How Do Spread Betting Brokers Work Out Their Prices?
Spread betting providers determine their prices according to the value of the underlying market in the relevant asset or index, combined with the degree of market liquidity. This is designed to produce a different result from the spot price at a given time, because it reflects the reality of the market situation rather than the temporary trading levels.
In order to accurately arrive at pricing that factors in both the underlying market and liquidity, brokers turn their attention to the futures markets as a signifier of pricing. Futures are far more liquid instruments than underlying markets, thereby presenting a more accurate reflection of true value. This is designed to help protect the spread betting brokers, by providing them with more cover for market movements.
The prices quoted by the spread betting broker not only largely reflect the futures prices in the same instrument class, but also factor in a margin for their commission - i.e. the spread. Where there is no obvious underlying market or obvious price base for a spread, the broker will turn to algorithms and formulae in order to output prices, similar to the way in which bookmakers set their pricing, in order to make up for the lack of market price transparency.
While the brokers are interested in covering their own backs as far as pricing is concerned, that doesn't mean its impossible to win - in fact, brokers tend to prefer successful clients who trade with them time and time again, resulting in more transactions and more spread commissions for them.