Investing has become more intricate than a simple purchase and selling of assets. Investors can hedge their respective portfolios much more efficiently in anticipation of more positive returns hence, analysis and strategies must be used so that there will be better facilitation such as outcome.

Before adopting an investment strategy, an investor must carefully decide which financial product suits is appropriate. In the United Kingdom, financial spread betting has become a very popular leverage product. Spread betting lets investors take a position on whether the market will increase or fall without any fault of the underlying asset.

A spread is better defined as the difference between the bid and the ask price of a certain security. Investors supported with the bid price should the market rise and go with the ask if they believe it will fall.

Implementing strategies and analysis can assist investors limit their exposure to substantial losses. Arbitrage, specifically has been used by financial spread bettors who are looking to beat the market. The practice although generally lower risk, does have risks and limitations that can lead to losses for an investor.

Arbitrage

In finance, arbitrage is the purchase and selling of an asset so that one can exploit price differences. Arbitrage opportunities arise when the prices of near identical financial instruments vary in different markets or among different companies. As a result, the financial instrument can be bought low and sold as high simultaneously. An arbitrage transaction takes advantage of these market inefficiencies in order to gain risk-free returns.

There are many different types of arbitrage that exists which allows for the exploitation of differences in interest rates, currencies, bonds and stocks among other securities. Although arbitrage is ideally associated with risk-less profit, there are in fact risks that are associated with the said practice.

The failure to complete transactions can result to substantial losses for the arbitrageur. Moreover, counterparty and liquidity risks can also come from markets or company’s failure to fulfill a certain transaction.

Spread betting

Financial Spread betting capitalises on the exploratory nature of investors. As a leveraged product, a small deposit provides investors access to large market exposure. Utilising leverage which has substantial benefits and risks, investors with small investment capital gained exposure to markets, indices and funds that were previously inaccessible at that time. The spread is given by the buy and sell prices from the market and although movements in the market dictates profit and losses, an investor has no ownership of any underlying asset.

As the market moves, in an investors favour, higher returns is significantly realised; on the other hand as the market moves against an investor, it will incur greater loss. Successfully, predicting the market is dependent on chance, but implementing a strategy can help minimise losses and possibly increase returns. Financial spread betting presents opportunities for many investors to utilise arbitrage to take advantage of price difference for risk-less profits.

Spread Betting Arbitrage

Despite the widespread access of information as well as increased communication, opportunities for arbitrage is spread betting are limited. Spread betting arbitrage can still happen when two companies take separate stances on the market although setting their respective spreads.

At the expense of the market maker, an arbitrageur bets on spreads from two different companies. When the top end of a spread offered by one company is below the bottom end of another’s spread, the arbitrageur from the gap between the former and latter. Simply put, the trader purchases low from one company and sells high in another. Whether the market increases or decreases does not state the amount of returns.

The real score

Implementing strategies and analysis with financial instruments can greatly assist risk and increase the potential returns. Arbitrage, specifically, allows investors to exploit the difference in prices between the two markets. Opportunities for arbitrage are so limited as advancements in technology and inter-company communications have greatly diminished price difference occurrences making the practice inconsistent with gaining returns.

Within spread betting, arbitrage can happen when two companies provide different spreads on similar assets. Acting on arbitrage opportunities must be done promptly in order to avoid execution, counter party and liquidity risks.

Last Updated: January 30th, 2015