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Spread betting futures explained take

Jones: So what we're saying is that if they hold for longer than two-and-a-half months, then it's costing them more money. Bowman, iDealing : In most cases, yes. But having said that, most people's positions are no longer than two weeks anyway, even for the equity contracts. Jones: Let's get to some of the nuts and bolts of the futures versus spreadbetting argument. If we start from the futures side of things first of all, what would the spread be on a FTSE March future at the moment?

It can be half a point. Jones: Okay, so a quote would be , It just depends on the liquidity in the market at that time. A point or less is what you'd expect to find. Jones: And a typical spreadbet price on the future at the moment? Why would I bother trading with a spreadbetter when my break-even is so much further away?

This relates to what clients are potentially looking to receive and what profit they're looking to take from a trade. But what I would say with the spreadbet as opposed to a futures trade is that, on a very simple level, that eight points covers all your costs. Jones: So with some futures firms, I have to pay money on top? Generally, there can be a rebate against commissions but if you don't deal up to that each month, you have the fixed charge.

Jones: If I want to trade futures online, you're saying companies will levy a charge for using their platform whereas with spreadbetting there's no charge. Dan Moczulski, IG Index : I would say as well that there are quite a few instances where you might feel a spreadbet would be easier to do.

Take the FTSE contract that we mentioned - if you were to do 50 lots on a spreadbet price, you'd have no trouble getting away with it. Because we don't have the liquidity problem that maybe an exchange would have, quite often on a spreadbet you can get away with quicker prices and instant execution. Jones: So you're saying that on a spreadbet, I could trade a bigger lot size than I could in the real market and see it filled quickly.

That's because you are taking the risk on your book - the risk is with you, not with someone else in the market? Dan Moczulski, IG Index : Rather than say we take on the risk, we're hoping to have someone on the other side. But generally speaking, yes.

There would be no problem in our trading on the FTSE in, say, 50 lots, which is quite difficult on the exchange. De Roeper, Berkeley Futures : Well, I suppose there may be some firms still charging for terminals but certainly we don't and some other firms don't nowadays.

Secondly, commission is equivalent to about half a point to a point, so the total cost of a round turn will be anything between one and one and a half points, which is equivalent to point seven five spread on each side rather than the eight point spread quoted by spreadbetters. Commission includes the clearing fee, our fee, exchange fee and everything else. As far as size is concerned, a proper trader can see how many contracts are for offer, at what price and then the prices behind them.

So before he actually goes into a trade, he will know he can get the fill at these different prices all the way up. Then he can either back off and not trade, or decide to trade, or he can put a bid or an offer in at his price and let people come into it. The advantage of spreadbetting is tax, the disadvantage of spreadbetting is cost.

A 'scalper' is normally looking for two or three points in the market. For scalpers, therefore, any futures contract is far better but for longer-term people sometimes perhaps the tax advantage is attractive. Dan Moczulski, IG Index : We've used the FTSE March contract as an example but, generally speaking, a scalper wouldn't deal on the March contract, he'd deal with a daily FTSE future which has four points of spread, and if he was in and out of the market he'd perhaps deal on an hourly contract which has two points of spread.

Jones: So although we're using the March future and March spreadbet to try and compare apples with apples, what you're saying is that for a shorter-term trader, there are alternatives out there where the spread comes down. Dan Moczulski, IG Index : I think that's a distinction between the two products which is worth pointing out.

Futures contracts, by their very nature, have to be homogenous and they have to be standardised, so you have these quarterly contracts - March, June, September and December. Because spreadbetting can be a little bit more flexible and because it's not necessarily relying on the underlying exchange, it does have the ability to provide much cheaper prices for much shorter time-frames. Jones: So for the short-term trader, there is a less expensive spreadbetting route while on the futures side, it does look tighter for the scalpers trading the real market.

Bowman, iDealing : I'd say the main bottom line is that the tax-free consideration of spreadbets should be the driving factor in whether or not someone trades a future or a spreadbet. If you expect to make money and you don't want to pay tax on that profit, then you use a spreadbet.

That doesn't go for all markets though. Most notably, the liquidity is much better than the equity products offered by the CFD and spreadbet shops than that in the single-stock futures market in LIFFE, whereas exchange traded financial futures, commodity markets and index futures have fantastic liquidity because that's where all the institutional players aggregate their liquidity.

I think Dan's point on contract flexibility warrants underlining. A contract can be created by the spreadbet firm, delivered, traded and monitored sometimes within days. So if someone came to iDealing or IG Index and said they would really like them to consider coming out with a contract that expires weekly, it could be done.

It can't be done in an exchange-traded market with that speed because the whole market is underpinned by contracts and standardisation. Basically, if you want to trade tax-free, use a spreadbet; if you don't care, go where the liquidity is best. Plus you have this flexibility, because it's the spreadbetters who decide what market they're going to offer, so they can create all these weird and wonderful things, whereas the futures brokers are a go-between between us and the real market exchanges.

A smaller or retail trader can trade in lesser amounts, in pounds per point, so they can design their own contract size. That is pro the spreadbetting side. From the scalper side, I cannot see why any short-term traders, unless they were paranoid about the tax and always made money on every single trade, would use a spreadbet mechanism where there is an eight-point cost, when the highest retail rate that we offer is point eight of a point round-turn.

Also, on the tax side, losses do occur and losses are offsetable for tax. Should you be trading the FTSE to hedge an underlying share portfolio, you may not be too worried about the fact that your profits in futures might be taxable because they would be offset by the loss against the underlying portfolio which you're hedging. Should you spreadbet your hedge and have the underlying portfolio in the stock market that you're hedging, and should the stock market move in your favour, you're going to have a double-whammy because you're going to have to pay the tax on your profits from the stock market but you're going to take a loss on your hedge anyway.

So there are various different angles on whether the tax is a good or a bad thing. Jones: Let's talk a bit more about the mechanics of trading. With spreadbetting, people are quite familiar with how much they can make or lose because they bet so many pounds per point. How does it work in the futures markets - how do I adjust my risk and adjust my position sizing?

