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# Never Heard of Spread Betting? You Will

15 April 2001

Spread betting is one of the most exciting innovations in modern gambling. It is the only form of gambling where losses and gains are potentiallly unlimited. The principle is simple. A spread firm will offer a quote on the result of some event. Initially, spread firms dealt exclusively with business so the quotes tended to be about financial things like currency movements.

Say you think the pound will rise against the dollar. The spread firm would quote a spread of, say, 14385-14415. What on earth does that mean?

The figure on the right is the number you have to beat if you want to buy pounds; the number of the left is the one you have to beat if you want to sell pounds. Well, the pound at the time of writing is worth about 1.4400 dollars. The spread firm will allow you to "buy" pounds. You're betting that the pound gains against the dollar. Say you bet \$5 per hundredth of a unit and the pound rises against the dollar to 1.4420. This is above the 14415 (hundredths of a unit are quoted for convenience) quoted by the spread firm. Your winnings are your stake multiplied by the margin with which you beat the spread: 14420-14415 is 5, which multiplied by your \$5 stake is \$25. If the pound falls to 14380, you lose 14415-14380=15 x \$5, which is \$75.

You could also choose to sell pounds. In this case, if the pound fell to 14380 you would win 14385-14380 or 5 x \$5, which is again \$25. You can see that the difference between the two figures the spread firm quotes is where it gets its profit from.

If this sounds very similar to financial trading, that's because it is. However, one big difference exists, it's not real! You would not actually be buying any pounds or affecting the currency markets in any way. You've just made a bet with a bookie. Because of this, the spread firms have discovered that they can apply the same type of betting to non-financial areas.

For example, say the U.S. soccer team are competing in the World Cup tournament. A spread firm makes up a "performance index" based on how well they think the team will do. They allocate points as follows: 100 to win the cup, 50 to get to the semi-finals, and 25 to get to the quarter-finals. The team is quoted at 24-27. You think the U.S. will get to the semi-finals and then get knocked out, and bet \$10. If they do, then you would win 50-27=23 x \$10 or \$230. If they are knocked out in the opening stages, you'd lose 27 x \$10 or \$270.

You can see that spread betting is very volatile. It's also very exciting. It can also be very satisfying. Not only do you have the satisfaction of winning when you make a correct prediction, but your winnings are proportional to just how right you were. The downside is that your losses can be large, and potentially limitless. For this reason spread firms have traditionally demanded some proof that you can actually honour any debts you might incur before they will allow you an account. For newcomers to spread betting, "limited risk" accounts are offered whereby your potential losses are capped at some low level, say 10 times your stake.

To serious sports bettors in the U.S., this should be a godsend. In particular sharp handicappers should note the trouble spread firms have with quoting games foreign to them, such as baseball and football. Although traditional English bookmakers have coped with this problem by simply copying the odds given by Nevada bookies, no such quick fix is possible with spread betting. Quotes on U.S. sports are often wildly inconsistent with reality.

Also, the potential for new and successful wagering systems based on psychology or pricing inefficiencies is staggering. The skill of the sports bettor is more closely correlated with the money he will make from spread betting than with traditional fixed odds betting. For this reason, the advent of this new form of wagering should be welcomed. Readers who want to know more should read Jacques Black's excellent Spread Betting to Win.