How Financial Spread Betting Works – TD Waterhouse Financial Spread Betting
How Financial Spread Betting Works
In the stock market, when you want to deal in traditional
shares, you go to a stockbroker and they will quote you two
prices.
The lower of the two prices, which is the one you will get if
you are selling shares, is called the bid price.
The higher quoted price is what you will have to pay if you
are buying shares and is the offer price. The difference between
the two prices is called the spread.
In Financial Spread Betting the principle is exactly the same.
You will be quoted prices, bid and offer, which includes our market
making spread.
For example a share which trades in the market at 771p – 772p
may be quoted by us as 769.8p -773.2p (including the TD Waterhouse
Financial Spread Betting spread) for settlement at the end of the
day.
A buyer of £10 per point would make £10 for every penny that
the price of the underlying share exceeded 773.2p or lose £10 for
every penny that the price is below 773.2p. However, we update our
quotes throughout the trading day linked to the underlying
instrument so customers can take profits or cut losses at any
point.
To open a bet and to keep it open, Margin must be paid which
consists of the Margin Requirement (typically 10% of
contract value for shares) and the obligation to meet running
losses in full. Positions held overnight are also subject to
financing costs (See section 7.0 and 10.0).
TD Waterhouse Financial Spread Betting offer Rolling Bets on
UK and International equities, indices, currencies and commodities.
A full list of markets covered can be found in the Market
Information Sheets.
The general Financial Spread Betting principles outlined can
apply to any market that TD Waterhouse Financial Spread Betting
offers, but remember that if an open bet moves adversely, you will
need to cover the running loss on top of your initial deposit in
order to keep the bet open.
Financial Spread Betting is not currently subject to UK
Capital Gains Tax regime nor UK Stamp Duty. Tax laws may
change.
Rolling Bets
All TD Waterhouse Financial Spread Betting bets are Rolling
Bets which provide a transparent, cost effective solution for short
term trading.
Rolling Bets are offered on UK and International Equities,
Indices, Commodities and Currencies. For Equity Rolling Bets, the
price is based on the underlying share price to which a small
spread is applied. Index Rolling Bets use a price derived
from the appropriate Futures market, taking into account funding
and dividends, to create a price that is representative of the
underlying Index market.
FX Rolling Bets use the Spot price for the appropriate market
to create the price. Rolling Bets can be opened and closed at any
time during normal trading hours.
Financing
Margined trading involves a person who is going long (buying
equities) – borrowing money and a person going short (selling
equities) – lending money. The interest associated with this is
known as financing.
Financing is calculated on Rolling Bet positions held
overnight and is credited or debited on the next trading day. If
you are holding a long Rolling Bet position (i.e. an up bet,
equivalent to being long on the underlying shares), you pay the
financing and if you are holding a short rolling bet position, you
receive the financing. For more details on Rolling Bets, please see
the Market Information Sheets
| Example |
|
The financing rate might be UK LIBOR + 2.50%, which might
equate to 7.00% (4.5% + 2.50%).
If the end of day price is 132, and you bought £100 per point,
the overnight financing is
calculated as follows: 100 x 132 x 0.07 / 365 = £2.53.
This will be debited from your account on the next trading
day.
|
Quarterly Bets
Quarterly Bets, unlike Rolling Bets, do have an expiry date.
They remain valid for a quarter, after which the position is
automatically closed on the expiry date. They can be left to cash
settle at expiry date, or can be closed by you at any time before
expiry. Quarterly Bets are also known as ‘futures’ or
‘forward prices’.
Daily financing charges do not apply to Quarterly Bets.
Instead, the financing cost of holding the position is built into
the price – the quote therefore includes all the anticipated
funding up to expiry of the position. In addition, the quote will
include any potential dividend adjustments. As a result of the
adjustments made for financing and potential dividend payments, the
quote given for a Quarterly Bet may be quite different to the price
of the underlying instrument, and quite different to the quote
given for a Rolling Bet.
For Quarterly Bets, TD Waterhouse Financial Spread Betting
will quote the nearest two months of the March, June, September and
December cycles and the expiry date will be the Tuesday before the
third Wednesday of the contract month.
A Bit More Detail
This section outlines TD Waterhouse Financial Spread
Betting pricing policy and financing charges.
There are four elements which may affect the TD Waterhouse
Financial Spread Betting quote:-
1. The TD Waterhouse Financial Spread Betting spread is
applied in addition to the underlying market spread and is akin to
a commission charge.
2. Supply and demand may affect the upward/downward bias of
the TD Waterhouse Financial Spread Betting quote in relation to the
underlying instrument. In the vast majority of circumstances we do
not adjust our prices in this way. Where we need to do this (in
response to significant supply or demand) we provide the price
before we ask which way you wish to trade. We would only rescind a
quote if it were based on our “manifest error” (i.e. we had clearly
made
a mistake).
3. Financing affects all margined trades which are not closed
within the trading day. This is because we will incur the financing
charge associated with hedging in the full value instrument if the
trade is carried overnight. This charge is passed on as a specific
daily charge for Rolling Bets.
