Is financial spread betting gambling or investing?

[Duke of Marmalade]

Give me the formula with dividends calculation included for Eurostoxx 50.
Show me mathematically that rolling something 2 or 4 times per year is not going to deteriorate the result.
It is easy to think in the head like: oh it is cheaper and looking cheaper.
I will believe you when you present me some mathematics, real one.

Z, the math is not complicated. The charge is the spread, nothing else to it.

The futures market is umbilically linked to the spot market by a formula involving dividends and interest. You don't need to strain to understand that formula as you can be sure that if the futures market was not priced at fair value relative to the spot market, the pros and Nobel Prize winners would bite the arb of the FSB provider.

If I have big money outside pension (like more then 100k) I will be insane not to put that money with Vanguard Ireland and pay 0.1% per year in charges and own the market passively.

Sure about those charges?

 

[Zoran]

Z, the math is not complicated. The charge is the spread, nothing else to it.

The futures market is umbilically linked to the spot market by a formula involving dividends and interest. You don't need to strain to understand that formula as you can be sure that if the futures market was not priced at fair value relative to the spot market, the pros and Nobel Prize winners would bite the arb of the FSB provider.

Sure about those charges?

I need to agree that if it is not priced properly somebody may arbitrage it.
The only thing is that money market or bond market you invest your money needs to beat that "cost-of-carry".

I see your point in comparing it to QL as their charges are too much.

Vanguard charges for Europe is more then in the US and they are from 0.2% to 0.5% for various funds.

While looking Vanguard Europe I have seen the first time this kind of fund based on futures and 2-years bond investment:

[broken link removed]

You can clearly see they are doing the similar thing as we want to do

How closely we can use such strategy and have the nice cost through the spread betting companies I do not know.

You should go for it Harchibald and post us back after a few rollings.
We can compare your results with the index you have chosen.
I am putting my money mostly through the pension so not sure will go that way with spread betting.

Best of luck with it.

 

[Duke of Marmalade]

Z, great to see that we are closing the gap between us.

FSB is not suitable for pension funds as you pay the cum/ex slippage on divies which Delta says is about 20%. If you have ETFs with .75% all in charges, then for a pension fund that is better than FSB even if the latter was allowed.

A summary thought to me is that spreads are very very small on IG Eurostoxx 50 - only .05%. But if you actively trade, say, 100% turnover every week that amounts to 2.5% per annum. That's where IG et al make their money. Buy to Holds are piggy backing off these remarkably small spreads and probably are a complete pain in the neck to the IGs of this world.

 

[Zoran]

A summary thought to me is that spreads are very very small on IG Eurostoxx 50 - only .05%. But if you actively trade, say, 100% turnover every week that amounts to 2.5% per annum. That's where IG et al make their money. Buy to Holds are piggy backing off these remarkably small spreads and probably are a complete pain in the neck to the IGs of this world.

OK. So let see what we have on IG.

MAR-08 sell/buy is 3818.5 - 3820.5 - so the spread is around 0.05% as you said.

The spot price is around 3765.5 so you are paying 55 points between buy MAR-08 and spot price.
The number of days till MAR-08 future is finished and needs to roll over is around 53 days If I calculated it correctly.

When you calculate what interest they are charging you per year:

(3820.5 - 3765.5) * 365 / (3765.5 * 53) ~= 7%

So for me your money market (bond, AIB or whatever else) needs to be better then 7%.
This is in line with Pryor's book too as spread betting company interest between longs (7%) and shorts (4%) are around 3% making them easy to make money in the interest spread.

What is wrong with my calculation?
If nothing how are you going to beat 7% with the rest of the money?

 

[Duke of Marmalade]

Z, you are missing the arb principle.

If your calcs are correct and I doubt it for there should be no arbs, the Nobel Prize winners would sell the future and buy the spot. That means borrowing at 4% and earning 7%, sure fire profits.

The fact is that the futures market is absolutely the same as the spot market, the only difference being the interest rate and dividends.

The interest rate has to be the the mid wholesale rate as one can go short or long, anything different leads to an interest rate arb.

BTW if you do rolling dailys then the interest charged is very explicit - 3% over ECB on Delta, 2.5% on IG. This is similar to the interest spreads you quote. But with futures the interest spread is included in the dealing spread. For IG Eurostoxx 50 that's .05% ALL IN.

 

[z106]

OK. So let see what we have on IG.

MAR-08 sell/buy is 3818.5 - 3820.5 - so the spread is around 0.05% as you said.

