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Markets for the Digital Generation

All across America, workers are busily betting on the NCAA basketball tournament (from Fortune):

…considering that 19% of U.S. employees have participated in a March Madness pool, according to a poll by CareerBuilders.com. It’s a bigger deal in some businesses than in others - 30% of financial-services workers are in on the betting, for instance, and 29% of salespeople. It’s also more popular in the Midwest than in the rest of the country: 25% of employees in Midwestern states say they participate, compared to 22% in the Northeast, 18% in the South, and just 11% west of the Mississippi.

Of course this is illegal (and I suppose if your company has offices across the country, potentially a federal offence) but nevermind as in this case it’s ok because no one is going to enforce the law:

As for the legality of office betting pools, you’re right: Betting on organized sports teams or events is illegal almost everywhere in the U.S. except Nevada and Atlantic City. But in practical terms, the risk of prosecution is almost nil. Your state attorney general’s office has far more important things to do than go after March Madness pools.

“Even if a sore loser decided to call in the authorities, saying, ‘I got cheated in my office basketball pool’ or whatever, that is not nearly enough to start an investigation,” says Steve Miller. “Alleging that the company is running a major booking operation, maybe…” But that’s not happening at your shop, right?

So relax. Amid all the bad news these days, your underlings could probably use the chance to let off a little steam. And just think: In a couple of weeks it will all be over - until next year.

Please Mr. or Mrs. Next-President-of-the-United-States, lose the hypocrisy: remember… land of the free… rule of law… free markets…

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The Economist reports on the sorry state of New York state’s quasi-public Off-Track Betting Corporation:

The OTB has in effect been operating in the red for years, but has used its reserves to keep going. By this summer it will need a cash infusion just to make ends meet. Mr Bloomberg has said he has no intention of subsidising the largest legal gambling operation in the country—not least because the city’s share of the revenues has dwindled while those of the state and the racing industry have grown.

The OTB was originally designed to raise money for the city and the state and to take gambling out of organised crime’s control by providing a legal outlet for betting. During the 1980s, it earned the city $65m a year. Just seven years ago the entity was almost sold for $250m. Today, its bleak-looking parlours are frequented by an ageing, dwindling base of punters.

Gee, what should they do? Hmmm…. how about getting the government out of the business, legalizing private operators, regulating and taxing them. Innovation: good for punters, good for racing, good for government coffers, good for transparency. Crazy, I know. Mike Bloomberg obviously knows all about the power of technology and innovation; maybe the folks over at Betfair should try to get a meeting…

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As a result of some of my recent thoughts on how markets for (live event) tickets should work, I was pointed in the direction of a new start-up called yoonew:

yoonew is the world’s first futures exchange for event tickets. We have created a dynamic marketplace that helps online consumers save money and time when buying and selling tickets. Our real-time trading platform gives fans, traders, and resellers a safe and transparent place to trade tickets.
We are passionate about leveling the playing field and creating a fair marketplace where everyone has equal access to tickets. Our team focuses on building new product features that will bring transparency to markets where pricing information is not universally available. We help customers make more informed purchasing decisions so they are confident that their purchase or sale concluded at a fair price.

TechCrunch did a write-up in early January and they got a lot of coverage in the run up to the recent Super Bowl game:

I’m not 100% convinced that they’ve nailed it but it is certainly a very interesting step in the right direction in terms of introducing modern (and useful) markets technology into the historically moribund market for live event tickets. Essentially, they are selling call options on tickets to major sporting events. Moreover they have taken an original and clever approach by - at least initially - focusing on major sporting events (like the Super Bowl) where the terminal value of the underlying is different depending on the buyer. ie If “your” team gets through to the game, the tickets are of more value to you. Of course, with a properly functioning secondary market (irrespective of whether on yoonew’s upcoming secondary exchange or another market - StubHub, etc.) financially this should be irrelevant - the ‘market’ value of the tickets depends only on the clearing price of the event once the participants are known. (ie Super Bowl tickets on balance will be worth more if two teams with big, passionate fan bases are playing as opposed to two teams from smaller markets; NY v New England more valuable than Kansas City vs Detroit for example.) So a ‘rational’ trader would try to buy the cheapest options - not necessarily the option on his team, especially if you could re-sell the option before delivery. (I’m not sure this is allowed, if not it should be.) Nonetheless, the (marketing) focus on ‘real’ end buyers (people that hope to take delivery, rather than just make a financial profit) is a good angle as it plays to the psychology of ‘hedging’ rather than speculating and should add heterogeneity to their risk book.

