Spread Betting Quoted Prices

Spread betting companies such as IG Index will be losing money this week. They always do when the market is so obviously moving in one direction. It is one of those strange industry facts that spread trading companies do not hedge their positions, instead relying on their spreads and market volatility to do the job of losing money for clients. Only a small percentage of traders make regular profits. However, when a market makes a decisive move in on direction - down in this case - everybody jumps in with the same trades and everyone is making money. Everyone, that is, apart from the spread betting company.

There are always tell-tale signs when this happens. In extreme cases you will see the prices indicating telephone dealing only. In cases like the last two days you will see prices being manipulated to reflect not just the underlying market but also the profile of bets on the trading company's book. Remember that spread betting companies are not market brokers but bookmakers. They may look and smell like brokerages but the taste is as much casino as it is stock exchange. Contracts such as binary bets and daily options are not covered by the FSA, and it was with the daily options that I finally saw the most flagrant price fixing.

I was trading Wall St daily options and had made good profits on put options but also had a call option hedge. Late in the session the Dow rallied bringing that call option into profit too, which was nice. However, as I stared at the Dow index price and my option price I was getting worried. The option was being priced at below its market value. At one point the market was 45 points above the option strike price and yet the option was being priced at 35 points - a huge 10 points below its value with no time value, or indeed negative time value, to speak of. I was tempted to wait for the market to close and then the option would have closed at a fair price. However, the indicators were pointing to another turn around so I sold it with a pathetic profit. It seems obvious that the calls were all hugely under-priced and the puts over-priced, no doubt reflecting the profile of the positions taken. But in my case this was a raw deal as I was already holding a position. This is the first time I have actually seen such a blatant mis-pricing. The only lesson is to be aware that these things happen and allow for it. During a "normal" day this rarely happens but you will see small price spikes as they are either adjusting the volatility setting in the options formula or, yet again, just trying to balance their books so they are not over-exposed and in the hope people will close early if they see the price start to go against them. The other option is not to use daily options, but sometimes they are useful, especially in a highly volatile market. Just be careful.