Simon English: Why is the dark art of spread betting thriving?
Friday 15 June 2012
Outlook The spread betting sector has still yet to firmly shake off the idea that somehow it is up to no good. In some minds, just the words "betting" and "tax free" conjure up dark images. Playboys on speed boats, perhaps, slicing through Geneva waters while Granny Smith loses her savings on punts she does not understand.
An alternative view: this industry is the City of London at its innovative best. If in the past it has attracted the wrong sort of clients, these days it's firmly a deal between consenting adults who understand the risks they are taking and can mostly afford to lose what they bet.
The recent disaster at WorldSpreads – it went under, is under investigation, and client funds are seriously under water – has hardly helped perceptions, but such disasters are not limited to spread betting.
IG's year-end sales figures yesterday show a business in rude health despite (because of?) the chaos in financial markets.
Moreover, there's a chance they have hit upon a highly unusual business model.
The statement says that profit margins remain at 50 per cent (in English: it makes 50p from every £1 of revenue). In most industries that margin would be eroded by competitive price pressures. In this one, says chief executive Tim Howkins, every time they cut supposed profit margins by narrowing spreads, the level of activity simply goes up and margins say the same.
This can't last, you'd be tempted to say. But it has for many years at IG. What other industry can claim such a success? Mr Howkins can't think of one, neither can I. Suggestions welcome.
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