Financial betting
Encyclopedia
Financial betting refers to the wagering on the price development of a financial instrument at some later date relative to the current price or level of the instrument, against odds offered by a bookmaker. Maximum potential pay-off of the wager is known when the bet is taken and as a corollary risk is known beforehand by being limited to the initial stake.
Financial betting instruments are a type of digital option. The outcome of the wager at settlement is binary, that is, either a win or a loss. Settlement is executed in cash and there is no delivery of the underlying asset. At any point in time prior to the settlement date bets can often be sold, allowing for possibilities to bet on the accuracy of a market move within the fixed limits of zero win (loss of the stake) and maximum potential win. A fee might sometimes be charged for this service.
The main difference between financial betting and speculation
on financial markets using products such as financial spread betting is that the bet must result in a simple binary win or loss based on an event on the underlying financial instruments. This triggers a fixed payout for a win, while with spread betting the payout or loss varies with the price level of the underlying instrument.
s or securities exchanges in order to avoid arbitrage
opportunities (although this might not be possible because of limitations on shorting, i.e. laying bets). Calculation of the odds therefore draws on the Black–Scholes formula for pricing options. Using some variation of the model to solve for volatility, from observed market prices of traded options, gives implied volatility
. Implied volatility is forward looking, that is, it can be used to estimate the odds for future price movements using mathematical algorithms.
Within financial fixed odds betting the odds are fixed, while the strike price
where a win is achieved relative the current level changes. The fixed odds company will calculate how much has to be bet to win a certain amount upon settlement if the conditions of the prediction become true.
Liquidity is always provided and is achieved by the bookmaker acting as a market maker
, always being willing to sell bets to a buyer, and in the case it is permitted, to buy bets back from a participant wanting to sell the bet before it expires.
A central feature of financial betting is leverage
. The benefit of leverage to the participant is that it allows a greater percentage change in capital than if it were invested directly in the underlying asset. This makes financial betting less capital intensive than trading directly on securities exchanges.
. As financial spread betting and CFD brokers are regulated by the UKs financial regulator the FSA
and not gambling commission
there are limitation on financial betting they can provide but all the brokers provide binary betting.
Gaming companies providing financial betting include:
Other financial betting firms include:
Financial betting instruments are a type of digital option. The outcome of the wager at settlement is binary, that is, either a win or a loss. Settlement is executed in cash and there is no delivery of the underlying asset. At any point in time prior to the settlement date bets can often be sold, allowing for possibilities to bet on the accuracy of a market move within the fixed limits of zero win (loss of the stake) and maximum potential win. A fee might sometimes be charged for this service.
The main difference between financial betting and speculation
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
on financial markets using products such as financial spread betting is that the bet must result in a simple binary win or loss based on an event on the underlying financial instruments. This triggers a fixed payout for a win, while with spread betting the payout or loss varies with the price level of the underlying instrument.
Basis in financial theory
Odds have to be consistent with the real-time pricing of the underlying financial instruments listed on foreign exchange marketForeign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
s or securities exchanges in order to avoid arbitrage
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
opportunities (although this might not be possible because of limitations on shorting, i.e. laying bets). Calculation of the odds therefore draws on the Black–Scholes formula for pricing options. Using some variation of the model to solve for volatility, from observed market prices of traded options, gives implied volatility
Implied volatility
In financial mathematics, the implied volatility of an option contract is the volatility of the price of the underlying security that is implied by the market price of the option based on an option pricing model. In other words, it is the volatility that, when used in a particular pricing model,...
. Implied volatility is forward looking, that is, it can be used to estimate the odds for future price movements using mathematical algorithms.
Types of financial betting
There are three main variations of financial betting. These vary mainly in the way odds are displayed.- Fixed odds financial betting
- Floating odds financial betting
- Binary betting
Fixed and floating odds betting
Within financial floating odds the odds change for a given strike price as the price of the underlying changes. The floating odds company calculates odds for different strikes and how much can be won upon settlement depends on how much is bet at those odds.Within financial fixed odds betting the odds are fixed, while the strike price
Strike price
In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...
where a win is achieved relative the current level changes. The fixed odds company will calculate how much has to be bet to win a certain amount upon settlement if the conditions of the prediction become true.
Binary betting
Binary betting displays odds as an index from 0 to 100 where the bet settles at 100 if the event happens and 0 if it does not. An amount is wagered per point on the index. The event can be bought or sold, making it possible to profit both from the event occurring or not occurring.Features
A central feature of financial betting is the fixed risk nature which allows market participants to limit the risk to a known amount. When one opens a bet (long or short) they know beforehand what risk they are taking. What important here is that you can exit your bet at any time before settlement thus you have an option of minimizing the risk even further. The same can be applied to the winning bets (you can collect the win before the settlement time).Liquidity is always provided and is achieved by the bookmaker acting as a market maker
Market maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
, always being willing to sell bets to a buyer, and in the case it is permitted, to buy bets back from a participant wanting to sell the bet before it expires.
A central feature of financial betting is leverage
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
. The benefit of leverage to the participant is that it allows a greater percentage change in capital than if it were invested directly in the underlying asset. This makes financial betting less capital intensive than trading directly on securities exchanges.
Financial betting providers
Financial betting is sometimes integrated within gaming companies. There are also specialized financial betting firms, some of which might also provide financial spread betting and/or CFDsContract for difference
In finance, a contract for difference is a contract between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time...
. As financial spread betting and CFD brokers are regulated by the UKs financial regulator the FSA
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
and not gambling commission
Gambling Commission
The Gambling Commission is Great Britain's regulatory body for most, but not all, gambling.-History:It was established under the Gambling Act 2005 and assumed full powers in 2007, taking over responsibility from the Gaming Board for Great Britain, in regulating arcades, betting, bingo, casinos,...
there are limitation on financial betting they can provide but all the brokers provide binary betting.
Gaming companies providing financial betting include:
- BetssonBetssonBetsson Malta Ltd. is an online gambling company that offers online poker, online casino, scratch cards, exchange betting and sports betting. The company is headquartered in Malta and owned by the OMX listed public company Betsson AB.- History :...
- LadbrokesLadbrokesLadbrokes plc is a British based gambling company. It is based in Rayners Lane in Harrow, London owned by Bhavin Kakaiya. From 14 May 1999 to 23 February 2006, when it owned the Hilton hotel brand outside the United States, it was known as Hilton Group plc...
- gnuTrade
- InterTrader
Other financial betting firms include:
- City Index GroupCity Index GroupCity Index Group is a broker providing online financial spread betting, FX, and CFD trading. As well as Britain, it operates in United States, Australia, China, Singapore, Poland and Germany. Today, the group consists of the City Index Limited, Finspreads, FX Solutions and IFX Markets...
- ETX CapitalETX CapitalETX Capital is a UK based financial company and a trading name of Monecor Limited. Monecor Limited is a member of the London Stock Exchange...
- FinspreadsFinspreadsFinspreads is an online financial spread betting firm that offers customers access to various instruments on the world’s financial markets through online and mobile trading platforms...
- ChoiceOddsChoiceOddsChoiceOdds is a UK based company specialising in online financial betting. The company head quarters are at Sugar Quay, London.-History:The company was founded by Felix Riley in 2006 along with co founders Paul Laight and Michelle Bass...
- Paddy PowerPaddy PowerPaddy Power is Ireland’s largest bookmaker. Offline it conducts business through a chain of licensed betting offices and by operating Ireland's largest telephone betting service. Online it offers sports betting, online poker, online bingo, online casino games and spread betting...
- IG Index