I’ve actually thought it is illegal to trade this way?

Is spread betting illegal? The answer to this is not as obvious as it may seem. Certainly there have been some articles in the Press on spread betting that would seem to imply there is a morality issue, if not a legal one. They assert that financial spread betting is gambling, and cannot be considered trading or investing. The Financial Times called spread betting the “crack cocaine of gambling”.

spread betting illegal

In view of the similarities between spread betting and many other financial derivatives which are regularly used by major financial institutions, it would seem that this is a rush to judgment and a gut reaction to the given name. Financial derivatives by their nature leverage trading capital on the basis of an underlying financial instrument, usually without ever taking ownership of the underlying security. The outcome of spread betting fits exactly into this description.

Perhaps the reason for doubting the legality is that financial spread betting is not accepted in certain countries, the main one of which is the United States of America. Some cynics say this is because the structure is not in place to achieve tax revenues from it, and others say that the existing derivatives markets in the US have influence over the regulations in order to protect their revenues. However, a major advantage of spread betting in the UK is that it is considered betting and therefore does not attract capital gains tax. In the USA, gambling is taxable — although gambling losses can be offset against any winnings — so the taxation argument does not seem to hold water.

The official reason that spread betting is not permitted in the USA is that the Securities and Exchange Commission (SEC) is protective of the general public, and considers spread betting too risky for potentially uninformed people to take part. Note that this protection also extends to hedge funds, managed by professional investment consultants, where the SEC require any clients to have substantial savings and/or income before being able to take part. This prohibition also means that the general public are unable to participate in investments that can generate much better returns than the open market, and thus appears to favour the rich getting richer, with the rest of the population remaining where they are.

That aside, should spread betting be considered illegal? From a morality standpoint, spread betting gives you the facility to profit or lose more than your original stake, based on the movement of the price of an underlying financial security or commodity. It is tax efficient in the countries in which it is allowed, but otherwise the outcome is very similar to futures trading, Forex trading, or with different emphasis, options trading. These trading practices are legal and accepted around the world, thus there would seem no good reason to consider spread betting illegal. Certainly, spread betting, as a leveraged product, requires that the client is familiar with the level of risk, and how to mitigate it, but that is the only thing that could give it a bad name. Otherwise it is an efficient trading tool, and the choice of many.