Spread betting
From Wikipedia, the free encyclopedia
Spread betting is a term used to describe various types of wagering on the outcome of an event, where the pay-off is based on the precision of the wager, rather than a simple binary outcome (win or loss). A bet is made against a 'spread' (or index), on whether the outcome will be above or below the spread.
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[edit] Purpose
The general purpose of the spread is to create an active market for both sides of a wager, even if, a priori, the expected outcome of the event may be tilted in favour of one side or the other. In a sporting event, for example, a good team may be matched up against a bad team. Persons wagering on the event would likely gravitate towards the better team, to such an extent that there would be very few, perhaps none, wagering on the lesser team.
The use of a point spread evens out the market so that there are an equal number of participants on each side of the wager. This allows a sports book to make a market, by accepting wagers on both sides of the spread. The sports book charges a commission and acts as the counterparty for each bettor. As long as the number of participants on each side is roughly equal, the sports book does not need to be concerned with the actual outcome; its profits instead come from the commissions.
[edit] Spreads in sports wagering
The concept has a long history in American sports betting and was exported to the United Kingdom in the 1980s. In North America, the bettor usually bets that the difference in the scores of two teams will be less than or greater than a value specified by the bookmaker. For example, if a bettor places a bet on an underdog in an American football game when the spread is 3.5 points, he is said to take the points; he will win his bet if the underdog's score plus 3.5 points is greater than the favourite's score. If he had taken the favourite, he would have been giving the points and would win if the favourite's score minus 3.5 points was greater than the underdog's score.
Spreads may be specified in half-point fractions to avoid ties, or pushes. The winner of a North American spread bet wins the amount that he has bet, while a losing bettor loses the amount wagered plus the bookmaker's commission, which is commonly known as the vigorish or vig, and is usually 10 percent of the original wager; in the United Kingdom both sides are held at odds of 9-10. In North American betting a push is treated as if no bet at all had been made, while in the United Kingdom "dead heat" rules apply, resulting in a net loss of £5 on a £100 wager due to the 9-10 odds of the proposition.
If a key player on a side is marginally injured and may or may not play, the "sports book" — or establishment that handles the bets — may declare the game off-limits to bettors (by not quoting any spread at all on it), or may "circle" the game; in the latter scenario, lower maximum amounts for each bet are enforced (typically $5,000 instead of the $25,000 limit observed at most Las Vegas sports books) and certain specialty wagers, such as "teasers," are banned on either side in the game. (A "teaser" is a bet that alters the spread in the bettor's favor by a predetermined margin, often six points - for example, if the line is 3.5 points and the bettor wants to place a "teaser" bet on the underdog, he takes 9.5 points instead; a teaser bet on the favourite would mean that the bettor takes 2.5 points instead of having to give the 3.5. In return for the additional points, the payout if the bettor wins is less than even money. At some establishments, the "reverse teaser" also exists, which alters the spread against the bettor, who gets paid off at more than even money if the bet wins.)
Example: In a soccer match between Liverpool and Everton the spread for corners is 12-13, the index firm believes there will be 12 or 13 corners in total during the match. A bettor approaches the firm with the belief that there will be more than 13 corners during the game, the bettor 'buys' at £25 a point at 13. If the final total of corners is 16 the bettor has won, receiving 3 x £25. If the final total of corners is 10, the bettor loses 3 x £25. A 'sell' transaction is similar except made against the bottom value of the spread. Often there is live pricing, which changes the spread during the course of an event allowing a profit to be increased or a loss minimized.
In North American sports betting many of these wagers would be classified as over-under (or, more commonly today, total) bets rather than spread bets. However, these are for one side or another of a total only, and do not increase the amount won or lost as the actual moves away from the bookmaker's prediction. Instead, over-under or total bets are handled much like point-spread bets on a team, with the usual 10% commission applied. Many Nevada sports books will allow these bets to be used in parlays, just like team point-spread bets, making it possible to bet, for instance, "the Packers and the over," and be paid if both the Packers "cover" the point spread and the total score is higher than the book's prediction. (Such parlays usually pay off at odds of 13:5 with no "vig," just as a standard two-team parlay would.)
