Europe News

Spread-betting pool shrinks as stocks rally

The challenges facing the spread betting industry

The pool of spread-betters in the U.K has shrunk 8 percent this year, as investors' appetite for owning stocks grows and market volatility calms, according to a report.

But the practice -- which involves betting on the price movement of an asset without owning that asset -- offers some benefits traditional trading can't offer, and spread betters believe there is plenty of room for expansion.

There were 92,000 spread-betters in July 2012 compared to 85,000 in September of this year, according to a study by research firm Investment Trends.

But the spread-betting market has remained stable over the past five years. There were 83,000 active clients in both 2009 and 2010, which increased to 88,000 in 2011 and 92,000 in 2012 before dropping to 85,000 this year.

Uwe Helmes, a senior analyst at Investment Trends which produced the report, told the Financial Times that investors are making money just owning stocks on the back of a strong FTSE rally, so "fewer people feel the need to be more active and use spread-betting".

Risk of 'burn out'

Some spread-betting firms including IG and CMC markets have seen their active client numbers decline this year, but many providers deny a bullish equity market has caused a drop off in clients and say they are in fact taking advantage of the stock rally.

(Global equities to rally another 13 percent by end-2014: Citi)

"If you look at spread-betters, they are very opportunistic traders and want to take advantage of swings in the short term. But we typically see clients wanting to go long in the markets not short," Joshua Raymond, chief market strategist at City Index told CNBC in a phone interview.

But the spread-betting industry sees massive dropout rates. In 2013, 37,000 or 40 percent of people exited the market from the 92,000 active traders in 2012. This figure was 35,000 last year.

The significant drop-out rate is due to the risky nature of spread-betting, Akshay Kapoor, business and product development director at Gekko Markets told CNBC in a phone interview.

"The spread-betting market does not grow because clients burn out. The problem is a lot of people trade with very high leverage. A lot of them trade too aggressively and too often. It is psychological, all of us think we can perform better than the market," he said.

Tax benefits a 'no brainer'

Profits from spread-betting are not taxable under U.K. laws as the ownership of an asset is not being transferred.

The tax status of spread-betting has earned the practise a controversial reputation, but has also attracted clients.

(US bank stocks could rally 30%: RBC)

Despite the high drop-out rate of spread-betters, the market continues to attract new clients and bring back old ones. In 2013, 12,000 new clients joined the pool while 22,000 dormant betters resumed trading, according to Investment Trends.

Speaking on condition of anonymity, one trader told CNBC he uses spread-betting because of its favorable tax status.

"Spread-betting primarily was for tax reasons. The big advantage is you don't have to pay capital gains tax. So it is a no-brainer to be part of this market," he said.

Small market

The spread-betting market is very small, but many companies see huge potential to grow by attracting clients from traditional stock brokers.

Asset growth for the execution only sector, those stockbrokers that do not offer advice on investment, was 7.1 percent this quarter, continuing an unbroken spell of growth stretching back to the second quarter of 2012,

(Here's what could push Treasury yields to 2% in 2014)

The wealth management sector as a whole in the U.K. manages £600 billion, according to research firm Compeer. Based on a pool of 1,000 investors with between £50,000 and £1 million of investable assets, 39 percent who receive advisory or discretionary investment services said that they were "likely" to invest without advice.

Gekko Markets' Kapoor told CNBC that this presents huge potential for spread-betting companies.

"If even half of these people switch, the value of assets in the self-directed space could double or triple and that is where the most important potential is for companies in that space."

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal