A novice punter on out how it works

I’ve enjoyed reading PB.C much longer than I’ve been placing bets on elections, so until a few months ago I was mystified by some of the phrases and odds given in the posts. When I made serious effort to find out what it all meant I was able to get a lot more from the posts and comments, so hopefully I can now return the favour to others.

Rather than laboriously go through the details, let’s jump right in with a concrete example, from Cantor Spreadfair (27 March, 5.30pm):

The ‘spread’ here for Labour seats is 299 – 302, because that is the difference between the Buy and Sell price: the market believes Labour will win between 299 and 302 seats.

Assume you believe this to be a severe underestimate of Labour’s position come the next General Election. By buying at 302.0, you will make money for every seat more than this that Labour wins. The figure right below is the number of pounds per seat available to bet. If you bet only £1, and Labour wins 352 seats, you will win £50. If you take the full £5 available and Labour gets 352, you will win £250. But the downside is just as steep: if you buy £1 a seat at 302 and Labour wins only 280 seats, you will lose £22. But with the same bet at £5 a seat, you will lose £110 in that event.

If you’ve followed this far, you’ve basically grasped all there is to it. When buying, you multiply the stake by the number of seats the Buy price is off by (positive or negative) to calculate potential wins and losses.

Selling operates by exactly the same principle. If you believe Labour will win only 270 seats, you would sell at 299, and if you are right on the nose you will make £29 for every £1 you staked. If you took the whole £13 stake, you would be a pleasing £377 better off. Of course, if Labour did worse than either you or the market expected, you would win even more.

This is the main difference between Buying in spread betting and Backing an outcome in ordinary betting. If you Backed Labour to win more than 302 seats with a conventional bookmaker, your winnings would be the same no matter how much better than this Labour did. With spread betting, every additional seat different from the price you bought or sold is multiplied by your stake to calculate the winnings.

This is why spread betting carries such heavy warnings: there is arguably no such thing as low-risk spread betting, because even a £1 bet will mean big losses if the error that stake is multiplied by is large enough.

Binary betting , part of IG Index, is a form of spread betting that follows all the same rules, but does so by assigning a certain range of prices (usually 0 to 100) to an event, with 100 being the outcome if it occurs and 0 if it does not. If you buy at £1 a point at 33 and the event occurs (David Cameron is elected Conservative leader, say), you win £100, for a £67 profit. If it does not, you lose your stake of £33. Binary spread betting is much more comparable to conventional betting in the sense that the wins and losses are clear at the time the contract is bought or sold: a £1 a point Buy at 20 is identical to Backing an outcome with £20 at 4-1.

There are often interesting political markets at SportingIndex and its associated BetHiLo.

Those with a keen eye on political outcomes and a trust in their own judgement may already be seeing the potential for making a lot of money with spread betting as described above, but there are other advantages that can prove lucrative.

On Betfair, any bet made involves tying your money up until the outcome. If you bet that Labour will win the most seats at the next election, even if you do so with the greatest confidence, you will have to wait until 2009 or perhaps 2010 before you can profit from it. Similarly, if you back a long-shot leadership contender early in the day (say, I don’t know, … Chris Huhne at 200-1), and then lay him when the odds move down to 3-1 or so, you are in the green whatever happens – but only after the result is announced.

But because spread betting involves buying and selling contracts that are interchangeable (£1 a point is simply £1 a point: worth that day or minute’s price whether you paid £400 for it or £200), the drawback of tying up money and waiting until the event for profits does not arise in any reasonably active market. You can buy Chris Huhne in a binary bet at, say, 6 and if he rises to 36 two weeks later you can sell him there and then. The same money can enter the market for the same event repeatedly, growing each time you guess right, to allow for further bets on the short-term direction of the market.

It should not need to be said that spread betting involves great financial risks, and shouldn’t be entered into lightly – if you want a carefree flutter, Betfair may suit you, but Spreadfair does not. But the upshot of the fact that one big mistake in spread betting can mean huge losses is that if you can get it right just once while the market has got it considerably wrong, there is a potential for huge gains. If you really believe you know your stuff just that once, it may be worth taking the extra risk when you think the market is in error.

And just as Betfair is a fantastic resource even for political people who never gamble, understanding spread betting allows the non-gambling politico to understand in quantitative terms where those willing to stake their money on certain outcomes are placing it. If you’re interested enough in politics to read this site, it’s unlikely you can’t benefit from an understanding of spread betting.

Peter Cuthbertson
Peter is an experienced Conservative activist and blogger, and is finishing a degree in Philosophy, Politics & Economics at the University of Essex.

Note from Mike Smithson: Peter’s feature is the latest guest contribution in part of the new strategy on the site. If you think you have something to write that would interest the thousands of people who check out PBC each day then please let me know by email.