Spread Betting Companies Eye New Markets Amidst Slowing Growth Rates

on Jun 22, 2012

Spread betting companies are looking to boost revenues by tapping into new high-growth markets, the Financial Times reported. The industry’s growth rates have slowed down in mature markets such as the UK, prompting executives to seek opportunities abroad.

Although the young online financial betting market has enjoyed increased popularity during the past decade, in 2008 many companies suffered a wave of bad debts due to the global financial turmoil. As a result, some spread betting operators have not been able to generate a full-year profit since.
Spread betting allows users to make profits from betting on minor fluctuations in the prices of securities by placing relatively small deposits. Online betting operators require clients to post “margin” to cover any losses, and they typically impose automatic “stop-losses” to avoid unsustainable deficits. However, rapid market swings can produce losses that significantly exceed this margin, raising the risk that customers will default. Because spread betting companies cover their exposure to large customer positions by taking corresponding positions in the market, sudden adverse price movements can result in serious losses.

!m[](/uploads/story/99/thumbs/pic1_inline.png)The FT gave as an example the IG Group, the UK-based company trading in financial derivatives. The firm is reportedly the largest operator by sales in the country, and in the three years between 2006 and 2009, the firm has seen year-on-year growth in active client numbers of more than 30 percent. The IG Group’s growth rate has been decreasing every year since, hitting a low of seven percent between March 2011 and March 2012. Additionally, the IG Group experienced no year-on-year growth in active client numbers in the last three months of the latter period, with the UK figure falling by one percent.

According to IG Group Chief Executive Tim Howkins, while all evidence shows that the company’s domestic growth has slowed down, it is “fallacious to think the UK market would reach a plateau”. Nonetheless, he told the Financial Times that in an effort to facilitate growth, the company would channel its resources towards new markets and it would target “smaller numbers of better-quality clients.”

CMC Markets, the second biggest spread betting group in the UK, has been experiencing a similar trend. The company expanded its revenue 64 percent to £181.4 million in 2008, but earnings declined to £161.7 million in the 12 months leading up to March 2011.
CMC Chief Executive Doug Richards said the firm is optimistic that it would increase its market share in the UK after making investments in technology. He also stressed the importance of growth opportunities in emerging markets abroad.

City Index is another spread betting company seeking international expansion. The operator’s Chief Executive Martin Belsham told the FT that that the third biggest group has increased the share of revenues generated overseas from 30 percent to 60 percent.
And although all three company executives do anticipate challenges ahead – even bigger than the ones they have faced while opening up new markets for contracts for difference abroad—the executives remain optimistic and forecast rising profits in the long run. They place much of their hopes for increases in per-client revenue on the growing popularity of their smartphone platforms.


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