Will There Be 1 Million Spread Betting Accounts in the UK?

11th June 2006

A new report by Professor Chris Brady and Dr Richard Ramyar, Cass Business School, predicts that the number of people in the UK with a spread betting account could more than double from its current level of 400,000 to one million by 2011. To achieve this, the industry has to extend its appeal to a more mass market audience by going beyond their existing client base of white affluent males under 45 years old to embrace women, ethnic minorities, older people and international markets.

The report, entitled ‘It’sTrading Jim, But Not As We Know It’, was commissioned by financial spread betting company Finspreads in order to identify the opportunities and challenges facing the spread betting industry.

To sustain the industry’s current rate of expansion of between 20 – 26% per annum, the report claims that it must focus more on educating consumers on the role spread betting has, as a serious investment tool that can become part of a balanced portfolio. However, it argues that the industry suffers from the stigma associated with betting when in actual fact there is little difference between it and trading. In addition, unless it overcomes this perception issue, its numerous attractions such as providing consumers with tax-free profits and the ability to hedge against falling markets, or even benefit from them, will remain largely overlooked.

Chris Brady, Professor of Management at Cass said: “The spread betting industry has considerable potential to grow but to achieve this over the longer term it needs to move towards the mass market. What seems exotic and beyond the grasp of all investors is really just a form of trading. Indeed, derivative trading goes as far back as 3,800 years ago to help Babylonian farmers sell grain.”

“The industry’s greatest problem comes from no longer being adolescent. There is relatively little scope remaining to differentiate products but there must be focus on greater simplicity. Spread betting firms need to move beyond the young, white male professional into female, grey, ethnic and international markets.”

Dr Richard Ramyar added: “The industry faces a considerable educational task to convince the public, the regulators and legislators that all forms of trading are essentially the same type of activity. The only difference is the level of risk – which can range from post office savings at one end to betting on the proverbial two flies at the other end. For the industry to expand, it must work harder at segmenting and targeting the public because being first to market is no longer sufficient.”

Ed Warner, CEO of IFX Group Plc, Finspreads’ parent company said: "The public perception of spread betting is changing from old associations with gambling to a serious investment tool for the future. We are confident that quality research such as that conducted by Professor Brady will continue to highlight this important trend."

Growth means targeting the grey, female, ethnic and international markets

The report claims that the number of retired people with spread betting accounts is set to grow considerably over the next few years. Whilst retired people currently only make up around 5% of spread betters, Finspreads, for example, has seen an average 15% year on year growth in the 55 + market since 2002. As well as the wider demographics of an aging population, pension fund shortfall concerns are likely to spur growth as well as the fact that older people have the time, resources and financial experience to become skilled spread betters.

The report believes that there is a considerable opportunity for the industry to increase the number of female customers, which currently account for around 10% of the total number of investors. It cites the popularity of online poker where 45% of participants are thought to be women. Research suggests that women do about 40% more research than men on every trade. Although there is growing evidence that spread betting is growing in popularity amongst women (Finspreads has witnessed a 10% annual increase in the number of female customers over the past two years) the report’s authors believe that in order to generate more significant growth, spread betting firms must develop a more female-friendly profile and review their male oriented marketing approach. Finspreads are currently conducting market research targeted at understanding what drives female traders.

Ethnically, the report predicts a rise in the number of British Asians engaged in spread betting. Already the largest ethnic minority group involved in spread betting, numbers will continue to grow, particularly if the Indian rupee is floated. The report states that the industry will continue to seek out new international markets. As well as Ireland and Australia, which are already important markets, there is considerable potential in emerging markets such as India and China.

Moving towards a mass market means simpler products

According to the report, if the spread betting industry is to move towards the mass market (just as the hedge fund market appears to be doing), not only must there be more emphasis on improving awareness and understanding of the basic spread betting products but new, simpler products should also be launched. The report identifies the risk mindset of the consumer as the key factor in trading and so it follows that the products offered must have the flexibility to be used in a variety of ways by a variety of investors. For example these could include ‘binary bets’, which are closer to normal fixed odds bets. Binary bets could have longer expiry times, measured in years and shorter contracts lasting only a few minutes for the more speculative spread better. Conversely, the report states that ever more exotic products are needed to retain the interests of the specialist gambler.

According to the report, property investment fever could be tapped into by launching a range of property derivatives. These would enable retail investors to transfer their property risk without the need to buy or sell their home by hedging or trading its market value. Although currently restricted to the institutional market and commercial property, Finspreads is currently in discussion with the providers of property derivatives in the commercial market and aim to be the first to bring a simplified retail product to the street. With 15 million homeowners and a market worth over £2.8 trillion, the report predicts that this area has significant potential.

The industry needs to change its profile to move into the mass market

Despite the potential for growth, the report believes the industry is facing a number of challenges, not least shifting its profile away from being exclusive, complex and high risk to a more mass market positioning. The report observes that it is spread betting that has given amateur traders access into what has hitherto been a professional game but despite opening up choice, the spread betting industry has not explicitly claimed to represent the interests of the mass market.

The report states that in order to move into a mass market, spread betting companies need to focus on brand building and on educating consumers. Like the stock broking industry, spread betting firms will need to focus on the value added services offered to clients, such as full service trader support. The report also speculates that a move into the mass market may see spread-betting firms looking to establish upmarket bricks and mortar outlets, similar to a traditional bookmaker, and even online betting exchanges.

Regulatory threat

At the same time, the industry must remain vigilant to the threat of new regulations being imposed by British or EU regulators that could restrict spread betting to high net worth or professional investors and thus prevent any attempt to launch into the mass market.

David Mercer, Head of Business Development, Finspreads said: “We are delighted that this recent research indicates such a fantastic future for spread betting in the UK. All the statistics suggest that the sector will continue to expand exponentially as customer confidence increases."