Is financial spread betting gambling or investing?

[z106]

In fact (took that Delta course BTW) the following strategy seems just too good to be true - I will need to confirm it with Delta.

Euro Stoxx 50 FSB appears to trade on 1 per mil spread - yep latest quote is 4185-4189. That is 4bp and it can be rolled over at 2bp per quarter. In my book that is nil costs. Okay you have to deposit 5% margin so at 4% interest rate that's 20bp charge per annum.

Harchibald - I don't understand this.

Can you elaborate please.

As in - surely the bulk of the cost is in the price discrepancy between the actual current price and the futures price no?
i.e. If you buy long now and the rolling price doesn't move for the quarter then you lose money as the future price will gradually converge with the current price as time passes by up to the last day of the contract ?

As in - isn't the buy-sell spread different again?

Or have i misunderstood your post?

 

[Duke of Marmalade]

Keyboard, the fact is that the only costs in being invested in the index via FSB are the spread and the interest foregone on margin.

I prefer not to think of FSB as leveraged investment but as buying shares/indexes for settlement at some future date. Clearly, if you are paying at some future date the price should reflect the cost of that credit. Meanwhile you can have the purchase moneys on deposit (i.e. you are not running a leveraged position in aggregate) -so you only lose the difference between deposit rates and the implied credit rate in the price - but even that is part of the spread - the spread is the only cost of the trade itself.

I must be missing sumfin', too good to be true, anybody see the flaw in my argument?

 

[z106]

i still don't get it.

Can you give an example with figures.

 

[Duke of Marmalade]

Ok, keyboard, good challenge.

Let's simplify things. We will assume annual futures rather than quarterly. We will assume the index stays constant at 100. (That of course means the index was a bad investment, but that doesn't matter, we are trying to isolate the cost difference between this and QL Freeway).

Assume dividends are 2% and interest rate is 4%. Ignore the margin, that is a separate cost. Assume a spread of 0.4% (1 per mil per quarter, actually cheaper than that as only the first quarter is 1 per mil subsequent quarters are .5 per mil).

Then the FSB futures price at the start of the contract is 101.8 - 102.2, that is spot price plus interest less dividends then finally adjusted for spread.

Buy FSB forward and deposit 100 in bank. In 1 year's time the price will be quoted at 99.8 - 100.2 that is the spot price adjusted for spread.

You will now have 104 in bank but will lose 2.4 (102.2 - 99.8) on settling the FSB, a net profit of 1.6.

The alternative was to invest 100 in QL Freeway. A year later you will have earned divies of 2 but you will have paid management charges of 1, a net gain of 1.

Thus FBS is .6 cheaper than QL Freeway i.e. a whole 60% cheaper. After factoring in the lost interest on the margin and the fact that the rolling annual spread is less than 4 per mil, still c. 50% cheaper than QL and we know QL are simply the bestest.

Factor in the asymmetrical tax position and FSB becomes the no brainer way to invest in a tracker fund, irrespective of time frame.

 

[z106]

Ok - i don't know enough of how prices are determined - plus i know niothing of this quinn thing - so i really can't comment on possible flaws in ur logic.

I'm curious as to what other people have to say on it though.

 

[Duke of Marmalade]

Ok - i don't know enough of how prices are determined - plus i know niothing of this quinn thing - so i really can't comment on possible flaws in ur logic.

I'm curious as to what other people have to say on it though.

Well, ignore QL, it seems to me that the cost of investing in Eurostoxx 50 through FSB is .5% per annum, and nothing can match that.

 

[z106]

Well, ignore QL, it seems to me that the cost of investing in Eurostoxx 50 through FSB is .5% per annum, and nothing can match that.

And as u say yourself - no exit fees of 23% when the price rises.

 

[Duke of Marmalade]

Went to a Delta seminar on Oil futures last night. Fascinating stuff. One of the techniques is to track the relative positions of the Moving Average 8 days and the MA 34 days.

8? 34? Fibunacci numbers stupid. Sorry I don't buy it.

 

[Zoran]

Z, I make so very few mistakes I get little practice recognizing them.

How the price is formed is a very big mistake to me as you can see even trackers or indexes can be in backwardation (so the price in the future is lower then the current price) and not to say it can be much higher then the current price also.

