Parallels
The Betfair IT department has once again been in the news for their impressive exploits building and managing one of the most robust and successful electronic markets on the planet (shhh don’t tell the NYSE!) Referring to the opening match of last year’s football World Cup:
On the day of England’s first match, 4.4 million bets were placed and only 20 took more than one second to process. It means 99.999 per cent of bets were placed in less than one second.
‘To get five nines is fantastic,’ says Devine. ‘The reason why performance is so important is that lots of activity is done on the site in a short timeframe.’
Last summer, Betfair worked with its database supplier Oracle to increase the target percentage of bets processed in less than one second from 99.1 per cent to 99.9 per cent.
Devine says estimating opportunity cost for delays in processing transactions is not an exact science, but he suggests the mathematics is impressive.
‘Reducing the amount of time it takes to process a bet by 0.5 seconds – on five million bets per day – saves 694 hours, or 28 days of total customer waiting time per day,’ he says.
I’d be interested in finding out how this performance stacks up against the major stock exchanges and financial futures markets. (Any readers that have this information to hand please feel free to comment.) In any event, I’d be surprised if Betfair didn’t stack up nicely.
The parallels with more ‘traditional’ exchanges or derivative markets continue to grow and mature. One parallel I find particularly compelling is the vibrant community of professional traders and trading solution providers that has arisen around the Betfair exchange; with automated and algorithmic trading solutions adding significant liquidity to the markets (and creating their own challenges in terms of managing traffic on the exchange.) This is something I’ve highlighted before. The founder of RacingTraders, one such software provider, eloquently describes why Betfair has enjoyed much success with traders:
In appearance Betfair was no different from the financial markets, the only difference was the underlying instrument which was being traded. Instead of buying and selling stocks or bonds, people were buying and selling bets on sports events. There was nothing stopping me from Laying a bet with one person at a certain price and then placing that same bet with somebody else at a slightly higher price, so long as I could read the short term direction of the market. The major advantages that Betfair had were how easy it was for anyone to get started and also how cheaply you could start learning. To get back into the futures exchanges as a trader takes capital and some hefty monthly bills on seat lease, round turns etc, Betfair immediately struck me as the poor man’s stock exchange, instantly accessible to anyone. Even their commission structure was better than the financial markets: Betfair takes a small percentage of your winnings instead of a fixed transaction fee based on Volume. I was free to trade huge volumes of ultra short term positions whilst trying for only single tick profits and was still able to make it pay.
In addition to trading systems like RacingTraders above and others like the Sports Trading Workstation and Bet Angel, there are many blogs that focus on discussing Betfair trading strategies and results, such as The Betfair Trader and WizardGold (the latter who interestingly comments both on sports and forex trading strategies and systems.) I will continue to look for connectors between these parallel (market) universes, and increasing signs of convergence, especially on the institutional front; in jurisdictions such as the UK, convergence on the retail (buy & sell) side is an already well established niche with providers from Betfair to IG Group offering a variety of options to trade both sporting and financial outcomes.
January 31st, 2007 at 1:57 pm
When studying the history of futures markets one notes the importance hedgers in bringing liquidity to markets. Going back to the Commodities Exchange Act of 1974, a market is defined as acting in the public good if it satisfies three main requirements:
1. Reliable Price Discovery
2. Broad-based price dissemination
3. Effective hedging against price risks
I think its a pretty long stretch to argue that BetFair succeeds on #3, unless you consider the price risk faced by the punter who might otherwise be betting with an illiquid bookie. I’d be very curious to know the level and trend of speculators:hedgers on BetFair’s sister product, intrade.
January 31st, 2007 at 9:50 pm
Josh raises a valid question. Without opining on the intellectual robustness of any US securities laws, I would disagree that it is a long stretch that Betfair succees on the third test. Sports is a giant industry world wide; many businesses and individuals have significant economic value-at-risk with respect to certain sporting outcomes. Indeed last summer many many German businesses in particular (including banks, retailers, etc.) ran promotions linked to Germany’s performance in the soccer World Cup. Most of these were effectively digital options written on a German victory. Before the start of the tournament, these exposures could have been hedged (and in some cases were) at odds of c. 9 or 10 to 1. Or in semantically more ‘business friendly’ terms for a premium of c. 10% of the exposure.
Or imagine you are CBS and you’ve bought the rights to broadcast the World Series. Only instead of getting the Yankees vs. the Dodgers, you get the Toronto Blue Jays vs. St. Louis…not the same advertising value…or maybe CBS got lucky and sold all the slots before the season started… the risk then falls to the advertisers to hedge…etc.
I don’t understand why it is ok for orange juice makers to hedge their risk but not for someone running a business linked to sports.