De Roeper, Berkeley Futures : The first thing you have to know is the contract size which you're trading, and I suggest that if you don't, then you shouldn't be trading. That's because each contract is ounces of gold. So you simply multiply that by the stop loss level down to which you are prepared to risk. Jones: So if I'm used to trading the FTSE with a spreadbetter, maybe I fancy doing it a lot more short term and futures are the way for me. Is there anything I can do with spreadbetting to minimise the risk?

Our sister firm, Spreadright. I would also suggest you've got flexibility, including guaranteed stops, which aren't available in the futures markets. Jones: So if I'm long the FTSE and there's a big terrorist attack, for example, and the market opens points lower, if I had my guaranteed stop maybe points below the level it was at the previous night, I would be out for a points loss.

A good example of this was when it was announced that Saddam Hussein had been found. The Dow future jumped 70 points in the blink of an eye. Many of our clients who were short of the markets had guaranteed stops and were completely protected.

That won't be the case if you go straight to the futures market. Jones: Is there anything similar we could do in the futures markets? A futures broker is an agency broker on to the exchange, so you're really operating in the big boys' world and you take those market movements. On the subject of guaranteed stops, there's no such thing as a free lunch and I think that people should probably drill down into the overall costings and see whether they're better off with a guaranteed stop or an on-exchange stop over a long period of time.

Of course, isolated incidents, such as markets gapping through terrorism or world news, can be found where it has been extremely beneficial to have a guaranteed stop. But I would say that, over the long term, some research into finding out which is the cheapest mechanism and the safest way of operating or the cheapest way of operating should be undertaken by the prospective user.

Jones: That's a very good point. Guaranteed stops give you the ability to sleep at night and not worry about extraneous events that are going to drive the market a bit crackers, but there is a price to pay. It's how big the extreme move is, isn't it? De Roeper, Berkeley Futures : There is another issue here: price transparency.

On-exchange prices are made public, the price data is reported and the levels at which executions are made can be investigated and looked at. With spreadbetting, you are trading an over-the-counter product with a counter-party and you have no recourse, as in the FX markets, to what those underlying prices are, how they've been devised or any other thing. I'm not suggesting for a moment that every spreadbetting firm is ripping its clients off, because they wouldn't survive very long in business, but you do have no recourse to any form of pricing mechanism.

I spend hours every day talking to customers asking me why they haven't got an execution on their order. The problem is, you may be wanting to take a profit in, say, gold at and you see on the screen that the June or April contract traded at But, unfortunately, only one contract may have traded at and you weren't at the front offer.

What I can then do is get an official time and sale from the exchange. It's very useful to be able to settle any dispute. But the main importance of transparency, from the trader's point of view, is knowing exactly where the market is and that it's fair. Dan Moczulski, IG Index : It's a good point and I cannot deny the fact that you can explain to people why their orders have been filled or why they've not been filled.

However, a spreadbetting firm doesn't have to adhere to the market and what's available on the bid or offer, we can fill this person regardless because it's not actually having to prove that it's there. That's where a lot of the action has been over the past few months. But the volatility does scare me a bit and, as I do a normal job, I don't want to be sitting in front of a screen all day watching the markets ticking up and ticking down.

What options do I have? De Roeper, Berkeley Futures : Ideally, you'd go to a broker who can watch for you. Both Ben and myself in our firms have advisory customers as well as execution-only customers, and even execution-only customers can request information or for levels so that they can be telephoned or e-mailed when they hit that level. I would say about half of our customers are in front of a screen for a considerable part of the day and the other half are not, they are on a plane or a train or at work.

We will happily look after a position for a customer, give him a call if something interesting or dangerous occurs in the marketplace and basically be his eyes and ears on the market so he can carry on doing his normal job. Jones: What about spreadbetting? Say I want to spreadbet the euro against the dollar and this thing can swing around , points on a busy day.

What can I do if I don't want to watch the market? Bowman, iDealing : Place a limit order or place a stop loss. A limit order is typically used if you want to enter a position at a price that doesn't currently exist in the market - if you want to buy at a price lower than the current level or if you want to sell at a price higher than the current level. I don't have to sit there and watch it, I can leave an order to buy it? Bowman, iDealing : You can leave an order to buy at and you can go to work or go to sleep or start watching TV and if you get filled, you get filled.

Jones: Then I can just ring up and close it out whenever I want to take my profits. Bowman, iDealing : You can also use stops to enter positions. You can say: 'I'd like to buy euro dollar if it breaks above Jones: So if I'm a technical analyst and I think certain levels are important, that's a way of me getting in if these levels get hit or get broken without watching the screen all the time.

Can I also do that with futures? If you have a position and for some reason you're called away or don't wish to be watching it, you can enter a profit-taking order which may or may not happen in your absence. Jones: Say, I've got a very understanding employer who doesn't mind me keeping an eye on the market during the day.

If I don't want to trade over the phone, what sort of options do I have online? The majority of them allow you to place trades, place stop and limit orders, and obviously by its very nature the prices must be pumped out live 24 hours a day. You've also got a lot of functionality on there to help you make the decisions - tick chart, historical charts, news providers and research.

There are a couple of firms, of which IG Index is one, which also provide mobile dealing. So if you have one of the new pocket PDAs, you can actually trade on that as well as monitor prices. Jones: Do I have to pay for all this whizzy stuff?

There are no IG fees. Obviously if you're using a mobile internet dealing platform, you have to pay your network provider whatever fee it charges, but that's none from us. Jones: What online options are available to me in the futures markets? De Roeper, Berkeley Futures : Most firms now offer online trading.

We do both for foreign exchange and for futures trading and option trading. There are two types of market nowadays. The electronic markets, where you can deal with matched prices on the internet as opposed to going down to the floor of the exchange where the people in bright-coloured jackets are and the prices are being shouted out.

You have the opportunity of placing orders both for exchange products and electronic exchange products. Most of the markets we trade in are open over and above the normal market hours, because there are various different markets which click in with electronic sessions of, say, treasury bonds. You can deal pretty much most of the day and evening and sometimes through the night, but not for products such as the FTSE futures contract which shuts one hour after the cash market at 5.

