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Will Halifax take spread betting mainstream?

There’s a big grab for spread betting customers going on

I see Halifax, the bank that brought us Howard the singing clerk – and brought to its shotgun suitor Lloyds a load of duff Irish property loans – is now offering spread betting.

Previously, spread betting has been the preserve of companies like IG Index and City Index. Large firms, sure, but hardly household names.

As I write, Halifax is devoting a key spot in its share dealing home page to promoting its spread betting product. I don’t know how many share dealing customers Halifax has, but its service – which I use and like – has regularly won awards, and given the size of the parent I’d imagine it’s significant.

Halifax's spread betting promotion, yesterday. (The bank calls it 'spread trading').

I think we can therefore say that spread betting has hit the mainstream.

What is spread betting?

When you spread bet on a company’s shares, you speculate that their price will go up or down.

The more the price rises or falls in line with your bet, the more money you make – and vice versa.

Invariably spread betting firms enable you to ‘gear up’ your position if you want, so the same amount of money can go further than if you had bought (or sold) shares in the firm the traditional way.

  • This increases the potential reward you make from a correct bet, without the need for more money.
  • But it also greatly increases the risk, since you can easily lose more than your initial deposit if your bet goes wrong.

You don’t explicitly pay commission when you spread bet, but to cover its costs and make a profit, a spread betting firm defines a price ‘spread’ that the share price must move above or below before your bet begins to pay out.

The chief benefit of spread betting – besides the ability to borrow to bet on shares, for those who want that – is that spread betting gains in the UK are currently free of capital gains tax.

What then is ‘spread trading’?

You won’t find the words ‘spread betting’ featured prominently on Halifax’s site.

Instead, the company calls its new service ‘spread trading’, rather than ‘spread betting’.

The bank might argue that it’s a more understandable term for its customers. But I’d cough and suggest ‘trading’ is probably also a rather more respectable-sounding term for a bank to be associated with than ‘betting’.

The Inland Revenue isn’t confused, though. Spread betting is exempt from Capital Gains Tax precisely because it’s judged to be gambling, not investing.

Presumably Halifax ran the term ‘spread trading’ by the authorities before launching its service. But it will still be interesting to see what name it uses in the long-term.

There may even be existing spread betters who would be drawn to opening an account with a financial giant like Halifax.

It’s important to note, though, that Halifax’s spread betting service is provided by City Index – and I presume it runs a version of that company’s own platform.

More importantly, the bank also states that: “Halifax Spread Trading is provided by City Index Ltd and therefore your contractual relationship is with City Index.”

Risky business

Halifax is also offering the same encouragement you see in most adverts for spread betting in the media: free credit to get new customers started.

It’s widely quoted that something like 80% of spread betters lose money, so I’ve always presumed the credit offers were there to hook people into the habit.

But perhaps the bank will be spinning its £100 of free credit as more of an introductory bonus type affair.

To give Halifax its due, the bank does state very clearly and multiple times that spread betting is not for everyone.

The website frequently states it is “for the more experienced trader”.

The bank also states prominently on its “What is spread trading?” page beneath ‘Understand the risks’ that:

Spread Trading is a high risk product. Please remember that it’s possible to quickly lose substantially more than your initial deposit and you may be required to make further deposits at short notice to maintain open positions. Spread Trading is not for everyone so please ensure you understand the risks.

The follow-up page on those risks is pretty clear, too:

Halifax Spread Trading is a product which you can use to speculate on the price movement of an investment, whether it’s rising or falling. It is important to remember that Spread Trading is designed for experienced traders and carries a high level of risk to your capital. You should only trade with money you can afford to lose. It is possible to quickly lose substantially more money than your initial deposit.

There then follows a long list of the various things that can go wrong with this type of service.

I haven’t signed up for this service, so don’t know if any vetting is applied to ensure only “experienced traders” are given accounts.

When I opened a spread betting account with a different firm in the past, the chief requirement appeared to be a credit card.

What would you bet on?

I am not adamantly anti-spread betting, unlike many old school investors.

Back in the good old days when making big capital gains was still a problem (little joke), experienced investors with fairly large portfolios could use spread betting accounts to avoid accruing taxable gains, even while running fairly traditional portfolios – as opposed to the typical day trader betting on the value of the FTSE.

Properly explaining how they do this would require an article in itself!

But to simplify, you take small, leveraged positions of the companies you want to hold in your portfolio in your spread betting account, and keep the bulk of your money in cash to offset the ongoing costs of leveraging up your positions.

You must also have cash available to meet margin calls.

