Online spread betting tipped to even the odds for novice investors

24 Jul 2008

Treacherous markets have left conventional investors high and dry, but bookie Paddy Power has figured out a way to turn market losses into the punter’s gain.

Spread betting, a form of gambling that has its origins in the Seventies, is big business in 2008. As markets around the world rise and fall, the genre has been seized by one of Ireland’s largest betting firms as a way to allow punters to gain using the internet, whether stocks rise or fall.

But not only that, Paddy Power has begun using the rising demand for spread betting as a campaign against beleaguered brokers, coining the catchphrase ‘The death of stockbroking’.

While many stockbrokers will no doubt take issue with this, and intend to be in business for the foreseeable future, the betting chain has seized on an undeniable trend.

In the past, investors would have relied on the superior knowledge of stockbrokers to manage their portfolios wisely. Today, equipped with everything from Google, news feeds via RSS (Really Simple Syndication) and a variety of message boards, retail investors are more equipped than ever to make decisions on their feet.

Spread betting is essentially the ability to bet on an outcome of the performance of a stock, rather than being tied financially to the fate of that stock, no matter if it rises or falls.

The genre has existed for over 30 years but only with the advent of the internet has it emerged as a potent force in the online gaming business. Since 2000, seasoned financiers such as Dermot Desmond have invested in popular platforms like Betdaq, while former AIB treasury chief, Dermot O’Donoghue, has run Delta Index.

“We see this as access to an emerging customer segment,” explains Peter O’Donovan, head of financial spread betting at Paddy Power.

“Our core internet punter is a guy who is online typically three or four hours a day, watches all the races and is fully up to date on the form of all the runners and riders. The retail investor is a similar kind of guy. He watches CNBC, uses the internet and is well informed. The person may not be a gambler but may be an investor or a speculator. He or she may have the same appetite for risk, but not for a greyhound or a horse but a stock or a share.”

Paddy Power is a consummate investor in technology and in its half-year results for the first half of last year reported operating profits of €5.1m on revenues of €45.6m from its online channel, comprising nearly €300m staked on football, horse races, greyhounds and even bingo.

The new service allows punters to bet on the performance of currencies, bonds, oil, gold, socio-economic conditions and even the credit crunch.

In essence, with spread betting the punter is placing a bet rather than buying a share, so you can bet on prices going up as well as down. For example, if you think the Ryanair stock price will rise and buy at €3.46 for €5 per cent, you gain €5 for every cent the price moves up or lose €5 for every cent the price moves down.

O’Donovan says spread betting as a departure for Paddy Power is just one year old. But can people get as rich from spread betting as they could from investing in the markets the traditional way?

“Firstly, there is no capital gains tax on wins, nor is there stamp duty or brokerage fees or commissions.

“We wouldn’t over-estimate the gains, but we are presenting it as an alternative or a complement to traditional brokerages. Customers have a certain amount of money they want to invest in the markets, they put a portion of that into their pension funds and a portion to investment managers to manage.

“But increasingly they are keeping a portion of their investment portfolio to manage themselves. They have the internet at their disposal to research companies rather than rely on someone else’s knowledge.

“Financial investments were typically the sole preserve of city traders, guys who had access to hard-to-get information in a tight loop. If you weren’t on the inside of the information curve, there was no point playing ball.

“Broadband has afforded customers the ability to not only get access to information but also to do so in a timely manner. With business news and financial websites updating extremely quickly, punters can get access to information only city traders could access in the past.

“The barrier to entry is lower for the retail investor we’re typically targeting.”

O’Donovan explains that because Paddy Power is in a closed period, he cannot reveal the return on spread betting to the company so far. While the company is investing in robust technology to grow the spread betting market, he says, the challenge is educating the market to what spread betting is all about.

By John Kennedy

Pictured: Peter O’Donovan, head of financial spread betting at Paddy Power

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years