Spread betting as a method of trading the markets originally came from the U.S. The Wall Street firms realised that rather than doing the expensive business of buying the shares directly, they could become the market directly by betting on prices in what used to be called ‘bucket shops’. This however became outlawed in the U.S. for a variety of reasons, perhaps because of the lack of security of betting through a bucket shop than a broker, or perhaps because of broker power on Wall Street.
It was not until 1974 that spread betting began in its current form in the U.K. Here, Stuart Wheeler began to take bets on commodity prices. This began to expand with the onset of technology and the expanding set of markets. Soon it included a range of commodities, foreign exchange, shares and indices.
Since 1974, a whole range of financial spread betting platforms have sprung up, sensing the lucrative spread betting market: City Index followed in 1984, LCG in 1996, Spreadex in 1999 as well as various spin offs from large banks and stockbrokers investing in spread betting technology.
Stuart started IG Index with small loans from friends of £5,000 in return for shares. By the year 2000, IG Index had grown to a £125m company and floated on the LSE demonstrating the size of the industry. The shareholders who invested him when he started IG made huge returns on their investments.
The spread betting market was well established by 2000 and the dot com bubble cemented spread betting in the financial industry as it allowed ordinary investors to short shares and indices in ways that were simply not open to them before. The dot com bubble established the rumours of spread betting that millions could be made from shorting markets and really boosted the industry for the next few years.
The next 10 years were about technology enhancement, as phone dealing became a second rate service as platforms migrated online, with all the providers establishing online platforms. The speed of execution, methods of hedging and risk management by the spread betting companies themselves have meant a continual improvement on platform technology.
Moreover, as technology and risk management methods (move directly to a broker rather than holding bets from spread betters) have improved, so too have the spreads, now reaching 1 point on indice bets and offering instant execution.
The spread betting companies have also expanded their markets to include options, ETFs, binaries, bonds more exotic options such as ‘bungee bets’ and variety of bets.
The final development has been in analysis and charting packages, as spreads have been cut the companies are constantly trying to find ways to have an edge, this has included offering level 2 access (market depth) and comprehensive stock screener packages.