AT: Can you tell us a little about Spreadex and what you’re offering clients at the moment?
MH: Spreadex was established in 1999 by former City trader Jonathan Hufford. Since then, the firm has gone from strength to strength, and we are one of the most financially secure firms in the industry. We provide a high-quality, reliable service for our clients.
Our clients can place financial trades on global markets and also place sports spread and fixed-odds bets via our web and mobile platform. Focusing on the financial side, we specialise in small cap stocks, allowing our clients to trade AIM shares down to a market cap of £1 million.
We are also one of two firms that make credit widely available rather than focusing only on their larger clients (dependent on client status of course). This removes the need for investors to liquidate their current investments to start financial spread betting.
AT: Do you find the growth in sports spread trading is creating more interest in financial spread betting?
MH: In general we find only a small proportion of our clients trade sports and financials. I think the problem is the difference in perception between the two products. One is seen as a method for investment, the other is widely perceived as purely a gamble.
However, we find it gives our clients flexibility and allows them to bet on the weekend’s football after trading the stock market mid-week.
AT: Despite the recession in the UK, many brokers have reported some record months in terms of volume over the last year or so – what do you think has generated this, and do you expect it to continue?
MH: Spread betting firms benefit from increased volatility during times of recession because it whets the appetite of risk-seeking clients. For example with QE, the market can move considerably. Back in November 2010 the Dow Jones Industrial Average went from 11092 to 12810 in the space of 4-5 months. Then at the end of July in 2011 it shed 1800 points in a month!
Spread betting also has the key advantage of allowing you to profit from falling markets too, and as spread betting profits are currently free from CGT and Stamp Duty it makes it an attractive product for investors during times of recession.
AT: Do you see the growth in interest in forex markets to continue?
MH: FX is exceptionally popular across the channel, and it is an exceptionally competitive market there as it is here. Even though we offer a wide-ranging, 24 hour, comprehensive FX service with 50+ pairings backed up by our award-winning charting service, the majority of our overall trades are on indices and shares, and only a handful of major pairings such as Cable and Eurodollar.
AT: The market in spread betting continues to get more competitive, with spreads continually tightening across the board. Can they get much tighter?
MH: We all remember what happened with WorldSpreads when they began offering zero spreads!
Many firms now offer variable rate spreads, dependent on market volatility and volumes. We think this is quite misleading as some firms may advertise from 0.8pts on the FTSE but overall they end up paying much more than our fixed spread of 1pt. We have stuck to our belief that a fixed spread is fairer to our clients as they know the size of the spread before they place the trade.
I personally don’t foresee spreads getting tighter. It seems to me a zero-sum game, when someone cuts their spreads and everyone else follows suit. With many other firms struggling to turn a profit (Spreadex continually break the mould and recently had a record turnover and profit), you have to wonder how these other companies will survive in such a competitive marketplace.
AT: As a specialist in pricing spread bets based on UK small caps, where do you see this market going in terms of choice and/or pricing?
MH: There are only a handful of spread betting brokers who now offer their clients small cap stocks. Spreadex offers the most comprehensive AIM stock service and you can trade AIM stocks of £1m+ market cap from a fixed margin rate of 20%. In terms of pricing, due to very few firms offering it and the high risk/reward nature of the product, I think pricing will remain the same.
However, Spreadex are always happy to work an order for any client to get them the best possible price if the trade is of an appropriate notional size.
AT: Many brokers are now looking to disintermediate the trade, with automated quotation and DMA for example. Will there still be a future for the human sales trader?
MH: There are several companies now focusing on DMA and removing the need for a trader, however most of these trades are classified as CFDs and do not benefit from being tax-free, unlike spread betting (tax laws are subject to change, correct as of 03/10/12). Investors in CFDs are also charged a commission on their trades.
There is a perception that financial spread betting companies solely balance the book themselves, however in many cases we hedge positions and earn our profit from the wider spread. For our clients interested in trading shares, we will “work the order” on request and pass on the savings to our clients. Most other firms simply take an extra profit for themselves.
Considering this I think there is definitely a purpose for our sales traders, certainly at Spreadex. Also, many of our clients prefer the personal touch of talking to a trader and place their trades over the phone. We offer our clients a personal account manager, giving them a regular point of contact.
AT: What do you think will be the major future technological development for UK financial spread betting in the next few years?
MH: There have been some interesting developments in the FX industry, and I would reasonably expect the spread betting industry to follow a similar pattern. One of the most notable developments is social trading. This allows you to follow a particular client and see what they are trading, and also mimic the positions of the more successful traders. I see this as being a major development in the future.
At Spreadex we are also developing our own technology that will allow us to offer all the benefits of a personal broking service plus much more, to every client.
AT: Will margins and credit facilities for traders remain low even if base rates finally rise?
MH: Overall the impact will be small; there would be no changes to margin rates and the availability of credit. Although futures spreads would remain the same, funding charges would increase. Also, it would have an impact upon overnight funding charges.
Overnight funding charges for daily rolling bets would increase slightly as they factor in LIBOR. The funding charge is based on the one-month LIBOR + 3% per annum. Therefore if LIBOR was 0.5%, the total daily funding charge to a long position would be (0.5% + 3%) / 365 = 0.0096% of the total position value.
AT: Do you think new markets or new takes on existing markets will become available to the trader?
MH: We are always looking to expand our offering if there is a sufficient demand from our clients. For example we have recently provided our clients the ability to trade options on our platform and also the VIX (Volatility Index). We are always looking for products that will give us a unique advantage over our competitors.