Spread bets future
Spread Betting Future
1st January 2007
The
UK spend on betting has increased sevenfold since Gordon Brown’s cut on
betting tax in 2001, with £59billion being spent last year alone9.
According to research giant Forrester, 76% of the UK’s 29 million adult
internet users admit to regularly placing a bet either online or
offline10. This change in the UK’s wider betting habits cannot fail to
have an impact on the spread betting industry as people look for new
experiences beyond the traditional. In the UK the spread betting
industry has been at the forefront of offering online trading and
analysis tools, frequently stealing a march on traditional share
trading services. The current market for spread betting is almost
completely internet based and is in a similar market to other online
trading accounts. The investors currently exploiting online trading
services are predominantly white, male, affluent internet users who are
under 45 years old.11 Of course, this is not unexpected. The early
adopters of all new technology applications are generally this same
group, whether they are trading online, the first to buy books or home
electronics online.
The needs of this group will
change as it gets older. Pensioners currently only number 5% of the
customer base, a figure that will grow. They are already being
encouraged to worry about their insufficient pension pots and they will
begin to structure more of their portfolios with a view to the
long-term and managing risks to their capital. Finspreads, for example,
has seen an average 15% year on year growth in the 55+ market since
2002. Successfully meeting the challenge of retaining existing
customers will further change the age profile of the customer base. And
this is without mentioning that the population at large is aging.
Current
adverts for CFDs and spreads tend to revolve around macho objects of
desire: glitz, cars, aeroplanes and the like. This will necessarily
change for any longer term products that are offered to an older age
market. Any products with longer expiries, perhaps measured in years,
would compete at least indirectly with traditional brokers who do not
aspire to the wheeling-dealing image.
An example of
an exotic contract might be a security that pays interest, similar to a
bond; however, this interest payment is instead determined by returns
on an index of traded commodities; this interest payment will continue
until the expiry of the contract unless one of five specified stocks
rises 10% above its price at the start of the contact. It is perhaps
clear (or unclear) from this example why these are described as exotic
contracts.
The spread betting and CFD companies will
therefore have to cater for these older customers in the future.
However, this market segment known as “empty nesters, silver surfers’
are only one element of the potential market so far under-represented
in the financial gambling arena. If, as expected, there will be an
annual growth rate of between 20%12 and 26%13 in the number of spread
bets and CFDs used by retail investors, that growth is unlikely to
occur simply in existing segments of the market.
If
these products are to be more widely used, logic dictates that the
profiles of the investors must change. The challenge for the industry
is to decide which other groups are going to be interested in spread
betting or CFDs in future years. Also, will the industry be able to
serve these groups without cannibalising their existing client base?
Traditionally
women have been conspicuous by their absence in spread betting and
CFDs. In recent years, however, this has been changing. Sandy Jadeja,
Chief Market Analyst of Finspreads, has seen an increase in their
numbers trading and attending his educational seminars, at first
steadily, and then growing more rapidly; and this trend seems unlikely
to reverse. Interestingly, Mr. Jadeja also notes that women have a
different, more calculated, trading mentality. They tend to prepare
their research more effectively and be more cautious. Sheila Gleason,
Marketing Operations Director at Barclays Wealth Management, has
noticed that Barclays’ own research shows that “women do about 40% more
research than men on every trade”. Research from Digital Look shows the
same result – women clearly outperform men when investing.
They
also trade or game online less compulsively than men and are less
likely to become addicted. Finspreads has seen a 10% year on year
growth in female clients over the past 2 years, a figure fairly
representative of the industry at large. Compared to when the company
formed in 1999 they now have over 300 times the number of female
customers. However, despite the growth in female spread-betters they
are only in the region of about 10% of all account holders. This
correlates with the percentage of women in the overall gambling
population which is usually stated to be between 8%-12%. There is
concern in the industry, therefore, that the rapid recent growth in
female participation may have plateau-ed at the general level.
Contrary
evidence is provided by online poker where there has been a dramatic
increase in the numbers of women to somewhere in the region of 45% of
punters. It is not entirely clear what has driven this increase –
anonymity, challenge, complexity and hygiene have all been suggested as
reasons. The spread betting industry will need to understand what drove
this enormous rise in female participation and attempt to replicate it
for spread betting. As mentioned before, while adverts for CFDs and
spreads focus on the macho online gaming billboards have even included
fluffy bunnies to appeal to the female consumer. Whatever it takes the
spread betting industry must address it.
Ethnic
minorities are also likely to be important sectors where growth might
be expected in the retail derivatives industry. Although immigration is
not new, growth in the United Kingdom population has been increasingly
driven by immigration since the mid-1990s. Will the first wave of
immigration from the new EU states settle and prosper here like past
hard-working immigrants? Past immigration from the Indian subcontinent
has developed into an affluent middle class. According to the Institute
of Asian Professionals 10% of business startups are the brainchilds of
Asian entrepreneurs, even though they make up only 5% of the UK
population. Just as the Hispanic constituency in the United States is
growing in importance for marketing a wide range of products, so too
could British ethnic groups. Australia provides an interesting
experiment in targeting ethnic groups. Australians with a far-eastern
heritage are viewed as a specific market segment and Britain is
certainly following suit.
Adrian Buthee of Two Way
Trade, a CFD brokerage, points out that the British Asians already
constitute a very noticeable group of traders, and certainly the
largest ethnic minority group. It may be politically incorrect to
characterise racial stereotypes but it would also be commercially
incompetent to ignore ‘a priori’ evidence that suggests preferences for
financial products based on ethnic background. It is important,
therefore, to segment individual markets not only by age and gender but
also by ethnic sub-groups if the evidence for so doing is strong.
The
industry will also continue to seek out new international markets.
Ireland and Australia are already important markets, but these are not
incredibly different environments from the British market. In the
far-east and the Indian subcontinent, however, there is a greater
tendency to think of commodities such as gold as an investment. The
Chinese are even planning to open a theme park entirely dedicated to
the yellow metal.14 The £14 million (€20 million) park will allow
visitors to watch gold being mined and processed. The more adventurous
will even be able to mine gold for a day. For the more serious Chinese
‘gold-bug’, a special edition of the China Economic Daily was published
in two gold versions. The more expensive issue cost each reader just
over £4,500 (€6,600) to catch up on the news and used 500 grams of
gold.