Jones: But with some of the bigger contracts in the US markets I can trade around the clock? De Roeper, Berkeley Futures : Yes. For instance, you can do gold and most of the currencies around the clock. So all order entry, order reporting, confirmations and trading executions are done online. Jones: How does it work? Let's talk about the FTSE again. Do I see a price there updating? Is there a delay when I want to buy?

Bowman, iDealing : It's like exchange-traded products, in that you see the current bid and offer, the last price, and you enter an order. It's order-driven trading, so you can place an at-best order, at-limit, stop or stop-limit order. Then your order status depends on where the liquidity is for a particular contract. Obviously, if you want to do the equivalent of 1, FTSE contracts, the liquidity may not be there at the current price.

It may be that, for that size, the price is slightly higher but it mirrors the order-driven trading markets that you see on most exchanges and on Nasdaq. Jones: It all sounds straightforward enough. So let's say I've decided that there is more to the world than Abbey National and BP shares, and I'm going to open a spreadbetting account and a futures account.

Are there lots of hurdles that I need to go through? How straightforward is it going to be for me to get one of these accounts opened for futures? Ben Few Brown, GNI Touch: : We all have the same regulator, whether a spreadbetter or a futures broker, and the main issue is the 'know your client' rule.

We are not allowed to give razor blades to babies. Technically the rolling contracts do actually expire although many years in the future. Futures contracts can be rolled into the next corresponding month or quarter. You need to pick the type of contract that will best suite the duration of your trade as they have different prices, spreads and costs. Rolling Daily contracts roll over from one day to the next, along with any corresponding orders that might be attached.

An overnight financing rate is applied for every night that you hold a Rolling Daily contract open. But Rolling Daily contracts can still provide a cost-effective solution for short to medium term trading. Rolling Daily contracts on individual shares can be kept open over periods when dividends are paid on the underlying shares. For this reason, dividend adjustments are made to your account if you hold a position in a share or an index, in some cases that goes ex-dividend.

Your account therefore incurs a debit or credit for each day that a Rolling Daily position is held overnight. For example, any position that is rolled from a Friday night to Monday morning will incur a financing charge of three days. This is made because clients trading on margin are effectively being given a loan to cover the total notional value of their positions. The overnight financing for a Rolling Daily position can be calculated using the following formula The Relevant Funding Rate RFR is generally equivalent to the base rate of the underlying currency of the country of the market concerned.

RFF is the central bank base interest rate corresponding to the 2nd currency minus the central bank base interest rate corresponding to the 1st currency. Therefore, if the UK base rate was 4. Future contracts are different to Rolling Daily contracts in that they are derived from live underlying futures contracts traded in the market, that will expire on a defined date.

You can close a futures trade at anytime before the expiry of the contract just as it can with a Rolling Daily contract. But the price quoted for a futures contract will have already taken into consideration all interest rate costs and any future dividend payments due between now and the time of expiry. Note also, that the future contracts generally have a wider spread than the Rolling Daily contracts.

BETTING OVER UNDER EXPLANATIONS

As it has a time expiry, a spreadbet is very much equated with a futures contract because, in that way, they perfectly mimic the movement of each other. Jones: If I'm spreadbetting, what markets can I trade? Foster Bowman, iDealing: , Well, it depends on which broker you use but, generally, spreadbetting can cover everything that's available over the counter or on exchange-traded financial markets and more.

Spreadbetting is, as Dan mentioned, a bet on the price or the outcome of events - that can include sports events, political events, anything you want. With commodities, you've got most of the agricultural crops - cocoa, coffee, wheat, soya beans. Then you get the base metals, precious metals, energy - gasoline contracts, oil contracts. There are futures contracts on most open-market type instruments.

Where there are free-flowing markets, futures contracts generally exist. Jones: Let's focus first of all on a futures contract on one market everyone is familiar with - the FTSE How does the future price compare to what's going on with the FTSE? As the FTSE future is deliverable some time in the future, it's a forward contract.

All forward contracts have an interest rate element. So the major difference is the time and the cost of money to borrow to that contract for that time. Against that, of course, the shares that constitute the index will receive dividends. Jones: That explains why if I'm looking at the FTSE future price and the cash price, there's going to be a difference. De Roeper, Berkeley Futures : There's always a difference. For instance, say you look at the currency markets, where you've got the dollar at one interest rate and sterling at another: if you're lending the pounds, you are receiving a higher interest rate than you are borrowing the dollars, therefore the price can be cheaper in a forward contract.

In fact, generally we take the lead from the futures market itself. As I suggested before, although one of the two products has the moniker of a bet to make it tax-free, they are nigh on identical in what they're purporting to follow. Jones: Why would I want to start doing all this derivatives trading and wander away from my Abbey Nationals and my BPs and my Glaxo shares? What are the benefits? Bowman, iDealing : With either category of financial instrument, they offer leverage, they offer the ability to go long or short and, crucially in the case of spreadbets, any profits you make are free of capital gains tax.

Both instruments can also be used for hedging the exposure you have, whether it's an existing investment or an investment that you expect to take place in the future. You only need to put up a small amount of the full consideration for trading futures or CFDs, for example, therefore you can have much more efficient use of your investment capital and greater flexibility with your portfolio.

Jones: Coming back to the gearing: we know that spreadbets and futures trade on margin, so I put down X pounds and effectively I can control 10 or 20 times X. Can you explain the concept of margin and why it's not as risky as some might think? De Roeper, Berkeley Futures : Margin is a deposit. When you deal through an exchange, as opposed to a spreadbet, there are two people involved in the transaction - the buyer and seller.

We clear that business through a clearing house, which demands both sides put up a deposit for the good faith, basically. This means that the clearing house and the exchange receive our money and your money together, which guarantees that we're going to be paying you or you are going to be paying us, whichever one wins on the deal. So the idea of margin is really to guarantee that you're going to get paid. If I lose a million and you make a million, you're you going to get the money off me.

And if I keep losing, I have to keep increasing my margin. The risk of margin is really one of self-discipline. It's to do with whether you over-gear or under-gear yourself. Say you buy 10, Abbey National shares: if you do the same with a CFD, you are going to have the same risk as buying the physical share.