You certainly put me right on Oil futures.

Oil is no different then other commodities and stocks.
You have a lot of stocks, funds and ETF's with high volatility that can go down and up every day 2-5%.

But as an alternative to direct holdings of shares/share indices FSB is very much in there in my book.
In fact (took that Delta course BTW) the following strategy seems just too good to be true - I will need to confirm it with Delta.

Why not if you know what you are doing.
I am unsure about your strategy.
Would you put them down so we can discuss it?

Euro Stoxx 50 FSB appears to trade on 1 per mil spread - yep latest quote is 4185-4189. That is 4bp and it can be rolled over at 2bp per quarter. In my book that is nil costs. Okay you have to deposit 5% margin so at 4% interest rate that's 20bp charge per annum.

That is the great example of backwardation where you have SEP-08 price lower then the current price.
That means spread betting company will pay you money for keeping such future and that is good.
But as I said you have no clue where the price is heading so keeping anything shorter then 10 years is not too smart.
Let say you will keep it 10 years or even 5 years so you will be OK next 5 years as you will not have too much costs except around 1-2% for the spread but next few years if things starts going up you will need to pay the premium as the price of the future will most likely be higher then the spot price.
I will also put the uncertainty that the government will not put CGT in the next few years.

Compare this strategy to Quinn Life Euro Freeway - that charges 1% p.a. and has an exit tax of 23% on profits with no symmetry on losses. And as all devotees of AAM know, QL Freeway is the darling choice.

What is the timeframe for your money. From this it looks you will put money for 1 year and expect big profit from it.
This is utopia with stock market where you are getting risk premium from being there for the longer period of time otherwise it is just the luck that year (not too big difference then gambling for me).

For me if I do this through the pension where I am immediate having 25% up to 80% back (I have 80% more money as I am trying not to pay the higher tax).
So I have the most of my money in the pension and buying tracker funds for 0.75% yearly fees.
Not sure what kind of spread betting strategy will give me more.
Even 1% of fees is tiny in this regards.

Is your primary way of investing through the spread betting or this is just for funny money (money you can loose)?

 

[Zoran]

Ok, keyboard, good challenge.

Let's simplify things. We will assume annual futures rather than quarterly.

I do not have yearly futures offered with my spread betting company except for FTSE index.
Do you?

Thus FBS is .6 cheaper than QL Freeway i.e. a whole 60% cheaper. After factoring in the lost interest on the margin and the fact that the rolling annual spread is less than 4 per mil, still c. 50% cheaper than QL and we know QL are simply the bestest.

OK, I did not understand your mathematics but I assume your calculation here is based on the current future prices that are lower then the spot price.
Did you think that the price of the futures will be higher later on as I assume you are not investing the money just for 1 year?

Factor in the asymmetrical tax position and FSB becomes the no brainer way to invest in a tracker fund, irrespective of time frame.

The time frame is a very important factor.
I am trying to invest the majority of my money through the pension so I have an edge against any of your long term spread betting strategies.

If it is after tax money you are saving for something (e.g. house deposit, emergency money, children education, ...) then you should still consider longer period of time then 1, 2 years when playing with equities.

 

[Zoran]

Went to a Delta seminar on Oil futures last night. Fascinating stuff. One of the techniques is to track the relative positions of the Moving Average 8 days and the MA 34 days.

8? 34? Fibunacci numbers stupid. Sorry I don't buy it.

Did you expect from them to teach you the long term buy&hold strategy?

These are all some kind of trading strategies you can read in a lot of books or free on the Internet.
Such strategies maybe worked in the past and maybe not.
As you need to have the strategy to beat the current market behavior and change it as the market is changing you have no chance against pros.

Trading, market timing, single stock picking and such things are more pure luck for individual investors then anything else.

The only winning combination that is nothing to do with the luck is to hold the proper for your situation portfolio of cheap passive indexed funds /ETF's (trackers) for a long period of time.
If you can risk your money as you have them a lot then go with the more risk for possible more profit but that will for majority of people be gambling rather then anything else due to luck of knowledge and good trading strategy.

 

[Duke of Marmalade]

Z, I would love to engage in all your arguments but I want to keep at least some other contributors in the debate.

