Trading Corn Futures on IB vs IG via Spread Bet

isotope1 said:
What I don't understand is that IG must be taking out an equivalent position somewhere and has to make a profit somehow. What have I missed?
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the vast majority of positions go unhedged they make a healthy profit per customer without hedging, you can check the number of active accounts and net profit figures in their public accounts online. Most retail trade with small accounts, small stops in volatile markets hence it is a reliable profit centre for them.

If you are one of the tiny minority of clients who are consistently profitable they will place their positions into a separate 'book' and hedge accordingly. They can hedge in the underlying futures no problem.
 
It would make sense not to hedge client positions as End says, I didn't know it was allowed re regulation (in the UK).

So they'll have an A and B book, A for numbskulls (the vast majority) and B for those that know what they're doing with a history of making money. In fact, why not duplicate their B book to mirror the clients?
 
AbbotAle said:
So they'll have an A and B book, A for numbskulls (the vast majority) and B for those that know what they're doing with a history of making money. In fact, why not duplicate their B book to mirror the clients?
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I can assure you dumb people aren't the only people losing money. The vast majority of well educated people also lose.
 
isotope1 said:
I'm trying to understand the differences in costs between trading real corn futures, versus a spreadbet on corn futures, provided by IG (details here: https://www.ig.com/uk/ig-commodities/corn).

As best as I can tell, when trading the spread bet futures contract (not the DFB on the underlying, although I'm curious about that too):
  • There are no overnight funding charges
  • No commission
  • You still need to roll it over to the new contract, so there's some spread here. Unsure what this will be, but imagine it is around 1-1.2 points.
  • I can't see a cost of carry anywhere
  • There are no taxes to pay
The problem is, these derivative providers have a funny way of adding mysterious costs to make up their margins.

I pay tax on profits at 28%, so it seems that trading with spread bets will be cheaper overall than trading with real futures.

What am I missing?
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I have nothing to add, except that for a spread bet futures contract the funding is implicit, .

When I did this analysis myself (admittedly not for corn) I found that the spread bet was always more expensive; properly costed by a factor of 10 in some places. The main difference was the size of the spread; I see from IG that it's a 'standard' spread of 0.8; whereas for the future it's 0.25 (actual live samples from my database on Z6).

Assuming IG are hedging this in the futures market, it must cost more than the underlying. If it costs less than you have found a free money arbitrage. To stop you exploiting this IG will have to use lags and/or requotes.

IG aren't a bucket shop but any OTC broker is less safe than a futures exchange backed by a clearing house, to say nothing of the transparency.

Also where does 28% come from? UK CGT rates are 10% and 20% - changed for this year if you didn't know. Basic income tax is 20%, higher 40%.

Spread bets (on futures) will have to be traded more slowly than the equivalent future (and Corn futures are pretty expensive anyway). Daily bets are cheaper for very short periods of time, but a very expensive way to trade slowly.

GAT
 
AbbotAle said:
In fact, why not duplicate their B book to mirror the clients?
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They made $130M last year on the spread, a relatively risk-free way to almost print money. No reason in the world to make a bet on the market when you can make that kind of money with minimal risk, even if your B book had spectacular returns. Their investors didn't give them a $2.75B market cap to do that!
 
Sig said:
They made $130M last year on the spread, a relatively risk-free way to almost print money. No reason in the world to make a bet on the market when you can make that kind of money with minimal risk, even if your B book had spectacular returns. Their investors didn't give them a $2.75B market cap to do that!
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Yep, that's my point about running a clean casino, like Meyer Lansky said, there's a tonne of cash to be made just picking up on the inbuilt probabilities, the spread in the case of the spread betters.
 
1. Spreadbet firms use OTC products offered by investment banks to hedge net exposure.
2. Do not use spreadbet firms for anything other than longer term* (i.e. at least overnight and preferably longer!) trading. They are very expensive (about 5x to 10x as much as Interactive Brokers).
3. The odds are of course that you are a losing trader, so what difference does the tax exempt status make!
4. If you are a rare winning trader, 10% tax isn't very much and you have an £11k exemption anyway in the UK.
5. One big legit reason to use a SB firm is because your acct cannot support the bigger contract sizes on the exchange. Even then u can use mini contracts etc.

* An excellent use of a spreadbet firm is if you are into passive index investing. No need for ISAs. You can simply buy as much as you like of say ES contracts, replicating the S&P500 and keep rolling them over every quarter. Would cost very slightly more than using SPY but you would have zero tax to pay and unlike ISAs, the amount you can do is limitless! You may be able to do this with individual stocks as well.
 
So I did complete my detailed analysis yesterday of IG vs IB, and like GAT above, while I couldn't be precise about it, I figured the costs were on the order of 10x more using spreadbets.

As I have been following GATs book and created a backtest, I quickly coded up both scenarios and found that in the long term, the spread bets significantly underperform the futures due to the fees/spreads, and in some cases, creating losses.

I'll be working towards trading actual futures from here on, but I'm glad I did the work to understand it.
 
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Thing is, with the Future. You can sit your side of the market and not pay any spread at all.

I forgot IG charges interest for some strange reason. I would like to know how many different ways they milk their clients accounts. :) All to easy.
 
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