But if you have then bought 10 times as many of a CFD, you have multiplied your risk by 10 and your potential profit or loss by Margin in itself is not risky. The risk is how you handle it. Margin trading is fine, it's just up to you whether you're an idiot trader or a disciplined, good trader. Bowman, iDealing : A lot of beginning and intermediate investors confuse margin with a product category.

In layman's terms, margin just means that you may have to send your broker more money to cover your losses if you do lose. That's it. If you put all of the money that you have in your initial deposit and you lose more than that, then you're going to be bankrupt. But that's a silly misuse of margin. Jones: How do people trading these markets trade? Do they jump in and out 50 times a day or do they hold stuff for weeks? People getting in and out within the day, maybe many times a day, basically looking to make short-term moves out of the market.

They're the people providing liquidity. A couple of weeks is quite long-term in the derivatives market. Longer-term trading is probably still best done in the stock market as opposed to a CFD, unless it's a long-term shorting position, because the cost of borrowing and the saving of stamp duty on the CFD don't generally benefit a long holder. They probably do as well going into the underlying market, although in that case they're not going to be availing themselves of the gearing available on spreadbetting or a futures contract.

De Roeper, Berkeley Futures : It depends really on the type of user. The futures markets were originally set up not for speculation but for protection. You produced your coffee in Brazil and it took three months for it to get here, meanwhile, the price would change.

So you went to one of the coffee houses in London and agreed the price today for delivery in three months' time. Now that still happens an awful lot, so the trade houses will be in the market perhaps forward hedging for a year or two. Likewise, the banks may be in there hedging interest rate movements, and you have people who are protecting their portfolios or trying to gain extra income from their portfolios.

They'll all be long-term strategic traders. The day trader is really a short-term speculator, dealing minute by minute, hour by hour. He gives us lots of commission and provides the market with huge amounts of liquidity, which means that the spread is very tight because so many people are trading. I'd love to tell you spreadbetters will all go on a particular time frame, but it just doesn't happen.

It relates very much to the type of trader and how they're looking to trade markets. You may well have a short-term speculator who views himself as a long-term hedger - they'll use the account and the contracts in many different ways. Jones: Foster, your company does traditional stockbroking as well, so maybe you have slightly longer-term buy-and-hold clients.

You also offer CFDs and spreadbets, so how do you see your clients breaking down on the spreadbetting side? Is it similar to the others? Bowman, iDealing : Yes. When they use spreadbets or CFDs at iDealing, it's generally for short-term positions. If you take into account the incremental financing charge for the rolling products, two to two-and-a-half months is generally your break-even versus the stamp duty that you save from using those products.

Jones: So what we're saying is that if they hold for longer than two-and-a-half months, then it's costing them more money. Bowman, iDealing : In most cases, yes. But having said that, most people's positions are no longer than two weeks anyway, even for the equity contracts. Jones: Let's get to some of the nuts and bolts of the futures versus spreadbetting argument.

If we start from the futures side of things first of all, what would the spread be on a FTSE March future at the moment? It can be half a point. Jones: Okay, so a quote would be , It just depends on the liquidity in the market at that time. A point or less is what you'd expect to find. Jones: And a typical spreadbet price on the future at the moment?

Why would I bother trading with a spreadbetter when my break-even is so much further away? This relates to what clients are potentially looking to receive and what profit they're looking to take from a trade. But what I would say with the spreadbet as opposed to a futures trade is that, on a very simple level, that eight points covers all your costs. Jones: So with some futures firms, I have to pay money on top? Generally, there can be a rebate against commissions but if you don't deal up to that each month, you have the fixed charge.

Jones: If I want to trade futures online, you're saying companies will levy a charge for using their platform whereas with spreadbetting there's no charge. Dan Moczulski, IG Index : I would say as well that there are quite a few instances where you might feel a spreadbet would be easier to do.

Take the FTSE contract that we mentioned - if you were to do 50 lots on a spreadbet price, you'd have no trouble getting away with it. Because we don't have the liquidity problem that maybe an exchange would have, quite often on a spreadbet you can get away with quicker prices and instant execution.

Jones: So you're saying that on a spreadbet, I could trade a bigger lot size than I could in the real market and see it filled quickly. That's because you are taking the risk on your book - the risk is with you, not with someone else in the market? Dan Moczulski, IG Index : Rather than say we take on the risk, we're hoping to have someone on the other side.

But generally speaking, yes. There would be no problem in our trading on the FTSE in, say, 50 lots, which is quite difficult on the exchange. De Roeper, Berkeley Futures : Well, I suppose there may be some firms still charging for terminals but certainly we don't and some other firms don't nowadays.

Secondly, commission is equivalent to about half a point to a point, so the total cost of a round turn will be anything between one and one and a half points, which is equivalent to point seven five spread on each side rather than the eight point spread quoted by spreadbetters. Commission includes the clearing fee, our fee, exchange fee and everything else. As far as size is concerned, a proper trader can see how many contracts are for offer, at what price and then the prices behind them.

So before he actually goes into a trade, he will know he can get the fill at these different prices all the way up. Then he can either back off and not trade, or decide to trade, or he can put a bid or an offer in at his price and let people come into it. The advantage of spreadbetting is tax, the disadvantage of spreadbetting is cost. A 'scalper' is normally looking for two or three points in the market. For scalpers, therefore, any futures contract is far better but for longer-term people sometimes perhaps the tax advantage is attractive.

Dan Moczulski, IG Index : We've used the FTSE March contract as an example but, generally speaking, a scalper wouldn't deal on the March contract, he'd deal with a daily FTSE future which has four points of spread, and if he was in and out of the market he'd perhaps deal on an hourly contract which has two points of spread. Jones: So although we're using the March future and March spreadbet to try and compare apples with apples, what you're saying is that for a shorter-term trader, there are alternatives out there where the spread comes down.

Dan Moczulski, IG Index : I think that's a distinction between the two products which is worth pointing out. Futures contracts, by their very nature, have to be homogenous and they have to be standardised, so you have these quarterly contracts - March, June, September and December.