How the price is formed is a very big mistake to me as you can see even trackers or indexes can be in backwardation (so the price in the future is lower then the current price) and not to say it can be much higher then the current price also.

Backwardation/contango are not meaningful concepts in the equity/index futures market. An index futures market is really just the spot market with future settlement (by both parties). The differences are simply and absolutely the interest on the delayed payment (which would make futures prices higher than spot) and loss of dividends (which would do the opposite). Any other price would allow an arbitrage by taking appropriate opposite positions in the two markets. The reason there is a futures market in equities is because it is much more liquid than the spot market as you don't need all the mess of transfer of ownership.

At the present time we are coming into dividend season so futures prices on equity indexes are slightly lower than spot prices.

I used annual futures in my examples to ease the math but you are right, Delta only does quarterlys.

The spread plus lost interest on margin are the only costs for being long an index. These amount for the Eurostoxx 50 to about .5% per annum, which is even better than the .75% tracker funds you are investing in. However, I don't know whether pension funds can invest in FSB.

Personally I have 90% of my humble portfolio on deposit and always have. I get my kicks from a tenner each way my namesake to win the Champion Hurdle.

But maybe I should be a bit more adventurous and I do think an FSB position on some index or indexes is a very viable, cost effective and tax efficient long term strategy.

BTW I think you are right, only a matter of time before caught in CGT net but presumably that won't be retrospective and in any case CGT is far superior to the 23% asymmetrical exit tax on the life fund alternative.

 

[Zoran]

Backwardation/contango are not meaningful concepts in the equity/index futures market.
At the present time we are coming into dividend season so futures prices on equity indexes are slightly lower than spot prices.

The exact term is not but I wanted to point out the prices can be off you earlier post that prices only depends on interest rate and spot price exclusively you advocated.

The prices are just off the spot price and interest rate calculation and it is just making it too complicate for regular individual investor.

I am now putting down all things making the price calculation so let see how easy for non pros can be to figure out the real price cost of indexes or stocks:
1. The current price (for future prices it is the future market regular investors not familiar with)
2. Risk-free interest rate
4. Yield (dividends)
5. Spreads in the underlying futures market (difference between buy and sell)
6. Additional spread added to 5 by the spread betting company (they need to earn something too)

I used annual futures in my examples to ease the math but you are right, Delta only does quarterlys.

The spread plus lost interest on margin are the only costs for being long an index. These amount for the Eurostoxx 50 to about .5% per annum, which is even better than the .75% tracker funds you are investing in. However, I don't know whether pension funds can invest in FSB.

Does it make any difference in your calculation that you have no clue about the price too much in the future?
Is that risk?

What about other trackers or indexes?
Are they that cheap?

I would not say that just investing in 1 tracker like this will be proper diversification.

I do not think anybody could understand your calculation above.
I did not.
Did you include the dividend discrepancies in the prices of future positions for the next rolling periods as I believe that the price is not going to be lower all the time?

Maybe this tracker is very specific and we cannot use it for comparisons between real funds/ETF's and spread betting.

BTW I think you are right, only a matter of time before caught in CGT net but presumably that won't be retrospective and in any case CGT is far superior to the 23% asymmetrical exit tax on the life fund alternative.

What is for your long term investing? How many years?
Did you try to follow this long term holding of indexes yourself?

Not sure what is that 23% but I assume if you are not speculator and short term investor then is it 23% or 20% on CGT is not a huge difference.
Why would anybody invest money on 1 or 2 years in QL trackers?

To be honest I have no price history from spread betting company, I have no proper futures charts, the public does not have details about how people are doing with them.

If it is so profitable why spread betting companies are not showing such great results and/or methods (e.g. long term investment) to the public so we can all gain from spread betting.

I think they have no clue themselves how to make money in the futures market otherwise they will be making it that way and not from spread fees and interest difference borrowing between long and short positions.
I am not saying they are not trying to make better results with no covering positions in futures market if they have strong opinion they do not need to.

I just hate all that sales crap around the investment industry about trading, market timing and so on.
If they are so smart pros will beat the simple stock market index over many years. But no they all think they can beat the market but for the price of us we are paying for their crap management (or spread) fees.

