise’ “We would probably like to quote more, but we don’t individuals. “We’ll probably be offering Events such as this, a stun- nobody does, the score will want to find ourselves quot- straight 25 for gold, 10 for ning performance from a be zero. companies as it is for the ing on things where we are silver indexes, but we will do runner regarded before this Bolt’s ability to take 28 general public – it will offer short of expertise and could every single track and field season as a 200 metres spe- 100ths out, when only three wall-to-wall live televised find ourselves very exposed.” event, quite a bit of the row- cialist, are the sort of new other men have yet gone sport to large audiences But there will be betting ing and the swimming – as information that moves mar- below 10 seconds at all this more or less non-stop for opportunities. Most compa- well as football, tennis and kets. And no Olympics mar- year, impacts on a poten- more than a fortnight. But nies have been offering a boxing.” kets matter more to the tially highly volatile market. while the spread betting com- punt on the number of Brit- Not the punter’s paradise spread-betting fraternity He will also join Powell, panies will be following ish golds for some time. They one might expect, But as Mr than the men’s 100 metres. current 100 and 200 metres form, fitness and prospects, will also be running markets Scott says: “With the interest As Karl Suntay, head of world champion American it is not a huge event for on football and tennis. that will come with the event trading desk and client serv- Tyson Gay, US swimmer them. Mr Scott also sees scope for being in Britain, I’d expect ices at Sporting Index, says, Michael Phelps and a host of Jeremy Scott, sports business on ahtletes likely to 2012 to be very different.” Market mover: Usain Bolt shakes up the record books a FINANCIAL TIMES FRIDAY JUNE 13 2008 7 Spread Betting Golf and tennis take up the sporting baton during the summer Football may dominate the sports business was Murray,” says Karl Suntay, “crosscourts”. This multiplies the spread betting business, but there is still head of trading desk and client services winner’s and loser’s score in each set a healthy summer market for golf and at Sporting Index. “But they wouldn’t (so 63 is 18 points) then adds the tennis. necessarily be buying him. There seems totals to reach a final number. Mr Ryder Cup golf in September is the to be a tendency to bet against him, as McKenzie says: “This can be hugely likeliest outlet. Jeremy Scott, sports there was with Tim Henman.” volatile, particularly with the possibility spokesman for IG Index, compares it to Mr Scott expects Federer, on current of five sets and an 1816 final set.” the Ashes cricket series between form, to start at Wimbledon on about When the British Open golf is played England and Australia. “It is heavily 3740 points on an index giving 60 to at Birkdale in June, those fastmoving hyped, hugely popular and the winner and 40 to the runnerup. In numberdriven tennis bets have their welldocumented, with excitement recent years, given his extraordinary counterpart in threehole specials offered building up well beforehand,” he says. Wimbledon performances, that offer by Sporting Index. “People get into it as sports fans, but would have had the punters piling in, “If a player goes 434 that’s 48 like to have a punt as well. At the but as Mr Scott says, “He has been points. If he goes 768 it is 336, so you moment, the supremacy bet on the showing signs of vulnerability.” Selling get the sort of volatility our punters margin of victory is favouring the Federer, and buying rivals such as love,” says Mr Suntay, who also reports Americans, but if you start to see Novak Djokovic or Richard Gasquet a healthy demand for Catastrophe Europeans on top in matches at the might start to look a tempting option. Specials – a points index for high scores beginning you’ll soon see the patriotic Tennis spreadbetting tends to focus at the most fearsome holes. The most pound coming in.” on the men’s game, which SpreadEx popular bets are usually those matching The complexity of the match creates spokesman Andrew MacKenzie reckons up the day’s pairings, and on players’ subplots that lend themselves to bets. accounts for 95 per cent of the overall finishing position. Chris Houston, trading manager at firm’s business but, as Mr The search for volatility makes Spreadfair, points out that there is Suntay points out: “At the unpredictable players such as John always lively interest in who will partner quarterfinal stage all eight will Daly popular, but Mr the world’s dominant player – Tiger be possible winners, and you Houston points to Woods – for the US in the pairs and get shocks – which are always alternative possibilities. foursomes matches, in which he has a good for us.” “You have someone like surprisingly ordinary record: “It looks as Among the the Australian Nick though the European players are most O’Hern who rarely inspired by the challenge of playing wins, but against him, while his partners are consistently intimidated.” popular bets offered finishes well up. Variations on the patriotic pound are by most companies is “If you back to be found at another of the great him you know summer events, Wimbledon. “If Andy Eyes on the Tiger: who will you’re getting four Murray were to play Roger