Spread betting is any of various types of wagering on the outcome of an event, where the pay-off is based on the accuracy of the wager, rather than a simple "win or lose" outcome, such as fixed-odds (or money-line) betting or parimutuel betting. A spread is a range of outcomes and the bet is whether the outcome will be above or below the spread. Spread betting has been a major growth market in the UK in recent years, with the number of gamblers heading towards one million. Spread betting can carry a high level of risk, with potential losses or gains far in excess of the original money wagered. In the UK, spread betting is regulated by the Financial Conduct Authority rather than the Gambling Commission.
The general purpose of spread betting is to create an active market for both sides of a binary wager, even if the outcome of an event may appear prima facie to be biased towards one side or the other. In a sporting event a strong team may be matched up against a historically weaker team; almost every game will have a favorite and an underdog. If the wager is simply "Will the favorite win?", more bets are likely to be made for the favorite, possibly to such an extent that there would be very few betters willing to take the underdog.
The point spread is essentially a handicap towards the underdog. The wager becomes "Will the favorite win by more than the point spread?" The point spread can be moved to any level to create an equal number of participants on each side of the wager. This allows a bookmaker to act as a market maker by accepting wagers on both sides of the spread. The bookmaker charges a commission, or vigorish, and acts as the counterparty for each participant. As long as the total amount wagered on each side is roughly equal, the bookmaker is unconcerned with the actual outcome; profits instead come from the commissions.
Because the spread is intended to create an equal number of wagers on either side, the implied probability is 50% for both sides of the wager. In order to profit, the bookmaker must pay one side (or both sides) less than this notional amount. In practice, spreads may be perceived as slightly favoring one side, and bookmakers will often revise their odds in order to manage their event risk.
Spreads in sports wagering
Spread betting was invented by Charles K. McNeil, a mathematics teacher from Connecticut who became a bookmaker in Chicago in the 1940s. The idea became popular in the United Kingdom in the 1980s. In North America, the gambler usually wagers that the difference between the scores of two teams will be less than or greater than the value specified by the bookmaker. An example:
- The bookmaker advertises a spread of 4 points in a certain game;
- If the gambler bets on the "underdog", he is said to take the points and will win if the underdog's score plus the spread is greater than the favorite's score.
- The eventual score is Underdog 8, Favorite 10: 8 + 4 > 10, so the gambler wins;
- The eventual score is Underdog 8, Favorite 13: 8 + 4 < 13, so the gambler loses.
- If the gambler bets on the "favorite", he gives the points (sometimes called lay the points) and will win if the favorite's score minus the spread is greater than the underdog's score:
- The eventual score is Underdog 5, Favorite 10: 10 – 4 > 5, so the gambler wins;
- The eventual score is Underdog 8, Favorite 10: 10 – 4 < 8, so the gambler loses.
- If the gambler bets on the "underdog", he is said to take the points and will win if the underdog's score plus the spread is greater than the favorite's score.
Spreads are frequently, though not always, specified in half-point fractions to eliminate the possibility of a tie, known as a push. In the event of a push, the game is considered no action, and no money is won or lost. However, this is not a desirable outcome for the sports book, as they are forced to refund every bet, and although both the book and its bettors will be even, if the cost of overhead is taken into account, the book has actually lost money by taking bets on the event. Sports books are generally permitted to state "ties win" or "ties lose" to avoid the necessity of refunding every bet.
Betting on sporting events has long been the most popular form of spread betting. While most bets the casino offers players have a built in house edge, betting on the spread offers an opportunity for the astute gambler. When a casino accepts a spread bet, it gives the player the odds of 10 to 11, or -110. That means that for every 11 dollars the player wagers, he will win 10, slightly lower than an even money bet. If team A is playing team B, the casino is not concerned with who wins the game; they are only concerned with taking an equal amount of money of both sides. For example, if one player takes team A and the other takes team B and each wager $110 to win $100, it doesn’t matter what team wins; the casino makes money. They will take $100 of the $110 from the losing bet and pay the winner, keeping the extra $10 for themselves; this is the house edge. The goal of the casino is to set a line that encourages an equal amount of action on both sides, thereby guaranteeing a profit. This also explains how money can be made by the astute gambler. If casinos set lines to encourage an equal amount of money on both sides, it sets them based on the public perception of the team, not necessarily the real strength of the teams. Many things can affect public perception, which will move the line away from what the real line should be. This gap between the Vegas line and the real line is where value can be found. Once you find the value in a line, and identify your correct winning percentage, you can input those numbers into a Kelly calculator to determine proper size of the wager to make.
