The question of how spread betting prices are set is of interest to any of the almost 100,000 people who partake of spread betting in the UK. Spread betting companies take prices from the stock market, add a spread and then package them as financial bets. Futures markets are taken to signify pricing, as they are more liquid and so give a more accurate reading of true value.
You need not spread bet for long at all to realise that this is not always the case. Sometimes, a market price will not be reflected by a spread betting company. Prices can be lower or higher than those of the market. Any differences inevitably arouse suspicions, particularly to investors who have lost money, which is especially damaging because, as with betting on horses, the average punter loses money. They appear to suggest that spread betting firms are no more than glorified
bookmakers who shorten or lengthen odds to ensure that, at the end of the day, it is they who profit. It is, after all, a zero sum game whose odds favour the bookie.
It is commonly known that spread betting companies can set whatever prices they want. The small print of any spread betting contract will usually say that companies can change spreads as they see fit.
Competition keeps spread betting firms honest. 12 spread betting firms are licensed by the Financial Services Authority: Blue Square, Cantor, City Index, CMC, E*Trade, Finspreads, iDealing.com, IG Index, Global Trader, Spreadex, Man Spreads and TradIndex. Experienced traders usually open accounts with a number of spread betters and compare their prices and service as a matter of routine.
It is often heard in spread betting circles that too many companies are chasing too few customers, so a bout of takeovers is to be expected within the forthcoming year or so. Competition is now not only between spread betting companies, but with covered warrants, options, binary bets, futures contracts and contracts for difference. A spread better that consistently posted wonky prices would not last long.
Most of the profits of spread betting firms come from people who trade regularly, so novice traders are given prices that have been honed by the cut-throat competition required to lure and retain professional customers. Whatever the case, it is not impossible to win at spread betting. Companies prefer successful clients who will keep trading with them and pass on details of the company to their friends.