Alan Hicks  Alan Hicks has spent over 20 years in foreign exchange with major banks, specialising in FX options since 1983. Since 1996, he has been running courses in over-the-counter financial derivatives and, more recently, has concentrated his time on the fast expanding financial spread betting market in the UK. He is an active trader in his own right using FSB to procure income and for hedging his investment portfolios. Books Managing Currency Risk Using FX Options , Woodhead, 2000 Foreign Exchange Options , Woodhead, 2nd ed., 1997 Financial spread betting Introduction Don't be frightened by the word 'betting' in financial spread betting (FSB). Investing through FSB is not the same as betting at the racetrack (the risk /return profile is completely different). The FSB market can be viewed as an over-the-counter (OTC) equivalent to a cash-settled financial futures contract and, as such, may offer a more efficient, cost effective method of profiting from stock (and other market) movements. There is no need to use a broker. Users reap the benefits from dealing in an OTC market - you talk directly to the market makers and you can specify your own contract size (not restricted to contract specifications or share size amounts). This has the immediate effect of reducing the costs associated with using a broker in exchange listed markets such as stock and futures exchanges. -
Deal outside Exchange market hours. Many of the FSB firms operate when the underlying cash markets are closed; some firms operate 24 hours for certain markets such as stock indices. This means you can make investments (or get out of bad positions ) ahead of the crowd . Don't be put off by wider bid-ask spreads if you strongly believe that the market will open higher or lower - a few points lost in the spread will look tiny compared to a market open price driven by a wall of money waiting for the first price! -
FSB prices can be a leading indicator for the underlying. Many stockbrokers give forecasts of where a particular stock, or market, might open or close but such advice is not backed by any fact - it is just waffle to entice buy and sell orders where they can collect their commissions. FSB prices are not just forecasts - they are real dealing prices - the smart money is already on. Evidence the recent flotation of Friends Provident in the UK. The traditional stockbrokers were estimating the first day's price to be in a range of 210-270, when the FSB market was dealing 220-225. The FSB price, being backed by actual transactions, was the more accurate indicator. -
Open accounts with at least three FSB firms. FSB firms will usually have a bias to buy or sell a particular stock or index based on their position (whether they are already long or short), and perception of the direction of the next price move. This means you will sometimes get different prices from different FSB firms - which is great because it has the net effect of reducing the bid-ask spread - but does mean that you will need more than one account. Calling different FSB firms need not be an onerous task as most display their prices on the internet. Use the internet price as a guide, then call the dealer (either by telephone or by a dealing system, if provided) to get a dealing price - there may, or may not, be a difference depending on the FSB firm concerned and the trading software employed. Thus, it is possible to talk to two (or more!) firms at the same time if markets are moving fast. -
Understand the forward value. FSB is based on the underlying future value of a particular stock or index. Thus you will not normally get the cash price of the asset as related in the relevant stock exchange price. This means that the FSB price will normally be higher than the cash price. But do not be put off if buying this 'high' price - you have not paid the cash to buy the stock in the first place, and will benefit from the interest accrual over the time the position is held (less any dividend that might be paid). -
Understand the tax considerations. Profits from FSB in some countries - including the UK - are tax free, so it makes a lot of sense to invest through this method. In the UK, FSB also avoids stamp duty and broker/exchange fees. However, FSB losses are not deductible for tax purposes and this should be borne in mind when arbitraging (see below) or hedging. Thus, you should always look for the FSB 'leg' of any strategy to be where the profit should accrue. -
Arbitrage opportunities. It is possible to arbitrage price differences between the FSB market and other derivatives such as CFDs (Contracts for Differences) and financial futures and options. Or, if you are very quick, between the FSB firms themselves (don't forget, FSB is an un- brokered OTC market). However, you will need to have several accounts and manage the resultant cash flows that make arbitrage capital intensive . In addition, the tax implications will make arbitrage somewhat complex as losses on betting may not be offset against capital gains in other markets. -
Always ask for a two-way price. Never disclose your direction - whether you intend to buy or sell - before you get a two-way (bid and offer) dealing price. This rule applies to all markets but especially to OTC markets such as FSB. The very nature of the product implies that you will get a two-way price automatically, so it is normally down to the investor making the mistake of disclosing their intentions. If, by chance, the FSB dealer asks whether you want to buy or sell, respond by saying, "I will let you know after you make me a two-way price". -
Show your interest. This is the opposite statement to that above and only applies after receiving a two-way price. FSB is an OTC market - you are dealing direct with your counterparty - so there is nothing wrong in asking if the firm can meet a specific price for you. A typical conversation might go like this: - Investor: "May I see your September Vodaphone please ?" FSB firm: "152-155" Investor: "Any interest to offer me at 154 in & pound ;50?" Whether or not you get the 'improvement' is up to the FSB dealer but, in all cases, you will get an instant yes or no. Note that the act of showing your interest (in this example to buy 50 per point - equal to buying 5,000 shares in Vodaphone Plc) is not a limit order - the ensuing 'yes/no' means you have either bought the shares at 154 or nothing has been done at all - no order has been left in either event.) www.fenics.com 'The entire financial industry exists to sell product. If you don't understand this basic maxim , you'll be misled time after time.' ”Timothy Vick | |
