Deal Tickets

I got an email from IG Index saying how they’re offering some new enhancements on their deal ticket. I designed a much better deal ticket than any that exists in the market place over 10 years ago. There are certain things you need to know when you’re trading and most of them aren’t made available to you at all.

Firstly, before you put a position on you need to know what your actual exposure is. If, for instance, you are betting £10/point on the Dow, then multiply the level of the Dow by the stake and that’s what you’re really on the hook for if push comes to shove. Assuming it’s a per-point bet (and not per 0.1 for instance), as I write that would be in the region of 16300 x £10. In other words you’re technically risking £163k on your trade.

In practical terms we can say the Dow has never fallen close to 100% in a day, so we could attach a reasonable risk of the current daily move say, using ATR (Average True Range) and that would be more like £3,000 (given a 14 day ATR on the cash market DJI). And you have to consider the largest fall in a day was around 23% (perhaps even more intraday). In such a case the markets might close without warning (take 9/11 for example) and then you really are on the hook for tens of thousands, so do take it seriously and use guaranteed stops when you have to. I want to see these numbers when I place a trade but I have to calculate them myself.

Many spread betting companies are de facto bookies. They don’t hedge your positions, especially if you routinely lose overall, and so now that IG is introducing a ‘partial fill’ option two things spring to mind. Why not just give you access to the order book if they are hedging? If they’re not, then it’s a straightforward bet, and the notion of a ‘fill’ is nonsense anyway. I always get filled incidentally, and for one simple reason – I don’t trade in when markets are volatile (early entry is a winner!).

As important as a stop might be, a limit order is too. You should always place a limit order when you place a trade, unless you don’t think your trade is going to succeed, in which case close your account immediately and give up all hope of ever making money trading. People are always whinging about getting stopped out on a spike. Start using limit orders properly and start getting limited out at a windfall profit on a spike instead.

IG has also introduced a ‘points through’ option. The idea being that you don’t have to get requoted and they can fill at a pre-agreed price in the direction of your trade. I do want to be cynical here and say that really opens up the possibility that you could end up routinely paying more than you would like for opening a position. I don’t see either of these new options as an enhancement, but rather handling the fact that you’re more likely to not call their Customer Service and complain if your position is not rejected, but you’re probably paying a premium for that. It’s profit maximisation for IG; no real benefit for you.

By the way, stock brokers have a 30 second window from market makers to accept a price (no less than 15 seconds even in volatile markets), so it’s ridiculous to pretend these prices move so fast that nothing can be done but to keep requoting you.

My dream deal ticket would have lots of controls over a position. One of my favourites: time stops – i.e. if my position is still open five minutes before the market closes I can predetermine upper and lower limits on the price, and at that time exit accordingly because I don’t want the overnight risk. That’s not complicated, by the way; it’s a simple bit of programming. But it’s not very attractive for them, as they charge you interest on positions overnight and also recoup any discounted spread they offered intraday to entice you in.

I’m all for being hands on entering and exiting positions. But the first rule is that you shouldn’t be trading in conditions volatile enough that you’re getting requoted or not getting filled. If you are then you’re too late for the trade you want to place. You should have done it before when the market was quiet. I’ll write about Early Entry another day. Pre-placed Limit Orders should be banking your profits in volatile conditions.