A teaser is a bet that alters the spread in the gambler's favor by a predetermined margin – in American football the teaser margin is often six points. For example, if the line is 3.5 points and the bettor wants to place a teaser bet on the underdog, he takes 9.5 points instead; a teaser bet on the favorite would mean that the gambler takes 2.5 points instead of having to give the 3.5. In return for the additional points, the payout if the gambler wins is less than even money, or the gambler must wager on more than one event and both events must win. In this way it is very similar to a parlay. At some establishments, the "reverse teaser" also exists, which alters the spread against the gambler, who gets paid at more than evens if the bet wins.
Bets on the total (over/under)
In addition to the spread bet, a very common "side bet" on an event will be the total (commonly called the over/under or O/U) bet. This is a bet on the total number of points scored by both teams. Suppose team A is playing team B and the total is set at 44.5 points. If the final score is team A 24, team B 17, the total is 41 and bettors who took the under will win. If the final score is team A 30, team B 31, the total is 61 and bettors who took the over will win. The total is popular because it allows gamblers to bet on their overall perception of the game (e.g., a high-scoring offensive show or a defensive battle) without needing to pick the actual winner.
In the UK, these bets are sometimes called spread bets, but rather than a simple win/loss, the bet pays more or less depending on how far from the spread the final result is.
Example: In a football match the bookmaker believes that 12 or 13 corners will occur, thus the spread will be set at 12–13.
- A gambler believes that there will be more than 13 corners, and "buys" at £25 a point at 13.
- If the number of corners is 16, the gambler wins (16–13) = 3 x £25.
- If the number of corners is 10, the gambler loses (13–10) = 3 x £25.
- A "sell" transaction is similar except that it is made against the bottom value of the spread.
- Often "live pricing" will change the spread during the course of an event, allowing a profit to be increased or a loss minimized.
In North American sports betting many of these wagers would be classified as over-under (or, more commonly today, total) bets rather than spread bets. However, these are for one side or another of a total only, and do not increase the amount won or lost as the actual moves away from the bookmaker's prediction. Instead, over-under or total bets are handled much like point-spread bets on a team, with the usual 10/11 (4.55%) commission applied. Many Nevada sports books will allow these bets to be used in parlays, just like team point spread bets, making it possible to bet, for instance, "team A and the over", and be paid if both team A "covers" the point spread and the total score is higher than the book's prediction. (Such parlays usually pay off at odds of 13:5 with no commission charge, just as a standard two-team parlay would.)
Mathematics of spread betting
The mathematical analysis of spreads and spread betting is a large and growing subject. For example, sports that have simple 1-point scoring systems (e.g., baseball, hockey, and soccer) may be analysed using Poisson and Skellam statistics. For a gambler to maintain profits, they must achieve a 52.38% win ratio.
Financial spread betting
By far the largest part of the official market in the UK concerns financial instruments; the leading spread-betting companies make most of their revenues from financial markets, their sports operations being much less significant. Financial spread betting in the United Kingdom closely resembles the futures and options markets, the major differences being
- the "charge" occurs through a wider bid-offer spread;
- spread betting has a different tax regime compared with securities and futures exchanges (see below);
- spread betting is more flexible since it is not limited to exchange hours or definitions, can create new instruments relatively easily (e.g. individual stock futures), and may have guaranteed stop losses (see below); and
- the trading is off-exchange, with the contract existing directly between the market-making company and the client, rather than exchange-cleared, and is thus subject to a lower level of regulation.
Financial spread betting is a way to speculate on financial markets in the same way as trading a number of derivatives. In particular the financial derivative Contract for difference (CFD) which in many ways mirrors the spread bet. In fact a number of financial derivative trading companies offer both financial spread bets and CFDs in parallel using the same trading platform.
Unlike fixed-odds betting, the amount won or lost can be unlimited as there is no single stake to limit any loss. However, it is usually possible to negotiate limits with the bookmaker:
- A "stop loss" or "stop" will automatically close the bet if the spread moves against the gambler by a specified amount.
- A "stop win", "limit" or "take profit" will close the bet when the spread moves in a gambler's favor by a specified amount.
Spread betting has moved outside the ambit of sport and financial markets (that is, those dealing solely with share, bonds and derivatives), to cover a wide range of markets, such as house prices. By paying attention to the external factors, such as weather and time of day, those who are betting using a point spread can be better prepared when it comes to obtaining a favorable outcome. Additionally, by avoiding the favorite-longshot bias, where the expected returns on bets placed at shorter odds which exceed bets placed at the longer odds, and not betting with one’s favorited team but rather with the team that has been shown to be better when playing in a specific weather condition and time of day, the possibility of arriving at a positive outcome are increased.