Because spreadbetting can be a little bit more flexible and because it's not necessarily relying on the underlying exchange, it does have the ability to provide much cheaper prices for much shorter time-frames. Jones: So for the short-term trader, there is a less expensive spreadbetting route while on the futures side, it does look tighter for the scalpers trading the real market.

Bowman, iDealing : I'd say the main bottom line is that the tax-free consideration of spreadbets should be the driving factor in whether or not someone trades a future or a spreadbet. If you expect to make money and you don't want to pay tax on that profit, then you use a spreadbet. That doesn't go for all markets though. Most notably, the liquidity is much better than the equity products offered by the CFD and spreadbet shops than that in the single-stock futures market in LIFFE, whereas exchange traded financial futures, commodity markets and index futures have fantastic liquidity because that's where all the institutional players aggregate their liquidity.

I think Dan's point on contract flexibility warrants underlining. A contract can be created by the spreadbet firm, delivered, traded and monitored sometimes within days. So if someone came to iDealing or IG Index and said they would really like them to consider coming out with a contract that expires weekly, it could be done.

It can't be done in an exchange-traded market with that speed because the whole market is underpinned by contracts and standardisation. Basically, if you want to trade tax-free, use a spreadbet; if you don't care, go where the liquidity is best. Plus you have this flexibility, because it's the spreadbetters who decide what market they're going to offer, so they can create all these weird and wonderful things, whereas the futures brokers are a go-between between us and the real market exchanges.

A smaller or retail trader can trade in lesser amounts, in pounds per point, so they can design their own contract size. That is pro the spreadbetting side. From the scalper side, I cannot see why any short-term traders, unless they were paranoid about the tax and always made money on every single trade, would use a spreadbet mechanism where there is an eight-point cost, when the highest retail rate that we offer is point eight of a point round-turn.

Also, on the tax side, losses do occur and losses are offsetable for tax. Should you be trading the FTSE to hedge an underlying share portfolio, you may not be too worried about the fact that your profits in futures might be taxable because they would be offset by the loss against the underlying portfolio which you're hedging. Should you spreadbet your hedge and have the underlying portfolio in the stock market that you're hedging, and should the stock market move in your favour, you're going to have a double-whammy because you're going to have to pay the tax on your profits from the stock market but you're going to take a loss on your hedge anyway.

So there are various different angles on whether the tax is a good or a bad thing. Jones: Let's talk a bit more about the mechanics of trading. With spreadbetting, people are quite familiar with how much they can make or lose because they bet so many pounds per point.

How does it work in the futures markets - how do I adjust my risk and adjust my position sizing? De Roeper, Berkeley Futures : The first thing you have to know is the contract size which you're trading, and I suggest that if you don't, then you shouldn't be trading. That's because each contract is ounces of gold. So you simply multiply that by the stop loss level down to which you are prepared to risk. Jones: So if I'm used to trading the FTSE with a spreadbetter, maybe I fancy doing it a lot more short term and futures are the way for me.

Is there anything I can do with spreadbetting to minimise the risk? Our sister firm, Spreadright. I would also suggest you've got flexibility, including guaranteed stops, which aren't available in the futures markets. Jones: So if I'm long the FTSE and there's a big terrorist attack, for example, and the market opens points lower, if I had my guaranteed stop maybe points below the level it was at the previous night, I would be out for a points loss.

A good example of this was when it was announced that Saddam Hussein had been found. The Dow future jumped 70 points in the blink of an eye. Many of our clients who were short of the markets had guaranteed stops and were completely protected. That won't be the case if you go straight to the futures market. Jones: Is there anything similar we could do in the futures markets? A futures broker is an agency broker on to the exchange, so you're really operating in the big boys' world and you take those market movements.

On the subject of guaranteed stops, there's no such thing as a free lunch and I think that people should probably drill down into the overall costings and see whether they're better off with a guaranteed stop or an on-exchange stop over a long period of time.

Of course, isolated incidents, such as markets gapping through terrorism or world news, can be found where it has been extremely beneficial to have a guaranteed stop. But I would say that, over the long term, some research into finding out which is the cheapest mechanism and the safest way of operating or the cheapest way of operating should be undertaken by the prospective user. Jones: That's a very good point. Therefore, if the UK base rate was 4. Future contracts are different to Rolling Daily contracts in that they are derived from live underlying futures contracts traded in the market, that will expire on a defined date.

You can close a futures trade at anytime before the expiry of the contract just as it can with a Rolling Daily contract. But the price quoted for a futures contract will have already taken into consideration all interest rate costs and any future dividend payments due between now and the time of expiry. Note also, that the future contracts generally have a wider spread than the Rolling Daily contracts.

On every subsequent day as the June futures contract gets closer to its expiry date, the fair value will gradually reduce towards zero as the interest rate costs reduce and ex-dividend dates are passed. You may wish to rollover a futures contract where the current month contract is about to expire but you want to keep the trade open into the next contract period.

Rolling over a futures contract is more cost effective when you do so on the telephone, because you can save half of the spread on one side of the deal. If you closed out the June trade yourself online, and immediately bought the September contract you would sell at and re-buy at Risks: When you instruct a provider to rollover a futures contract, the existing position is closed, realising any profits or losses. If you had any limit orders attached to the original position these will also be lost and you will have to attach new limit orders.

With most markets, you have the choice over whether to trade the Rolling Daily contract or the Futures contract for any given market. In general, Rolling Daily contracts tend to be used by traders looking for short term positions and the quarterly and monthly futures contracts by those looking to take a longer term view. To help you make your choice, here is a table showing the main differences between the two types of contract Trade responsibly: Your money is at risk. Overnight Rolling Charges?

Dividend Policy? Guaranteed Stops? Rolling Daily Contracts Rolling Daily contracts roll over from one day to the next, along with any corresponding orders that might be attached.

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Bowman, iDealing : Yes. When they use spreadbets or CFDs at iDealing, it's generally for short-term positions. If you take into account the incremental financing charge for the rolling products, two to two-and-a-half months is generally your break-even versus the stamp duty that you save from using those products. Jones: So what we're saying is that if they hold for longer than two-and-a-half months, then it's costing them more money.