The spot price is around 3765.5 so you are paying 55 points between buy MAR-08 and spot price.
The number of days till MAR-08 future is finished and needs to roll over is around 53 days If I calculated it correctly.

When you calculate what interest they are charging you per year:

(3820.5 - 3765.5) * 365 / (3765.5 * 53) ~= 7%


What is wrong with my calculation?
If nothing how are you going to beat 7% with the rest of the money?

Hang on Zoran - I hink you made a mistake there.

Assuming your prices are correct (i haven't checked)

Future price = 3820
Spot price = 3765.

=> the difference is 55 points.

Or put another way,by the end of march (2 months time) it has to gain 55 points to just break even.
So - a 55 point gain on 3765 = 1.4608% gain (lets just say 1.5%)

Multiply this for 6 for 6 2-month period in the yaer = 9% .

Hm...that's interesting...i am surprised it is that high.

I have seen other products that are far cheaper.
E.g. Gold on worldspreads for the rolling spot price right now is 929.5
The june future is 939-940.

i.e. 11/940 * 100 = 1.17% for 5 months
=> for 12 months would be around 1.17 * 2.4 = 2.8%.

So -what's that about?
Hpow come such a discrepancy in both products?

 

[z106]

Z, you are missing the arb principle.

If your calcs are correct and I doubt it for there should be no arbs, the Nobel Prize winners would sell the future and buy the spot. That means borrowing at 4% and earning 7%, sure fire profits.

The fact is that the futures market is absolutely the same as the spot market, the only difference being the interest rate and dividends.

The interest rate has to be the the mid wholesale rate as one can go short or long, anything different leads to an interest rate arb.

Harchi....Zorans calculations are pretty much correct.(assuming the original spot and future prices supplied by him are correct of course)

Can you give a working example of this arb?

Beause if the borrowing is at 4% like you say - and i calculate the earning is 9% - then lets actually work through this arb that you say exists.

Can you give an actual example by going through the working mechanisms using the figures above.

I'm not convinced this arb exists if the original figures zoran supplied are correct.

Just to clarify - an arb means a situation where a discrepancy in prices occurs whereby you can't lose by buying at one price someplece and selling at ahigher someplace else at the same time ya?
I'm not knowledgable enough really to ge getting in on this about arbs - but i am curious.
What i can say is that my calculation above is correct though if that's any good to the situation.

 

[Duke of Marmalade]

Keyboard, Z, was including half the spread in that calc, and he also said the spot was "about" xxx, not precise enough.

You have included the full spread in your calc.

Let us try and isolate the pure interest rate cost - which is mid to mid.

The big boys can operate at practically no spread and it is they who would exploit any arbs. So let us say the Futures is trading 7% p.a. higher than Spot.

The arbers would sell say 1000 Futures (on credit they don't need margin, or if they do they earn interest on it).

Simultaneously they would borrow enough at 4% p.a. to buy 1000 Spot.

When it comes to settling the Futures, they have the Spots already bought and it doesn't matter one jot what their then price is, they simply pick up the original Spot cost plus 7% per annum and pay back the original loan at 4% per annum, pocketing the difference.

All very theoretical but because short and long positions are allowed the theory actually dictates the relationship, it doesn't rely on arbers actually making it happen.

Gold is slightly different since it is a quasi commodity and there can be contango/backwardation due to supply and demand factors.

 

[Zoran]

Keyboard, Z, was including half the spread in that calc, and he also said the spot was "about" xxx, not precise enough.

You have included the full spread in your calc.

My calculation was very precise.
I just went to IG Index spread betting that I have an account with.
I also get the spot price from the yahoo finance:
http://uk.finance.yahoo.com/q/bc?s=^STOXX50E

You can see exact figures in my formula.
You can do it yourself for today's prices.

After MAR-08 you need to roll it to JUN-08 and it will cost you 54 instead of 55 as you will pay just the half the spread.
You will still need to pay the difference between MAR-08 when it expires (that will be close to the spot price) and JUN-08 premium price.

 

[Duke of Marmalade]

Look, this is very simple. The only charge is the spread. If you think the carry is too high then short the future - you are earning that rate on your reverse leverage.

Future (ex spread) = Spot(ex spread) + Wholesale mid Interest rate - Dividends

End of story, if you see anything different, arb it.

 

[Zoran]

Look, this is very simple. The only charge is the spread. If you think the carry is too high then short the future - you are earning that rate on your reverse leverage.

Future (ex spread) = Spot(ex spread) + Wholesale mid Interest rate - Dividends

End of story, if you see anything different, arb it.

So, your long term buy&hold strategy is to do arb?
Or to go short?

