The costs of spreadbetting

[Brendan Burgess]

I get a daily statement from IG Index telling me the changes in position and the costs charged. I had never really studied them as they seemed small. But I was a bit nervous that they might mount up. I have had a Bitcoin position for two years now. And I had a position in Tesla for about 6 months.

But I got an annual summary today and the costs are relatively small. About 1/4% of the notional value. In my case, that is about 2% of the profits made.

Brendan

 

[Andrew365]

Thanks Brendan, when you enter the trade does it tell you the daily funding charge? I read a fantastic book on spreadbetting a few years ago. If done correctly it can be a great investment tool. The book was by Malcolm Pryor (Spreadbetting Handbook), I particularly liked it because it had a good section on risk management. I had the first edition and back in those days he would answer questions on his forum.

 

[Brendan Burgess]

when you enter the trade does it tell you the daily funding charge?

Hi Andrew

I trade very rarely. And it's over 6 months, so I don't remember.

This is what the Bitcoin information says

So, it looks as if over the last year, they paid me for my short bets?

I knew that they did this at the start, but I thought that it had switched.

So as well as the betting profit I have made, I have been paid 1/4% interest in the last year?

Brendan

 

[Fella]

Well the costs could be zero but it could still be expensive if the spread is large , they make money on the spread.

 

[Brendan Burgess]

Hi Fella

The spread is very small for a long term sell and hold like myself

I think that is 0.5% ?

But it's huge for people who close out their position every day.

Brendan

 

[Duke of Marmalade]

I stumbled onto the below PRIIPS disclosure from IG for a €5000* intraday LONG or SHORT position on shares.

I was surprised that PRIIPS applied to IG and I suggest that they have misinterpreted the regulations, (assuming they are like the ones applicable to collective investments, with which I am familiar).
The Favourable Scenario is stipulated by PRIIPS to be the 10% best scenario which for the LONG is taken to be +1.5%, perhaps a bit fruity for intraday but let's not quibble.
The Unfavorable Scenario is, surprise surprise, the 10% worst scenario and is understandably taken to be -1.5%.

The positions are reversed for the SHORT which makes total sense.

But what about The Moderate Scenario? PRIIPS stipulates this to be the median or 50% scenario. IG take this to be +0.5% for the LONG but -0.5% for the SHORT
Thus in The Moderate Scenario both the LONGs and the SHORTs are winners.
But this should be the same scenario and the long and the short of it is that both can't be winning in the same scenario

* leveraging off a 20% margin this is a €25,000 nominal exposure

 

[Duke of Marmalade]

Well the costs could be zero but it could still be expensive if the spread is large , they make money on the spread.

Fella, as I understand it the charges disclosed by IG in the OP include the spread.

The charges shown here include both the explicit costs (items deducted from your ledger as a separate charge and which will appear on your regular statements) and implicit costs, such as the effect of spread, factored into the price that you buy or sell at. To help you understand the full cost to you we have included both the underlying market spread and the IG spread where applicable.

 

[Fella]

Fella, as I understand it the charges disclosed by IG in the OP include the spread.

I'm not sure if it does or not , I don't have an IG account or statement to check .

 

[Duke of Marmalade]

I'm not sure if it does or not , I don't have an IG account or statement to check .

I do have a statement to check and I have quoted from it in post #7

 

[Fella]

I do have a statement to check and I have quoted from it in post #7

Yeah so that would be roughly half the total cost as you will have to pay when closing out , interestingly in times of high volatility the minimum spread can increase significantly so it could work out more expensive , you won't know that until you close.

 

[Andrew365]

Is the spread not a function of liquidity? The spread on the FTSE 100 will be much closer to the actual bid/ask spread, whereas an individual stock (varying on trading volume) would have a larger spread than the actual bid/ask for purchasing outright.

is PRIIPS a kind of stress test just to indicate the size of their P/L account for a 1.5% move?

 

[Duke of Marmalade]

Yeah so that would be roughly half the total cost as you will have to pay when closing out , interestingly in times of high volatility the minimum spread can increase significantly so it could work out more expensive , you won't know that until you close.

Well, it wasn't actually my statement. The owner had partly closed out but I take your point that any open positions will be subject to further spread costs upon closing.

 

[Duke of Marmalade]

Is the spread not a function of liquidity? The spread on the FTSE 100 will be much closer to the actual bid/ask spread, whereas an individual stock (varying on trading volume) would have a larger spread than the actual bid/ask for purchasing outright.

IG talk about the IG spread in addition to the market spread. Your point is well made, though I believe IG's spreads are quite competitive for the bigger shares. BTW I only ever did one trade on IG. On the recommendation of this forum I shorted bitcoin at 14,000 odd and closed out a few weeks later at 8,000 odd. Hard to believe that is almost 2 years ago.

is PRIIPS a kind of stress test just to indicate the size of their P/L account for a 1.5% move?

PRIIPS is the actual regulations for Packaged Retail Investment and Insurance Products; really surprised that financial spread betting is covered by those regulations*. The main document aimed at punters is the Key Information Document. I attach the KID for IG's intraday CFDs. It was extracts from Table 1 that I reproduced in an Excel spreadsheet which I attached to post #6.

* Actually I think I have the answer to this quandary. I presume that IG provide the same product but in either guise - as a financial spread bet or as an investment. As a spread bet surely there can be no PRIIPS implications, whereas as an investment they presumably do apply. The choice of vehicle would I presume be driven by tax considerations.

 

[Colm Fagan]

I get a daily statement from IG Index telling me the changes in position and the costs charged. I had never really studied them as they seemed small.

I'm in the same boat, except that I get daily statements from two providers, IG Index (my initial provider but I'm now gradually trying to unwind all my positions with them) and CMC Markets (my more recent provider). There's quite a difference between their charges. I estimate that, for long positions, IG Index charges just over 4% a year (charged daily) for long positions on sterling stocks. The corresponding rate for CMC Markets is around 2.6%. For long positions in Euro stocks, CMC Markets charges around 1.5%. I don't have exact figures for IG Index but I reckon it's closer to 2%. The more interesting comparison is between the amounts charged for my short positions in Tesla. The charge from CMC Markets is around 0.4% a year, while the corresponding charge from IG Index is over 1% a year - more than double that charged by CMC Markets.
As @Fella note, spread bet companies make most of their money on the spread between bid and offer prices. Neither of us trade much, so that's not a major factor, but the charge is significant for anyone who trades regularly. Once again, my experience is that CMC Markets beats IG Index hands down, even allowing for the fact that I pay a commission to my own broker for CMC trades while there is no commission to a third party for IG Index trades.
I should add the final qualifier that I haven't looked at the total charges for the year, so there may be occasional once-off charges that I haven't noticed. I've no recollection of seeing any.