WHEN spread betting started in 1974, it was set up to get around the strict price controls that were in place in the UK – at the time it was illegal for retail investors to speculate on gold. Unemployed stockbroker Stuart Wheeler hit upon the idea of creating an index giving investors a way of betting on the movement of gold, without having to hold the underlying asset.
At the time, a meeting was held every week at the offices of NM Rothschild to fix the gold price for the week ahead. Wheeler offered those who thought that the price of gold would be above his predicted price the opportunity to place a buy bet, and those who thought it would be below it to place a sell bet. This Investors Gold Index was abbreviated to IG Index, and the nascent spread betting industry was up and running.
IG Index offered its first financial spread bet on the FTSE in 1985, 2 years after City Index entered the fray. CMC Markets was founded in 1989 and dozens of other providers came hot on its heels. Wheeler sold his stake in IG Index in 2003.
It’s not just the size of the spread betting industry that has changed, but also the markets that spread betters choose to take positions on. In the early days, spread betting providers only offered commodities, options and some indices, such as the FTSE 100 and the S&P 500 – markets that the average man on the high street had little knowledge of at the time. But times have changed and with it so has the financial information available to the public and the investment trends of the retail consumer. Where Britain was once a country of buyers of stocks and bonds, the modern spread better is just as likely to take a position on dollar-yen as they are on the price movements of a BP share.
TRADING SHARES FOR FX
“Gold, silver, indices and FX have grown massively in recent times,” says Raj Patel, head dealer at SpreadCo. “It used to be the case not so long ago that a lot of spread traders used to start off trading equities – for example, by buying Barclays or BP, or selling a share short they thought was overvalued.” Patel adds that UK spread betters have had an increasing appetite for forex trading – in fact, many providers report that last year foreign exchange was the most traded market. “A lot of retail traders wouldn’t touch FX. Now it is almost the opposite – clients are starting off trading FX and indices and less are trading shares,” says Patel
So why the shift? According to David Jones, chief market strategist for IG Index, a lot of the trends are driven by news headlines: “We see repeated instances where clients are driven to trade whatever is dominating the media agenda. We’ve seen this when commodity stories – such as coffee or cocoa – break onto the front pages of newspapers, and a similar story has been played out for Eurozone debt.” However, while interest in these markets tends to be driven by news headlines, according to Jones, over the longer term, clients will stick to what they know: “The biggest cap FTSE stocks, major currency crosses and the big indices like the FTSE, Dax and Dow are perennial favourites.” Who knows where the industry will head next?