Hey, I just want the cheapest possible portfolio of passive indexed funds (bonds included) to give me the equity risk premium over the long period of time.

In the US they have it. You build your diversified cheap market tracket portfolio for around 0.2% management fees in average.
I hope this time will come to Ireland sooner or later too and that people will go away from gambling, trading, frequent fund switching, market timing, spread betting and all that sales hype.

 

[Duke of Marmalade]

I just hate all that sales crap around the investment industry about trading, market timing and so on.
If they are so smart pros will beat the simple stock market index over many years. But no they all think they can beat the market but for the price of us we are paying for their crap management (or spread) fees.

Fully in agreement - short term trading is gambling, so in a sense the formal question of the topic is now settled, if we are talking about FSB as a trading vehicle, which I agree most people do.

I have raised a new question. Are long term FSB positions on equity indexes viable alternatives to tracker funds?

Of course the subject is complex. I have nearly convinced myself, but I have not convinced you, Z, and I certainly haven't convinced the Boss. But if we can all reach a consensus that what I outline below is correct then we can forget about the complexity. I hasten to assure you that I do not see this as a mass market proposition, but maybe for the likes of us sophisticates.

Here is my simple long term strategy:

1 unit of Eurostoxx 50 trading at 4029 - 4033
1 unit of FTSE 100 at 5873 - 5879
3 units of Nasdaq 100 at 1846 - 1849

That would be around 16K worth of a diversified portfolio, requiring about 1K to be deposited with Delta.

Charges (the above spreads are the only charges except loss of interest on margin) are around .1% to enter and .2% per annum subsequently.

Implicit 20% tax on dividends, otherwise no tax.

Of course, a downside is that you have to remember to rollover your portfolio every quarter and for maximum efficiency you have to strive to maintain the minimum margin.

 

[Duke of Marmalade]

If it is so profitable why spread betting companies are not showing such great results and/or methods (e.g. long term investment) to the public so we can all gain from spread betting.

Z, I didn't say it was a sure way to make profits. But it seems to be a very efefctive way of having a long term position in an index.

There are several reasons why the spread betting companies would not be promoting this as the best thing since sliced bread for the mass market.

- Impossible to explain
- Can't guarantee that the current conditions would always apply (that shouldn't really bother you or I, we can simply exit)
- If they started promoting these as long term investments rather than betting they would risk the favourable tax treatment
- Getting involved with the mass retail market would bring all the associated admin and compliance burdens and they could no more offer this service at .2% p.a. than a life company
- Anyway, they make their money from active traders, they ain't goin' to get rich with a lot of passive long term punters. In a sense the long term holder is leveraging off the very fine margins which are required by the traders to justify high activity.

 

[Zoran]

Fully in agreement - short term trading is gambling, so in a sense the formal question of the topic is now settled, if we are talking about FSB as a trading vehicle, which I agree most people do.

I have raised a new question. Are long term FSB positions on equity indexes viable alternatives to tracker funds?

I fully agree.
OK, now we agreed what we should look for so let try to get the figures correct about spread betting and long term buy&hold.

Here is my simple long term strategy:

1 unit of Eurostoxx 50 trading at 4029 - 4033
1 unit of FTSE 100 at 5873 - 5879
3 units of Nasdaq 100 at 1846 - 1849

That would be around 16K worth of a diversified portfolio, requiring about 1K to be deposited with Delta.

We should try to form more proper portfolio so people will also have an idea what proper portfolio is.
We need to put realistic figures down, easy to understand for us and everybody else.
E.g. complexity problems are:
1. It is not the same doing rolling 4 times per year or 1 time as you know there is the compounding factor in that case
2. Some indexes in my case cannot be open without e15 per point meaning you need much more money to be non-leveraged
3. Problem of how much money you have at spread betting company not earning interest is variable due to that money needed to be:
deposit + Loss (e.g. when you place the position you can go 5% down and in need to have twice your deposit with spread betting company)
If you start first two years with to say -5% and -10% you are not going to earn a lot of interest as you will actually depleted money put into money market
4. We have no clue what will be the spread in the future or what was before now so we can base our calculation on the historical or future data

Z, I didn't say it was a sure way to make profits. But it seems to be a very efefctive way of having a long term position in an index.