Like this, you can theoretically replicate how a ‘normal’ portfolio of shares would rise and fall, without incurring a tax gain (or loss) – although at today’s low cash deposit rates I think it would be difficult to offset all the costs of borrowing.

But I don’t think this is how most spread betters behave.

Rather, they make short-term bets on anything from the gold price to the Dow Jones Industrial Average to the price of Shell to how many runs England will make in their next Test Match.

And they leverage up those positions without a cash reserve, which means they are wiped out by small moves against them.

It is therefore probably only a matter of time before a tabloid paper finds someone made into a pauper by spread betting and publishes a “Should our taxpayer-owned bank be supporting this gambling?” type story.

That might be unfair, like most tabloid sensationalism.

Yet I would question whether this is really a sensible product for a mainstream bank to be getting into.

Average investor: Not a hedge fund genius

Another thing to consider is what the evident appetite for spread betting tells us about the psychology of investors today.

It seems you can hardly open an investing magazine or newspaper without finding an ad or pullout supplement for one of the big spread betting firms.

The ability to go short (i.e. bet against) companies and the indices seems to be very appealing to the many who are sick of losing money as the markets bounce around.

But remember, the average investor is very poor at timing the market.

Therefore, as with so much else since 2008/2009, I see this evident desire to short the market as probably a pretty bullish contrarian indicator, suggesting that markets are more likely to go up than down from here.

Filed under: Commentary, Investing

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{ 12 comments… add one and remember nothing here is personal advice }
  • 1 Beagle January 19, 2012, 10:32 pm

    So do Halifax (or City Index) need a gaming license?

  • 2 Lemondy January 19, 2012, 11:58 pm

    “spread trading”… Jesus Christ, do they think we are stupid?

    “probably a pretty bullish contrarian indicator” – sometimes I get the feeling you’d see sunrise as a bullish indicator 😉 Still, the FTSE is up today…

  • 3 Paul January 20, 2012, 8:15 am

    This is not for “experienced traders”, it is for gullible punters. I cannot imagine a product further removed from a low-cost tracker.

  • 4 ermine January 20, 2012, 11:41 am

    I use spread betting to short the shares in my employer sharesave scheme. This is coming to maturity in August and is decently up. I’ve shorted half the share options to lock in the current price and will short half the remaining half in three months.

    That’s hedging against a Euro disaster between now and August. The amount of the shares at the current price is over the CGT limit so I can’t dispose of all of them when the option matures either, so spread betting may still serve me there in the way you indicated above.

    One thing that helped me was when someone pointed out the spread bet quotes are a model of the market, and there is significant divergence at times of change. Which means it is worth arranging things so you don’t need to use stops and limits, ie have the cash to cover your entire position, and execute any trades manually.

  • 5 gadgetmind January 20, 2012, 11:47 am

    You can use spread bets as a low cost way of (effectively) buying and selling shares, and for some strategies it really does work better than regular trading.

    However, it was when I started to try and get my head around the tax and dividend position that I decided to keep it simple. Read this!

    http://www.financial-spread-betting.com/Dividends-spread-betting.html

  • 6 The Investor January 20, 2012, 12:00 pm

    @Beagle – Don’t know, but spread betting firm IG Index is in the FTSE 350, so I am pretty sure it’s done the right paperwork. 😉

    @Lemondy – Hah, a fair cop guv, especially after last year. However, remember my 2020 vision – against that general backdrop (*not* a prediction, but a best guess expectation) shares just keep looking cheap to me, and long government bonds a disaster waiting to happen, with 2010/2011 just hiccups in either direction. I hope I’ll be blogging here in 10 years and we’ll be discussing whether to keep even a 50% holding in expensive equities while I delete spam comments from bullish 20-year olds telling me I’m an idiot not to buy loss-making biotechs, but we’ll see. 😉

    @Paul – No argument here. 95% of Monevator readers shouldn’t go anywhere near spread betting, and arguably none of them *need* to. As I said, though, there are ways to use the products fairly sensibly, if you are absolutely aware of what you’re doing and where the risks/stresses are, and they can also be used for special situations like @ermine describes.

    @gadgetmind – The short answer is the dividend is accounted for in the spread. With volume products like this (important: in normal, non-stressed, times) it’s usually a reasonable bet that the market will be efficient – if there was a dividend anomaly in the pricing then a relatively wealthy spread better could come in and try and arbitrage for profit.

    That said, it’s definitely not the LSE so there is more chance of technical deviations and inefficiencies. (I have a very bright friend who has quit work in the City to build a mechanical strategy / black box to run on spread betting platforms, and while I don’t know the details I suspect it looks for likely short-term deviations in pricing).

