As volatility and uncertainty have taken hold in financial markets, traders have been forced to adapt their habits.
Spread betting firms say activity in day trades, in which spread betters seek to profit from very short-term market swings, have reached record levels.
According to Angus Campbell, head of sales at Capital Spreads, the average time that clients hold their positions has decreased – reflecting rapidly changing views on where equity and commodity markets are heading next.
“Intra-day trading is the flavour of the moment,” he explains. “Clients are dipping in and out of the market and often not holding positions overnight.”
Even those spread betters without access to complex charting tools and technical analysis can benefit from intra-day price movements by using binary bets on whether an index will finish up or down over a specified timeframe.
Binary bets allow traders to profit from rising, falling and even stationary intra-day markets, and interest in them is growing fast.
For short term players who believe a market is going to finish one way or another, but are not sure by how much, they can provide a lower-risk alternative to conventional spread bets. Clients can bet on daily movements of equity markets, major currencies and commodities such as oil, gold and silver.
One of the key benefits of binary betting is that the exposure is transparent. As soon as the bet is placed, clients can see the maximum that they stand to gain or lose. And with market volatility currently well above average, limited risk has become more appealing, according to Franz Khanna at IG Markets, which pioneered binary bets.
Mike Chadney, chief executive officer of CityOdds, even believes binary bets a new threat to traditional trading platforms.
“At the outset, the buyer knows exactly how much the bet will be worth,” he says. “This presents the perfect balance of known downside and known upside.”
With other forms of spread betting it is possible to lose more than you bet, even if stop losses are used, but this is not the case with binaries. Binaries do not involve stop losses and the bet simply closes out as a win or a lose, no matter how much the underlying market moves against the client. Although this means that a client can lose the entire bet, it also means intra-day traders can benefit from a sharp rebounds in the market.
Each binary bet has a statement associated with it, such as “FTSE 100 to finish up” and is priced between 0 and 100 points – closing at 100 points if the statement proves true, or at 0 points if the statement proves false.
So, in this example, if the FTSE has finished the day above its opening level, then the client would make the difference between the buying price of the bet price and 100. Taking a buying price of 52, and client buying the ‘FTSE 100 finish up’ bet for £10 a point, the profit would be (100-52) x £10, or 48 x £10 = £480 ($709).
If, instead, the FTSE closed below its opening level, the bet price would fall to 0 and the client would lose the entire value of their bet. Taking that same buying price of 52 at £10 a point, the loss in monetary terms would be 52 x £10 = £520.
Prices are influenced by the number of buyers and sellers, and their view of the likelihood of an event ocurring. So, if the FTSE 100 had remained largely unchanged but there were still a few hours to go until the market closes, then the odds of the FTSE closing up are likely to be around 50/50 – and the binary price will be around 50 points. The more likely an event becomes, the higher the price will go. A binary bet quoted at 90 or 95 points is seen as a safer bet than one priced at 5.
But one of the major advantages of a binary bet, over a conventional fixed odds bet, is that if the market starts moving in the right direction, traders can close their bets before the end of the time period – and so benefit from the interim price movement.
For example, if a client bought a “FTSE 100 finish up” bet at 10 points and the price rose to 50 points by mid afternoon, that client could sell the bet straight away, and make a profit of 40 points times the stake.
More precise bets on market movements are also available. Range bets, such as “FTSE 100 to finishing up by more than 50”, or “Nasdaq to finish down by 0-15” can be offered, and use the same 0 to 100 pricing system.
As a result, even when an underlying market is relatively quiet, binary prices can still be volatile. A one point movement in the underlying market can cause a binary price to jump suddenly.
CMC Markets, which at present does not offer binaries, points out that binaries increase the chances of the market going against you very quickly, and that although losses are limited, the minimum bet is still £100.
But this volatility also means customers can make a lot of money over a relatively short amount of time – and this makes them good fun, according to some other spread betting firms.
Joshua Raymond, market strategist at City Index, believes that as the bets become more popular, binary markets will also become more creative in adjusting timeframes and adding increasingly interesting and exotic underlying markets.
The pricing model of binary bets has already be applied to very short-term outcomes, such as whether the FTSE will be higher or lower than its level just minutes ago. But, in the future, firms say it could become common practice to make binary bets on longer-term transactions, such as whether the FTSE 100 will be higher in a year’s time.
