So who still thinks sports risk is not a “legitimate” market?
I don’t follow football (soccer), but if you live in the UK, you can’t have missed the headlines following England’s defeat a couple days ago knocking them out of the Euro 2008 championship. And I’m not talking about the sports pages.
Numerous reports flagged the probable negative economic impact of this loss on the country, with estimates ranging between £1.3 and £2 billion pounds (from BBC News):
“A successful run to the 2008 final would have led to a £2bn bonanza for the economy,” said Simon Chadwick, professor of sport business strategy and marketing at Coventry Business School.
Professor Chadwick also explained that the impact of England not playing in Euro 2008 could even go deeper than just lower retail sales.
“Evidence from previous tournaments also shows that, at another level, worker productivity normally increases as the England national team progresses through major tournaments and the ‘feel good factor’ takes hold,” he said.
It’s not just diffuse, hard to isolate, losses across various sectors, the equity markets reacted strongly by marking down shares in companies most obviously affected, with Sports Direct for example being the biggest loser on the London market on the day, down 15% wiping over £100mn off its market capitalization.
If I were a market-maker in this stock, I would certainly want to be allowed to manage this kind of event risk by having access to the sports risk exchanges like Betfair. Now I don’t know that they don’t but all my experience of the City would suggest that it is unlikely:
Head of Trading: “I would like risk limits to trade on Betfair to help hedge our positions in sports sensitive stocks.”
Risk Management: “So you want to bet on football and horses and such? I think somebody must have spiked your coffee this morning.”
Head of Trading: “No. I want to hedge my book. Furthermore it would allow us to be more aggressive in making prices to our customers, making them happy and reducing our risk.”
Risk Management: “But that is crazy. You’re asking us to include gambling in our VaR models? I would get laughed out of the bank if I proposed that to the regulators. We deal with real, measurable financial risks, not fanciful punts on footy.”
Head of Trading: “Oh yes I understand - you only deal with risks that you understand completely and can manage precisely. Like exotic credit correlation and the like…”
Risk Management: “Yes, precisely! Errr…wait a second…”So Trading goes up to Management,
Senior Management: “Son, we are a serious and reputable City institution. We do not gamble. If you want to punt on sports please do it on your own time and with your own capital. We are not a betting shop.”
But inertia and close-mindedness is just a petri dish for opportunity. And opportunity is always seized in the end. Five years from now, this conversation will be the historical anachronism it deserves to be.
November 28th, 2007 at 9:39 am
Wouldn’t you need a number of financial institutions to decide to do this at more or less the same time (otherwise the liquidity wouldn’t be there)?
I doubt you could hedge your exposure to (say) JJB Sports with a £5 lay on England’s match (which is about all that’s available at a reasonable price at any given time at the moment).
November 28th, 2007 at 10:59 am
I don’t have the data to hand (not enough Betfair points to access their historical data files) but I think you will find that there is much much more liquidity than that on Betfair (and probably other exchanges) especially in “mainstream/marquee” markets like England football. Millions of pounds are regularly traded on big matches and tournament outcomes. Of course if you were trying to hedge say £20mn of stock against a notion 10% gap lower ie £2mn of risk, you probably couldn’t do that today. However you could probably hedge a few £100k of risk. So yes, for it to be sustainable and useful in the medium term you would need to get more financial institutions and corporates involved to add market depth. I guess my point is that the hard(er) work has been done in the sense that there is a pre-existing, non-trivial market with real prices already there and you are past the critical “tipping point” in terms of creating a tradeable market and on to the easier “bootstrapping” phase of market growth where liquidity begets liquidity.
January 16th, 2008 at 12:05 pm
A futures exchange (like USFE) could issue a binary event future on a single match. (In fact we are suggesting this in a small piece in the next issue of Futures and Options World that quotes your site)
January 17th, 2008 at 3:30 pm
I was at the Man Financial (MF Global) Broker’s reception dinner in Chicago back in October 07. Satish Nandapurkar, the CEO of USFE, was the keynote speaker. He spent the majority of the presentation explaining binary options using sports betting apologies and repeatedly saying, “Of course we can’t do sports futures.” I had AmazonBay flashbacks throughout dinner since in AmazonBay Man was mentioned as a broker of sports betting in the future.
The irony was that some of the Man folks near me were really grumbling about Satish’s presentation because of the betting overtones. They felt that they have spent years trying to lose the betting connotation around derivatives trading yet this guy from USFE was giving all his examples using sports betting. Made me chuckle.