Federer, partner Woods is always of days of trying.” you’d find that 90 per cent of the interest Donald Miralle/Getty Images Huw Richards the record books and the odds with his 100 metres win Hayden Roger/Celestin/AFP/Getty Images 8 FINANCIAL TIMES FRIDAY JUNE 13 2008 Spread Betting Food gives a taste of both gain and pain SOFT COMMODITIES well as livestock, including cattle and lean hogs. Investors believe Some also offer spread bet prices have further contracts on the price of exchange-traded commodities to rise, says or commodity baskets such Sharlene Goff as ETFS Grains, which are listed on the London Stock Exchange or the ETFS Agri- R ice and beans may cultural, which tracks the not make for a par- Dow Jones Agricultural ticularly adventur- Index. ous meal. But these “With spread betting, it’s grocery-cupboard staples are as easy to trade soya beans providing some spice for pri- or orange juice as it is to vate investors. trade Barclays shares,” says Spread betting groups have Alexis Webster at Cityindex. seen a surge of interest from “You just need to take a view retail investors looking to on which way you think the profit from a sharp rise in price will move, and under- food prices. stand the risks of getting it Soft commodities such as wrong.” rice, grain, corn and soy- Betting providers say that beans have soared in price most investors believe prices over the past year on the have further to rise. back of rapidly growing Angus Campbell, head of demand, particularly from sales at Capital Spreads, China and India. says: “Demand for soft com- A number of leading rice modities has been booming exporters, including India, so far this century, as the Vietnam, China and Cambo- India and China juggernauts dia, have imposed bans on gain momentum, and fore- foreign sales in recent casts for growth remain months. Cambodia has since high.” lifted its trade restrictions, China’s population is but the price of rice is still increasing rapidly – people about $1,000 a tonne, com- are becoming more affluent pared with just $350 a tonne and want to improve their a year ago. diets. They are increasingly Wheat has also risen able to spend money on strongly, although the price has eased in recent weeks, and many other agriculture ‘These markets are stocks have also rallied in the past year. not for the The ripple effects are fainthearted. already being felt in the UK. Some restaurants have had There’s a chance of to pull certain types of rice from their menus, and many seeing your cash have increased prices signifi- balance wiped out’ cantly. But while consumers pay Free but not cheap: trade in rice has eased following Cambodia lifting its ban on exports Tang Chhin Sothy/AFP/Getty Images more for their meals, some investors have been raking meat, which leads to higher have also surged, as ethanol, Mr Campbell says it is earthquake or a change in big price movements over in profits by placing spread demand for feed, and on which can be produced from important that investors the weather pattern that the past few months. Oil and bets on these assets. other luxuries such as coffee. them, has developed as an remember how volatile the affects the crops. Markets are gold, for example, have also CMC Markets, for example, Mr Campbell says growth alternative source of fuel. soft commodity markets can also at the mercy of political had violent intra-day swings. says its average monthly is also being driven from However the movements of be. “These markets are not pressures over imports and “For those who like a trade counts are more than elsewhere. “Industrialised these types of assets are hard for the faint-hearted,” he exports. white-knuckle ride and some 10 times higher for both US economies are increasingly to predict. James Hughes at says. “If you trade them In one sense, this is wel- volatility, oil is providing wheat and rough rice so far looking for renewable energy CMC Markets points out that there’s a chance of seeing come for spread betters, as it both at the moment,” he this year, compared with in an effort to cut their emis- rice and wheat prices had your cash balance wiped means they can make large says. 2007. sions,” he says. been movign together, but out.” profits from relatively small Betting providers say that Spread bets are typically “Biofuels are said to be the wheat prices have recently Soft commodity markets bets, but it also puts them at anyone looking to start based on the pricing in the answer, with farmers around fallen back. have shorter trading hours risk of large losses. spread betting in these areas futures market for the indi- the world switching from “There was a co-ordinated than currency markets or For the novice investor, should start with small bets vidual commodities. They livestock to crops that pro- move higher at the start of equity indices and can open these markets can be diffi- and put in place a stop loss offer a good way to speculate duce these new products.” 