Spread Betting

Spread betting is any of various types of wagering on the outcome of an event, where the pay-off is based on the accuracy of the wager, rather than a simple "win or lose" outcome, which is known as money-line betting. A spread is a range of outcomes, and the bet is whether the outcome will be above or below the spread. Spread betting has been a major growth market in the UK in recent years, and the industry is regulated by the Financial Services Authority (FSA).

The concept of spread betting was launched in 1974 by IG Index so that investors could punt on the gold price without all the expense of buying bullion at a time of penal exchange controls. Popular spread bets were originally based upon performances of the Financial Times, Dow Jones Index and other financial barometers. The purpose was to hedge investment positions and the betting was largely confined to those in the financial community. City Index joined the market in 1983 and several others such as Financial Spreads, Cantor Index and Spreadex opened shop during the dotcom boom.

The spread betting industry is now a multi-million pound industry and there are more than 400,000 spread betting account holders in the UK, and firms multiplying simultaneously. According to research by TradIndex, 90% of spread betters are male, half live in south-east England, and they have an average income of £50,000.

There are now over 20 spread betting providers in the UK, and fierce competition has driven spreads down. A decade ago, the spread on a benchmark index such as the FTSE 100 index was around 10 points. Today it has fallen to around two. Consolidation rumours are constant, but most believe that the market is growing sufficiently to support this number of providers. The most popular include Capital Spreads, IG Index, Financial Spreads, City Index, CMC Markets and Cantor Index.

According to a report by Professor Chris Brady and Dr Richard Ramyar of Cass Business School, the number of people in the UK with a spread betting account could more than double from its current level of 400,000 to one million by 2011. The financial betting industry is poised to grow at a CAGR of 26.33% between 2005 and 2010. To achieve this, the industry has to extend its appeal to a more mass market audience by going beyond their existing client base of white affluent males under 45 years old to embrace women, ethnic minorities, older people and international markets. To sustain the industry’s current rate of expansion of between 20 – 26% per annum, the report claims that it must focus more on educating consumers on the role spread betting has, as a serious investment tool that can become part of a balanced portfolio.

However, the industry suffers from the stigma associated with betting when in actual spread betting closely resembles trading. Unless the industry overcomes this perception issue, its numerous attractions such as providing consumers with tax-free profits and the ability to hedge against falling markets, or even benefit from them, will remain largely overlooked. Trading in derivatives goes as far back as 3,800 years ago to help Babylonian farmers sell grain.

The spread betting industry faces a considerable educational task to convince the public, the regulators and legislators that all forms of trading are essentially the same type of activity. The only difference is the level of risk – which can range from post office savings at one end to betting on the proverbial two flies at the other end. For the industry to expand, it must work harder at segmenting and targeting the public because being first to market is no longer sufficient.

Female customers currently account for around 10% of the total number of spread betting investors. In online poker, 45% of participants are thought to be women. Research suggests that women do about 40% more research than men on every trade. The report’s authors believe that in order to generate more significant growth, spread betting firms must develop a more female-friendly profile and review their male oriented marketing approach.

The report states that in order to move into a mass market, spread betting companies need to focus on brand building and on educating consumers. Like the stock broking industry, spread betting firms will need to focus on the value added services offered to clients, such as full service trader support. The report also speculates that a move into the mass market may see spread-betting firms looking to establish upmarket bricks and mortar outlets, similar to a traditional bookmaker, and even online betting exchanges.

At the same time, the industry must remain vigilant to the threat of new regulations being imposed by British or EU regulators that could restrict spread betting to high net worth or professional investors and thus prevent any attempt to launch into the mass market.