I just do not get it what you are talking here.
We are calculating the price of being long and I showed you the mathematics.
Show me the mathematics that your pick Euro 50 is not with the premium of 7% per year.

You need to beat 7% in money market and that is not possible so the only good long term strategy is to have portfolio of passive indexed funds/ETF's.

I do not care about arb at all.
Please, let talk about long term buy&hold investing as anything else is trading and speculating.

Please, let just discuss the price of long as this is what we wanted to know.

 

[Duke of Marmalade]

Z, I am obviously a very very bad pedagog.

I have already explained that your calculation included half the spread. It could also contain a miniscule timing difference between spot and futures.

I have just repeated the exercise - March futures trading at 3796/3798, Spot (unfortunately from another source, IG don't do spot, and up to 15 mins delay) was 3777. Do the math again - that's 3.2% per annum, but I know that is slightly wrong as the exact answer has to be 4%. (also divies have to be factored in) Unless you are using market makers at the exact same moment of time you will never get enough accuracy here - a sort of uncertainty principle of the markets, but be sure that the same market maker will calculate its futures from its spot using the precise fair value formula.

I will be doing no arbing but I can rely on the existence of arbers to ensure the interest rate will always be the mid wholesale rate.

I will try for the very last time.

Imagine shorts are exactly balanced by longs. I hope you will agree that the FSB company definitely only makes the spread in this situation. But you are arguing that the longs are paying an extra 3% per annum penalty. If so that that must be going to the shorts not to the FSB company.

Of course, the FSB company might recognise that it has more longs than shorts and up the price. But you see the FSB is quoting directly from the real futures market and such price fixing would never survive because of the arbers.

IG and Delta both state quite categorically that their only charge is the spread. IG in particular is regulated by the FSA, so Z I suggest you make your "complaint" to the FSA.

 

[Zoran]

I have already explained that your calculation included half the spread. It could also contain a miniscule timing difference between spot and futures.

I have just repeated the exercise - March futures trading at 3796/3798, Spot (unfortunately from another source, IG don't do spot, and up to 15 mins delay) was 3777. Do the math again - that's 3.2% per annum, but I know that is slightly wrong as the exact answer has to be 4%.

Future market prices are reacting faster then regular spot prices on the stock market. Some strategies are even exploiting such fact.
Spread betting is probably following closely futures market.
Futures market is not following closely regular market as we proved it.

I just read the prices again

IG Index MAR-08 - 3907.5 - 3909.5
spot - 3867

Difference = (3909.5 - 3867) *365 / 3867 / 48 ~= 8.3%

You had less then 4 percent earlier and I had 7%.

I will take another one market that is both open at the moment. S&P 500, the most liquid of all indexes:

spot price - 1390
IG Index MAR-08 - 1392 - 1393
JUN-08 - 1394 - 1395

Difference (MAR) = (1393 - 1390) * 365 / 1390 / 48 ~= 1.7%
Difference (JUN) = (1395 - 1390) * 365 / 1390 / 139 ~= 1%

Pretty good, is not it?
Does it depend on supply/demand (current participants feeling of the market) or it is just pure mathematical equation as you say.

It is all just too complicate to me.
I am giving up Harchibald.
For me time is very important thing and resource.

I decided to not spend so much time on investing anymore.
I bought in both pension and outside pension account passive indexed funds or ETF's and I am giving up any active trading and stock picking.

Best of luck for all of you out there.
Just think that there are more important and nice things in life then just spending time on investing.
Also that investing needs to be long term as it should give you decent return over 20 or 30 years probably. If you are good 100% a couple of years means nothing as with such risk you may be next year 50% down easy or even loose all your money.

I found my way and tried to tell others so bye.

 

[Duke of Marmalade]

Bye, Z, and good nite, enjoyed the banter.

 

[Zoran]

Bye, Z, and good nite, enjoyed the banter.

Bye H. I enjoyed it too.

I wanted to contribute due to the idea that some thoughts may help somebody. It is very hard to talk against the Wall Street, TV and all that sales hype (here you have people that still believe them).
Do not forget what is good for these blood suckers is not good for you at all.

 

[vortex]

Re: The difference between Investing and Gambling

Hi Harchibald


Market return = Punters' gains (losses) + provider's gross profits

What I don't get is who provides the market return?

Punters' gains + provider's gross profits must be funded by someone unless they are buying the market themselves?

