Analysis and News

Casino Capitalism or New Financial Derivatives?

BY GEOCAP's David Ackman

Financial trading by non-professionals, popularly referred to as retail trading, has grown exponentially in the past decade. Spread betting and Contract for Differences are the two most popular retail products persons use to trade on proprietary online platforms.


Spread betting and CFDs are referred to as new derivative instruments. However, some financial market participants view these products, often used by amateurs with limited to no trading experience, as “Casino Capitalism.” 


The roots of traded online financial derivatives can be traced back to the emergence of futures contracts over 3800 years ago — used in the Babylonian grain trade. Futures are based on a commitment by a buyer and seller to transact at a specified time and for a specific location, a predetermined quantity of a given commodity. Futures grain trading on exchanges emerged in Japan during the 1600s; the standardisation of contracts was led by the Chicago Board of Trade in the 1860s. Futures expanded to non-agricultural commodities in the late twentieth century and played a key role in the financialisation of the energy markets.


Spread betting allows individuals to benefit from price volatility. Amateur traders speculate on the short-term price action of commodities (such as crude oil), forex, shares, indices and cryptocurrencies. CFDs also allow for trading on short-term price action and entail the parties to the contract exchanging the difference between the opening and closing prices of the underlying such as Tesla stock.


A central question emerges on the difference between derivative trading and gambling — how should spread betting and CFDs be treated in the eyes of the law? The United Kingdom, London being a leading global financial centre, has led the online retail trading movement from innovation to the conducive legislative framework required. Before 2005, spread betting was overseen by both the gambling laws and financial regulations. 


The Gambling Act 2005 left spread betting to the Financial Services Authority, deeming the offering financial in nature. The EU Markets in Financial Instruments Directive (MiFID) also extended regulation of European financial services to cover CFDs, commodity derivatives and credit derivatives. 


The first spread betting company opened shop more than sixty years ago in the United Kingdom and registered under the 1960 Betting and Gambling Act. Section 18 of the Gaming Act 1945 states that all contracts or agreements, by way of gaming or wagering are null and void; the Act frustrates the winner of a bet from suing. Spread betting thrived due to the early legalisation of private gambling and removing the legal risk of off-exchange derivative transactions. 


Some market commentators argue that spread betting and CFDs are purely speculative, aleatory in nature and are a representation of opportunistic and non-productive behaviour. Regardless of the opposition, an online trading platform regulated by the applicable market regulator has superior beneficial market implications than the barring of such activity or the public’s engagement in unregulated foreign services that are easily accessible due to the digital nature of the transactions.


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