Do you know for certain that spread betting companies such as IG Index actually take opposite positions to those taken by their customers in the market in the hope that they will win and you will lose? I understood that they match opposing trades internally and then hedge any exposure by taking real positions in the market.
Answer follows below -:
No, spread betting companies such as IG Index don’t take opposite positions in the hope that they win. This is a common myth which is perpetuated when clients lose money. This is not their business model and its far too risky. For every particular share say Barclays, they look at the net position of all their clients on a ROLLING BASIS and not just an individual’s order at that time/spot because,
“what is the point of matching (or going against) a client 30 minutes after they have placed their bet only to find out that someone else has placed a larger bet in the other direction 32 minutes later?
They will keep changing their positions in the market so many times and their costs of commissions, fees will be too high and in the long run they will lose money. Their dealing costs would be massive and this is not their business model.
Fundamentally spread betting companies provide a platform/market place for clients to bet against each other based on the financial markets movements.
They make a lot of money on the spreads and because of their business model, they do not like or need to take extra risks unless they have to in certain circumstances.
A spread betting company doesn’t like taking positions in the main market because they lose control of their little set up and have to pay commissions to hold these positions as well.
They are happiest if all the longs match the shorts. Imagine a spread betting company having their short matching their longs, then they have ZERO risks and pocket the spreads.
However if their net position internally for say Barclays is skewed to one direction then, they need to manage their risks just like the hedging you mentioned above
But, they actually don’t go against their client’s net position, they go with the overall net position.
If everyone of going long on Barclays (including you) and a few people are going short, then they will go to the external market and buy Barclays to make the difference.
If Barclays goes up, then since they hold the shares, they will also make profit and use the profit to pay you and keep the spread and also keep the looses made from those going short.
If Barclays drops, then they will keep all the money from the large sheep (punters) who went long and pay the few that went short and also use the money gained from the punters that went long to cover their losses from the stock exchange shares they bought and they will be no worse off and hence minimal risk.
Imagine if they gambled and got it wrong, they will be out of business quicker than you could blink.
The only decision they have to make is how much to hedge in the main market and when to open / close it based on their internal risk management criteria To make this decision, they use sophisticated risk management software and techniques and not really based on individual orders because the positions are changing so many times per hr and it will be virtually impossible and too expensive to match or go against every single punter. So they look at their net rolling positions and make decisions to hedge or not in the main market.
In this respect look at spread bet “clients” as two different types of punter.
Retail – these are small clients with a few grand in their accounts who trade in small size. The hedging by providers in such cases is limited – some providers just take them on the book and run risk.
Professional – these clients have very large accounts and trade in very large size. Providers would typically hedge these customers back to back in the underlying market.
That’s a simplified version but the theory is sound – most providers would risk profile their customers and hedge them accordingly/not at all.
Do spread betting providers hate winners?
Not really, providers don’t mind winners as a whole since they utilise futures to hedge their exposure when they are significantly unbalanced on one side. Of course providers do have to take on some liability (as market makers) but they also hedge the bigger trades on the futures markets so winners will be welcomed (one IG insider once even told me to disregard the stats about percentage winners and losers since this data is skewed due to the fact of so many traders depositing a few hundreds in their account and blowing the money soon after).