Chapter 5
History of Spread Betting
Spread betting was born, as are most great new ideas, from the mind of an entrepreneur who saw an opportunity to provide people with a service that was unavailable elsewhere.
In 1974 it was illegal for individuals in the UK to trade gold as a speculative investment. That didn’t mean there wasn’t any gold trading – it only meant that there was then no legal way to do it.
Enter Stuart Wheeler. Mr. Wheeler, who now has more money than God, came up with a way to get around the ban on trading gold. His solution was a deceptively simple one: rather than actually trading physical gold, he would offer investors the opportunity to make trades based on the price of gold.
The law was satisfied since gold itself was not actually being traded. And the desire of traders to speculate on gold prices was satisfied by being able to make a bet on which way the price would go – up or down.
The founding of IG Group
Spread betting was created with Wheeler’s founding of IG Index, now IG Group. Following the London gold fix every trading day, which set the buy and sell prices for the day, Wheeler created his own bid and offer spread (the difference between the buy price and the sell price) and christened it the “Investors Gold Index”. IG Index was born, starting an industry that today is worth billions.
Traders who believed the price of gold would rise could bet on the index going up, while those who thought the price would fall could bet on the price going down. This was one of the great innovations of spread betting – the fact that one could just as easily bet the sell side as the buy side.
Spread betting gold prices with the gold index was a hit with traders – enough so that it soon encouraged IG to offer other financial instruments as well.
Spread betting was ahead of its time
Following the success of Wheeler and IG Group, other spread betting companies, such as City Index Group and Currency Management Corporation, now CMC markets, began to enter the industry. However, at the time, the take up of spread betting was limited by two major factors:
- Lack of Investor knowledge.
- Lack of adequate technology.
Although spread betting was available on an increasingly wide range of financial instruments, most of those instruments – such as foreign currency exchange, commodities, and options – were traded in markets that the vast majority of investors were unfamiliar with and therefore leery of.
The second handicap was inadequate technology. Personal computers were just starting to be seen in the 1980s and connection speeds to this mysterious new thing called the “internet” were as slow as watching paint dry. Spread betting is inherently a fast-paced trading endeavour.
For everything to work smoothly, traders have to be able to access real-time price spreads and be able to enter an order before the spread changes. The trading platforms that provide real-time market information and lightning-quick execution of orders, that are commonplace today, simply didn’t exist in the 1980s.
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The internet boom of the 1990s
Where the 1980s were lacking for spread bettors, the 1990s and beyond the turn of the century seem almost like they were tailor-made for the successful boom in spread betting.
In the 1990s, technology advanced more quickly than most people could keep up with. You could buy a computer with the fastest processor the maximum amount of RAM available and twelve months later it was hopelessly slow compared to the latest models.
Advances in technology were adopted in the financial markets more rapidly than other areas, and electronic trading began to become increasingly the norm. Brokers began to develop sophisticated trading platforms that offered real-time pricing, instant order execution, up-to-the-minute market news, and charting with every conceivable technical analysis tool.
The financial markets expanded in two key ways that fed the growth in popularity of spread betting:
- The expansion of derivatives trading.
- An increasingly global financial market.
Derivatives trading
Derivatives trading – the trading of securities whose price is based on an underlying asset – grew exponentially across all of Finance in the 1990s.
As derivative instruments, spread betting and contracts for difference (CFDs) began attracting the attention of more and more traders. More traders became aware of, and attracted by, the tax-free nature of spread betting (CFDs, in contrast, are typically subject to capital gains taxes).
A global financial market
As the new century dawned, the financial markets increasingly became global markets. This spurred an increased interest in some of the most popular spread betting markets, such as foreign currency exchange.
The new century also saw a downturn in most major stock indexes and a bull market in commodities. Such a market shift was Heaven-sent for spread betting companies, as more and more traders began to explore new financial markets and instruments that were ideal for spread betting.
Spread bet firms were hard-pressed to keep up with bettors demands for more instruments to bet on.
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The many advantages of spread betting
The simplicity of trading and other advantages of spread betting continued to attract novice traders and small investors, as well as savvy veteran traders who could appreciate the advantages offered by spread betting.
The leverage offered in spread betting gives spread bettors access to markets – such as basic commodities like oil and gold – that were previously the trading province of only the most well-heeled investors.
The fact that spread bettors can trade virtually any financial instrument worldwide from a single trading account – and with no currency exchange risk – gives spread bettors a significant advantage over more traditional investors.
Contrast that with more traditional trading avenues that – to accomplish the same range of investing access – would require an individual to have separate accounts set up with a stock market broker, a commodity futures broker, a forex broker, a financial services firm, a cryptocurrency exchange, and two or three sportsbooks.
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The continuing growth of spread betting
The spread betting industry, and its close relation CFD trading, continues to grow worldwide, with no signs of slowing down. When spread betting becomes legal in the US, as it almost certainly will, that will open up the floodgates with millions of new spread bettors to write a new chapter in spread betting history.
Betting apps for mobile phones means spread betting is getting easier and more accessible all the time.
Stuart Wheeler’s innovative solution for traders being denied access to gold trading has grown to become one of the largest retail financial industries in the world. The continuing expansion of spread betting – with spread betting companies constantly coming up with new things for traders to bet on – translates to more and more people opening spread betting accounts every day.
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