2008,” he says. “Wheat prices at very different price levels cult to judge. “Clients have to limit their downside. on further price appreciation He says soybean has been have fallen from their highs, from the close the night been dipping in and out, try- “These prices can suddenly or bet on the end of a rally. one of the main beneficiaries however, and, from a techni- before. ing to pick the tops and bot- jump around,” says Mr Betting providers price of this switch, with prices cal perspective, it could be They are also susceptible toms,” says Mr Campbell. Campbell. “But if investors bets on rice, corn, wheat, rising about 70 per cent in a argued that a reversion of to sudden price movements if He says it is not just soft can catch a trend they can be oats, soybeans and coffee, as year. Sugar and wheat prices rice may well follow.” there is, say, a hurricane, commodities that have seen lucrative.” FINANCIAL TIMES FRIDAY JUNE 13 2008 9 Spread Betting Groups attempt to reach a wider audience DEMOGRAPHICS reformed. In the past, spread scuh as spread betting firms now outside the UK alto- As the market widens, ing seminars online to reach betting has been promoted have focused their attention gether. both socially and geographi- clients unable to travel to big There is big money and advertised as a natural on these areas,” says Simon The situation in continen- cally, there will be natural UK cities, and innovations to be made by progression for people who already invest in stocks and Denham, managing director. “Our clients used to be based tal Europe is similar to that in the UK four years ago, consequences for the indus- try say managers, and online such as this are likely to con- tinue. looking beyond shares. But, he says, this is around the south-east of Eng- says Mr Denham. This has facilities will become even Now that clients are southern males, changing. “Ten years ago it was very land, but this is changing.” The company has caught the attention of spread betting firms, which more important to clients. “Probably the greatest inno- located in far corners of the UK and abroad, the ability says Elaine Moore much a male City worker increased its client base in see the potential for a range vation to spread betting was for companies to communi- who would open an account, the Midlands, Leeds, Newcas- of potential clients currently the ability and facility to cate with clients, and for cus- now the idea has much tle upon Tyne and some without the opportunity, or open an account online,” tomers to open accounts, As spread betting moves broader appeal.” other big UK cities. And 10 sufficient knowledge, to open says Mr Buik. remotely has become more from a niche pursuit to a Proof of this is evident, per cent of the business is a spread betting account. Providers are already hold- important than ever. mainstream investment tool, according to Mr Jones, from providers are looking for the fact that spread betting ways to extend their reach firms now advertise in main- and broaden their client stream publications, not just demographic beyond the finance papers. Some also industry’s heartland in Lon- target particular groups, don’s Square Mile. such as the Asian commu- Spread betting has tradi- nity, by advertising in spe- tionally been the preserve of cialised publications and City men looking for new attending targeted business ways to make money on the fairs. financial markets, but firms Alex Orban, vice-president are aware of the benefits of of E*Trade in the UK and expanding their customer EU, agrees that it is impor- base. tant for the spread betting Last year, researchers at industry to raise awareness Cass Business School, part of among as wide a range of London’s City University, people as possible. said that if spread betting The key, he says, is educa- firms focused their advertis- tion. Although more people ing efforts on women, the than ever are familiar with elderly and members of eth- the concept of spread betting, nic minorities, they could many have heard nothing double the number of but horror stories. accounts opened by 2011. Many firms, such as But so far, the advice appears to have fallen on deaf ears and the range of customers opening spread betting accounts has remained largely homoge- onous. More than 90 per cent of spread betting clients are male and the majority live in ‘They [women] the south of England. A recent survey by E*Trade tend to be more found that the average cus- conservative, less tomer was a 39-year-old man living in London or the gungho, calmer, south-east and employed at and more logical’ an executive level. However, spread betting David Buik firms say change is on the Cantor Index way. They say the profile of spread betting clients mir- rors that of private investors E*Trade and IG Index, use – spread betting is a natural seminars as a means of dis- progression from private pelling myths about spread investment in the stock mar- betting. ket, which is heavily popu- CMC Markets, which lated by men. claims to have always had a But some have drawn com- more diverse client base than parisons between spread bet- its competitors – both geo- ting and online poker, which graphically and in terms of has a wider range of partici- the type of jobs its clients pants and where nearly half have – says regional semi- of accounts are owned by nars have been a mainstay of women. its campaign for many years. When they do open spread Patrick Latchford, UK & betting accounts, women Ireland managing director, tend to outperform their says the company travels male counterparts. “They across the British Isles [women] tend to be more rather than focusing on Lon- conservative, less gung-ho, don and south-east England. calmer, and more logical,” It has recently opened