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Spread-betting myths: prices skewed against you

Created:

25 November 2005

Written by:

Investors Chronicle

"Last month, I had a large, profitable position - but when I came to close it, the price I was quoted was way below the price in the market. They were skewing the price against me"

A lot of spread-betting clients would probably claim to have suffered from this. And many of the spread-betting professionals we spoke to admitted that this may have been a problem in the past. A few years ago, for example, when most trading was by telephone, it was possible to quote different clients different prices - once you knew whether they were long or short.

Remember, though, that these days nearly every spread-betting company has a website that allows trading online. "I don't think that any spread-betting firm has the ability to disseminate different prices to different people over the internet," says Dan Moczulski of IG, "so if they were really skewing a price, then countless other people would have the ability to trade on a better price".

David Jones, of CMC Markets, backs up that point: "If a company moved a price to disadvantage a client, there would be a whole host of other clients who would be looking to take advantage of that price." After all, there are plenty of very savvy ex-City traders willing to leap on any arbitrage opportunity presented by sloppy pricing from a spread better.

For phone trades, where this type of discrimination is still possible, IG recommends withholding your account number and your instruction to buy or sell until you have a firm dealing price. "While we would never skew the price against an individual, having this process protects us from the accusation and hopefully reassures the client that this situation would not happen with IG," adds Mr Moczulski.

If you are still sceptical, remember that all spread bets expire at the market level, not at a level that the spread better can alter. So if you really suspect that the price is skewed against your interests, let the trade run until expiry. If you want to lock in your profits, use another spread better to open a hedging position in the same underlying.

One final point about the risk of skewed prices: look more carefully at the reason why spread betters are supposed to benefit from skewing prices. It is believed to be a reaction to a perilously unbalanced book of bets. Suppose a company has taken £1m on the sell side of BSkyB and only £20,000 on the buy side.

By skewing the price offers downwards, it can attract more buyers and so balance the book again. But that can be a risky and inefficient way for a spread better to hedge its position. What if the market falls even more before you can restore balance?

"We have risk limits in every market and once these are reached we just hedge all client positions," says Capital Spread's Simon Denham.

The more a spread better hedges externally, the less it will contemplate skewing its book to restore the long/short balance. But hedging externally costs money, so the spreads may not be as tight as with a company that takes on more risk. It's a classic example of a trade-off.