Bowman, iDealing : In most cases, yes. But having said that, most people's positions are no longer than two weeks anyway, even for the equity contracts. Jones: Let's get to some of the nuts and bolts of the futures versus spreadbetting argument. If we start from the futures side of things first of all, what would the spread be on a FTSE March future at the moment? It can be half a point.

Jones: Okay, so a quote would be , It just depends on the liquidity in the market at that time. A point or less is what you'd expect to find. Jones: And a typical spreadbet price on the future at the moment?

Why would I bother trading with a spreadbetter when my break-even is so much further away? This relates to what clients are potentially looking to receive and what profit they're looking to take from a trade. But what I would say with the spreadbet as opposed to a futures trade is that, on a very simple level, that eight points covers all your costs.

Jones: So with some futures firms, I have to pay money on top? Generally, there can be a rebate against commissions but if you don't deal up to that each month, you have the fixed charge. Jones: If I want to trade futures online, you're saying companies will levy a charge for using their platform whereas with spreadbetting there's no charge. Dan Moczulski, IG Index : I would say as well that there are quite a few instances where you might feel a spreadbet would be easier to do.

Take the FTSE contract that we mentioned - if you were to do 50 lots on a spreadbet price, you'd have no trouble getting away with it. Because we don't have the liquidity problem that maybe an exchange would have, quite often on a spreadbet you can get away with quicker prices and instant execution.

Jones: So you're saying that on a spreadbet, I could trade a bigger lot size than I could in the real market and see it filled quickly. That's because you are taking the risk on your book - the risk is with you, not with someone else in the market? Dan Moczulski, IG Index : Rather than say we take on the risk, we're hoping to have someone on the other side.

But generally speaking, yes. There would be no problem in our trading on the FTSE in, say, 50 lots, which is quite difficult on the exchange. De Roeper, Berkeley Futures : Well, I suppose there may be some firms still charging for terminals but certainly we don't and some other firms don't nowadays. Secondly, commission is equivalent to about half a point to a point, so the total cost of a round turn will be anything between one and one and a half points, which is equivalent to point seven five spread on each side rather than the eight point spread quoted by spreadbetters.

Commission includes the clearing fee, our fee, exchange fee and everything else. As far as size is concerned, a proper trader can see how many contracts are for offer, at what price and then the prices behind them. So before he actually goes into a trade, he will know he can get the fill at these different prices all the way up. Then he can either back off and not trade, or decide to trade, or he can put a bid or an offer in at his price and let people come into it.

The advantage of spreadbetting is tax, the disadvantage of spreadbetting is cost. A 'scalper' is normally looking for two or three points in the market. For scalpers, therefore, any futures contract is far better but for longer-term people sometimes perhaps the tax advantage is attractive.

Dan Moczulski, IG Index : We've used the FTSE March contract as an example but, generally speaking, a scalper wouldn't deal on the March contract, he'd deal with a daily FTSE future which has four points of spread, and if he was in and out of the market he'd perhaps deal on an hourly contract which has two points of spread.

Jones: So although we're using the March future and March spreadbet to try and compare apples with apples, what you're saying is that for a shorter-term trader, there are alternatives out there where the spread comes down.

Dan Moczulski, IG Index : I think that's a distinction between the two products which is worth pointing out. Futures contracts, by their very nature, have to be homogenous and they have to be standardised, so you have these quarterly contracts - March, June, September and December.

Because spreadbetting can be a little bit more flexible and because it's not necessarily relying on the underlying exchange, it does have the ability to provide much cheaper prices for much shorter time-frames. Jones: So for the short-term trader, there is a less expensive spreadbetting route while on the futures side, it does look tighter for the scalpers trading the real market. Bowman, iDealing : I'd say the main bottom line is that the tax-free consideration of spreadbets should be the driving factor in whether or not someone trades a future or a spreadbet.

If you expect to make money and you don't want to pay tax on that profit, then you use a spreadbet. That doesn't go for all markets though. Most notably, the liquidity is much better than the equity products offered by the CFD and spreadbet shops than that in the single-stock futures market in LIFFE, whereas exchange traded financial futures, commodity markets and index futures have fantastic liquidity because that's where all the institutional players aggregate their liquidity.

I think Dan's point on contract flexibility warrants underlining. A contract can be created by the spreadbet firm, delivered, traded and monitored sometimes within days. So if someone came to iDealing or IG Index and said they would really like them to consider coming out with a contract that expires weekly, it could be done. It can't be done in an exchange-traded market with that speed because the whole market is underpinned by contracts and standardisation.

Basically, if you want to trade tax-free, use a spreadbet; if you don't care, go where the liquidity is best. Plus you have this flexibility, because it's the spreadbetters who decide what market they're going to offer, so they can create all these weird and wonderful things, whereas the futures brokers are a go-between between us and the real market exchanges.

A smaller or retail trader can trade in lesser amounts, in pounds per point, so they can design their own contract size. That is pro the spreadbetting side. From the scalper side, I cannot see why any short-term traders, unless they were paranoid about the tax and always made money on every single trade, would use a spreadbet mechanism where there is an eight-point cost, when the highest retail rate that we offer is point eight of a point round-turn.

Also, on the tax side, losses do occur and losses are offsetable for tax. Should you be trading the FTSE to hedge an underlying share portfolio, you may not be too worried about the fact that your profits in futures might be taxable because they would be offset by the loss against the underlying portfolio which you're hedging. Should you spreadbet your hedge and have the underlying portfolio in the stock market that you're hedging, and should the stock market move in your favour, you're going to have a double-whammy because you're going to have to pay the tax on your profits from the stock market but you're going to take a loss on your hedge anyway.

So there are various different angles on whether the tax is a good or a bad thing. Jones: Let's talk a bit more about the mechanics of trading. With spreadbetting, people are quite familiar with how much they can make or lose because they bet so many pounds per point. How does it work in the futures markets - how do I adjust my risk and adjust my position sizing? De Roeper, Berkeley Futures : The first thing you have to know is the contract size which you're trading, and I suggest that if you don't, then you shouldn't be trading.

