Spread betting is widening its net. Though its staple was the stock market, wagers on test matches and football games - or on John Major still being prime minister at the end of the year - are catching on fast.
When Ivan Welham arrives at work every morning, he has two things on his mind - Mercedes cars and gambling. Welham, who runs a Mercedes export business from offices in leafy Reigate, Surrey, spends several hours each day betting on stock markets and on futures. Last year, he made £80,000 from his endeavours, the previous year £40,000. The year before that he made a small loss. But there is a twist. Welham doesn't buy a single share. He is not using a broker and, if he felt like it, the agency he talks to every day would be just as happy to take a bet on a premier league football game, the latest test match, or the chances of John Major being still prime minister at the end of the year. Not only that but the winnings are tax-free. 'I used to buy shares but became disenchanted,' he says. 'Then a friend suggested I try this and I've never looked back.'
Peter Gold, another betting fiend, who runs a direct marketing agency in London, is equally enthusiastic. He bets every day on sport and currently has wagers on Leicester City conceding more than 75 goals in the Premier League by the end of the season, on Alan Shearer being the league's leading marksman, plus other bets on the FA Cup and European competitions. Like Welham, none of his bets are with the standard bookmakers such as Ladbroke or William Hill. He uses an altogether different type of 'bookie', where the winnings and losses are potentially greater and clients must have their creditworthiness checked before they are allowed a single flutter.
Welcome to the world of spread betting. There are now three companies offering this type of wager - City Index, IG Index and Sporting Index, all based in London - and a fourth looking to start up. Compton Hellyer, the portly ex-futures broker who runs Sporting Index, says: 'I think there is a great future for spread betting and within five years all of the big three bookmakers will come in.'
Hellyer has good reason to sound bullish. In the past 18 months his company has increased its number of clients from 800 to 4,000. IG Index has doubled sales and profits in the past year. City Index has plans to take over a casino in Las Vegas and open a bar in London. 'It's fantastically exciting,' says Stuart Wheeler, the tall, donnish managing director of IG Index. 'It allows people to back their judgment and you can also bet on people to do badly as well as to win. The more right you are the more you win.'
While betting on stock markets remains a staple of the spread-betting business, the agencies have tried to broaden the appeal with a range of more eye-catching bets. It is, for example, possible to bet on the number of points Blackburn Rovers will have at the end of the season, or the combined numbers of all the winners at a race meeting at Ascot. In football, bets are taken on the number of corners, throw-ins and the time of the first goal. At the last election, spread betters proved more accurate than the polls - they had the Tories inching ahead in the final days before the election.
For people weaned on fixed-odds betting, spread betting can seem confusing. However, regular users say that once the penny drops it is just as easy. In fixed odds, a punter may place a £10 bet on a horse at 10-1. If it wins, he receives £100 in winnings, minus tax. If he loses, he simply loses his stake. Spread bets operate more like the stock market, with the bookie acting as the stockbroker, offering a spread of prices at which clients can buy or sell. Take a typical cricketing spread bet. If an individual wants to bet on England's first-innings total in a test match against Australia, the betting agency would be offering a spread of, say, 250-260, which is the the number of runs it thinks England will score. If a punter thinks England will score less he places a 'sell' bet, offering a stake of £10 per run. So if England scores 200 the punter wins 250 minus 200 multiplied by the £10 stake, ie, £500. But if England romps to 360, the gambler loses 360 minus 260 multiplied by the stake, that is £1,000.
Back at the office the agency has a roomful of dealers watching computer screens and either making markets - that is, devising the spreads - or taking calls on bets. While the game is progressing, clients can change their bets against spreads that will be constantly changing. All they need is a teletext screen to check the prices - or they can simply ring the office. This is just like standard bookmaking. If large numbers of punters bet in the same way it affects the odds, just as a large number of buyers of Marks & Spencer shares will push the price up.
All this is highly regulated stuff. Spread betting is classified as investment business under the Financial Services Act, and the firms are regulated by the Securities and Futures Authority. The stringent rules demand that the firms are well capitalised and that they undertake thorough checks on clients. Once potential members have shown they have adequate income they are allowed to bet - but only up to agreed limits. All client deals are taped and all debts are legally enforceable. 'We are closer to a broker than a bookmaker,' says Hellyer.
Dealers are drawn from a range of backgrounds, though most come either from the City or from other book-makers. The punters, according to IG Index, range from farmers to playboys. However, a large slice of regular clients work in the City, as it is there that spread betting is best known.