offices says David Buik at Cantor in Edinburgh and Dublin to Index. “Sadly, there are not provide better service to enough of them.” Commenta- regional clients. tors say this could be used as Capital Spreads has also a hook to attract more been travelling and has female clients. started moving into the con- David Jones, chief market tinental European market. strategist at IG Index, the “Most of the UK’s wealth UK’s largest spread betting in the past was in the south- firm, says advertising tactics east and Edinburgh, so up to for spread betting are being now financial institutions 10 FINANCIAL TIMES FRIDAY JUNE 13 2008 Spread Betting How to create a crisis from a calm CUTTING RISK Want to take a punt on the emerged almost five years “Binary betting is the mid- particular security moves, financial markets but wor- ago as an alternative to dle ground between spread binary bets have predeter- Fixedodds and ried you might lose more spread betting for betters betting and fixed-odds bet- mined profits and losses at binary betting than you can afford to in these uncertain times? who wanted to take a punt on movements in share ting,” says David Buik at Cantor index. “While it puts the outset, with the chance of one or the other deter- explained by Lucy Then try fixed-odds betting prices, indices, currencies a ceiling on how much you mined by the odds you are WarwickChing or binary betting, both of which allow you to gamble and commodities with less risk. can win, it also removes the worry of losing more than offered. “Legally, there is no differ- with controlled risk on a Since then, the market has you can afford.” ence between a fixed-odds wide range of equity, index, grown and several companies While conventional spread bet and a binary bet,” says currency and commodity offer betting options, includ- betting targets a direction Jean-Yves Sireau, chief exec- Binary bonus: Tim Hughes movements. ing Bet On Markets and IG and its return is geared to utive of Bet On Markets. These types of betting index. how far in that direction a “They both pay a fixed multi- “short” market indices. ple of the stake and are Rather than simply bet on hence regulated as bets where the market will finish rather than as FSA-subject up on the day, binary betters financial contracts.” can place money on whether However, he says the dif- it will finish up between 1 ference is in the way they and 10 per cent or 11 and 20 are marketed. “Binary bets per cent. tend to be intra-day, where Because of this, binary bet- the bookmaker quotes a bid ting can create volatility in a and offer price between 0 and flat market in which it would 100, corresponding to the otherwise be difficult to probability of the bet paying make money. out. A calm market is the worst “Fixed-odds bets tend to be sort for spread betting, given longer term and are pre- the lack of movement in sented in a different fashion: which to wager. With binary the client specifies the betting, a small movement amount he wishes to win, can mean the difference and the bookmaker then cal- between winning and losing culates the odds on the bet.” it all. The best way to think Angus Campbell at Capital about binary betting is as a Spreads says: “The volatility simple bet on an index – or implicit in binaries means asset – between 0 and 100, that when markets are quiet, with the settlement price a small move in the underly- determined by the outcome ing market – and therefore a of a specific event. If the small move in the spread bet event occurs, the bet closes price – could give a much at 100; if it does not, then it bigger move in the binary closes at 0. The price at market.” which you can deal on the Binary markets have 1-100 spectrum indicates the evolved so much that there likelihood of that outcome. are now many variations Tim Hughes at IG Index – such as “one-touch” bets on which is seen as the binary whether the market will betting specialist in the UK – touch a particular level, says a person would choose a “tunnels” on whether the binary bet rather than a market will have a daily fixed-odds bet when they change of X number of anticipate wanting to be able points and “ranges” on to come out of a position whether a market will reach before its conclusion. “In this a particular range. situation, a binary bet has a “Because of the time value huge advantage,” he says. aspect to binary bets, option There is no limit to the traders tend to like them,” number of financial events says Mr Campbell. “Few on which people can place a beginners venture into them, binary bet, although in prac- as they can be put off by the tice most are made on the prices changing so quickly, direction of financial market but once you get your head indicators such as the FTSE. round how they work, they They can also be used to can be good fun.” Whipping up peaks: binary betting can create volatility FINANCIAL TIMES FRIDAY JUNE 13 2008 11 Spread Betting American poll offers closerun fun US ELECTION chief executive, who sets the political markets. The November The vice-presidential post poll lends itself offers potentially large returns for those who can to a flutter, says spot the winner – nobody is Huw Richards yet trading at 20 per cent in either party – but there are front-runners. W ith an epic pri- Among the Republicans, mary season former candidates Mitt Rom- concluded, the