IG: What the sector's granddaddy did next

Motorway Man is the latest the psephologists have come up with to describe the geography and habits of swing voters in the upcoming general election.

When asked what sort of people trade with his firm, Tim Howkins of IG Index replies immediately: "They are decision makers A new client has a median age in the mid-thirties and has a degree of financial or domestic security.

They are, however, in general decision makers, they are in management, are professionals or own their own business."

Popular myth has it that spread betting attracts only either high-rolling professional punters or City boy-racer types acting on a bit of inside information, and although Howkins, chief executive of IG's listed parent company IG Group, is not attempting to de-glamourise them, he does a pretty good job by talking about his clients utilising "surplus risk capital as a tool within their investment portfolio" rather than calling them speculators taking a punt.

Instead he is seeking to explain why he firmly believes in the ambitious growth trajectory which he says IG Index remains firmly on.

IG claims to have more than 50 per cent of regular UK spread-betting punters using its products either as primary or secondary market maker. It also says that it has 25,000 regular traders every month. It further claims its punting clientele can comfortably continue to grow at mid-teen percentage points every year.

"We have been talking about 'annual mid-teen percentage growth in the UK over the next two to three years' for the past decade," says Howkins pointing to a 10-year graph. "I cannot make predictions over the longer term but as greater understanding of financial markets occurs among the public — and the internet has been a great leveller here — I remain happy we can continue to grow at mid-teen percentage points in the UK over the next two to three years."

His point is that while spread betting will never overtake a punt on the horses at Kempton in popularity, there are plenty more decision makers who might yet take the plunge into spread betting and see it Howkins' way: as an important investment portfolio tool.

UK growth, says Howkins, will also be almost all organic. So-called "white label" operations — investors trading CFDs or spread betting with financial intermediary Hargreaves Lansdown are, for example, using IG's platform — only bring in "incremental" revenues, he says, while there is "virtually no crosso-ver" in business from punters betting on IG's sports spreads arm extrabet.

But IG's exponential growth is not in the UK. The European Union's MiFID financial services directive has liberalised and deregulated markets and so spread betting is spreading in the more sophisticated investment communities of the EU: Germany, France, Italy and Spain. "In those markets we have between 1500 and 2500 clients trading regularly every month," he says. "There is no reason that should not grow to the levels of our Australian business where we have 8000 regular traders monthly."

He does concede that the notion of spread betting is foreign to some markets' psyche. "The 'betting' side might suggest leisure activity," he explains. "In certain markets the notion of betting on shares is some sort of crazy English idea. To them it is serious. It is serious investing."

And he further concedes different markets have different trading patterns. "Business in Singapore for instance has grown at a vastly disproportionate rate to the population — but then Singapore very much has a speculative culture," he says. "In Germany where business is currently very good, the Germans are very less reactive to volatility compared with, say, in the UK. It is just a different type of risk appetite."

While growth in Europe is the most exciting market for IG at present, Howkins is also looking west: "The US is certainly the biggest piece of blue sky excitement."

In America, long time the land of the not-free to speculate online, times are changing. Not only have regulations changed to allow IG's US unit Nadex to offer spreads or binaries on indices, forex and commodities, the business is becoming disintermediated: that is, Nadex can approach brokers for access to their client base of investors. While Nadex is unlikely ever to be allowed to trade spreads or CFDs on individual shares — a legacy of the frauds of the Great Crash in 1929 — the potential for attracting large numbers of American clients is huge.

Further out are the opportunities of the BRICs, the giant emerging markets.

In China IG has opened a representative office — "we are showing commitment but don't hold your breath: this is a market for years in the future"; financial regulation in India meanwhile makes it a "difficult market"; and Howkins believes Russia has limited opportunities. Which leaves Brazil.

"This is potentially a very large and very exciting market. Watch this space."

Howkins believes spread betting — done well — can have a competitive edge in the battle to attract trading investors. "There are two things, both technology related," he says. "The first is reliability. Everything at IG is duplicated. If this office burns down, the website would be fine and we'd trade as usual."

The other issue, he says, is quality of execution. "Firms might be trying to offer one-point spreads but can they deliver them? We believe we execute 99% of the time at the price offered.

"It is all very well saying you can offer the best prices but if you don't, your clients move on."

FROM GOLD TO FOOTSIE

IG INDEX did not even exist when most of its clients were born.

The world's oldest and largest spread-betting firm with a market capitalisation of £1.5 billion, was founded by Stuart Wheeler, the grand old man of the industry, in 1974 as Investors Gold Index, a way of betting on movements on the precious metal by indexing the price when speculating on gold was illegal.

By 1982 IG was offering bets on Britain's leading companies and by 1995 on all publicly quoted firms.

As for the rest of the gaming industry, the coming of the internet changed everything. IG now claims that 50% of all UK spread betters use it as their primary or secondary financial bookmaker of choice.

Wheeler cashed in his chips in 2003 in a management buy-out. The company floated in 2005. Current chief executive Tim Howkins took charge a year later. Howkins, 47, perfectly fits the demographic of many IG clients: well off (pay package of £436,000 and shares in the company worth nearly £20 million); professional (trained as an accountant with Ernst & Young), and entrepreneurial (before joining IG he set up his firm of accountants).