Spread Betting companies don’t charge commissions and earn their money through the spreads they charge, if they are offering zero spreads or extremely low spreads then this should sound alarms bells in your head – how are these companies making money and what is the catch with zero spreads?
This is a bit of a bold statement and we’re certainly not accusing any one firm (disclaimer alert!). But this is one way an unscrupulous spread betting company could make money off zero spreads. Traders that consistently lose money are obviously not a problem, they will continue to receive the benefits of zero spreads in the expectation that they will carry on losing money, those that do make money might be put on dealer referral. Being put on dealer referral means that the Spread Betting company’s traders then need to check the price and the trade. All of this creates a big enough time lag for the price to move. If this moves in your favour, the trade could be rejected on the basis that the price had moved. If the price moves against you, well then they might place your trade.
This is what Conor Foley posted on trade2win back in September 2010, putting his case for why there is no catch in offering zero spreads:
“We have decided to offer 10 of our popular markets at zero spreads. We quote over 2,000 markets and there has been no change to the spreads on those. In our experience, clients trade a range of markets, so while we will clearly be earning less on the 10 'Zero Spreads' markets, we would hope clients will also trade other markets where we offer 'normal' spreads. So, while we are not a charity, as you correctly state, there is no catch.”
WorldSpreads were only offering this to their Platinum account holders who deposited £5000 so this cut out the lower end traders and made sure that traders that wanted to take advantage of the offer would have enough capital tied up to make them consider making WorldSpreads their primary broker.
It is also worth comparing this offer to a free sports bet from the likes of Bet365. These free bet offers aren’t made out of the goodness of their hearts, they make them because they believe in the long run they will make more off the punter than he will off of them. Unlike zero spreads, the sports betting firms could lose money with these bets i.e. they are loss leaders, by offering zero spreads, spread betting companies aren’t losing any more money than otherwise they’re just not making any.
Offering zero spreads is a pretty attractive offer to plaster all over the walls of the London Underground, the free newspapers and internet banner ads. A zero spreads offer also spreads by word of mouth via the forums (although people mostly question whether it is a scam).
Zero spreads may only be a temporary offer but if it is successful at attracting clients then it might be cheaper in the long run than alternative marketing methods. For instance a Spread Betting company may pay a marketing agent a commission on every trade their referred trader makes for the duration they have an open account.
If a company like WorldSpreads requires that you invest £5000 to take advantage of zero spreads then it’s a reasonable argument that they would do this for the interest. However, it’s unlikely that Spread Betting companies will offer zero spreads only for the interest income in this market.
This is a popular conspiracy theory on some of the spread betting forums.
The theory goes as follows; the unscrupulous spread betting company invests/trades/loses the client funds and has a big hole in their accounts that they need to fill preferably before the auditors or the FSA find out. In order to recoup the client money the spread betting firm needs an attractive offer to bring in new funds, say, zero spreads if you have £5000 in your account. The spread betting firm then take those funds and invest/trades/loses that money in an attempt to recover their initial losses.