Notwithstanding the ridiculous US laws proscribing trading on sporting outcomes, there would also potentially be very interesting arbitrage and hedging opportunities (for both yoonew as the market-maker and their customers) with trading sports risk. For example (using the same teams as above) going long New England and NY to make the Super Bowl to hedge the extra cost of delivering tickets to this pairing (vs a less valuable team pairing.) Or going long the team in the host city (which would also probably be more valuable on delivery if they ended up playing.) I’m not sure if they have any plans to offer markets on European (or global) events - it would have been great for the recent Rugby World Cup, imagine if England fans could have bought (what would have been) cheap options on the final in Paris - but if they did they could use Betfair to manage their price risk today.

Longer term, ideally you would hope that sports teams and leagues would embrace this kind of market to help manage their own pricing risk. Instead of just selling tickets (in the primary market), they could sell options on tickets and use secondary markets to dynamically hedge their risk. For a team that didn’t sell out systematically, it would be a good way to monetize potentially empty seats and even for teams that sold out perennially it would allow them to be more aggressive in finding the ‘true’ equilibrium clearing price for a given seat. For investors it would be another potential (uncorrelated) asset class to trade and invest in. I wonder what the implied volatility curve on the NY Giants season would look like? Gamma trading based on the weekly game results anyone? The question is do the owners and managers of these teams understand how this could work to everyone’s benefit or will they stick to the old model of static seat prices and unoptimized revenue management?

I hope yoonew succeeds and helps to develop a more enlightened and efficient market for tickets in live events. One to watch.

Update:
All About Alpha has a look at yoonew.

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It seems William Hill is having some trouble adapting to the digital century (from The Guardian):

A failed website relaunch has wiped £22m off William Hill’s profits for 2007.

The bookmaker admitted today that it has scrapped a major upgrade of its internet betting operations. The platform, dubbed NextGen, had been scheduled to launch by last month and allow the firm to significantly improve its online gambling offerings.

But following an internal review, William Hill – which has been without a chief executive for more than three months – has decided to ditch NextGen. It now plans to use a “third-party technology solution” that will not be ready until the end of 2008.

I wonder if the kids over at Betfair could lend a hand?

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Almost as if on cue, imagine my surprise (and delight) to find this month’s Prospect magazine (quickly becoming a must read for me, as a wonderful complement to my weekly Economist fix) feature an essay by David Goldblatt “Taking Sport Seriously” on its cover:

Sport has never been more important, but its meaning and appeal are still not taken seriously, at least in Britain. It is time for sport to enjoy the same cultural weight as the performing arts, and to be judged by the normal standards of public life.

The focus of the essay is on the lack of political and cultural respect accorded to sport in our - with particular focus on British - society and how this is incongruous with the role it actually plays in our culture, our economy and our society. The author spends some time explaining the historical context and does a good job of framing how this bias against sports (being accorded the legitimacy it is due) came to be; in politics, culture and - yes, finance - sport is trivialized and not seen as worthy of “serious” attention - after all, they are “just games”…

Yet serious organised play cannot be purely spontaneous. If we wish to watch the spectacular, to participate in its grand narratives, we need rules and rule-making institutions; we need facilities, stadiums and professional athletes. Spectaculars require backers; the circus must be paid for. Sport needs, attracts, and must deal with money and power, and the backers will always be looking to buy or take their share of glory. How are we to police the line between the realms of power and play, economic space and social space? The production and consumption of modern sport clearly is political, albeit with a small “p.”

The author goes on to propose his view of a more appropriate positioning of sport in our society:

What would a healthier sporting culture look like? It would start from two ideas. First, sport should be treated with the same seriousness that is accorded to the performing arts. Second, it should be judged by the same standards of transparency, sustainability and democracy that we expect elsewhere in public life.

