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Independent Report Into CFDs & Spread Betting Compared To Short & Leverage ETPs

Wednesday 10th December '14

Research from iMarkserv and Indxx find attributes of ETP structure align with investor preferences in leveraged trading space
  • 100% of respondents would like a leveraged trading product that is listed on a regulated exchange and 95% would prefer to trade with multiple market makers
  • 90% of respondents prefer a product where they can offset capital losses, this is possible with ETPs but not with spread bets
  • Vast majority of respondents are looking for various features that are standard in short and leverage ETPs and not available in CFDs and spread betting
  • 72% of respondents already trade ETFs as well as CFDs and spread bets

BOOST ETP, A WisdomTree Company and Europe’s award winning, specialist short and leverage (S&L) exchange traded product (“ETP”) provider, recently commissioned iMarkServ and Indxx, to conduct an in-depth piece of market research into the contracts for difference (“CFDs”) and spread betting markets in the UK. The survey considered three main themes: the insights and habits of CFD and spread betting users; their attitudes towards risks and returns; and finally the areas where they think CFDs and spread betting need to be improved.

The survey demonstrates that short and leveraged ETPs are an attractive alternative for CFD and spread betting investors. They already have many of the features that investors feel are lacking in CFDs and spread bets, as well as addressing many of the regulatory, counterparty risk and other concerns that CFD and spread bet users have in relation to their current trading arrangements.

The main findings of the research are set out below.

Insights and habits:
  •  72% of respondents trade ETFs as well as spread betting and CFDs
  • 66% trade the FTSE100 index and 62% trade single stocks
  • High leverage (69%) and the ability to go short (also 69%) were seen as the main attraction of CFDs and spread betting. 54% also cited tax advantages as a benefit
  • 65% trade with the top three providers, showing a lack of effective choice for investors
  • 83% of equity focused trading was between 2x and 5x leverage. For commodities and fixed income the equivalent figures were 76% and 64% respectively
  • 62% believe that margin calls, losing more than their initial investment and being closed out are all major risks to them
Based on these factors, short and leveraged ETPs are an attractive alternative. CFD and spread bet investors are already used to trading ETFs. Investments with some, but not excessive, leverage suit them well, as does the ability to go short.
Attitudes to risks and returns:
  • When considering provider risks, 40% had concerns regarding the finances of providers, understandable given recent bankruptcies of major firms such as MF Global and WorldSpreads. Respondents also cited liquidity, client money risks and poor spreads (15% each) as concerns they had regarding their providers
  • Most respondents (86%) are aware that most investors lose money when trading spread bets and CFDs
  • 40% of respondents are concerned that spread betting and CFD providers operate hedged and unhedged books. However, 71% were unsure whether their provider operated this way

With ETPs, all investors are treated equally. ETPs are generally over collateralised and/or physically replicated, with investors therefore being insulated from the financial risks of providers and not being subject to client/firm money segregation risks.

Areas needing improvement:

  • All respondents said they would rather trade on a regulated market; 95% prefer a product that mitigates their counterparty risk; 91% prefer to trade on an official exchange. The OTC nature of CFD and spread betting appears to be unsatisfactory for investors
  • 95% said they would prefer to trade with multiple market makers; ‘betting against the house’ also seems unsatisfactory
  • Where trading on a leveraged or short basis, 86% of respondents would prefer to use a product where they cannot lose more than their original investment
  • Trading without the risk of margin calls, and without the risk of being ‘knocked out’ of the market in a severe fall, were both also highly desired features (77% in each case)
  • 90% of respondents preferred a product where they could offset capital losses for tax purposes against their broader investment portfolio, understandable given that most investors lose money on CFDs and spread betting 
  • 91% also wanted the ability to use tax wrappers such as ISAs and SIPPs which is standard for ETPs but limited for CFDs and prohibited for spread bets

Hector McNeil, Co-CEO of WisdomTree Europe, commented: 

"The iMarkserv and Indxx research clearly shows that UK investors have an appetite for leverage trading across a wide variety of asset classes in the UK. The CFD and spread betting market has led the way in providing leverage trading facilities to active traders. However, investors clearly understand that these products come with risks and they are looking for solutions. Investors are uncomfortable with the risks of over the counter products, and ETPs can help. The survey shows overwhelming support for a product that offers exchange listings, Crest settlement, multiple market makers and counterparty risk mitigation. A frequently cited advantage of spread betting is the tax free nature of any gains, but actually most investors want a tax offset for capital losses, which spread betting doesn’t give.

What is clear is that all the issues and improvements highlighted by the respondents point towards short and leverage ETPs, which mitigate those issues and include those improvements. However, investor awareness of ETPs and their benefits is still relatively low. Boost, as the sole European ETP provider focused on S&L ETPs, will be at the forefront of educating UK investors on these positive features.

CFDs and spread betting date back to the 1990’s, and since then they have not kept pace with the increasing demands of investors. In fact, that is why short and leveraged ETPs were first created, they were launched in 2005 to address many of the negative issues that investors were finding.”

Overall, the survey, in our view, highlights the overwhelming advantages that ETPs provide to investors versus what they receive through CFDs and spread betting. ETPs are listed, bringing advantages such as liquidity, price discovery through a number of market makers and standardised clearing and settlement processes. ETP investors can change broker and provider by choice, and move in and out of positions freely. Whether structured as securities or funds, ETPs tend to be backed by 100%+ physical assets or collateral, mitigating counterparty risks. In contrast, with CFDs and spread bets an investor tends to be fully exposed to the balance sheet of the provider and only protected by in-house client and firm money arrangements.

The table below summarises the advantages of short & leverage ETPs over CFDs and spread bets:

The full market research report is available at here. We encourage anyone seeking an attractive alternative to CFDs and spread betting to read the report. The research was undertaken during August 2014.