:: The Park Paradigm ::

Markets for the Digital Generation

In the Guardian a couple days ago there was an interesting article highlighting the fact that since the rise of Betfair (the leading online sports trading exchange), the betting strategy consisting of backing the favorite has outperformed most other strategies or tipsters.

      “The market has always been a fair guide to the relative chances of the horses in a race, but Betfair - which also provides a valuable guide to which horses are “live” from as early as the evening before racing - has pulled everything into a tighter focus.”

This is analogous to the index outperforming active fund managers in financial markets.

By creating a true two-way market with thousands of participants, Betfair harnesses the wisdom of the crowd to ‘find’ the price at which the favourite really is the probability adjusted favorite. Information assymetry is tempered and the ‘game’ is now fair - ie the ‘house’ no longer has a structural advantage. There is no ‘house.’

Which is why I guess the incumbent traders (bookmakers) in the UK and especially Australia have been so shrill with regards to Betfair’s arrival on the scene. They are living the post-Google paradigm already and finding it uncomfortable. Ironically, in the short term Betfair has probably helped their business by creating more liquidity, hedging possibilities and at least for now, attracting a new set of traders to these markets.

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from eFinancialnews.com:

The Chicago Mercantile Exchange and the Chicago Board of Trade, the two largest futures exchanges in the US, saw their highest volume gains in 2005, while European exchanges OMX and SWX also posted record volume numbers.

The CME, the largest US futures exchange, saw its trading volumes top one billion contracts for the first time in 2005. The exchange posted its sixth consecutive year of double-digit volume gains. Average daily volume at the CME was roughly 4.2 million contracts, up 34% from 2004.

The CBOT posted its highest yearly total volume recorded in its history, with more than 674 million contracts traded in 2005. Total annual volume rose 12.4% over 2004, making last year the fourth consecutive record-breaking year for the CBOT. The CBOT’s average daily volume also increased 12.9% to 2.7 million contracts from 2.4 million in 2004, another record for the exchange.

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Not specific to markets or financial services, but this post from naked conversations reminded me of another impact of the ‘post-Google’ / Web 2.0 world on our industry. The ability to promote an idea or build a reputation is no longer hostage to multimillion dollar advertising and promotional campaigns. Another traditional source of power or influence wanes.

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In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists. –Eric Hoffer

Twenty years ago the competitive advantage of an investment bank (or perhaps more importantly of an investment banker) lay in its access to superior information. Power, success and wealth revolved around the ‘I know’ (and you don’t!) model.

It’s pretty obvious that this model is obsolete in today’s online world: “It’s been very democratising, both across countries and within countries, ” says Mr. Brin of the access to information Google offers, “the most esteemed researcher at Stanford 10 years ago didn’t have the kind of access to information that somebody who is close to an internet cafe in Bangladesh has today.” (from an interview with the Financial Times)

Replace ‘esteemed researcher’ with ‘trader’ and you hopefully see my point. For those that are interested I wrote a more substantial article on this idea in June 2003.

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