While finding much to agree with in his framing of the current state of affairs and the broad lines of his call to acknowledge and even embrace the reality of the key role it plays in our culture and our economies, my opinions diverge quite strongly with respect to his take on the role of markets in buttressing or even leading this realignment. His logic breaks down when he states that private capital and market forces are inimical to the emotional and ethereal value that lies at the heart of sports cultural value:

In sport, as in so many other areas, we seem to have accepted the triumph of private capital and global markets as irreversible. The private ownership of British football clubs, often by foreign billionaires, may appear to be a fait accompli, but it remains a flawed model. After all, what is a club? Stadiums, players, coaches and directors can and do change, and yet Arsenal is still Arsenal. What gives Arsenal continuity is the accumulated social capital amassed by generations who have attached significance to the narratives generated by the team’s performances. This network of memories, meanings, identities and rituals constitute a precious form of value which cannot be owned by anyone and should not have its fortunes exclusively linked to the vagaries of private capital—just ask people in Brooklyn how they feel about the Dodgers’ flight to Los Angeles in 1958.

He goes onto demand that we “balance private capital’s opportunity to make profits from [sports] with its duties of care.” I don’t disagree but find nothing contradictory in the preservation of “this precious form of value” with ownership by private capital and market mechanisms generally. That is not to say that good regulation and governance is not needed - indeed regular readers will know that I consider that a sine qua non of robust and efficient markets - but it confuses the lack of these with private ownership. They are not linked. I would go further and say that market forces are the best guarantors of good stewardship in the medium term precisely because there is a direct (non-diffuse) interest in preserving the “magic” that drives so much of the value. Indeed, the greatest risk of amateurish, parochial and near-sighted governance is more often found in sports and countries where the sport is considered a “public good” and so risks being compromised by the corrupting and often opaque forces of undemocratic and politicize power that typically favors a privileged and incumbent elite.

(For example, if the IRB were “privatized”, the next rugby world cup would almost certainly have gone to Japan (and not New Zealand.) Furthermore, Argentina (and other emerging rugby nations) would have long ago been given the opportunity to regularly compete with rugby’s elite. Both these would be to the benefit of the game; creating more (and spreading more widely) the “precious value” that sport brings, and would make commercial sense. However the political appointees that run the IRB - and are not subject to the discipline of private capital, but answer to the powers of the incumbent (self-perpetuating) elite - are free to ignore this even at the risk of damaging the long-term value of the game.)

Market mechanisms - allowed to work - will indeed promote the cultivation of the grass roots and ensure a necessary level of competitive parity because it is in their self-interest (economically.) One only has to look at the professional leagues in the US to see that private capital understands this impeccably. The failure in the UK (and elsewhere) - and I am sympathetic to his view that there is a failure - comes from the muddying of the waters by according sport a “special” quasi-public status: it’s a variation of the tragedy of the commons - the capitalists only abdicate their responsibilities because they can. ie Someone else (the government, the community, etc.) pays for it. So (mainly correct) diagnosis, but wrong treatment.

In any event, I applaud Prospect for doing its part in engaging the debate and the author for framing the issues so eloquently and challenging our society to reassess our preconceptions on this subject.

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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.

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A couple great posts from the always interesting Sports Economist recently asked the question “why study sports economics?” adding to a (not quite top ten) list written by Justin Wolfers:

1. Sports provide unique opportunities to test economic theories.
2. Sports shapes broader national debates.
3. Professional sports are an important part of the economy.
4. Sports participation is an important activity.
5. Sports provides a useful teaching metaphor.
6. Doing research on sports is fun.

Earlier they highlight the relevance of the 2007 Nobel Economist’s work for sports markets:

OK, not quite, but the work of Leonid Hurwicz, Eric Maskin and Roger Myerson has much relevance to sports economics and the design of sporting contests such as leagues, championships and so on. Their key insights relate to the design of mechanisms when agents have private information. The economic framework for analysing these problems (e.g. ensuring that rules are “incentive compatible”, i.e. the payoff to breaking them is not greater than obeying them) was laid down by these guys, and insights into the regulation of monopolies and so on were important consequences of their work. It’s not hard to think of a whole host of current sports issues to which their work is relevant: incentives and revenue sharing; creating mechanisms to prevent match fixing; doping. Moreover, the notion of a sports competition itself can be thought of as a mechanism designed to elicit maximum effort from contestants.

I’m looking forward to learning more about Mechanism Design Theory as it would seem to have particular relevance in an emerging “age of markets”.

