The increased profile of the financial spread betting industry (FSB) is raising some interesting questions. Not the least of which is where it fits in the investment landscape. Is it a serious investment mechanism or is it merely a way to play?
At the moment the industry itself is – as you might expect – hedging its bets. With zero stamp duty and no capital gains tax to pay and no direct dealing fees FSB has much to commend it for any seriously committed investor. The downside is the level of risk attached to a wider than standard bid-offer spread and, as derivative based product, it is possible to see losses spiraling out of control.
With the overall market for FSB reported to have shrunk by 8% in 2013, down from 92,000 active participants to 85,000, the sector is becoming increasingly competitive as providers seek to both bolster their own share of what is an already limited natural market and to cannibalize the clients of others.
The explanation for that reduction was interpreted as a reflection of traders happy to commit to actual stocks in the anticipation of a predictable return, rather than seeking to exploit the movements of a more volatile marketplace. With a general election in the offing and an understandable degree of market uncertainty increasingly evident, it would be no surprise to see that recent trend reversed.
At the same time it is notable that providers are committing themselves to energetic marketing campaigns in a bid to win new business (and reclaim that already lost). Inevitably that targeting of new users is geared towards the potential market made up by those not already versed in the minutiae of professional trading. The promotion of FSB as an extension to the sports betting market is a move that brokers such as Trade fair clearly see as a viable route to growth. As an off-shoot of the market leading Betfair group Tradefair’s strategy makes sense from a cross-selling perspective, but whether the complexity and high risk associated with trading against market dynamics is too much of an ask for the general public remains to be seen.
Whilst those issues play out, the question as to where in the investment landscape FSB fits remains open. Serious traders with the market intelligence and the resources to trade in volume have been quick to seize on the exchequer’s seemingly relaxed treatment of such trades to leverage their insight. In the process they are bound to attract the attention of a government that is not keen to see revenues slip through its fingers.
For the time being the tax treatment of FSB as a bet pure and simple inclines towards the view that this is fundamentally a recreational – as opposed to a strictly commercial – activity. The same might be said of the standard time frames that tend towards short term ‘hits’. In the absence of any dividend, and given the exposure to risk, extended holdings are simply not viable in this context. But FSB is not an activity that anyone should be encouraged to venture into blindly. As serial spread-better Simon Cawkwell told the Daily Telegraph as long ago as 2009, “You’ve got to know about the stock market. It’s never easy, whether you’re in a recession or not. Anybody who’s traded properly will know that. And you must take it slowly at the start. Don’t put too much money in all at once when you are just beginning.”
Clearly, FSB sits in a half-way house position that we could categorize in terms of serious players – even if the term ‘player’ does suggests a less than wholly invested participation.