Brendan

Each spread bet is matched with purchasing a CFD contract. So the spreadbetter company is not acting as a bookmaker but as a wholesaler. Am I right QWERTY?
I agree with QWERTY. Its no more gambling than buying a CFD, which is no more gambling than buying the share itself. As for the logic that when one gambler wins another loses, the same can be said for share purchase. A seller sells a share to a buyer at 100 cents which one month later is worth 110 cents. The seller has lost a potential profit of 10 cent per share the buyer has gained that 10 cent profit.

 

[ccraig]

Does anyone know how spreadbetting companies hedge against their clients exposure when in some cases the difference in the share/currency value is 1-2 pips

i,e
USD today midmarket 1.56101
USD BID: 1.5705 OFFER: 1.5707

You jump in and buy at 1.5707 in the belief the USD will weaken placing 10euro per pip

Are the spreadbetters simply making their margin on the difference between the midmarket and the rate they offer on 'bid' or offer'? If so that means they have to fork up money on every trade.

Do they merely follow you into the trade and take their margin when you hit margin call or want to get out of the trade?

 

[Duke of Marmalade]

Don't fully understand the question. In your example if the FSB is quoting 15705/15707 then they in turn are being quoted, say, 15705.5/15706.5 and they will immediately hedge at a small profit no matter how you jump. Is your question prompted by the fact that the FSB would need to be dealing in fractions of a pip? Conceptually no problem with that.

 

[spreadbet]

Interesting thread, I am new here.

I tend to agree with Zoran's views and I think that spread betting including financial spread betting is gambling. I also think that any short term day trading is also gambling. Both depend on getting the timing of the market right and as most people cannot see the future I suspect that most get the timing wrong and lose. This leaves aside dealling costs for day trading and margins for spread betting.

Spread betting is much worse as it is leveraged, as Zoran has said you only need a small drop in the underlying financial for you to lose a lot more than your stake. Unless you are willing to risk your whole live savings without stop losses you will need a stop loss. In most instances market volatility will cut you out at a loss - but at this time your loss is realised. Do this many times and the volatility of the markets is likely to break your bank.

Long term financial investing is preferable in my view, but still a risk and in some cases may lose. Returns are smaller, but the chances of obtaining a return on your investment is greater even if it will not make you a millionaire so easily!.

I am willing to bet anyone on here that if we could check the accounts of spreadbetting companies that at least 75% of their customers lose money over time. Anyone want to make a market on this?

By the way, buying shares gives you an asset, dividend income, and your loss is limited to the value of the share. Holding long term it is the DIVIDEND income that makes most of the return on a share investment. Spread betting does not offer you dividends on your spread bet and so long term cannot compare with holding shares directly.

Spread betting = gambling. High risk for potential high reward, high risk for potential big losses. Take your chances but at least be informed!

Cheers

 

[zxcvbnm]

Interesting thread, I am new here.

I tend to agree with Zoran's views and I think that spread betting including financial spread betting is gambling. I also think that any short term day trading is also gambling. Both depend on getting the timing of the market right and as most people cannot see the future I suspect that most get the timing wrong and lose. This leaves aside dealling costs for day trading and margins for spread betting.

Spread betting is much worse as it is leveraged, as Zoran has said you only need a small drop in the underlying financial for you to lose a lot more than your stake. Unless you are willing to risk your whole live savings without stop losses you will need a stop loss. In most instances market volatility will cut you out at a loss - but at this time your loss is realised. Do this many times and the volatility of the markets is likely to break your bank.

Long term financial investing is preferable in my view, but still a risk and in some cases may lose. Returns are smaller, but the chances of obtaining a return on your investment is greater even if it will not make you a millionaire so easily!.

I am willing to bet anyone on here that if we could check the accounts of spreadbetting companies that at least 75% of their customers lose money over time. Anyone want to make a market on this?

By the way, buying shares gives you an asset, dividend income, and your loss is limited to the value of the share. Holding long term it is the DIVIDEND income that makes most of the return on a share investment. Spread betting does not offer you dividends on your spread bet and so long term cannot compare with holding shares directly.

Spread betting = gambling. High risk for potential high reward, high risk for potential big losses. Take your chances but at least be informed!

Cheers

Ok - 2 things.

Firstly - spreadbetting does pay out dividends just like regular shares do.

Secondly - answer me this:
Do you consider CFDs gambling ?
Spreadbetting is exactly like CFDs.
So whatever you think for CFDs then the same applies to spreadbetting.

And if you do consider CFDs gambling then why?
Because it is leveraged?
Because something is leveraged does not mean it is gambling.

A lot of people would consider property as 'investing' - that too is levergaed.
WOuld you/have you always considered property gambling ?