    @ermine – Absolutely right, spread betting is not *the* market. A classic problem for even cautious spread betters is when margin requirements change at times of stress. Suddenly they have to find lots more cash to keep open positions that are turning sour, and often they don’t have it to hand. A mini-version of what happened to hedge funds invested in illiquid commodity markets etc in 2008!

  • 7 SB January 20, 2012, 2:11 pm

    Bookies have to post contact details of ‘Gamblers Anonymous’ (or its equivalent) in their shops. Will Halifax have to start posting such information too, in their branches, if promoting/advertising of Spread ‘Trading’ (Halifax’s euphemism for ‘betting’) starts to take place in them?

    I can see some pros for the sophisticated investor (locking in some gains for example), but the cons – for me- mean that this news is potentially a big step in the wrong direction.

    I notice that they give £100 after 5 ‘bets’. Ladbrokes currently offer up to £50 after just one bet, and Bet365 are offering up to £200.

    If such a good thing then they should not mind a punter swapping their endowment/ISA/repayment backed mortgage held with them for a spread trading one; if they are an ‘experienced trader’ of course.

  • 8 GoodLuck January 20, 2012, 5:07 pm

    Well, with even H-L themselves openly admitting that “90% of [active funds] are complete dross” (see: http://www.trustnet.com/News/Research.aspx?id=304015), I suppose some people need to get their thrills somewhere. Personally, I’d recommend smoking or skydiving – both are less hazardous to health and wealth than spread betting.

    Interestingly, spread betting is explicitly not regulated by the Gambling Commission but instead the FSA. I mean, if it was really gambling, it would be regulated by the GC, right? Right?

    Margin/leverage is a double-edged sword, just ask any bank that lost money in the “credit crunch” – much of that “credit” was/is fronting leveraged trading positions, hence market hammerings over forced sells. Even the “pros” only have to put one foot wrong to lose a limb.

    I’ve yet to meet anyone who’s been spread betting for significant time (10+ years) – let alone making serious money. Coincidence? Seems like they’ve either all been bankrupted/divorced, died of sudden heart attacks or – at best – are on the GA wagon picking up the pieces. The only people who do well out of it (strangely) are the market makers, e.g. IG Index et al.

    Still, good luck to you if you’re comfortable with risks etc. At least most readers here are much more well informed than Halifax’s target market.

    I’m off to buy some Halifax shares – they might make a few quid off out this!

  • 9 The Investor January 20, 2012, 5:33 pm

    I’ve heard it suggested that the reason that HMRC is happy to continue to allow spread betting to be exempt from Capital Gains Tax is that so few spread betters make any gains!

    Instead they make losses – and because spread bets are exempt from CGT, you can’t use those capital losses to offset capital gains made elsewhere.

    Hence a net win for the tax man, it’s been argued.

  • 10 Zero Matrix February 14, 2013, 7:17 pm

    You may all scoff, but I have used spread betting (and what a good term spread trading is) successfully to replace all of my ‘paper’ trades. I do exactly as is described in the article. For example earmark £50k to trade with and then don’t use leverage, so if you ‘maxed out’ you would only have used up a deposit of say £10k and the other £40k is left untouched. It works for me. Someone in the background is covering my spread bets with equity trades, I pay them a slightly higher spread, but all profits are tax free. Manage your money in this way, don’t use leverage, its a really beneficial system of trading.

  • 11 Mellow July 1, 2013, 6:10 pm

    From what I can see, spread betting would be a good idea for a sensible long term investor – can anyone point out any flaws in my reasoning:

    Spread bet £1/point long on the FTSE 100 futures (at roughly 6300 at the moment), with a deposit of say £500. You can then put the remaining £5800 (that you otherwise would have invested in getting equivalent exposure) into another interest bearing investment (e.g. a decent cash ISA or bond). As long as the interest you’re receiving on the cash is higher than the charges on the futures position at the spread better then you will be making extra money? The costs for holding an index future at a spread betting firm won’t be more than about 2 or 3 % I think.

  • 12 Theta July 22, 2013, 8:07 pm

    @Mellow
    Cost of holding an index position at a spread betting firm is I believe 3% (2.5% above base rate), whereas you are lucky if you receive 2% gross for your cash deposit. More likely after taxes it will cost you about 2% p.a. to run such a position. Whether the capital gains tax savings justify that depends on the appreciation of the index, the length you hold the position for, whether you are able to realize capital gains gradually within your annual allowance, you marginal tax rate at the end etc. etc.

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