What Should I Look for in a Spread Betting Broker?

Financial spread betting started life in London in the 1970s to enable punters to take bets on the price of gold, which was streaking away towards the moon (to $850 per ounce, actually), and was (just like today) attracting massive public interest.

It didn’t take long for others to cotton on to the possibilities to run a ‘book’ on other markets, including the FTSE Index. After all, the new firms were taking bets (not acting as a normal broker) as bookmakers. In the UK, all winnings from gambling are exempt from capital gains taxes – thereby giving the new firms an unbeatable USP.

The industry quickly grew along with advances in computing, so that today, there are several firms that offer real-time charting and quoting on a huge range of markets in individual shares from around the world, stock indices, currency pairs, commodities, fixed interest securities, and other exotic animals.

Financial spread betting has been around for decades now and as the industry has evolved the competition has got greater. Today competitions between spread betting brokers is intense, which should spur existing spread betting providers to continue improving and innovating, as well as luring new entrants into the industry. All of which is positive for us private traders.

What Should I Look for in a Spread Betting Broker?

Companies that provide spread betting services are variously called spread betting brokers, spread betting providers, or even bookmakers. Despite this, their regulation comes under the Financial Services Authority (FSA) rather than the Gambling Commission in the UK. This, or an equivalent regulation in other countries, is one of the first things that you should check. Make sure the registration is current, and find out if there have been any complaints lodged against them.

The industry is very competitive, and all try to offer the tightest spreads – that is, the difference between the simultaneous selling and the buying prices. I advise choosing a firm that offers very tight spreads, because wide spreads can reduce significantly your profits, especially if you are a frequent trader.

The alternative to spread betting is to open a traditional futures account with a brokerage house. Sadly, all gains here are subject to capital gains tax for UK residents. So, if you do not have an account larger than around £100,000, spread betting makes sense. But all the methods of trading the markets in later chapters will apply if you trade the futures directly.

Here are some other benefits:

  • Low transaction costs. Really, it is in the buy-sell spread. With share ownership, you have stamp duty (for UK residents) and commissions. With unit trusts/mutual funds, you have high commissions and annual fees. Ugh.
  • Credit can be available, although to be used wisely
  • Can open an account with as little as £100 with some firms (although I don’t advise it).
  • Just as easy to go short as to go long
  • High leverage. For example, many firms offer a margin requirement of 3% for the FTSE and other indices.

In today’s environment, accessing the internet has become so natural to the majority of us that it is one of the first things most of us do in the morning. It provides an efficient and quick way to stay in control of your investments, anywhere in the world at any time. Online trading is both effective and convenient and enables investors to manage their portfolios alongside their busy lifestyles.

Of course some trading platforms are clunky and difficult to navigate, but most firms are continually upgrading.  The ones I use are super-efficient and fast.   I suggest you have a play with a few and take up their offer of a free trial account to get a feel for them.  Some firms even will even give you a £250 cash-back against any net losses in your first 10 days of trading.  Before grabbing that, check out their spreads against rival firms – they may not be competitive.

How to Choose the Online Trading Platform that is Right for You?

Not so long ago I received this message from Mr Schlemiel -:

Can you suggest which spread betting firm is the best in terms of spreads, execution, customer service, deposit requirements. Moreover a company that doesn’t try to ‘rip u off’ its customers when the market moves against them and in your favour i.e. the system mysteriously freezes or you press sell and the system rejects the trade which means you lose your profit, the usual crap methods some use to steal your dosh and make it difficult to trade.

Well, rather than mentioning particular companies, here are some things to look for when researching a spread betting provider to use:

  • User friendly: Make sure you choose a spread betting platform that you feel comfortable with and find easy to use.
  • Established presence: Choose a spread betting company that is fairly established – avoid the unproven ones.
  • Competitive bid-offer spreads. The bid/offer spread represents one of the principal costs of trading so generally speaking the narrower the spreads, the better – however beware companies that may tempt you with zero spreads as they may come with inferior execution.
  • Competitive margin rates. Margins should be competitive, however other factors are more important, unless you want to trade permanently over leveraged!
  • Access to accurate information and research in real time allows you to take speculative decisions at the right moment.
  • Tailored/automated trade monitoring: With today’s technology you should be able to place price alerts and customise the look and feel of the trading platform to suit your preferences and investment objectives.
  • Client support: Support people should be helpful, courteous and provide you with real replies to queries – not ‘canned’ e-mails. The availability of live chat support is an added benefit.
  • Innovative: Choose a spread betting provider that keeps up with industry and client development needs.

Your goal as a trader is to find the tightest spreads available whilst ensuring the level of service and sophistication of the trading platform remains the same. The interface may be “browser-based”, which means that you interact directly with a website when placing orders, or it can be software which is downloaded to your computer the first time you open your account. Whichever it is, it is called the “trading platform”. The software takes care of the graphical representations and the functions, and simply passes code to your broker when you place your bet. Some providers give you a choice of either of these.

When everything is going well, there is not much to choose between them. If your Internet connection is slow (and because of its vital nature I recommend you invest in as fast a connection as you can), then you may find that the browser-based trading platform is slow to react, and could give errors, perhaps if you press a button twice thinking nothing is happening. But by using the direct interface you have instant feedback when you place the order, and confirmation that it has gone through. If you may be using different computers, or want to access your account when away from home, then the browser based version will be more convenient. Whatever type you favour, be sure that you are able to try out the trading platform without making a commitment to that particular broker.

Educational tools, simplicity of use and cost also matter when it comes to choosing a spread betting provider. Most spread traders will use the latest market information and data to determine their position holding, so the quality of research tools and cost are important.

That deals with the practicality of placing trades. There are two other aspects with which you should be concerned. The first one is the amount of technical data and analysis that the provider can offer. Most if not all providers will give you good charting facilities for you to develop and implement your trading plan. Some provide more facilities than others, so if you need a particular technical indicator or calculation, you should make sure that your intended broker includes it. It is also possible to subscribe to charting providers, usually with a monthly subscription, and this should allow you the ultimate customization of your charts; but often a decent broker will provide you with all the information that you need.

Why are the size of the spreads so important? A spread of one point is very different from a spread of three points, and as this money goes to the broker, the larger it is the more it takes away from your profit. You will find that spreads vary depending on the market that you are trading in. Sometimes the spread is only one point when trading indices, but if you spread bet on foreign shares you can expect a larger spread. Most brokers claim that they have low spreads, but it is up to you to do your homework and see what each means by ‘low’. In practice spread bet pricing is no doubt a competitive area, with most spread betting providers chopping and changing in an effort to attract more clients.

Finally, you should look at how much deposit each broker requires for the type of spread betting you intend to do. Brokers vary, and they may have different assessments of your credit worthiness which can also cause them to require different amounts. Be aware that if you have spread bets running against you, and you choose to leave them open, your broker may need to contact you to deposit more money to cover him against any losses. This is called a margin call, and you must respond to it.

In any case if you are just starting out, I would recommend that you go to a provider like Capital Spreads who will give you free access to a demo account, on which you can place practice trades without risking any money. This allows you to test out any trading strategies and plans that you may have developed, as well as to get used to the interface on which you will place your bets.

To conclude when it comes to choosing which spread betting provider to go with, you really need to take a look at the total package. Pricing is important but an online spread betting provider has to be able to provide a good, reliable service. It’s not just about the size of the bid-offer spreads and the extra perks like research and analytical tools that most providers offer these days but if there is a technical problem with the spread trading platform, it would be nice to know that you can make a phone call and get assistance there.