As we wrote in a recent feature (How Safe is your Broker, 14 September 2012), investments in Isas, Sipps and share dealing accounts are covered by the Financial Services Compensation Scheme (FSCS), up to a maximum of £50,000 for investments and £85,000 for deposits per person per company.
However, because investments held by your broker in nominee accounts are ring-fenced in a trust, even if your broker is declared bankrupt these assets will not be made available to its creditors. While in theory this means you should be able to recover your assets should a nominee company fail - unless fraud or incompetence means there is a shortfall in the pool of nominee accounts - this may take time, which is why we advise splitting your assets between providers. If spread betting firms are regulated by the FSA, they are also covered by the FSCS in the event of failure.
The issue of whether nominee companies are lending shares to institutional investors wishing to short sell shares is less clear, and you will need to check with your broker to see if they do so or not. Selftrade, for example, very clearly states that it does not engage in stock lending, as does Barclays Stockbrokers. However, in its case it will lend your stock if you ask it to, which could generate an additional return on your investments.
Of course, stock lending is perfectly legal and highly regulated, and is a practice that a large number of institutional shareholders engage in. However as you rightly point out, it does expose you to counterparty risk - any financial troubles with the borrower of your shares could mean that your nominee provider may struggle to retrieve your stock. If you are worried that your broker may be lending out your shares, it's best to give them a call.
Regarding your concerns over spread betting firms, some do take the other side of bets to their customers, and others do not. There is nothing especially sinister about this practice. Taking the other side of a bet is very different from actively trying to cause one’s clients to lose.
An understanding of how spread betting firms make money is helpful here. In general, these organisations earn a perfectly good living from the bid-ask spread, and from financing charges that they collect on their clients' open positions.
DP: Disgruntled traders have occasionally approached me with stories of how one firm or another has allegedly moved prices against them in order to trigger their stop loss. None has ever presented me with compelling evidence to this effect, however.
From time to time, I have myself tried to exit a winning position when the price had turned against me and found myself unable to do so. This is annoying and I cannot always see why it should happen. However, spread betting firms do say that they may not execute trades immediately during “fast market” conditions.
To summarise, I don't believe that spread betting firms generally fiddle their customers. It's too much effort. The majority of traders make silly mistakes and end up losing money without the need for any sharp practices on the part of their trading providers.
As the great Marc Rivalland once said: "If you are ready to blame anyone else for your losses, you shouldn't be trading the markets."
