Is The Spread Betting Company Betting Against You?

This question is actually pretty complex and controversial. The correct answer is sometimes. In other words sometimes the spread betting company will hedge your bets and other times they will leave them open so that they are effectively betting against you.

The sad reality is that many spread betters lose money in the long run. Hence if you run a spread betting company you can make money continually betting against your weakest accounts. However if you've got professionals on your books, you would really want to lay off all the risk because betting against them is much less likely to be profitable.

The exact hedging policy varies between brokers (they don't usually tell you - or if they do they hide it away somewhere). You can typically find the ones that bet against their customers by reading the annual reports of the brokers. If they make a lot of money don't it they will be sure to gloat in the annual report (and up executive pay) but if they lose money it will all be down to random chance.

Typically a large number of bets will be cancelled out. If someone goes long the FTSE at £10/ point and someone else goes short the FTSE at £10/point the two bets pretty much cancel out (there may be a few points difference due to timing). Hence if the FTSE goes up the spread betting company can pay the long position with the short positions losses (in theory - since they won't close at the same time, but for the time they are both open both positions are hedged). It is also possible for spread betting companies to use CFD's to hedge out client exposures. Big spread betting companies actually employ people to sit at trading desks all day hedging out clients risk. The reality is that a few huge profits by a handful of traders could seriously dent a companies bottom line.

Its also worth noting that its not economical to hedge out the smallest positions. So if there are only a few people trading at £10 per point or less on a small AIM stock there is no point of hedging out the position as the net exposure will be very small. The chances are that the bulletin board loons will be cancelled out by the smart bears.  The bears will end up with all the money which since its short is capped. Though, I doubt the brokers think that way but this happens to be true.