4. Other factors which may affect the outcome of the bet are
dividends and corporate actions (e.g. rights issues/share
splits/share buy-backs etc). These mainly affect equity and equity
related bets and are intended to replicate the net dividend payment
in the underlying market.
Equity Financial Spread Bets
Example of quotes in Vodafone*
| Market |
Quote (p) |
Comments |
| Vodafone underlying share quote |
125 – 125.25 |
LSE quote |
| Vodafone rolling quote |
124.8 – 125.4 |
Includes TD Waterhouse
Financial Spread Betting spread.†
|
† No financing component unless held overnight.
* TD Waterhouse Financial Spread Betting may have a position
in Vodafone in the ordinary course of business.
FX Rolling Spot
TD Waterhouse Financial Spread Betting offers Rolling Spot
contracts, which are based around the underlying spot price for the
specific market. As there is no publicly accessible exchange or
marketplace to obtain these FX prices, we take a minimum of three
electronic price feeds from the professional market, select an
aggregated mid price, then place our spread around it. Our spreads
may be wider in situations of extreme volatility, or poor
liquidity.
Commodity Rolling Spot markets
TD Waterhouse Financial Spread Betting offers Rolling Spot
Gold and Silver markets. These markets are priced using electronic
competing market maker prices to determine an equivalent mid-price,
which we then wrap our spread around.
Gold trades per 0.1 Dollar,
ie for every 1 dollar move you would make/lose 10 times your stake.
So if you buy £5 and gold moves up two dollars you would
make £100 (£5 x 2 x 10).
Silver trades per 0.5 cents, ie for
every 1 cent move you woule make/lose 2 times your stake. So if you
buy £5 and silver moves up twenty cents you would make
£200 (£5 x 2 x 20).
How is financing calculated?
Financing is the cost of carry of the full value instrument in
which TD Waterhouse Financial Spread Betting hedges its exposure.
For most products this is calculated by multiplying the full-value
consideration by the financing rate. The financing rate is
expressed in terms of increment/decrement over/under LIBOR. LIBOR
is the widely accepted reference rate used by the banking system;
it is different for each currency and reflects bank deposit
activity. See example 2.
For FX Rolling Bets, the daily financing is calculated by
using the one day interest rate differentials for the two
currencies concerned. Effectively, you receive the interest on
the
currency you have bought and pay interest on the currency you
have sold, although the financing posting/adjustment will be made
in one currency. See example 1.
Example 1
If you had bought EUR/USD Rolling Spot, then the daily
financing charge is the EUR one day deposit rate vs the USD one day
borrowing rate (e.g. 2.25% - 4.08% = -1.83%)
| EUR/USD rate |
= 11720 |
| Financing |
= 11720 x -1.83% |
| /360 Days |
= - 0.6 ticks |
If you had been long £10 of EUR/USD Rolling per tick then the
financing would have been –
0.6 x £10 = £6 debit to your account.
Example 2
A long rolling bet on ABC Plc
Opening bet
You think that ABC Plc share price will rise.
The current share price is 130.75 / 131 and the TD Waterhouse
Financial Spread Betting quote is 130.6 / 131.1
(assume the company is a top 10 equity in the UK 100 and
the TD Waterhouse Financial Spread Betting spread is 0.10% each
side of the underlying share price).
You decide to buy £100 per point (equivalent to 10000 shares)
at 131.1
Financing
The financing rate might be UK LIBOR +2.50%, which might
equate to 7.00%(4.5% + 2.50%).
If the end of day price is 132, the overnight
financing is calculated as follows:
100 x 132 x 0.07 / 365 = £2.53.
This will be debited from your account on the next trading
day.
Automatic Rollover
|
Closing bet:
Closing price:
Opening price:
Difference:
Profit:
Opening bet:
|
sell £100 per point at 132
132
131.1
0.9
£90
buy £100 per point at 132
|
Closing bet
On the following day ABC Plc is trading at 135 /135.25 and the
TD Waterhouse Financial Spread Betting quote is 134.9 /
135.4.
You decide to close the position and sell £100 per point at
134.9
|
Closing price:
Opening price:
Difference:
Profit:
Financing:
Profit on bet:
|
134.9
132
2.9
£290
£2.53
(£90 + £290 - £2.53)
= £377.47 tax free
|
Quarterly Bets
Equity Quarterly Bets: Equity Quarterly Bet
prices are derived using the underlying cash market for the stock
then applying financing and any dividend adjustments.
Index Quarterly Bets: Index Quarterly Bet
prices are derived using the price of the actual exchange quoted
Futures market that the product represents.
Currency Quarterly Bets: FX Quarterly Bets
are priced using the appropriate spot rate for the market and
deriving a forward price using the interest rate differentials
between the currencies concerned.
Commodity Quarterly Bets: Quarterly
Bets are available on a number of UK and US based commodity markets
such as gold, oil, copper and natural gas. Quarterly Bet prices are
derived from the actual underlying commodity’s Futures price from
the relevant Futures Exchange.