Slow Trader

Tag: margin

  • The margin is a changing!

    The margin on spread bet and CFD accounts are about to increase significantly. Why?

    Many (and indeed any accountants we’ve spoken to) consider spread betting in the same light as a sports betting app.

    They couldn’t be more different. Financial spread bets and CFDs demand a different level of consideration to sports betting. The difference between a CFD (contract for difference) and spread betting – apart from a grown-up name – is in detail.

    Beginners ought to start with CFDs as losses are deductible and then move to spread betting once profitable as profits on spread bet accounts are not taxed. Most do it the other way round.

    In both the trade is an agreement rather than a purchase of a security. They are traded as a derivative of the market. That is why they can be traded both long and short either as a stand-alone trade or as a hedge.

    This sports app miss conception possibly fuels the increase across the board of margins in CFDs and spread bet trades.

    Not too long ago margins were calculated at 0.5% of the potential risk, it is mostly now 1% of the risk and soon to increase to 5% of the risk.

    If we take the currency pairing of Sterling versus the Dollar the market as we write is at 13,962. To spread bet this at say £10 per pip (a pip, in this case, is the final digit). The risk is 13,962 x £10 = £139,620

    Probably not the same as a sports app bet! The margin required to trade at 5% is £6,981. If we consider that a suitable maximum margin of our account at any one time is not more than 10%, then we would require £69,810 to trade. Many serious retail traders trade up to four times this amount.

    So, yes the margin increase ought to make many traders reconsider.

  • Margin to increase for retail traders

    We have been awarded professional client status by our brokerage.

    To be classified as a professional client the qualification is 2 out of the following 3 statements below:

    1. Carried out CFD, spread betting or forex, in signicant size, at an average frequency of 10 per quarter over the previous four quarters
    2. An investment portfolio (including cash deposits and financial instruments) exceeding €500,000
    3. Work or have worked in the financial sector for at least one year in a professional position, which requires knowledge of CFDs, spread betting or forex

    Why is professional client status a big deal? Because margin requirements will increase substantially for ‘retail traders’; for professional clients they will not.

    What is ‘margin’?

    • It is a good faith deposit that a trader puts up for collateral to hold open a position.
    • It is not a transaction cost, but a portion of our account equity set aside and allocated as a margin deposit.
    • When trading with margin the amount of margin needed to hold open a position is determined by trade size. As trade size increases, margin requirement increases.

    This has no effect, however, on our usual spread payment: which we consider as a true identification of a retail trader. If we pay a standard spread then by definition we are retail traders.

    Institutional proprietary traders (or ‘prop’ traders as they are known) trade the firms money (not clients money) and often at a reduced spread cost, or no cost at all. They are, to our mind, non-retail traders.

    But to be considered a professional client, and thereby maintain a desirable margin commitment, is great.

  • Financial spread betting

    For my day trading I use a financial spread betting company.

    Don’t get bothered by the word ‘betting’, it could quite easily be called financial spread trading. However, putting the ‘betting’ word in there qualifies for no tax (under the current rules).

    My opinion on why no CGT, stamp duty or explicit trading commissions:

    • It is well-known that most (and I mean most) people lose at financial spread betting. It’s not the spread betting that people lose at per se, it’s trading in general and particularly day-trading.
    • Therefore, if financial spread betting were taxed, then the large majority would be claiming tax offsets for their losses.
    • Spread betting companies, on the other hand, make money (they operate like the casino) and the government are better off leaving the pundit who is attracted to and enjoying tax-free trading (losses) and taxing the profitable companies.

    Financial spread betting is a derivative based trading which simply means that we don’t own the physical product. This does give us the advantage (not necessarily always an advantage) of being able to buy, go long, or sell, go short.

    We also, unlike an ISA trade, don’t pay a fee for our trades. (I’m considering short-term trades from a DFT here). However, we do pay a spread. A spread being the difference between the buy and the sell-price.

    It might be noticed in my ‘algorithm to trade by’ page that I make repeated reference to the spread – in particular half-spread. The beginner doesn’t fully appreciate the importance of managing the spread. Furthermore, both the beginner and the intermediate, particularly if the latter drops into the dip, don’t fully understand the importance of managing margin and leverage.

    Spread:

    • On selecting a spread betting company probably my biggest criteria is the tightness of the spread.
    • A spread of, say, 2.5 pips for GBP/JPY is not a lot when we are trading at the minimum of £1 per pip. (As an aside, my amount per trade is always based on my reward/risk measurement which, in turn, is based on a consistent potential loss per trade).
    • If we entered a trade and exited immediately then for the £1 per pip example this would cost us £2.5 for the joy of trading.
    • Okay, that sounds very reasonable particularly as the average ISA has a ‘in/out’ trade cost of £24. (An ISA also has a spread, but lets keep it simple)
    • An expert’s (retailers) account may take them to the region of £60 per pip. An immediate ‘in/out’ in this example would cost £150. And they wouldn’t want to do that too often.
    • So, as we can see spread is a definite factor in financial spread betting; in my day-trading I measure to 0.1 of a pip so the spread is very closely included in my measurements.

    The real benefit of spread betting is leverage – for the expert at least who has learnt how to manage leverage and margin. The beginner, and often the intermediate trader, will misuse leverage (only having to commit 1% to 10% of funds to a trade). There is an enquiry ongoing to protect the inexperienced trader by a substantial reduction in leverage allowed. Particularly if a trader has less than 3-years experience. The effect of which will probably kill financial spread betting as an attractive trading vehicle for the expert.