As I mentioned in my introduction, spread betting as a trading technique is relatively new, and during the last 25 years has started to both mature and also develop, expanding into a variety of markets and an increasingly diverse range of products as well as developing other forms of financial betting, which have synergy with spread betting, which still remains at the core of the market. In the last few years we have seen the growth in online betting exchanges, fixed odds trading methods, and more recently the introduction of associated forms of spread betting such as binary betting and binary options.

Many of these different methodologies offer both advantages and disadvantages to the more traditional forms of spread betting, with both binary and fixed odds providing financial betting products where downside risk is known, and limited, before the trading position is opened, a great advantage for novice traders. However, this limited risk comes at a prices, since profits are also known and capped beforehand as well. Nevertheless, this form of financial betting is gaining traction in the trading world, not least because it is simple to understand and execute, and is one where losses are limited and known in advance, very different from traditional spread betting. Another form of this is the simple up down bet, which is now being offered by an increasing number of companies, with trades often limited to a few minutes, or even to the next tick! The choice of company and platform is now becoming bewildering and it is therefore increasingly important to choose the best financial spread betting company for your trading needs, and I hope the information I provide will help you make the right decision.

The roots of spread betting were of course founded in the city, and in the financial markets in particular with the formation in 1974 of IG index ( index gold ), but since then the number of companies and markets covered have grown dramatically. Many of the new breed of spread betting companies, now concentrate on the global sports markets around the world, as well as racing, along with major political events and media news. For my part, and as far as this site is concerned, I am concentrating on looking at those spread betting companies which offer core products for the financial markets. The reason for this is very simple, as I personally prefer to trade using a simple and less cluttered platform, which financial spread betting companies generally provide, as well as offering the streaming news feed and data feeds which are related to the market I am trading, and not littered with information in which I have no interest whatsoever.

Since the early days of spread betting, the industry has been ‘tarnished’, partly due to the gambling aspect associated with the market, which has always implied an element of smoke filled rooms, reminiscent of the prohibition days of the early thirties. However, with increased FSA regulation, and a consolidation of the various market providers, the industry has now begun to improve its image and become more widely accepted in professional circles, and is now no longer considered simply the preserve of the retail trader, and an easy way for spread betting companies to profit from the unwary punter. This has been evidenced in the last few years with the spread betting companies now falling over themselves to provide free trading educational materials, free trading seminars, spread betting explained downloads, and a variety of spread betting courses, all aimed to help you understand the market and the risks before you start trading.

Wind back a few years and none of this was available, a clear sign that the spread betting companies are now starting to clean up their act and try to help you to remain as a longer term client, trading profitably, rather than their original approach which was to clean out your account as quickly as possible, before moving on to the attract some fresh money into the business! Harsh perhaps, but similar in many ways to the current forex market which has also developed at an alarming speed with the usual crop of get rich quick brokers entering the market. As with spread betting, which is now starting to mature, develop and diversify, so the forex market will cylce through the same process in due course, with the consequent fallout and consolidation of trading companies and brokers. Some still believe that spread betting needs to clean up further before it is more widely accepted in the professional trading arena, and indeed many professional traders still maintain that there is little difference between spread betting and trading in CFD’s or contracts for difference. In fact a CFD is simply a spread presented in a different way, since they use the same trading systems as for spread bets with the same outputs. The principle difference ofcourse, which is the main attraction for spread betters is that CFD’s are taxed, whereas spread betting profits are tax free.

Finally let me try to explain how spread betting companies in general run their trading accounts, notoriously difficult to find out, unless you happen to know people working in the industry. Naturally not all companies hedge their risks in the same way, but if you can find out how the company operates then this will give you a view on how they will look at you as a client, and whether they are more likely or less likely to trade against you. Let’s take two examples and see how spread betting companies hedge your spread bet, and before we do let me also clarify another issue as to how the company will rate you. In short, all companies will have two categories, which are called the ‘A book’, and ‘B book’. The ‘A book’ clients are the large traders, who trade in both volume and size, whilst the ‘B book’ traders are all the small value retail speculators which forms the largest percentage of clients of spread betting companies. So how do the spread betting companies hedge their positions?

In the first example the company runs two trading books, with one for the A book clients and one for the B book clients. All A book clients are hedged in the market, so if the client wins, then so does the spread betting company, and if they lose then the company also loses, but only a very small percentage of theclient’s losing bet. With the B book clients, the company sets a level of risk, managed and monitored by a risk committee to ensure it stays within certain defined parameters. Any risk beyond these parameters is then hedged in the market and covered. The company offers margin accounts which allows traders to leverage their profits, by effectively borrowing money from the spread betting company to increase returns, but also magnify losses, which is one of the biggest dangers in spread betting and derivatives trading in general.

In the second example, the company takes a different approach. In this case both A book clients and B book clients are both hedged and the company does not offer margin accounts, with all bets covered by client deposits. The clients funds are held in a segregated account and all all trades are automatically protected with a stop loss – restrictive perhaps, but spread betting companies that operate in this way would argue that they are able to offer tighter spreads and margins, and indeed in many ways this form of spread betting is more akin to fixed odds betting, where accounts are cash traded and not based on margin, so you can only lose the cash amount in your account and no more, which is not the case when trading on leveraged margin.

Last but by no means least, whilst the number of spread betting companies and platforms is growing exponentially, there are in fact only a handful of what I would call ‘true’ spread betting companies, with most falling into the category of a ‘white label’. In other words the raw feeds, data, and in many cases the back office function is handled by the original provider, but to you as the client, the company appears superficially to be the provider of the service. Whilst a white label platform is not cheap to set up, it does circumvent many of the various financial regulations, as many white label companies will tend to sit beneath the compliance of the original provider, saving considerable time and expense as a result. Being a white label can be extremely profitable with the spread on every bet generally split between the two companies at an agreed percentage in the contract. So who are the principle spread betting companies that form the basis of the industry ?  Believe it or not there are 0nly FOUR! These are ( and in no particular order )

There is one other that I should now add to this list and that is FXCM – in the last two weeks, this global spread betting company has taken over London based ODL securities in the UK, who are now looking to increase their worldwide reach and take spread betting into the mainstream of financial betting. This is an interesting move in the spread betting world which will cause alarm and consternation amongst the four main players above, so watch this space! Spread betting is about to become a global game, rather than a local one which has been the case up to now.

I hope the above provides some useful background to the financial spread betting companies and has given you some ideas of what to look for when choosing your provider. Now let’s take a look at all the various platforms and companies available to find the best spread betting company for your trading.