In 2004 Cantor Fitzgerald launched the spread betting exchange Cantor Spreadfair which matches up spread bettors opposing views and allows them to bet with each other. This removal of the faceless bookmaker allows clients to bet at the spread size and monetary level that they request, and in turn this creates tighter spread magin which in turn allows users to lose less and win more than with the non exchange spread betting firms.
The mathematical analysis of spreads and spread betting is a large and growing subject. For example, sports which have simple 1 point scoring systems (e.g. baseball, hockey, and soccer) may be analysed using Poisson and Skellam statistics.
[edit] Spreads in the financial industry
By far the largest part of the official market in the UK concerns financial instruments; the leading spread betting companies (IG Index/IGMarkets, City Index, Cantor Index, Financial Spreads, CMC being amongst them) either make all their revenues from financial markets or have sports operations dwarfed by the financial side. For example, in the figures for the second half of 2006, the income derived from financial spread betting at IG Group, the largest of the companies, was £29.3m, compared to £3.8m in sports. Financial spread betting in the United Kingdom closely resembles the futures and options markets, with the major differences consisting in (a) the fact that the 'charge' occurs through a wider bid-offer spread and (b) the different tax status of spread-betting compared to exchange instruments (c) the flexibility of spread betting, which, not limited to exchange hours or definitions, can create new instruments relatively easily (e.g. individual stock futures), trade 24-hours, guaranteed stop losses and (d) the trading being off-exchange, with the contract existing directly between the market-making company and the client, rather than exchange-cleared.
Unlike fixed odds betting the amount won or lost can be very large, as there is no single stake to limit the maximum losses. However, it is usually possible to place a "stop loss" with the bookmaker, automatically closing the bet if the value of the spread moves against the better by a specified amount. "Stop wins" are the opposite -- closing the bet when the spread moves in a better's favour by a specified amount.
[edit] Financial Spread Bet Example
You are taking a bet that a share will go up/down with a certain stake.
i.e. LloydsTSB is trading the market @ 410 bid -411p offer.
S/betting company are also offering 410-411p.
Usual way using a broker to buy share:
Say I want to buy 1000 shares @ 411p. In the market you would call/deal online and buy 1000 shares @£4.11p thus - you shell out 1000x£4.11(£4110) +0.5% stamp duty (£20.55) + broker charge(say £10). = £4140.55p
Spread betting (using cash bets - no definite expiry):
If I wanted to spread bet I would bet £10 a point (i.e. £10 per penny the shares moves) @ 411p. Thus total loss could be £4110 so no more risky than buying the shares normally.
However, if you take a cash spread bet out each night you are charged a financing cost (or receive if you are shorting the stock) LIBOR (currently 4%) + (a certain percentage - usually around 2/3%)
Thus for every day you keep the bet open you are being charged (taking finance cost @ 7%) the exposure of the share i.e. if LloydsTSB were trading @ 415p - (415p x 10 )*(7/100 - 7% )/365 - no of days in year) = £0.7958.
Now on top of this you need an amount in your spread betting account to cover the bet. Usually this is either 5 or 10% of the total exposure you are taking on. i.e. in this case £4150 * 0.1 or 0.05 = £415.00 or £ 207.50
If LloydsTSB finished trading the day @ 400p - you would need to cover that £4150 - £400*10(£4000) = £150 difference by putting extra deposit (or margin) into the account.
So it is always advisable to have at least 25% of the total exposure (in this case, £4150 *0.25 = £1037.5) in case of adverse movement.
You will usually receive all dividends and other corporate adjustments in the financing charge each night i.e. LloydsTSB goes ex-dividend with dividend of 23.5p - you will receive that amount.
