Never mind the ESMA rules. The markets are becoming more and more volatile and the major spread betting brokers have increased margin rates for retail clients.
Here are 3 reasons why spread betting brokers put margin rates up.
1) They are based on volatility
This is obviously going to upset a few traders, but the bottom line is that margin rates are calculated on volatility, the more of it there is likely to be the higher the initial and variation margin is going to be. Most initial margin is based on what a broker believes the intraday move on an asset will be.
Most spread betting traders who bet on indices, forex and commodities are flat by the end of the day. This means that traders can get maximum leverage when the markets are at their most liquid and the broker can hedge positions efficiently.
2) It is for a trader protection as much as the broker
Anyone that knows the golden rules of spread betting or has even a vague spread betting strategy understands that one of the main reasons people lose money is by being over-leveraged and underfunded. If you can’t afford to fund a position you shouldn’t be in it, so either deposit more funds in the expectation that the market is going to encounter some good moves or cut your losses or bank your profits and get out.
3) Spread betting is not an amateur sport
The difference between initial and variation margin is that one is paid on the consideration of the position and the other is paid on the marked to market profit and loss. It’s true that spread betting brokers have opened the derivative markets up to a wider audience or private clients who before it’s existence wouldn’t have been able to speculate on products with such ease. But this doesn’t mean they should.
Spread betting is a derivative product where you can lose far more than your initial deposit when the market moves. The removal of the CHF cap that wiped out Alpari and left some IG clients in some cases a few hundred thousand quid out of pocket is a prime example. If you can’t pay don’t play and accept that in financial services the goal posts often move based on the view of regulators and exchanges that are beyond the control of brokers.
The concept of spread betting not being for everyone is explained quite nicely by Jonathan Hufford, Spreadex CEO when we interviewed him here.
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.