Magazine article Modern Trader

U.K.'S Spread Betting Draws Specs: What's the Vig on That Spread? (Trendlines)

Magazine article Modern Trader

U.K.'S Spread Betting Draws Specs: What's the Vig on That Spread? (Trendlines)

Article excerpt

Here's the deal: Paul "The Plumber" Davidson owns a chunk of a little biotech company called Cyprotex that was set to float shares in February. Just before the float. The Plumber calls his broker, Nigel "The Spaniard" Howe, who calls London spread-betting group City Index and places a [pounds sterling]6 million ($8.8 million) "spread bet," which is like the eccentric British uncle of single stock futures.

Spread betting was invented by bookies back in the 1970s, and it's regulated jointly by the Financial Services Authority (FSA) and the gaming board. "Each quoted spread represents the price or range at which a bookmaker expects the instrument to close at a specified date in the future," explains Jean-Paul Carbonnier, an analyst with Tower Group in Boston. "Investors then can place bets on whether they expect the instrument to be priced above or below the quoted spread at the date of expiry."

Spread bettors can take bets on just about anything. On April 12, for example, one of them quoted a spread on the number of days it would take once high-flying Vodafone to fall below [pounds sterling]1 per share. That flexibility is one of the things that makes spread betting so popular -- the other being that in England you don't pay taxes on gambling winnings.

Getting back to The Plumber: City Index figures [pounds sterling]6 million is too much to carry alone, so it calls Dresdner Kelinwort Wasserstein (DKW) and hedges itself with a so-called contract for difference (CFD), which is like an OTC stock swap. DKW then covers its CFD exposure by purchasing 17.8 million real shares in Cyprotex -- a position that is 80% of the initial float, or one-fifth of the whole company.

The stock floats at 3lp a share, but word of the trade gets out pretty quick, and The Plumber takes a hit. The Spaniard loses his job. The United Kingdom's FSA launches an investigation, and City Index boss Olive "No Nickname" Cooke says there should be disclosure laws for large stakeholders placing spread bets in the companies they run. …

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