Serendipity of course took me to these posts (I check Sports Economist every few weeks to catch up) on the same day I first learned about Lewis Hamilton’s plan to list himself on the stock exchange (from the Independent):

The innovative move could see the racing driver list a minority stake in a company in which he would be the main asset and remain the major shareholder. Several US sports stars are considering similar proposals, including Derek Jeter, the star batsman at the New York Yankees baseball team.

Hamilton’s multimillion pound salary from McLaren, his F1 team, is set to be dwarfed by the sums earned from endorsing and promoting products. If he chose to pursue a listing on the AIM market in London, he could, for example, sell a 10 per cent stake in Lewis Hamilton plc, for $100m. Investors in the company would be paid a dividend equivalent to 10 per cent of Hamilton’s total future earnings. The company would be structured like any other listed vehicle with a board of executive and non-executive directors.

By pursuing a listing, the driver would be able to safeguard his financial future at the start of his career by pocketing a large lump sum. The plan could be attractive to Hamilton because it would reduce the financial downside of any injury that might prematurely end his racing.

Readers won’t be surprised to hear that I think this is an excellent and interesting idea worth pursuing and if he goes ahead, will be yet another step in legitimizing sporting risk as the real and relevant (non-correlated) asset class that it is; I certainly didn’t predict Lewis in AmazonBay but this is exactly the kind of possibility I wanted to draw attention to with my rather far-fetched metaphors in the film. Of course, if Lewis PLC goes ahead and floats, one should expect trading volumes on F1 markets at Betfair and other sports exchanges to pick up considerably, especially on race days (think Treasury futures when “the numbers” - non-farm payrolls, GDP, etc. - come out). If I were the bank underwriting (and subsequently making markets) in these shares, I would make damn sure that my management and risk limits allowed me to trade the underlying F1 markets on Betfair etc. Of course this is not completely new - many football teams have had public listings; however I suspect Lewis PLC would be a much cleaner test of the relationship between economic risk and the underlying sporting outcomes given the lower basis risk (fewer variables.) And there should be plenty of both “end-users” (shareholders, sponsors, broadcasters, etc.) and speculators to provide liquidity to both the shares and the outcome markets.

My only regret is that I’m not in a position (yet!) to pitch for Mr. Hamilton’s business as an underwriter or financial advisor. Although I would be happy to advise him strategically (if any readers are close to his management please forward this post to them!)

(More recent posts on sports risk management here.)

*Note: The Independent article above mentions that US baseball star Derek Jeter has contemplated a similar idea. Given that he plays a team sport, the basis risk between his performance is higher than for someone like Lewis Hamilton and depends to a large extent on where he plays - both in terms of “is the team good?” and “is the (media) market big?” Furthermore given the ridiculous criminalization of sports trading in the US, any market-maker in Jeter Inc. would be hard-pressed to legally hedge their book. Of course, if they had a UK office they could potentially get around this but without US retail participation, I doubt Betfair or any other exchange would have a liquid market in baseball risks. Then again, maybe this is just the ticket to plow through sensible legislation and regulation of sports trading through Congress; if Goldman Sachs and Merrill Lynch are doing the asking, maybe Senator/President-elect Clinton will put her name on the bill!

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While completion insurance for construction projects is not a new business, for certain high-profile projects I wonder if it wouldn’t make sense to open up the risk pricing to a wider audience…

The recently unveiled plans for the London 2012 Olympic stadium got me thinking about this (from London Metro:)

The £496m structure, which has jumped in price from the £280m estimated in 2004 when London was bidding for the Games, will stand at the heart of the Olympic Park. It is being billed as a design representing a new era for Olympic stadium design.

Building work on the stadium is set to begin up to three months ahead of schedule in April or May, with completion in 2011 to allow for test events, the Olympic Delivery Authority (ODA) said.