Actually, some people/businesses can - in some cases - hedge their sports-related risks - via insurance companies - although this form of hedge is inevitably less liquid, usually more expensive and ultimately opaque. But avoids stirring up the extremely powerful ‘gambling is evil’ rhetoric that dominates the legal and regulatory environment in many parts of the world with respect to any new form of speculation, especially with respect to sporting events.
February 1st, 2007 at 11:52 am
Futures traders in the US, I have heard, get preferential tax treatment on profits, I don’t know the exact details, but I believe it can come down to 20%. So whenever there is a public perception that futures trading and gambling are one and the same the lobby group from chicago are straight over to washington.
The difference in the way the US and UK regulators recognise gambling and spread betting is giving the UK a massive head start in this area, sports and Financial betting.
The only Financial betting site I am familiar with in the US is Hedgestreet, they make a big point of being a risk transfer exchange rather than a betting exchange, and I believe they needed to jump through alot of regulatory loops before being able to open for business.
February 1st, 2007 at 2:16 pm
Sean , your point is taken well and in no way was I trying to negate the possibility that sports markets allow some participants to hedge intrinsic risks. However, at an academic level, I am interested in understanding the evolution of the mix between hedgers and speculators on BetFair, and in fact any market. While it may be possible to determine the difference between the two in some statistical fashion, CFTC regulations (as far as I understand) mandate the distinction, and as such it should be simple to study this evolution on exchanges that fall under their mandate. Looking at Weatherbill, which is clearly under these regulatory mandates, I would be interested to know what patterns of behavior result in a successful market.
I think the American view on gambling is pretty odd and your point about the German promotions highlight this. While I am far from being a lawyer, I can’t imagine that a US company running a similar promotion would run afoul of gambling laws. And if a company knows that it is exposed to downside risk if some event occurs, then there is probably very little stopping them from hedging that risk by running a promotion that generates income when that event occurs. Imagine a bar running a promotion in the event that the local team doesn’t win, or similar. If such promotions are in fact legal, then surely it would be better for everyone if these positions were established in a liquid market. But of course, that is ‘gambling.’
So yes - I readily agree that BetFair serves natural participants, but my original question stands. Are hedgers in any way a significant portion of the population on BetFair? If not, then what does this say about other online markets which are trying to establish themselves by catering initially to natural hedgers?
February 21st, 2007 at 6:19 am
America’s view on gambling and sports is odd, there’s no arguing that at all. The government wants a piece of everything and they don’t want you to enjoy it unless they have the bigger piece of the pie.
May 29th, 2007 at 5:57 pm
Greetings, just bumped into this thread.
I own Bet Angel and I am also a very big Betfair customer. I have been with them pretty much since they started and came from financial markets so I have studied and written about them a lot. I think these markets are much closer to traditional financial markets than most people realise, in fact I would hypothesise that they are more efficient for participants due to their structure.
Unfortunately there is a lot of mis-information on the markets and a lot of people promoting activities and ’services’ who don’t actually participate in the market.
If anybody picks up this thread and wants to chat feel free as I should be able to offer objective comment.
May 29th, 2007 at 7:45 pm
Welcome to the conversation Peter. I find what you’ve done over at Bet Angel very interesting and I hope you are as successful as it looks; if you’ve had the chance to read a bit more of this blog you’ll have realized that I am a vocal advocate of the demystification of derivatives markets and as a result find the parallels between betting exchanges (like betfair) and ‘traditional’ financial markets very useful for illuminating (traded) markets more generally.
May 29th, 2007 at 7:53 pm
Peter’s comment brought me back to this post and re-reading I realize that I didn’t give my thoughts on Josh’s last question. The truth is ‘I don’t know’ (what portion of BetFair’s population could be considered ‘hedgers’) but I would suspect it is still very small. Indeed I would posit that this is supporting evidence for the thesis that in order for a traded market (online or not) to be successful, the most important population to attract - ‘to cater to’ - are the speculators. They drive the liquidity that drives the market. ‘End users’ are clearly important in terms of their marginal participation driving the market to the ‘equilibrium’ price, but without the speculators, the continuity of the market breaks down (as does the profitability of the market platform…) Ergo hedge funds/CTAs/punters are an exchange’s best friend.
May 30th, 2007 at 11:40 am
Somewhere in the region of 50% of Betfair’s turnover is alledged to be traders or people hedging postions. On course bookmakers and larger firms now use Betfair to balance or hedge risk on their books. So in my view Betfair is a true exchange market. Thanks to the lack of transaction costs and low barriers to entry the market is actually a very efficient pricing mechanism of risk.