Choosing the right spread betting broker

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Spread betting is one of the greatest innovations in financial markets for the private investor and trader of the last two decades.  It has opened up markets and strategies that were previously reserved for professional and institutional investors.

By betting on the movement of a share price instead of investing traders can leverage, go short to profit in bear markets and access markets such as, bonds, gold, FX and indices such as the FTSE, DAX and S&P.  Plus, as spread betting is categorised as a bet, it is currently not subject to capital gains tax. That, plus no commission, stamp or custody charges, make it a very clear and admin free way to speculate on the financial markets.

Spread betting is unique to the UK market and there are currently over fifty brands, providers and platforms to choose from.  Here, I’ll go through by the process of elimination as to which spread betting broker you should have your account with.

The only two things that matter are…

  • Will they go bust?
  • Can they fix trading errors?

Most spread betting companies offer pretty much the same spreads, latency, online trading charting and research tools so you really need to concentrate on the two key points of any financial service provider.

Disregard the white labels

A white label platform is where a brand will put their logo on a spread betting providers platform.  There are some advantages, such as giving you a sense of brand loyalty or perhaps getting a special offer like some matched funds on your initial bonus.  Intertrader will give you up to £10,000 for example.  If you are interested you can read up on the main spread betting white label providers here.

But to be honest, once you open an account and start trading you’ll be entering into a long term relationship with a financial provider, a quick bonus when you open the account should be ignored.  Plus one good or bad trade will make it irrelevant.  I say you should ignore white labels because you simply won’t get the customer service of dealing with a firm direct.  You’ll always be going through a middle man by the brand or treated with slightly less importance by the provider at the other end (because they are earning less from your account).

On the two key issues you must remember that if you are going with a white label you are not actually a customer of the brand, you are a customer of the underlying spread bet provider and they hold your funds.  So if you are trading with a Barclays branded spread betting account, you are not reliant on Barlcays balance sheet, but that of the provider to protect your funds.  When it comes to trading errors, you can’t talk to your brand as they have no control over the platform, so if there is a problem, it will be slow to be sorted.  Also, errors and mistakes (regardless of who’s fault it is) are normally settled by way of a commercial decision from the head of trading.  Decisions are more likely to fall in your favour if you deal direct, as the broker earns more from your account and therefore has a greater interest in keeping you happy and trading longer.

That leaves the main providers

Don’t bother with non-public firms

It goes without saying that even though spread betting is gambling it is also regulated by the FCA.  Therefore never go with a firm that is not FCA regulated.  But more importantly don’t go with a spread betting firm that is not listed on the London Stock Exchange.  This is because you are trusting these firms with huge amounts of your money and even larger exposure to the financial markets.

It doesn’t matter if you are using spread betting to speculate or hedge longer term positions you need to be sure that the firm is financially sound and well capitalised.  There are no guarantees that any firm will not fail.  Even segregated funds are only segregated from the firm’s money, not other clients.  So if a client has a massive loss, ends up in negative equity, that negative equity will be covered by other clients funds until the broker recovers the cash from the client.

All firms have problems, there are trading errors, from clients and dealers.  Sometimes £1m of stock is bought instead of £100k. Sometimes things are bought instead of sold.  It is the nature of the business.  You need to be in a position where you can tell there are problems early on and get your cash and positions out to another broker as soon as possible.  Public firms are required to report results and cash positions on a more regular basis than private firms, so keeping an eye on the share price is a very clear indication of how safe your cash is.  This is still no guarantee, which is why you should always have more than one account and have your exposure diversified.

The final two to choose from

Of the two main providers, only IG and Capital Spreads (part of London Capital Group) are listed.  Looking at the two companies, IG is capitalised at £2.1bn and the share price has been steadily rising since it first listed.  London Capital Group on the other hand is having a bit of a tricky time of it.  Their market cap is only £15m and the share price is tanking.

So, there you have it.  IG is the most sensible choice to have as your main spread betting provider.  They also have some excellent sentiment tools and offer access to pretty much everything that the other brokers do.

On a final note: It’s not recommended to have just one account.  It is worth looking at the other main brokers in this article for secondary accounts.  ETX Capital have a pretty good offering and in the Investment Tends Report come in as the second biggest broker by market share.

 

 

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