The dangers of spread betting

We learned in the financial crisis that unaccountable hedge funds can play a useful role. The superior analytical skills of funds such as Sir Michael Hintze’s CQS meant they were able to detect the weak links in Britain’s banking system – of which alliance & leicester was one – long before the rotten quality of some of the securitised assets on balance sheets became widely known.

Short-selling of some of the financial stocks by lansdowne Partners among others attracted criticism for chasing down share prices. But by exposing the feebleness of the underlying balance sheets of weak links in the financial system such as northern Rock the hedge funds contributed to a more realistic value being placed on shares that were essentially worthless.

it was the reporting of a Bank of england emergency rescue operation for the Rock, rather than the calamitous drop in the share price, which caused the embarrassing run on the bank.

That experience taught us that hedge funds, basing decisions on rational analysis (rather than ille- gally acquired information such as the Galleon fund in new York) play an important role in making financial markets more efficient.

a big question at the moment is whether spread-betting companies, which are becoming ever more ubiquitous, are doing the same.

Plus500, which arrived on the stock market in 2012, was welcomed because it appeared to have first-class technology which made spread-betting on financial markets more efficient and the stock soared. We have since learned that it also seems to have had a rather cavalier attitude to regulatory checks such as money laundering. as a result, some 25,000 British users of the site have been in the unhappy position of having their funds frozen while proper checks are put in place.

in the meantime, some accounts have been switched to the financial Wild West of cyprus where the bust banks are only held together by Russian funding.

The Plus500 experience raises questions about the quality of compliance across the spread-betting industry. as we report today, it is not clear that all the established players, including ETX, have the most rigorous form of compliance.

We trust that after the Plus500 experience the regulator, the Financial conduct authority, is conducting checks on all the spread-betting firms to make sure that robust compliance is in place to prevent money laundering and ensure client accounts are securely managed. anecdotal evidence from colleagues who have used spreadbetting sites suggests that the experience at the very best has been variable.

indeed, there may be a premium to be paid for spread-betting firms which regard compliance as an essential part of what they do. This will be important as the sector looks to be growing by leaps and bounds with CMC Markets, founded by former Tory party treasurer Peter cruddas, hoping to come to the market next year with a potential £1bn valuation.

clearly, for investors interested in trading stocks, foreign currencies and bonds, the spread-betting firms are a useful point of access. They are cheap to use – in that there is no stamp duty – and offer investors the chance to leverage their cash, something more difficult to achieve on cash markets.

By the same token there is a higher degree of risk, as Plus500 investors have learned to their cost. One assumes a degree of expertise among the people who use spread-betting sites and therefore they become part of the price-forming process.

But there must also be concern that they offer an opportunity for chicanery. The libor and foreign exchange rigging scandals have demonstrated that even the highest-regulated activities are vulnerable to cheating. One hates to think how easy it must be to abuse spread-betting sites, many of which seem to fail the basic smell test.

Switching off

SOME 48-hours after the Hollywood Reporter revealed that ITV had decided not to pursue its £600m deal to buy the US television and film studio, this price sensitive piece of information finally is still to be shared with British investors. london brokers seem relieved that adam crozier and his cohorts have walked away from a production deal that might have caused severe indigestion.

Pity the company did not feel it necessary to share the information with investors through the conventional way of a regulatory announcement to the stock market. a bit old fashioned perhaps.

Dimon rage

JPMorgan chase chief executive Jamie Dimon seems to have learned no modesty from the huge regulatory cock-ups on his watch, including the london Whale affair and the whopping $13bn settlement over mortgage securities. He accused investors who cast 38.1pc of votes against his $7.4m bonus for 2014 ‘lazy’ and ‘irresponsible’ for following the advice of corporate governance advisory outfits ISS and Glass lewis.