ney and Mike Huckabee are US presidential jousting with Minnesota gov- election moves into a fresh ernor Tim Pawlenty. phase as it advances towards Mr Delaney says: “Romney polling day on November 4. has had a lot of publicity While there may be the recently for his endorsement best part of five months to of McCain, while Pawlenty come, it has already supplied has been a robust presence extraordinary quantities of since the market opened.” the tension and uncertainty Among the Democrats, on which spread betting and there has been support for prediction markets thrive. Hillary Clinton and Virginia John Delaney, chief execu- Senator Jim Webb. “Webb tive officer of Ireland-based has shown solid progress, a website Intrade, which offers case-study in momentum,” an immense range of politi- Mr Delaney says. cal prediction markets, says: One factor in Mr Webb’s Unknown quantity: what is not yet known about Barack Obama, and John McCain, will make the fight more exciting “It has been incredibly excit- favour, aside from his rela- ing. tive conservatism and mili- tility traditionally prized by “On the Republican side tary background – both com- the British spread better. you have to remember that plementing rather than Only three winners in the within the past year John duplicating Mr Obama’s past century have achieved McCain was all but out of it, appeal – is his state. fewer than 300 votes in the running at only about 2 per It is one of Mr Delaney’s electoral college – Woodrow cent in our market, before a proudest boasts that Intrade Wilson in 1916, so close to Lazarus-like recovery to win punters tipped all 50 states losing that opponent Charles the nomination, while the correctly in the close-fought Evans Hughes went to bed Democrats have given us the election of 2004. on election night believing epic battle between Barack This time Virginia, won by he had been elected – and Obama and Hillary Clinton.” George W Bush in 2000 and George W Bush in both 2000 It has been good news for 2004, is closer than all but and 2004. Intrade, which has seen large two other states – Nevada Spreadfair’s numbers point volumes bet on the Democrat and New Hampshire, both to another close contest, cur- race. “It is the battle that has much smaller – on current rently offering the Demo- captured the imagination showings, with Intrade show- crats at 275 to 287 and the and the column inches, as ing a 55-45 Republican edge. Republicans at 242 to 252. well as going on for longer,” Might having a popular local Much, of course, remains says Mr Delaney. senator on the Democrat to be decided. “There is still Its markets operate on a ticket make the vital differ- a great deal we don’t know 100-point winner-takes-all ence? about Obama in particular,” basis, so prices reflect what Mr Garrood says. “Debate so the market – formed on an far has been within parties. exchange basis – sees as the ‘How candidates We don’t know how he or percentage likelihood of an McCain will do in the heat of event. At the time of writing, are doing in a national battle or how their those expectations pointed fundraising is an debates will go.” towards a Democrat victory, Other events could move which could be bought at important indicator’ markets. Mr Delaney says: 62.1. “How candidates are doing in Mr Delaney points out that fund-raising is an important the Democrats have been The numbers also under- indicator.” Another potential leading for a long time, with line the characterisation of vote-mover is endorsements, a slow but steady trend Ohio as a bellwether state. particularly across party upwards from 50 towards 60 “At the moment, that is lines. and above since early 2007. showing as 62 per cent likely Intrade offers what Mr This would seem to dis- to go Democrat, almost Delaney describes as “not prove suggestions that the exactly the same as the like- heavily traded but fascinat- long nomination struggle lihood of a Democrat victory ing markets” on endorse- damaged their chances. How- nationally,” says Mr Delaney. ments, inviting punters to ever, Mr Delaney admits that All 50 state results (plus speculate on such intriguing the growing inevitability of Washington DC) add up to possibilities as Colin Powell, Obama’s victory over Hillary the final count in the a high-powered servant Clinton helped push the per- 538-member electoral college of Republican presidents, centage proce higher.” which, as Al Gore was endorsing Mr Obama – cur- Next up as a significant reminded brutally in 2000, is rently rated at 35 per cent. event is the nomination of what actually decides who And of course it will all go vice-presidential candidates. gets to be president. on right up to and including This has been attracting Mr Garrood points out that November 4 – and November steady business for Intrade, for British punters the elec- 5 in this timezone. but leaves the punters on toral college vote is one of Mr Garrood vividly recalls British spread betting site the most popular markets: “the drama last time at Spreadfair pretty cold. “Our people like betting on about 1.20am our time, when “Our customers are mainly numbers,” he says in a it became clear that Bush interested in who will get the reminder of the British mar- was likely to win after all, top job, how many states ket’s strong City roots. and the markets went hay- they will win and the votes This