I suspect that if you had a market in construction cost and completion date, both would go bid very quickly at £496mn and May 2011…and it would be a good bet. As Mr Taleb drives home in Black Swans, the people responsible for making these forecasts at best include all the normal - ‘expected’ - factors that contribute to the cost and delivery date of the development. It is unlikely that they have accounted for things outside those which have historically contributed to delays and cost overruns. Indeed, there is no way of “scientifically” accounting for these possibilities, and I further suspect if they were to add an arbitrary 50% or more haircut to at least provision for some unknown eventuality, they would never be allowed to do so (by the customer, the accountants, the insurers, etc.) However if there was a traded market price any interested party would be able to hedge this risk. This is not to say “the crowd is wise” and can know the unknowable (as is the often mistaken cry of prediction market evangelists) but that with a traded market the risk is better syndicated (distributed) to those best able to bear it at any given price. And the price signals - while not omniscient - would be useful to both the customer (London 2012) and the construction companies. For unlike the Syndey Opera house, the deadline is hard. (Well there is always Wembley I guess if it all goes completely pear-shaped…)

So I guess I should send a request over to Betfair to get these markets up and running! Only problem is (and this is why the future lies is data - robust, clean, reproduceable data) you would need to have a clear and robust settlement mechanism. Probably easier for delivery date (esp. if market settles on a week, fortnight or month to avoid ribbon cutting date shenanigans - ie insider trading) than for cost. That said given that it is a public project there must be some government auditing department that could state the methodology and vouch for the accuracy of the final accounting.

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Following up from my last post, reading the paper in the tube this morning, I couldn’t help but notice the article headlined “Cashing in on Success: ITV set to earn £10,000 a second as rugby fever grips nation.”

Media experts believe ITV could make £11million on the night, way beyond advertising bosses’ wildest dreams for a tournament where few gave England much chance of progressing past the quarter-finals.

Ok so clearly a good outcome for ITV, so why hedge? Well if they think their shareholders are buying ITV shares because of England’s sporting prowess, well perhaps they shouldn’t. But - unlike a gold producer - I tend to be sceptical that many of ITV’s shareholders are there for a leveraged punt on England. On the other hand it is clearly a very bad outcome for broadcasters in France (and Australia and New Zealand.) Closer to home, it is also apparently a potential financial debacle for the England RFU: if England wins this weekend, it will apparently cost them some £2 million pounds in winners bonuses:

The Rugby Football Union will be left out of pocket if England beats South Africa – because the governing body did not expect the team to do so well.

With England starting the tournament as virtual no-hopers, the RFU reportedly declined to take out insurance to pay the £2million winning bonus to players and staff. Each player is due to receive £45,000 if the team win.

Now I imagine that some of this will be made up in increased merchandising revenues but given the pre-tournament prices on England (significant volumes traded on Betfair at between 30 and 38 to 1), hedging this risk before the start of action would have cost the paltry sum of around £50,000. Of course more sophisticated and dynamic hedging strategies could have been employed that would have potentially even made money for the RFU.

I suspect that the biggest challenge to overcome - as JD often points out in his comments - is one of risk cognition: convincing financial officers that hedging non-core operating risks is in the best interests of their shareholders. If I had time I’d dig around NBER and see if any research has been published corroborating (or refuting) this position. I see it as just the corporate version of the old tried and true traders’ free option: if the market goes my way, I’m smart; if it goes against me, well it’s out of my control. This is by no means new - twenty years ago the first firms selling interest rate, commodity and fx derivatives to corporates faced the same reluctance; what is surprising to me is how little we seemed to have learned. You would think that the ‘follower’ risk classes would have an easier time of it. That is not to say that corporates should rush in enthusiastically without due consideration to every new risk hedge they are shown; prudence is indeed a virtue. But equally doing nothing should never be confused with prudence.

Perhaps we need more farmers in the finance department - these are people who have a visceral and entirely pragmatic understanding of risk and risk management. They of course have to ‘eat their own dogfood’, and blaming “market conditions” - however “unforeseen” they may be, doesn’t pay their expenses…

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Tim King, musing on the upcoming England - France Rugby World Cup clash, hits on the significant financial stakes in play for broadcasters:

Much of the anti-English hysteria which will be whipped up over the next five days is market-led. For the past month until last Saturday, the rugby World Cup had become a matter of enormous indifference to the French. Few understand its rules, even fewer its tactics, and France’s first-match defeat to a team deemed petit had convinced many that the game is of no national interest. Consequently all last week the media worked their socks off trying the impossible - raising interest in an apparently inevitable mauling by the All Blacks. They had to sell the New Zealanders’ game as something rare, beautiful and fascinatingly exotic, a spectacle not to be missed, a team so special that even defeat at their hands could be honourable. It worked, and according to TF1, France’s main TV Channel, Saturday’s viewing figures were “un record historique” of 16.6 million (since last year’s soccer World Cup attracted more than 22 million viewers for the France-Portugal match, “historique” is clearly a relative term). A great day for advertisers and a totally unforeseen windfall (my emphasis) for the TV companies, who are confident that this coming Saturday they will get even higher figures (and an even higher advertising revenue). Especially if they keep playing up the ros-bif bashing.