One City Index client is a top trader for a large merchant bank. As if trading all day were not enough, he also trades at home at weekends betting on football, rugby, anything. 'I just love to trade,' he says. 'Otherwise I get bored.'
Gold, the direct marketing man, says: 'It added a new dimension to my life. Every day when you get up is very exciting. But you have to be careful. These markets can be very volatile and I tend to look at how much I can lose rather than how much I can win.' Welham agrees: 'You have to have a system - and not be frightened to cut your losses. A friend of mine lost £26,000 in three months because he did not have a system.'
It is encouraging to note that even the bookies can get it hopelessly wrong. Back in February, for example, Sporting Index offered an eye-catching spread on Andy Cole, the £7 million new recruit at Manchester United. It said he would not score until his seventh game at the end of February. In fact he scored in the very next match against Aston Villa. The problem was that every punter got it right. Sporting Index lost £50,000. 'It was a disaster,' says Wally Pyrah, Sporting's public relations manager. 'It was supposed to be a bit of fun but it turned out badly.'
Sporting also took a bath on Brian Lara, the West Indian batting phenomenon who scored 375 in the final test match against England last winter. The Index had run a spread on the total number of runs Lara would score in all tests. Coming into the final test, Lara was already set to smash Sporting's spread of 350-370 for the series, but even the agency's gloomiest soothsayer was not predicting the havoc to come. Hellyer recalls: 'Every time he hit a four it cost us £1,000.' Gamblers who bet right at the beginning of the series were collecting 428 times their stake.
As with traditional bookmakers, however, the 'books' are designed to balance. The Lara index may have been a disaster, but the company made £150,000 on other bets during the test series. Then there is the punter who consistently bet against Nick Price to lose the British Open Golf championship last year. He bet against him after every round, but Price eventually lifted the trophy and the punter had to write a cheque for £40,000.
Such high-profile bets are a long way from spread betting's origins.The first official companies were formed in the 1970s - Coral Index, part of the Coral bookmaker group, is regarded as the first, taking bets on the performance of the FT30 and the Dow Jones markets. Stuart Wheeler, who had just been fired from his job at First National Finance Corporation, decided to get involved. He approached Cyril Stein, then chairman of Ladbroke, but nothing came of that or a similar overture to William Hill. So Wheeler, an Eton-and Oxford-educated former Welsh guards officer and poker wizard, set up on his own, offering bets on the gold price. This was in late 1974 and the plan backfired when the price of gold plummeted. But Wheeler noticed that the people who were winning were taking their profits tax-free.
Wheeler started IG Index with funds from friends. In a complicated later flurry of deals, Ladbroke bought Coral Index and renamed it Ladbroke Index. IG then bought that business in the 1980s. Last year IG made pre-tax profits of £800,000 on turnover of £16 million.
City Index was founded in 1983 by former City analyst Jonathan Sparke and lawyer Tony Wollenburg but in 1994 London markets broker Intercapital took a majority stake in the business. It has over 5,000 clients and last year saw profits rise from £240,000 to £580,000. This year, Sparke hopes to make £1 million. He has recently returned from a visit to South Africa where the company is considering offering spread bets. There are plans to run markets in Europe and even buy a Las Vegas casino and turn the place into a spread-bet paradise. Intercapital's chairman, Michael Spencer, is an enthusiastic devotee of spread betting, and City Index is considering opening a bar in London that would include TV screens and phones. 'We've looked at sites in Smithfield and Leadenhall Market,' says Sparke.
Sporting Index was formed by Hellyer who likes to joke that his three years at Trinity College, Dublin yielded a first in racing, a second in golf and a third in business studies. A former steward of Kempton racecourse and joint owner of successful National Hunt racehorse Docklands Express, Hellyer raised more than £1 million from 60 friends and established Sporting Index in Kennington, south London. Last year the company turned an £11,000 loss in 1993 into a £146,000 profit on a £1.8 million turnover.
The bets offered are diverse - IG is currently running bets on the number of seats the major parties will win at the next election with Labour on 323-333, well ahead of the Conservatives at 265-275 - but sports bets provide the lion's share of turnover. Last year, football accounted for 42% of profits, followed by racing and cricket, though the football figure was boosted by the '94 World Cup.
So far spread betting is little more than a niche business but Intercapital's purchase of a majority stake in City Index shows how seriously the sector is now being taken. The rumoured interest of the bookmaking groups also shows that the larger corporates are considering bringing the arcane world of spread betting to a wider audience. 'We are keeping an eye on them,' Ladbroke says. With or without the big bookmakers, however, the success of spread betting looks a sure thing.