How Do Spread Betting Brokers Make Money?

Spread betting allows traders to speculate on financial markets without owning the underlying asset. Instead of buying or selling stocks, commodities, or currencies, traders bet on whether prices will rise or fall. This form of trading is popular due to its leverage, tax advantages in some jurisdictions, and ability to profit from both upward and downward price movements.

Revenue Structures

Spread betting brokers generate income primarily through the bid-ask spread—the difference between the price at which traders can buy and sell an asset. Brokers set these spreads wider than the market’s natural bid-ask difference, ensuring a built-in profit on every trade. For example, if a stock’s market price is 100.00/100.02, a broker might quote 99.98/100.04, capturing a portion of each transaction. While wider spreads increase broker earnings, excessively large spreads can drive traders away.

Beyond spreads, brokers charge overnight financing fees on leveraged positions. Since spread betting involves margin trading, brokers effectively lend money to traders to control larger positions. These financing costs are typically based on an interbank rate such as SONIA (Sterling Overnight Index Average) plus a markup. If a trader holds a long position overnight, they might pay an annualized rate of SONIA + 2.5%. Short positions may receive a rebate, but brokers often adjust these rates to maintain profitability.

Some brokers also profit from client losses through a dealing desk model, where they take the opposite side of trades. In this setup, the broker acts as the counterparty, meaning trader losses translate into broker gains. While lucrative, this approach creates a conflict of interest, leading some firms to hedge client positions instead. Regulatory bodies like the UK’s Financial Conduct Authority (FCA) oversee such practices to ensure transparency.

Margin Requirements

To open and maintain positions, traders must deposit a percentage of the trade’s total value, known as margin. This ensures they have enough capital to cover potential losses and protects brokers from excessive risk. Initial margin, or deposit margin, is the upfront amount required to enter a trade. The percentage varies by asset class—major currency pairs often require as little as 3.33%, while more volatile assets like individual stocks may demand 20% or more.

Once a position is open, maintenance margin comes into play. If market movements cause a trader’s account balance to fall below the required threshold, a margin call is issued, requiring additional funds. If the trader fails to meet this call, the broker may forcibly close positions to prevent further losses. This is especially relevant in highly leveraged trades, where small price fluctuations can significantly impact account equity.

Regulatory bodies impose minimum margin requirements to promote market stability and protect retail traders. In the UK, the FCA enforces margin levels set by the European Securities and Markets Authority (ESMA), including a 50% margin close-out rule. If available funds drop below half of the required margin, brokers must automatically close positions to prevent negative balances.

Position Settlement

When a spread bet is closed, the difference between the opening and closing price determines the trader’s gain or loss, which is settled in cash. Unlike traditional investing, where ownership of an asset changes hands, spread betting is purely speculative. Profits are credited to the trader’s account, while losses are deducted. Given the fast-paced nature of this market, brokers ensure near-instantaneous settlement to reflect real-time account balances.

Settlement timing depends on whether the position was closed manually or expired automatically. Traders can close positions at any time during market hours. Bets tied to futures contracts or specific expiry dates settle at the prevailing market price upon expiration. Some brokers offer rolling daily bets, where positions remain open indefinitely unless closed by the trader, with adjustments for financing costs and any applicable dividend payments.

Tax treatment of settled positions varies by jurisdiction. In the UK, profits from spread betting are generally exempt from Capital Gains Tax (CGT) and Stamp Duty since no physical asset is acquired. However, tax rules differ across countries, and traders who rely on spread betting as a primary income source may be subject to taxation under different classifications.