So this time, the (sporting) results have smiled upon the French (and English!) broadcasters (and advertisers targeting the French and English public) - but if you are a shareholder in one of these companies are you really investing in their managers’ sports prognostication skills? My suspicion is no. No more than you are investing in their foreign exchange or interest rate trading skills. So why do these firms not hedge their sporting risk? Arguably for these types of businesses, this is a more important business risk than ‘traditional’ financial risks which are managed as a matter of course by any self-respecting finance department.

Indeed TF1 and ITV (the respective local broadcasters) should have been laying (selling) France and England respectively before the games last week end. Indeed, giving the odds (prices) prevailing before the games last weekend (approximately 6 to 1 against), these hedges would have been relatively inexpensive. Furthermore taking an enlightened risk management approach to this business risk would allow a myriad of interesting and potentially innovative business strategies. The simplest of course would be to keep the risk ‘on balance sheet’. By estimating the potential revenue loss arising from a French or English loss, the firms could have mitigated this risk and reduced the volatility of their expected earnings. Perhaps more interestingly using modern risk management, the broadcasters could sell outcome-adjusted advertising packages to their advertisers: tailoring the rate for exactly who will be playing in any given round - ie pay x the semi-final is New Zealand v Australia, 3x if it is France v England…(obviously this could be made more or less sophisticated depending on how robust a model you have for viewership, target audience, outcomes, in-play - think more expensive half-time ads for a close game than a blow-out, etc.) Finally, although due to population, time zones, etc. probably not entirely symmetrical, it is clear that broadcasters down under had the opposite risk to the French and English broadcasters. They should have been taking the other side of the trade.

Given that there are vibrant and liquid exchanges for this risk (Betfair, Betdaq, etc.) managing these risks is not only feasible but can be done dynamically throughout the tournament, and indeed even during play. Ultimately I believe that one day - combining real-time targeted ad-serving technology (which already exists), with a traded market in advertising prices, with sports risk trading will lead to a world where advertising slots for major sporting events are traded and managed up to the moment when they are served, allowing the invisible hand of the market to allocate this scarce and wasting resource to be optimally allocated all the time - the right advertisement at the right price at the right time. (Indeed, I alluded to this in AmazonBay, with respect to Google hedging its advertising revenues based on the fact that the audience size - and thus the advertising rates - varying as a function of the finalists in the the soccer World Cup; ie Brazil v China (in 2012 2014!) is better (for advertisers) than Denmark v Iraq…and even this example ignored the fact that at least for advertisers targeting the Danish market it would be a great outcome.)

Of course there are many many other businesses who are directly exposed to these sporting outcome risks: promoters/ticket resellers, concession vendors, hotel and tour operators, etc. etc. Better yet, there is usually (although admittedly not always symmetrical, see above) a two sided market: for each given outcome some businesses prosper while others suffer) which is a key ingredient (alongside active and intelligent speculators) to creating a vibrant and liquid market.

There is a business to be had here - a specialist sports risk management investment bank (advisory, trading, derivatives, market-making) - if anyone out there wants to send me a business plan I’d love to take a look. Of course there are challenges, not the least being the hysterical view of many legislators and regulators who refuse to see the outcome of sporting events as just another business or financial risk. But my feeling is that with time that will change (and is changing) and in particular there is a real opportunity for the UK (and London) (anyone for better aligning the FSA and the Gambling Commission and ending the artificial distinction? PM Brown? Mr Cameron? Bueller?) to extend its lead as the world’s leading financial and risk management centre by embracing and nurturing yet another emerging risk market.

Oh and by the way, take all the above and mix in weather risk management (the probability of any given sporting outcome is very often weather dependent. The odds for next weekend’s France - England match are certainly different in my opinion if it is pouring rain, than if it is warm and dry.)

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