Spread Bets History
Spread Betting History
1st January 2007
In
the late 19th century the American satirist Ambrose Bierce wrote that,
“the gambling known as business looks with austere disfavour upon the
business known as gambling”. What was true in the 19th century is just
as true today. It provides the spread betting industry with perhaps one
of its most significant challenges – how to convince the consumer that
essentially there is no difference between traditional trading and
spread betting. The word gambling is defined by one dictionary as:
- n 1: money that is risked for possible monetary gain
- v 1: take a risk in the hope of a favourable outcome.
With
the possible exception of those who invest in companies for the sake of
the company itself, and leave their money with that company, the
definition adequately covers most trading activity.
Understanding
that it is not the product that carries inherently more or less risk
but the person and mindset using that product would help not only the
individual consumer but also the industry, the legislators and the
regulators. Such an understanding would, for example, have produced an
entirely different ruling by the House of Lords in the Hammersmith
& Fulham `swaps’ case of the late 80s. In 1991 the HoL ruled that
local authority interest rate swaps were illegal. Their lordships ruled
in this way not because the swaps were used as hedging instruments but
because they were used illegally in this particular instance. The
reality was that it was the performance of the councillors that was at
fault and not the financial products or the concept of hedging.
Covering risk on behalf of the rates-payers seems an eminently sensible
activity. The real issue that led to such a poor ruling by their
lordships was that the process smacked of gambling in the traditional
usage of word and was, therefore, considered as being overly risky. In
fact, the informed professional gambler is the same animal as the fund
manager, someone who is paid to be more knowledgeable about
investment/betting than the individual placing money with that expert.
Almost
any transaction can be adjusted to suit the particular risk
characteristics of the individual consumer. And, in fact, products can
start with one intention and are utilised for another. Indeed,
financial derivatives originally appeared in the early 1970s as a
counter to the volatility introduced into the markets by the breakdown
of the Bretton Woods system of fixed exchange rates. Another example is
the development of credit derivatives that were originally intended to
reduce the risk and exposure of organisational finances by building in
stability and predictability and consequently insuring against
volatility.