In the UK and some other European countries the profit from spread betting is free from tax. The UK and some other European countries tax authorities designate financial spread betting as gambling and not investing, meaning it is free from capital gains tax and stamp tax, despite the fact that its regulated as a financial product by the Financial Services Authority in the UK. Most traders are also not liable for Income Tax unless they rely solely on their profits from financial spread betting to support themselves. The popularity of financial spread betting in the UK and some other European countries, compared to trading other speculative financial instruments such as CFDs and futures is partly due to this tax advantage. However, this also means any losses cannot be offset against future earnings for tax calculations.
Conversely, in most other countries financial spread betting income is considered taxable. For example the Australian Tax Office issued a decision in March 2010 saying "Yes, the gains from financial spread betting are assessable income under section 6-5 or section 15-15 of the ITAA 1997". Similarly, any losses on the spread betting contracts are deductible. This has resulted in a much lower interest in financial spread betting in those countries.
Financial spread bet example
Suppose Lloyds Bank is trading on the market at 410p bid, and 411p offer. A spread-betting company is also offering 410-411p. We use cash bets with no definite expiry, or "rolling daily bets" as they are referred to by the spread betting companies.
If I think the share price is going to go up, I might bet £10 a point (i.e., £10 per penny the shares moves) at 411p. We use the offer price since I am "buying" the share (betting on its increase). Note that my total loss (if Lloyds Bank went to 0p) could be up to £4110, so this is as risky as buying 1000 of the shares normally.
Thus, in the example, if Lloyds Bank are trading at 411p, then for every day I keep the bet open I am charged [taking finance cost to be 7%] ((411p x 10) * 7% / 365 ) = £0.78821 (or 78.8p)
On top of this, the bettor needs an amount (AKA collateral) in the spread-betting account to cover potential losses. Usually this is either 5 or 10% of the total exposure you are taking on but can go up to 100% on illiquid stocks. In this case £4110 * 0.1 or 0.05 = £411.00 or £ 205.50
If at the end of the bet Lloyds Bank traded at 400-401p, I need to cover that £4110 – £400*10 (£4000) = £110 difference by putting extra deposit (or collateral) into the account.
The punter will usually receive all dividends and other corporate adjustments in the financing charge each night. For example, suppose Lloyds Bank goes ex-dividend with dividend of 23.5p. The bettor will receive that amount. The exact amount received varies depending on the rules and policies of the spread betting company, and the taxes that are normally charged in the home tax country of the shares.
Terminology and acronyms
Spread: The difference between the ask and bid prices. May vary between markets and brokers substantially. London Turn: A point in time that the markets tend to observe a change in direction with incredible subtlety between 12:15 and 13:15 GMT with regularity that is more than coincidental. HoD: High of day conversely LoD (low of day). the highest price market traded at for the day Intraday trader: A trader operating from within each day's trade times. Market session: The time of day that is governed mostly by the regional stock markets. An example would be Asian session (22:30 to 08:45 GMT), European session (06:45 to 16:45 GMT), US session (13:00 to 21:30 GMT). Times are subjective in the most part from broker to broker, but these have been tested as most reliable data times by experienced traders.
Dangers of financial spread betting
According to an article in The Times dated 10 April 2009 approximately 30,000 spread bet accounts were opened last year, and that the largest study of gambling in the UK on behalf of the Gambling Commission found that serious problems developed in almost 15% of spread betters compared to 1% of other gambling. In addition a report from Cass Business School found that only 1 in 5 gamblers ends up a winner. As noted in the report, this corresponds to the same ratio of successful gamblers in regular trading.
- The Sunday Times: World Cup to kick off boom in spread betting
- The Times: The perils of spread-betting
- Gambling Commission
- Gambling Times: What are the Odds?
- The Sunday Times: Spread betting
- "An In-depth Review of Betting". SB Pal. Retrieved 11 October 2013.
- "Income Tax – Assessable income derivation of income – spread betting". Australian Government ATO. 3 March 2010. Retrieved January 26, 2011.
- Budworth, David. "Spread-betting fails investors in trouble". thetimes.co.uk. Retrieved 11 October 2013.
- Pfanner, Eric. "Spread-bets on Cup venture into bizarre - Technology - International Herald Tribune". nytimes.com. Retrieved 11 October 2013.
- Rayman, Richard. "White Paper on Spread Betting". Cass Business School. Retrieved 11 October 2013.