How to set up a spread betting brokerage business in five simple steps

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The spread betting market is becoming more competitive every day.  There are seemingly very few barriers to entry as new brands are popping up on a daily basis.

Here, we a take a quick look at what exactly is required to set up a new spread betting business.

Peter Cruddas has recently been in the news (for various reasons) but Cruddas (with the exception of Spencer) is one of the big names in spread betting and perhaps what others entering or trying to exploit the industry are trying to emulate.  Cruddas left his brokerage job to found CMC Markets (then known as Deal4Free) with £10,000 in the bank.  He states that starting a spread betting business with £10,000 probably wouldn’t be possible now.

In reality you can start a spread betting business with much less than £10k.  In fact, you can start a spread betting business with zero cash, zero experience and zero regulation.  Obviously we’re not talking about setting up an infrastructure, building a platform and taking customers deposits.  That clearly takes millions of pounds in development, balance sheet capitalization and compliance.

So here’s how to start a spread betting brokerage business for under £10k.

1. Choose a name

You need something that sums up your USP.  If you have an existing brand that you can leverage you can just stick spread betting or markets on the end and you’re done.  If you’re starting from scratch you need something catchy.  If you are self indulgent you could call is “your surname” then spreads.  But if your focus is on really tight spreads go for some City phrase that works like Touch Spreads, Choice Spreads,  Zero Spreads or Hedge Spreads.

2. Find a provider

Most of the major spread betting providers such as City Index, CMC, IG, Capital Spreads can provide branded versions of their platform.  These are called white labels and basically means they provide all the pricing, support, technology, compliance and liquidity etc.  All you have to do is come up with a logo, put it in the top left hand corner and get some clients.

There is an underlying cost to the provider for setting this up.  It’s usually not a huge initial outlay, probably about £10,000 and in most cases they will suffer this cost as they expect to profit heavily from your brand in the long run.

What you will need to do is convince them and provide a strong business case that you are someone worth doing business with.  If you’ve zero experience, contacts, network, marketing budget or clear strategy, they probably won’t entertain you straight away.  But, if you can provide a clear map of how your spread betting business is going to generate clients (and profit) then you will get the go ahead.

Spread betting providers will look to make about £100k a year from a white label partnership in commission, hedging and funding.  If you don’t cross that threshold after a year, you may find your self cut off and the partnership terminated.  After all there are ongoing costs to the provider such as compliance, support and hosting that they won’t continue to pay for if the partnership is not working.

3. Get the commercials sorted

There are three ways spread betting providers make money; spreads, funding and hedging.

The spread income comes from the difference between the buy and sell price times the stake.  So if someone bets £10 per point on the UK 100 with a 1 point spread, that is £10 income.  If the spread was two points that would be £20 income etc.

Funding income comes from over night financing on open positions.  This is usually 2.5% over/under libor and calculated on the consideration of positions (not the margin).  When libor is high clients receive interest on shorts, but at the time of writing it’s too low and the -2.5% takes it to negative and clients are charged.  So, for example, if a client has £10,000 worth of positions open they will be charged 2.5% over libor.  This is an annual rate and then charged on a daily basis.  In this example the cost to fund the position for a year would be (0.5% for simplicity purposes) Libor plus 2.5%, so £10,000 x 3% = £300 per year or 82p per day (£300/365 – yes they charge interest on the weekends).

Hedging income comes from netting off client positions.  In many circumstances spread betting clients will trade in amounts smaller than the minimum contract on the underlying exchanges.  For example the FTSE contract trades in one lots which are equivalent to £10 per point.  If clients trade less than that the broker cannot hedge it.  So they take some risk by not hedging everything, when the book fills up one way or another they cover.  They also run A and B books, generally an A book is fully hedged and the B book consists of clients who constantly lose money so is hedged less.

As a white label your spread betting business should be able to negotiate a split on the spread and financing income.  Your split will depend on your negotitaing skills and also how solid you business plan is.  It will also be scaled based on performance.  The more business you do, the better your commission and funding split.  Generally your provider will not share hedging revenue as this will be determined by their own book and other white label clients.  It will also consist of wild P&L swings and sometimes make a loss, so it may be in fact risk that you do not want.

4. Regulation and financial security of your clients funds

As a white label you will be using the regulation of your brokerage provider.  The provider will set up a trading name and lodge that with the FSA and operate on the basis as xxx spreads is a trading name of spread betting provider.

As far as client funds are concerned, they are not actually your clients.  They are the clients of the underlying provider, although you will retain marketing rights. So your brand customers are contracting with the provider and the funds are lodged with them.  Client funds are also protected under the FSCS scheme up to £50k or £85k.

5. Getting clients and making money

This is the hard bit!  Getting set up is easy and should take anything from three to six months depending on how busy your provider is.  Now, for you to make money you need clients and you need clients that trade.

The main way to market for new spread betting business is through these channels

  • Affiliate marketing
  • Direct online advertising
  • Email marketing

Affiliates are the most cost effective way of marketing a spread betting business.  It is a form of performance based marketing where you only pay once a client has deposited funds and placed a trade.  So it is relatively risk free.  To get set up you will have to find out where the other brokers source clients, this is pretty simple.  Once you have targeted your list of affiliates you will have to set them up with tracking links that tell your platform where an account has been introduced from.  Affiliates can be paid on a CPA (cost per acquisition) or percentage basis.  So either a flat fee when they introduce a new account or you can share with the affiliate a percentage of the revenue that is generated from the clients they introduce.

A word of note on affiliates is that the good ones can earn more than the white label brokers.  They are a major resource for spread betting brokers looking for new clients so if you find a good one look after them.  Affiliates can expect to receive anything up to £500 per account introduced or up to a 25% revenue split of the account commission and funding income.

Direct online advertising is simply advertising online through networks such as Google adwords with text and display adverts or other finance specific networks.  Unlike affiliate marketing (where you only pay for actual accounts) Online display advertising can be very hit and miss.  Spread betting marketing is a metrics game and you will need a big budget to make it work.  Over the last decade the cost of sourcing a new client from online advertising has increased from around £400 to near £1,000.  So expect to pay around £1,000 or more in advertising spend to get a single active customer.  This can clearly be very expensive if not done correctly so the use of highly targeting and efficient ad strategy is essential.  Simply casting wide net and hoping for the best will result in instantly blowing your ad budget and getting nothing in return.

Email marketing is still one of the best ways to market for new customers.  There are some very strict rules on financial promotions via email so ensure that you seek professional compliance advice before sending anything.  An email is a permanent feature in inboxes and can land you in hot water with the regulators.  In most circumstances your provider will insist on approving financial promotions before they are sent.  Email marketing can be expensive but worthwhile and the CPA is still around £500 for solus emails.  The key features of email marketing is to have a clear CTA (Call to action) and a significant offer.  Just sending an email saying “here we are” is not going to get you anywhere.  You will have to offer something like a guide, welcome offer, or competition to entice new clients.

So there you have it!

It will cost you virtually nothing to set up a spread betting brokerage business.  But it will cost you a fortune to actually make it profitable.  Expect to only be successful if you have:

  • A well established brokerage brand looking to expand into spreadbetting
  • A wealth of industry experience (both financial and marketing) and a strong network
  • A massive marketing budget and a network of affiliates

Good luck!

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