That's because each contract is ounces of gold. So you simply multiply that by the stop loss level down to which you are prepared to risk. Jones: So if I'm used to trading the FTSE with a spreadbetter, maybe I fancy doing it a lot more short term and futures are the way for me. Is there anything I can do with spreadbetting to minimise the risk? Our sister firm, Spreadright. I would also suggest you've got flexibility, including guaranteed stops, which aren't available in the futures markets.

Jones: So if I'm long the FTSE and there's a big terrorist attack, for example, and the market opens points lower, if I had my guaranteed stop maybe points below the level it was at the previous night, I would be out for a points loss. A good example of this was when it was announced that Saddam Hussein had been found. The Dow future jumped 70 points in the blink of an eye.

Many of our clients who were short of the markets had guaranteed stops and were completely protected. That won't be the case if you go straight to the futures market. Jones: Is there anything similar we could do in the futures markets? A futures broker is an agency broker on to the exchange, so you're really operating in the big boys' world and you take those market movements.

On the subject of guaranteed stops, there's no such thing as a free lunch and I think that people should probably drill down into the overall costings and see whether they're better off with a guaranteed stop or an on-exchange stop over a long period of time. Of course, isolated incidents, such as markets gapping through terrorism or world news, can be found where it has been extremely beneficial to have a guaranteed stop.

But I would say that, over the long term, some research into finding out which is the cheapest mechanism and the safest way of operating or the cheapest way of operating should be undertaken by the prospective user. Jones: That's a very good point. Guaranteed stops give you the ability to sleep at night and not worry about extraneous events that are going to drive the market a bit crackers, but there is a price to pay.

It's how big the extreme move is, isn't it? De Roeper, Berkeley Futures : There is another issue here: price transparency. On-exchange prices are made public, the price data is reported and the levels at which executions are made can be investigated and looked at. With spreadbetting, you are trading an over-the-counter product with a counter-party and you have no recourse, as in the FX markets, to what those underlying prices are, how they've been devised or any other thing. I'm not suggesting for a moment that every spreadbetting firm is ripping its clients off, because they wouldn't survive very long in business, but you do have no recourse to any form of pricing mechanism.

I spend hours every day talking to customers asking me why they haven't got an execution on their order. The problem is, you may be wanting to take a profit in, say, gold at and you see on the screen that the June or April contract traded at But, unfortunately, only one contract may have traded at and you weren't at the front offer. What I can then do is get an official time and sale from the exchange. It's very useful to be able to settle any dispute.

But the main importance of transparency, from the trader's point of view, is knowing exactly where the market is and that it's fair. Dan Moczulski, IG Index : It's a good point and I cannot deny the fact that you can explain to people why their orders have been filled or why they've not been filled. However, a spreadbetting firm doesn't have to adhere to the market and what's available on the bid or offer, we can fill this person regardless because it's not actually having to prove that it's there.

That's where a lot of the action has been over the past few months. But the volatility does scare me a bit and, as I do a normal job, I don't want to be sitting in front of a screen all day watching the markets ticking up and ticking down. What options do I have? De Roeper, Berkeley Futures : Ideally, you'd go to a broker who can watch for you. Both Ben and myself in our firms have advisory customers as well as execution-only customers, and even execution-only customers can request information or for levels so that they can be telephoned or e-mailed when they hit that level.

I would say about half of our customers are in front of a screen for a considerable part of the day and the other half are not, they are on a plane or a train or at work. We will happily look after a position for a customer, give him a call if something interesting or dangerous occurs in the marketplace and basically be his eyes and ears on the market so he can carry on doing his normal job.

Jones: What about spreadbetting? Say I want to spreadbet the euro against the dollar and this thing can swing around , points on a busy day. What can I do if I don't want to watch the market? Bowman, iDealing : Place a limit order or place a stop loss. A limit order is typically used if you want to enter a position at a price that doesn't currently exist in the market - if you want to buy at a price lower than the current level or if you want to sell at a price higher than the current level.

I don't have to sit there and watch it, I can leave an order to buy it? Bowman, iDealing : You can leave an order to buy at and you can go to work or go to sleep or start watching TV and if you get filled, you get filled. Jones: Then I can just ring up and close it out whenever I want to take my profits.

Bowman, iDealing : You can also use stops to enter positions. You can say: 'I'd like to buy euro dollar if it breaks above Jones: So if I'm a technical analyst and I think certain levels are important, that's a way of me getting in if these levels get hit or get broken without watching the screen all the time. Can I also do that with futures? If you have a position and for some reason you're called away or don't wish to be watching it, you can enter a profit-taking order which may or may not happen in your absence.

Jones: Say, I've got a very understanding employer who doesn't mind me keeping an eye on the market during the day. If I don't want to trade over the phone, what sort of options do I have online? The majority of them allow you to place trades, place stop and limit orders, and obviously by its very nature the prices must be pumped out live 24 hours a day. You've also got a lot of functionality on there to help you make the decisions - tick chart, historical charts, news providers and research.

There are a couple of firms, of which IG Index is one, which also provide mobile dealing. So if you have one of the new pocket PDAs, you can actually trade on that as well as monitor prices. Jones: Do I have to pay for all this whizzy stuff? There are no IG fees. Obviously if you're using a mobile internet dealing platform, you have to pay your network provider whatever fee it charges, but that's none from us.

Jones: What online options are available to me in the futures markets? De Roeper, Berkeley Futures : Most firms now offer online trading. We do both for foreign exchange and for futures trading and option trading. There are two types of market nowadays. The electronic markets, where you can deal with matched prices on the internet as opposed to going down to the floor of the exchange where the people in bright-coloured jackets are and the prices are being shouted out.

You have the opportunity of placing orders both for exchange products and electronic exchange products. Most of the markets we trade in are open over and above the normal market hours, because there are various different markets which click in with electronic sessions of, say, treasury bonds. You can deal pretty much most of the day and evening and sometimes through the night, but not for products such as the FTSE futures contract which shuts one hour after the cash market at 5.