Yes. That is something I tried to do but the cost did not work for me and not to say the volatility was awful as you needed to put more and more money into the account due to deposit + current paper loss (I hated this as deposit is just there why you need to cover the paper loss) needed to be covered. It all depends how you start your positions, in profit or loss, but you cannot count on this and we will not.

There are several reasons why the spread betting companies would not be promoting this as the best thing since sliced bread for the mass market.

I agree that their interest (similar to regular stock brokers) is to have so many transactions as they are earning on it.
They like active traders so will do everything to spoil passive investing.

I did not have enough time to finally do some proper portfolio calculation with the spread betting company.

 

[Zoran]

Charges (the above spreads are the only charges except loss of interest on margin) are around .1% to enter and .2% per annum subsequently.

I think nothing is this cheap.
The major cost for non leveraged positions is the difference between buy price of future and the current spot price.
That is the price that you need to beat to earn money from the stock market.

E.g. buy price for EU Stocks 50 is 4031.5 and the current price is 2995 so you are paying 38.5 (future price difference + spread between buy and sell = 36.5 + 2) or around 1% per quoter making it in total at least 4% as not sure when dividends are coming into the play.

My calculations for many indexes are giving me the figure of around 3-7%.
I just spotted my favorite Vanguard Emerging Market ETF (VWO) I am keeping in my portfolio (10% of portfolio) with my spread betting company with around 7% yearly charges.
I am keeping such position as regular stock position in the US with 0.25% management fees per year and $10 broker charges (having the $ risk exposure too).

 

[Duke of Marmalade]

We need to put realistic figures down, easy to understand for us and everybody else.
E.g. complexity problems are:
1. It is not the same doing rolling 4 times per year or 1 time as you know there is the compounding factor in that case

.1% has a compounding effect over 4 quarters of 6 in a million Compounding only comes significant with much larger percentage changes. Besides when a life company or other fund manager says it is charging 1% per annum it usually means 1/12% per month.

2. Some indexes in my case cannot be open without e15 per point meaning you need much more money to be non-leveraged

Delta trades at 1 euro per point.

3. Problem of how much money you have at spread betting company not earning interest is variable due to that money needed to be:
deposit + Loss (e.g. when you place the position you can go 5% down and in need to have twice your deposit with spread betting company)
If you start first two years with to say -5% and -10% you are not going to earn a lot of interest as you will actually depleted money put into money market

If you are losing money, the extra deposit is only until the next roll-over, at which time you roll-over at lesser levels and have less margin.

But yes, managing margin is a variable and a pain, but the negative effect will not be much different from .2% per annum.

4. We have no clue what will be the spread in the future or what was before now so we can base our calculation on the historical or future data

True, but why start off in a QL Freeway for example that is charging twice as much and with its assymetrical exit tax? You can always switch later in the unlikely event that spreads in the futures market significantly widen.

I think nothing is this cheap. [.2% per annum]
The major cost for non leveraged positions is the difference between buy price of future and the current spot price.
That is the price that you need to beat to earn money from the stock market.

These are the charges - there is also the cost of borrowing, which for Euro is 4% per annum. Presuming you have the "leverage" on deposit somewhere earning 4% or even more this cancels out.

 

[Zoran]

.1% has a compounding effect over 4 quarters of 6 in a million Compounding only comes significant with much larger percentage changes.
But yes, managing margin is a variable and a pain, but the negative effect will not be much different from .2% per annum.
These are the charges - there is also the cost of borrowing, which for Euro is 4% per annum. Presuming you have the "leverage" on deposit somewhere earning 4% or even more this cancels out.

I did not understand where did you find .1% and .2%.
As I said charges are around 3-7% per year for me. The similar is in Pryor's book when he compares spread betting with long term stock holding.
Just he did not elaborate all cases when the stock is going down, compounding and so on.

We need to see your formula for these tiny costs you are showing as it is looking to me you missed the difference in the price between the future price and the spot price.

Also, the money market return is not fixed over the years.

 

[Duke of Marmalade]

Z, you are including the cost of borrowing, but that is not a charge, it can be cancelled out and even better in today's conditions by depositing the leverage. The spread plus the interest on margin are the only charges.