Tight Spreads

I remember a spate of white label spread betting sites popping up a few years ago. A white label, for those who aren’t familiar, is when someone uses another company’s product but puts their own name on it. The white label which you then write what you will on. They were things like Fred Bloggs Spreads, Johnny Rotten Spreads (that’s a joke about his butter adverts). That sort of thing. But you never saw anything like Whitney Houston Spreads, in fact no women at all, as I recall.

I’ll talk about white labels another time, but it’s tight spreads today. If your broker – spread betting company really, but I’m saying broker, not because it’s accurate, but because it’s quicker, and saves me a lot of typing – offers you really tight, or even zero, spreads is that worth taking advantage of?

Well, there’s a number of things to consider. The first one is how probable it is that you won’t still be in that position chasing your tail when your selected market closes. Reduced spreads usually only apply for market hours at the most, sometimes less. You’ve really got to check the small print (which you should check anyway), things like the full spread, what time you need to close out by in order to avoid the full spread and overnight financing charges.

From a psychological perspective, it could make you take the wrong course of action. You may become preoccupied with the clock on the reduced spread instead of the position itself. And especially if you haven’t discovered the parameters of the offer in advance, you’ll be distracted by trying to find out when you should be managing your position.

Often these offers are meaningless. They wouldn’t be offering those spreads across their business model so you know they’re not making money out of them, they’ve done the numbers and know that x% of punters (yes we are punters to them) will let it roll over and what’s really happened is that an extra trade has been placed. It has increased revenue, not decreased it.

You also have to consider the underlying instrument. For example, the S&P trades in quarters. I remember a now defunct company that offered tighter spreads on the S&P but the net effect was zero because of the way they rounded up and down to their prices quoted in tenths. In fact the net effect was to maintain spread revenue but in doing so reducing the amount payable to introducers of business. Most spread betting companies will offer a corporate introducer of business a percentage of the spread on opening a trade. And there you have it; they were paying their introducers less. The only winner was in fact the spread betting company.

I suppose the rule of thumb is to mistrust any marketing campaigns. It was the late great comedian Bill Hicks who said “by the way, if anyone here is in advertising or marketing… kill yourself”. I’d add politics to that list, but anyway, the whole raison d’être of marketing is to yield more income, to make you buy more according to their cost basis, not yours. If you are lucky enough to fall between the cracks and benefit, great. But for the most part that won’t be the case.

My advice is to just trade as normal. If, and only if, the opportunities arise in that particular instrument, then great, take advantage. But one thing you discover over time is that the only reason to take a trade is because it has a good probability of success – never because there’s a discount. I wouldn’t even factor it into your trade-sizing or risk:reward ratio (if you must use such a simplistic model as risk:reward). Just accept a windfall profit if that’s what happens.