is in spite of the fact wire”. in the electoral college,” says that recent elections have Nobody is ruling out simi- Andrew Garrood, Spreadfair shown very little of the vola- lar excitement this time. 12 FINANCIAL TIMES FRIDAY JUNE 13 2008 Spread Betting Claim a share of the profits I BETTING ON THE BETTERS n volatile markets, few outfits are privately owned, Stock Exchange’s junior IEX volatility, which was a ”key businesses are better a handful are listed. IG market, joining last month. driver” of client activity. Alice Ross explains placed to thrive than Group is in the FTSE 250, At that time, its Aim share Angus Campbell, head of how to make spread betting compa- nies, whose punters love a while London Capital Group, which owns Capital Spreads, price had more than doubled since listing in August. sales at Capital Spreads, notes: “All three companies’ money from the fast-moving prices. is traded on Aim. IG Index said this month it share prices have performed marketmakers Traders can take advan- tage of this by buying shares Dublin-based spread bet- ting company Worldspreads expected July profits to show an increase in revenue well in the past 12 months primarily because of the con- Warning: Patrick Latchford in spread betting companies floated on Aim in London of over 50 per cent on the tinued growth of their UK – or even by betting on the last summer and also previous year, stating that financial spread betting busi- own holding companies, spread betters themselves. became the first company to its business had benefited nesses.” though some listed compa- While most spread betting list this year on the Irish from high levels of market LCG’s shares have been nies offer spread bets on “one of the major success other listed ones, such as IG. stories” of Aim in the past At the beginning of June, few years, says Mr Campbell. CMC was offering a cash It floated at the end of 2005 price on IG Index shares of at 82p – the shares are now 385.71p-389.04p, and a quar- at 376p, with a target price terly price for September of from analysts of 450p. 391.86p-396.04p. Regulatory conditions are IG Index itself offers bets improving the scope for such on the shares of any liquid companies to expand. EU company quoted in the UK legislation is cutting red worth more than £10m. The tape and making it easier for only spread betting firms spread betting firms to offer that qualify are LCG, worth their services abroad. £145m, and Worldspreads, Those interested in simply worth £44m. buying shares in such com- But the prices quoted tend panies can also get a yield – not to reflect a spread bet- both LCG and IG pay divi- ting company’s views on the dends. prospects of competitors. IG However, investing in Index calculates its futures such shares does carry a prices mechanically, taking risk. Duncan Anderson, sen- the cash price, adding inter- ior manager for spread bet- est and deducting dividends. ting at ODL Markets, says: Where any share future “UK spread betting compa- price is quoted at a discount nies tend to trade at high to the cash price, it merely multiples, for example IG’s suggests there is an expected price/earnings ratio is 27 and dividend, says IG Index. For yields 1.52 per cent, so the example, IG Index offers bets best advice is to trade with of 380p-384p for LCG in Sep- caution. If you are going to tember, and 38p5-390p in trade, make sure you are December, while the bet on happy with the fundamen- Worldspreads is 114p-116p tals of the company and that for September and 115p-117p you are comfortable with for December. your position. Don’t over-lev- Capital Spreads is quoting erage yourself.” IG Group in a rolling con- Tim Hughes at IG Index tract with a price of adds: “The decision between 385.5p-378p, with a Septem- whether to buy shares out- ber price of 389.2p-391.6p, but right or spread bet on them, does not quote World- fundamentally comes down spreads, as its market capi- to whether or not you’d talisation is deemed too low. spread bet generally.” At the beginning of June, “Assuming you’re not ODL was quoting IG Group looking to short the stock, on a rolling spread bet of then it’s to do with how 384.3p-385.4p, showing that aggressive you’d seek to be contracts vary between pro- [if you were to take full viders. advantage of the gearing] Betters also need to keep a and your time frame. keen eye on corporate “Typically, spread bets announcements. Patrick aren’t perfect for long-term Latchford, UK and Ireland positions, although the tax managing director of CMC benefit can still make such Markets, says: “Even what strategies attractive as should be perceived as good spread bets.” news – such as bumper prof- For those who prefer to its – may initiate a run of spread bet on the betters, profit-taking, so, as always, certain limitations exist. traders should be aware of Spread betting firms do not their market exposure and offer spread bets on their have an appropriate risk management strategy in place at all times.” But all those bears worried that talk of strong profits may leave little shorting opportunity need not worry – it’s not all good news. Some commentators fear that the economic downturn could eventually affect spread betting clients them- selves, so the outlook for these businesses is by no means a sure thing. All the Caution: Duncan Anderson better for spread betters.