Jones: But with some of the bigger contracts in the US markets I can trade around the clock? De Roeper, Berkeley Futures : Yes. For instance, you can do gold and most of the currencies around the clock. So all order entry, order reporting, confirmations and trading executions are done online. Jones: How does it work? Let's talk about the FTSE again. Do I see a price there updating? Is there a delay when I want to buy? Bowman, iDealing : It's like exchange-traded products, in that you see the current bid and offer, the last price, and you enter an order.

It's order-driven trading, so you can place an at-best order, at-limit, stop or stop-limit order. Then your order status depends on where the liquidity is for a particular contract. Obviously, if you want to do the equivalent of 1, FTSE contracts, the liquidity may not be there at the current price. It may be that, for that size, the price is slightly higher but it mirrors the order-driven trading markets that you see on most exchanges and on Nasdaq.

Jones: It all sounds straightforward enough. So let's say I've decided that there is more to the world than Abbey National and BP shares, and I'm going to open a spreadbetting account and a futures account. Are there lots of hurdles that I need to go through? Spreads are frequently, though not always, specified in half-point fractions to eliminate the possibility of a tie, known as a push.

In the event of a push, the game is considered no action , and no money is won or lost. However, this is not a desirable outcome for the sports book, as they are forced to refund every bet, and although both the book and its bettors will be even, if the cost of overhead is taken into account, the book has actually lost money by taking bets on the event.

Sports books are generally permitted to state "ties win" or "ties lose" to avoid the necessity of refunding every bet. Betting on sporting events has long been the most popular form of spread betting. Whilst most bets the casino offers to players have a built in house edge, betting on the spread offers an opportunity for the astute gambler. When a casino accepts a spread bet, it gives the player the odds of 10 to 11, or That means that for every 11 dollars the player wagers, the player will win 10, slightly lower than an even money bet.

If team A is playing team B, the casino is not concerned with who wins the game; they are only concerned with taking an equal amount of money of both sides. This is the house edge. The goal of the casino is to set a line that encourages an equal amount of action on both sides, thereby guaranteeing a profit. This also explains how money can be made by the astute gambler. If casinos set lines to encourage an equal amount of money on both sides, it sets them based on the public perception of the team, not necessarily the real strength of the teams.

Many things can affect public perception, which moves the line away from what the real line should be. This gap between the Vegas line, the real line, and differences between other sports books betting lines and spreads is where value can be found. A teaser is a bet that alters the spread in the gambler's favor by a predetermined margin — in American football the teaser margin is often six points.

For example, if the line is 3. In return for the additional points, the payout if the gambler wins is less than even money , or the gambler must wager on more than one event and both events must win. In this way it is very similar to a parlay. At some establishments, the "reverse teaser" also exists, which alters the spread against the gambler, who gets paid at more than evens if the bet wins.

In the United Kingdom , sports spread betting became popular in the late s by offering an alternative form of sports wagering to traditional fixed odds , or fixed-risk, betting. With fixed odds betting , a gambler places a fixed-risk stake on stated fractional or decimal odds on the outcome of a sporting event that would give a known return for that outcome occurring or a known loss if that outcome doesn't occur the initial stake.

The spread on offer will refer to the betting firm's prediction on the range of a final outcome for a particular occurrence in a sports event, e. The more right the gambler is then the more they will win, but the more wrong they are then the more they can lose. The level of the gambler's profit or loss will be determined by the stake size selected for the bet, multiplied by the number of unit points above or below the gambler's bet level.

This reflects the fundamental difference between sports spread betting and fixed odds sports betting in that both the level of winnings and level of losses are not fixed and can end up being many multiples of the original stake size selected. For example, in a cricket match a sports spread betting firm may list the spread of a team's predicted runs at — If the gambler elects to buy at and the team scores runs in total, the gambler will have won 50 unit points multiplied by their initial stake.

But if the team only scores runs then the gambler will have lost 50 unit points multiplied by their initial stake. It is important to note the difference between spreads in sports wagering in the U. In the U. In the UK betting above or below the spread does not have a known final profit or loss, with these figures determined by the number of unit points the level of the final outcome ends up being either above or below the spread, multiplied by the stake chosen by the gambler.

For UK spread betting firms, any final outcome that finishes in the middle of the spread will result in profits from both sides of the book as both buyers and sellers will have ended up making unit point losses. So in the example above, if the cricket team ended up scoring runs both buyers at and sellers at would have ended up with losses of five unit points multiplied by their stake.

This is a bet on the total number of points scored by both teams. Suppose team A is playing team B and the total is set at If the final score is team A 24, team B 17, the total is 41 and bettors who took the under will win. If the final score is team A 30, team B 31, the total is 61 and bettors who took the over will win.

The total is popular because it allows gamblers to bet on their overall perception of the game e. Example: In a football match the bookmaker believes that 12 or 13 corners will occur, thus the spread is set at 12— In North American sports betting many of these wagers would be classified as over-under or, more commonly today, total bets rather than spread bets. However, these are for one side or another of a total only, and do not increase the amount won or lost as the actual moves away from the bookmaker's prediction.

Many Nevada sports books allow these bets in parlays , just like team point spread bets. This makes it possible to bet, for instance, team A and the over , and be paid if both. Such parlays usually pay off at odds of with no commission charge, just as a standard two-team parlay would. The mathematical analysis of spreads and spread betting is a large and growing subject.

For example, sports that have simple 1-point scoring systems e. By far the largest part of the official market in the UK concerns financial instruments; the leading spread-betting companies make most of their revenues from financial markets, their sports operations being much less significant.

Financial spread betting in the United Kingdom closely resembles the futures and options markets, the major differences being. Financial spread betting is a way to speculate on financial markets in the same way as trading a number of derivatives. In particular, the financial derivative Contract for difference CFD mirrors the spread bet in many ways. In fact, a number of financial derivative trading companies offer both financial spread bets and CFDs in parallel using the same trading platform.

Unlike fixed-odds betting, the amount won or lost can be unlimited as there is no single stake to limit any loss. However, it is usually possible to negotiate limits with the bookmaker:. Spread betting has moved outside the ambit of sport and financial markets that is, those dealing solely with share, bonds and derivatives , to cover a wide range of markets, such as house prices.