Three of the biggest spread betting providers are calling for stricter oversight of the industry after the recent Worldspreads and MF Global bankruptcies showed several flaws in the FSA  supervision role.

One of the most important rules governing the financial activity respects to the segregation of client funds. Spread betting and CFD providers should separate client funds from their own. When opening an account and depositing funds, a client is not buying an equity position in the provider but rather contracting its services. The client is responsible for any losses deriving from its buying and selling activity but it should not incur in any risk deriving from the provider activities. In this sense, the FSA imposes providers to segregate client funds, holding them in separate accounts from the company funds.

Unfortunately both MF Global and Worldspreads did not comply with FSA rules and client funds simply vanished. To protect from this situation there is still another rule known as the Financial Services Compensation Scheme that fully protects the first £50,000 a client holds in his account. Although the vast majority of clients is in this situation, there are some that hold more than that amount and will see their money burned by the provider with no guarantee of recovering beyond the £50,000 threshold.

IG Index, CMC markets, and London Capital Group stated that the FSA has been spending too much resources with the biggest providers in the industry but was not able to conveniently scrutinise the financial affairs of the smaller operators. They are asking for further scrutiny of the industry and in a more equitable way.

It is doubtful that the FSA has the necessary resources to further scrutinise all the smaller players, at least in the same way it does for the biggest ones. One thing is for sure, something needs to be done regarding the segregation rule. Regulation should be changed such that client funds are assured to be separated from provider funds. It should be created a mechanism such that the client is not relying on the provider complying with its obligations but instead being certain the funds are held in a risk-free account.

Spread betting companies complying with FSA rules are concerned that clients may lose confidence after the Worldspreads and MF Global cases and have been sending emails to clients in order to further assure them their funds are secure. Spread Co is just an example. Earlier this month, Jonathan Silvester, Head of Compliance, stated in an email: “…all funds that you deposit with Spread Co, as a Retail Client, in connection with your account, are held as Client Money in accordance with FSA rules. This means that your funds are segregated from Spread Co’s own money.” He also added that “controls and procedures are designed to ensure that our clients are protected in the unlikely event that Spread Co was to become insolvent.”

Capital Spreads, a London-based spread betting company, has just slashed spreads on several foreign exchange markets, including many majors.

The cut in spreads was significant with many currency pairs now offering a bid-offer spread that is 50% less than before. The average cut was around 35%.

Spread traders looking for USD/JPY can now trade with a 0.8 point spread instead of the already low 1-point spread. The slash in USD major pairs was generous since traders can also trade USD/CAD at 3 instead of 4, and both the USD/CHF and NZD/USD at 2 instead of 4 points.

Pound traders will certainly appreciate the cut in the GBP/JPY that reduced the 8-point spread to just 3. The cross EUR/JPY was also significantly slashed from 3 to 1.8.

Capital Spreads also reduced spreads in many other minor foreign exchange pairs. The spread for USD/MXN was reduced 56%, for USD/SGD in 67% and USD/CZK in 57,5%.

The table below shows the full change:

The most traded pairs EUR/USD and GBP/USD were not changed at this time but their spreads are already low, with the first being just one and the second two points.

London Capital Group, the parent company for the UK based spread betting provider Capital Spreads, presented strong preliminary final year results for 2011.

After a difficult year of 2010 in which the company was not able to end with a profit, 2011 was much more favourable in terms of trading conditions. Volatility increased in the second half of the year and led to record trade volumes that helped the company return to profits and post a revenue increase of 13% to £39.0m and an increase of 9% in adjusted profit before tax.

Profit before taxation hit £6.1m after registering a loss of £0.056m in 2011. Net cash and short term receivables almost doubled from £13.9m to £25.1m improving the company cash flow.

Spread betting continues to be the main revenue earner representing 68% of the total, although it is decreasing in importance due to the stellar performance of other company divisions. Spread betting revenues grew from £25.83m to £26.59, a 2.9% rise, while institutional forex grew 32%, institutional brokerage 76%, and UK and Australia CFDs are now generating revenues after a negative 2010. Nevertheless, UK spread betting was responsible for almost 83% of the operating profit generated in the year and grew 27%, clearly showing its importance.

Spread betting is in a mature period, especially concerning the UK market. Providers are investing in other products like CFDs and spread betting outside the UK to better surpass the stiff competition they face. The growth presented by London Capital Group is encouraging, signalling there are great opportunities outside the UK and spread betting, but at the same time it shows there is still room to grow in the UK.

Commenting on the results, Simon Denham, the company CEO stated: “Despite a difficult start to 2011 the Group has delivered a strong set of results and made positive inroads operationally and financially. We are particularly delighted to have improved our scalability, competitive position and to have developed our international operations further. Whilst the uncertain economic outlook both in the Eurozone and UK presents a challenging backdrop we are confident in the robustness of our business model and our future growth plans.”

The company expects its Australian unit to breakeven later in the year. This unit assumes a huge importance because of the popularity of CFD trading in the continent that has been fuelling revenues of rivals like IG index. At the same time it may serve as basis for expansion into the South East Asia.

Although financial markets have been rising in an impressive way, it seems that spread betting traders are still unconvinced with the bullish prospects and prefer to continue opposing the rally.

According to Simon Denham, CEO of Capital Spreads, clients have been shorting every kind of instrument from the FTSE, to the S&P, the Euro, and even some soft commodities. The only market that seems to please almost every trader is gold. Spread betters have been holding tight their long positions on the metal due to the last FOMC comments about interest rates. With the FED extending the period it will hold its overnight funds rate at a record low to late 2014, the opportunity cost of holding non-interest bearing assets like gold decreased, making it more attractive than ever.

Capital Spreads clients have been opposing this market rally, in special, the recent EUR/USD rise. The sentiment among spread traders is that the recent rise will be short-lived because all debt problems are still on the table to solve, and will most likely continue to give headaches to investors. Greece was not able to close a deal with its creditors so far, and Portugal has seen yields on government debt rise lately. Traders expect the pressure on the Euro to increase.

Medium term prospects for the Eurozone may not be the best at this point but opposing the recent bullish momentum is a costly strategy to follow. One of the most common errors spread betters and other traders do is to try to catch tops and bottoms. Worse than that is when a trader adds to losing positions when the market moves unfavourably. That may be a sound strategy for long term traders but not for a leveraged short-term one.

London Capital Group, the parent company for Capital Spreads, has released a trading update concerning its full year results for the financial year ended 31 December 2011.

Profit before tax and exceptional items is expected to be in line with market expectations. The group experienced an increase of 13% in revenue that grew to £39.0m mainly due to an increase in volatility. The second half of the year was very strong. Revenue rose 52% over the same period in 2010. The company states that it has experienced an increase of client acquisition for retail spread betting and CFDs in the second half of the year that helped attain strong revenues in the period.

UK spread betting hit record daily trade volumes with average trades per day of 33,042, increasing 10.8% over 2010, and net revenue per client rose 7% to £1,370.

London Capital has been strategically trying to expand its reach outside the UK and in the second half of 2010, 30% of new clients were from outside the UK. The company launched its CFD product during last year and has been experiencing a growth in the number of clients and trade volumes such as break even will be reached soon.

In the press release the company also stated its balance sheet remains strong with a £25.1m of net cash resources and that there has not been any material change to the Financial Ombudsman Service claims. The total value of claims is £7.7m.

Full results will be released on 22 February.