Spread-bet bookies feel the pinch

CITY bookmakers that provide private investors with the chance to make money even when stock markets are going down are having to grin and bear it as their own valuations shrink.

Spread betting has grown rapidly as a tax efficient way of speculating on the markets in recent years, with customers able to make up-bets or down-bets at anything between a penny or thousands of pounds per point.

However, in recent months, City analysts and institutions have shifted from infatuation with the sector to caution. This change has been reflected in a fall in the share price of IG Group, the market leader in spread betting, from a high of 652 1/2p last autumn to just 295p.

Chairman Stuart Wheeler has seen the value of his 31% holding cut from £111m at the peak to £50m.

On Wednesday, Zetters, the football pools operator that has transformed itself into a foreign exchange and derivatives market maker, said it was buying Financial Spreads, one of IG's competitors, for a knockdown £8.7m.

To put it flippantly, anyone who made a down-bet on the valuation of financial spreads bookies six months ago would now be sitting on a profit. Several factors explain the change of mood. The first is that betting volume, although more resilient than that of private-client stockbroking, has suffered over that period as global stock markets have stalled.

Paul Spencer, analyst at broker TD Waterhouse, said: 'IG shares have fallen because people had been expecting its previous growth rates to continue in 2002 and 2003. Forecasts have been cut and IG's prospective price-earnings ratio has been scaled back from 25 to 15.'

The benchmark FTSE 100 index has been imprisoned in a 5000-5300 range since last October, hitting everyone that thrives on volatility - from day-traders, to hedge funds and financial bookmakers. Many of the customers of firms such as IG and Financial Spreads are big-hitting City employees who have seen their bonuses cut or their jobs endangered, and are therefore speculating less frequently.

Profits in spread betting face a second challenge - from a price war developing between bookmakers following the arrival of CMC/deal4free last year, which promised narrower spreads. Since the width of a spread is key to the dealing costs of the client and a bookie's profit margin, this put other firms under pressure. IG and Financial Spreads have narrowed some quotes in response.

Finally, City sentiment towards the sector was shaken a little by the noisy controversy this spring over a £ 6m punt by entrepreneur Paul Davidson in biotech firm Cyprotex. The bet by Davidson, who already owned 35% of the shares, was hedged by his bookie, a process that ultimately absorbed the bulk of the new shares issued in Cyprotex's flotation. It led to fears that regulators, or the Chancellor, might clip the wings of spread bookies.