Should Spread Betting be Considered Gambling?

Thomas Walker August 25, 2016 2
Should Spread Betting be Considered Gambling?

In the UK, profits from spread betting are not subject to tax like those from other forms of investment and trading are. This is because British law treats spread betting as a form of gambling.

Whether or not spread betting truly qualifies as gambling is, however, subject to a lot of debate.

Spread betting is a form of highly leveraged trading where the positions traders take are typically far larger than the actual sizes of their accounts. This obviously makes it extremely risky, although that risk can be mitigated to some extent with the use of stop losses and sensible risk limitation strategies like limiting risk per trade to 1% of one’s account size.

The high-risk nature of spread betting, combined with its unfortunate name, contributes to its image as a gambling-like activity.

But true gambling is quite a different thing. A casino game, for instance, will have a form of inbuilt house advantage, exemplified most obviously by the zero on a roulette wheel. Roulette is a game of pure chance; whether you hit red or white is out of your control, and the zero makes sure that the house has a small probabilistic advantage per throw that, over time, virtually guarantees them profitability over a long series of games.

The spread in a spread bet can be seen like that, but in reality it functions more like a commission in a direct investment. Unlike the casino, a lot of spread betting brokers (namely direct access brokerages) aren’t betting against traders, but simply facilitate exchange and extract a portion of it for their profits. Sadly some brokers are literally taking the opposite position and hoping the trader loses, and that behavior isn’t helping the image of legitimate spread betting as a form of trade. Others hedge clients’ trades as a way of profiting in either eventuality.

Gambling can also refer to betting on a binary outcome, such as betting on a horse or any kind of news event. In these situations the thing being bet on is out of the gambler’s control; they may have some knowledge giving them a better chance, but fundamentally they’re gambling on the outcome.

There are certainly some leveraged products offered by brokers that do seem to qualify as gambling in this kind of way. Chief among these are binaries. Binary products reduce a trade to a simple yes/no dichotomy, such as “will the FTSE 100 close above or below this level today?”

The kind of complex technical analysis that is used in regular spread betting goes out the window with binaries. The ‘trader’ is simply making a bet on the outcome, buying or selling at a price determined by the broker’s changing assessment of the likely outcome, much like the odds offered by betting firms.

But spread betting is a far more complex activity. Whilst a lot of trading essentially boils down to “will the price go up or down?”, there is a wealth of technical and fundamental analysis that goes into this. Provided risk remains within margin trades are effectively open-ended, they can be managed, added to and closed at different levels at any time.

The leverage is the key thing that sets spread betting apart from conventional trading. A large market move is going to wipe out a trader’s account far faster in leveraged spread betting than it ever could in direct investment.

Yet other leveraged derivative products aren’t legally classed as gambling. CFD trading, for instance, provides much the same functionality, a lot of the same risk, but does not come with the tax advantage. This is a legal distinction between trading a derivative product verses ‘betting’ per point on a price movement.

Likewise, a lot of countries will charge capital gains tax on spread betting profits. After all, in a long position the profit is made from selling something that has appreciated since its purchase. If that is gambling, then so is any investment.

Short selling is technically more challenging to define, but ultimately trades are still being made. Unlike a binary bet, it’s not a stake on an outcome so much as a trade in the hope of value change. So ultimately the classification of spread betting, and indeed calling it by that name, seems misrepresentative.

That can be very off-putting to a lot of prospective traders, who may miss out by writing off as gambling something that is really just another form of trading. However the risk factor is very much there, and the statement that perhaps spread betting isn’t gambling is not a denial of the massive risk involved. There’s massive risk involved in virtually any attempt to generate large profits.

Ultimately that is the lesson here; generating large profits is always going to be risky. Gambling, in the casino sense, is literally set up to ensure ultimate loss. Trading is not. The probability is still overwhelmingly against the novice trader, but it is a skill that can be learnt and people do consistently profit from it.

It would be idiotic to ignore the huge inherent risk in spread betting, but to label it as gambling is to associate it with something entirely different.

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