How Do Spread Betting Brokers Make Money and Balance Their Books?

How Do Spread Betting Brokers Make Money and Balance Their Books?

Spread betting providers are essentially market makers and they make their money from the bid-offer spread. Their prices are usually very transparent; for example for shares they simply wrap a spread typically 10bp on shares around the bid/offer of the cash price. This price is based directly on the inner market at any given divided second in time and its every fluctuation.

The prices that a spread betting provider quotes for any particular instrument are independent of their total exposure. Spread betting companies base their spread around the price that is offered on the market. If a market is especially volatile, you may be re-quoted a price but again the price you are quoted is dependent on the market price obtainable.

“Of course, in the real world, markets can and do move sporadically. consequently, when many traders are going long a certain instrument with a only spread betting company it will adjust its ask price upwards. This will have the impact of increasing the bid-ask spread if the bid price is kept where it is. However, if the company wants to reduce is exposure it would likely also increase its bid-price to encourage more sellers to come to the market.”

This is totally wrong and a popular misconception. It is complete and utter rubbish. If spread betting providers started to move their prices in hours out of kilter with the market then this would create arbitrage opportunities and open up their trading platform for abuse.

But then how do they hedge excess exposure in stocks. Say many investors are going short on Barclays what do they do?

In your Barclays example, if they are holding stock in Barclays, they would sell some to balance their exposure. If they don’t have any stock they would sell short to hedge their exposure. So for example they could simply sell Barclays shares (as CFDs). The direct correlation for shares is x100. £1 bet = 100 shares, £25.50 bet = 2550 shares and so on. Of course they don’t hedge locaiongs on a one-to-one basis but they nevertheless have to continue a tight book and they have to do this for all products.

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