| Spread betting symposium: a tool for all eventualities |
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| With the impact of the credit crisis on the financial markets, Spread Betting has seen an increase in volumes traded in 2008. Four market experts give their opinions on the emerging trends that are driving the market. |
Financial markets have displayed an increased level of volatility for almost a year now, reflecting major shifts in the performance of major asset classes, as well as the impact of the credit crisis, which, being unprecedented in scale and nature has been the source of major “arguments” in the markets, and hence major volatility.
In this Special Report on Spread Betting, we examine the nuts and bolts of Spread Betting, an alternative tool for investors and traders to the conventional markets in equities and other asset classes, and in the Symposium on this page we give the views of four of the leading analysts in spread betting in Ireland.
What sort of volumes are being traded in the credit crisis, compared to previous activity?
Declan Bourke, country manager - Ireland, CMC Markets: The credit crisis has resulted in a significant increase in volatility across all asset classes. Our clients thrive on volatility so as a result our volumes have continued to increase.
Davin MacAnaney, commercial manager, and paddypowertrader.com: Certainly the recent volatility has attracted more and more retail investors to financial spread betting than ever before. Paddypowertrader.com has seen a surge of new spread bettors since January all of whom are eager to get involved in the world markets. We have seen huge volume increases in equity and indices bets in particular. Irish equities are the most popular among our Irish clients as people do tend to trade more familiar assets.
Brian O’Neill, chief operating officer, Worldspreads: Worldspreads has seen a major surge in spread betting in the past 12-18 months. We would attribute this to a combination of favourable internal & external factors, namely: market volatility, the major fall in the Irish stock exchange, a much more cost conscious betting approach, foreign exchange fluctuation, tax exemption of any gains.
Liam O’Gara, senior market analyst, Delta Index: The increased volatility in the financial markets has resulted in much more position turnover as clients take profits or losses quicker as the markets move. While volume increases as a result of this, astute traders reduce their stake sizes to adjust for the increased volatility, maintaining their same risk profile.
Is recent volatility in the market the best market environment for spread betting?
Declan Bourke, country manager - Ireland, CMC Markets: Any movement in the markets helps provide opportunities for spread betters due to the ability to go long and short.
Davin MacAnaney, commercial manager, and paddypowertrader.com:
A certain amount of volatility is very good for spread bettors but an excess of that such as we’ve seen in January can hurt even the most savvy of spread bettors. As more and more retail investors delve in to financial spread betting, we can see that volatility is a two-edged sword. A lot depends on the position taken by the client and the volume of the trade placed. We do not advise clients but merely execute the decisions they take. Volatility does tend to attract attention to the markets and financial spread betters are generally eager to take an opportunity to
make profits.
Liam O’Gara, senior market analyst, Delta Index: It depends on what type of trader/investor you are. Spread betting is a very flexible tool which allows for all sorts of styles of trading and investing in the financial markets. The recent volatility has been good for short term traders, though not necessarily good for long term equity holders. However, the ability to go short has given equity players the ability to profit in the downturn by taking positions that the market will fall. This is also a useful tool for those existing long term holders of shares to lock in their profits by hedging with a spread bet.
Is there a bearish or bullish sentiment among your users - i.e. do you have more ‘punters’ or ‘hedgers’?
Declan Bourke, country manager - Ireland, CMC Markets: Although clients have the ability to trade both long and short with CMC Markets, there is always a natural bias towards buying positions. Although this remains profitable in the current range bound markets, the ability to profit from falling prices by short selling shouldn’t be overlooked either.
Davin MacAnaney, commercial manager, and paddypowertrader.com: In general, we find the number is about fifty-fifty, i.e. we have an equal amount of bullish and bearish investors. Our spread betters tend to trade both long and short on an ongoing basis. It only makes sense to try and break that down by category, at the moment most clients are bullish on commodities such as oil and gold. However if oil was to drop in price a switch to short bets might occur. Educating themselves and being informed about current market conditions is clearly a very good way for spread betters to make these kind of decisions.
Liam O’Gara, senior market analyst, Delta Index: Clients are still generally bullish on equities, especially on the Irish market - expecting the value that exists to be released as the markets recover. This is also the nature of equity markets - that there is always a long term upward bias. We have many clients very active in commodity and currency markets which have seen solid trends over the past nine months, e.g. Oil, Eur/Usd (even while equities have been volatile). Clients have diversified into other markets.
Brian O’Neill, chief operating officer, Worldspreads: Right now, sentiment is mildly bullish (but careful).
Are spread betters contrarian by nature?
Declan Bourke, country manager – Ireland, CMC Markets: Spread betters form a diverse group of people spanning many different employment types and with different outlooks. One of the positives of the product is that it accommodates all types as it is as easy to go short as it is to go long, so contrarian types along with people with other outlooks do spread bet.
Brian O’Neill, chief operating officer, Worldspreads: Traditionally, no. But, with increasing cynicism of late, contrarian tendencies are increasing.
Davin MacAnaney, commercial manager, and paddypowertrader.com: Financial spread betters are not necessarily contrarian by nature. Some spread betters follow strict strategies that only allow them to bet in a bullish manner. Others only look for opportunities that allow short or bearish markets. However these are in the minority. Certainly the fact that you can bet in favour or falling markets makes it easier to be a contrarian. However the choice is up to the client.
Liam O’Gara, senior market analyst, Delta Index: Not necessarily. While there are lots of traders who attempt to call the top or bottom of a market, experienced market followers will know that this is a dangerous game (hence the phrase ‘trying to catch a falling knife’) and for the one time you’ll call it spot on, there’s a hundred times you’ll end up getting burnt. The majority of spread betters are ‘trend followers’ and have made substantial gains going with trending markets. The Irish equity market boom, the commodities boom, and the falling US dollar to name a recent few.
How can spread betting be used in risk management?
 | | Declan Bourke, country manager - Ireland, CMC Markets |
Declan Bourke, country manager - Ireland, CMC Markets: Spread betters have the invaluable ability to go short on a wide range of instruments. That means that they can lock in profits associated with an investment they wish to hold in the long term - perhaps for tax reasons - by taking a corresponding short position. Such a strategy can be ideal in times of market uncertainty.
Brian O’Neill, chief operating officer, Worldspreads: In many ways but, obviously, hedging existing exposures would be the most common. The best example of this would be senior executives of companies with large option packages locking in a portion of their exposure. Certainly, as older senior executives move close to retirement, they should definitely consider such a move as prudent. Another good example might be hedging a currency exposure on a foreign property pre closing.
Liam O’Gara, senior market analyst, Delta Index: Being a leveraged product, spread betting by nature involves risk. At Delta Index we spent a great deal of time with clients teaching them about risk management and provide education, tools and resources in order to help them be as profitable as possible. These include trade risk calculators, automatic orders and tutorials and seminars from expert traders.
Davin MacAnaney, commercial manager, and paddypowertrader.com: Spread betting can be used to hedge risks in a variety of ways, and as the costs are so low it is accessible to everyone. Some examples might be: an employee is due to receive stock options from her employee in a few months or more – but doesn’t want to risk the value of those shares falling; a stock investor might have shares in US or UK companies but is particularly worried about the currency markets moving against him; a small company with a big exposure to the price of oil or the US dollar might want to reduce that exposure. In both cases spread bets could be used as a form of insurance, to protect the person against a particular risk. Spread betting can be used to hedge risks in a variety of ways, and as the costs are low it is accessible to everyone and it has the benefit of not being liable to capital gains tax. |
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| Article appeared in the June 2008 issue.
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