How Spread Betting Brokers Make Their Money
Spread betting has become big business for the brokers, with a number of organisations who solely exist to provide spread betting services. The most notable of which, IG Index, started out providing spread betting services in the 1970s and is today a mammoth broker of all things financial online. As a service that has distinct advantages for traders in terms of profitability, spread betting brokers also have a number of avenues through which they earn their money. The money-spinners for spread betting brokers can be largely broken down into three main areas.
The first, and most direct, way in which spread betting brokers make their money is through factoring in a spread to the odds they quote. If a spread betting broker is quoting a market at 99-101, the 2 points in the middle represent the profit portion that goes direct to the broker, with no further commissions or transaction costs to be borne. This builds-in the commission component for the broker, rather than imposing a percentage on the transaction, which allows traders to transparently see and compare the effective rate they're paying to the broker in order to trade on their platform.
Continuing with the above example, a trader who decides to sell the above market at 99 will need to wait for the market to fall from 100 (i.e. the mid-point between the spreads, which would give rise to the figures quoted by the broker) to 98 in order to make 1 point in profit - that's a 2 points favourable movement for the trader, but a 1 point profit. Thus in this instance, the broker would be up by 1 point, while the trader would get 1 times his original stake in return. This method of pricing commission into spreads between the odds quoted is the main method by which spread betting brokers generate revenue.
Another clever way in which spread betting companies can earn money is to take market positions in contrast to particular trades, opposing certain positions in the 'real-life' markets in order to double-capitalise on an errant trade. Of course, this can be a risky method of revenue generation, but by working on the model that most traders and most trades will lose (which invariably is the case), brokers can leverage their own capital spending power in order to deliver significant yields on top of their trading profits.
The third, but by no means least important method by which spread betting brokers can earn money is through banking the interest paid on trader deposits. Spread betting brokers don't pay interest on client funds because they don't have to, and as a result they sit on an absolute goldmine of interest. Particularly when client accounts are designed to bear high levels of interest, the cumulative total of deposits can often easily run into the tens of millions for brokers, which generates substantial revenues from interest payments alone. For the brokers, it's essentially free money - a win/win situation for those that run our spread betting platforms.
Spread betting brokers have devised a variety of strategies for making money from their clients, some directly and others indirectly, which when cumulated make spread betting a massively lucrative industry, and a highly-prized market in which countless new businesses have tried, and continue to try to break through.