Betfair - Understanding Types Of Money On Betting Exchanges:
One of the reasons why I first became interested in betting exchanges was a desire to understand how it all worked (apart from the obvious desire to make money). The first books, tips, and informational pieces I read all said the same thing: if there was a large weight of money on one side of the market for a single horse then this would provide an indication as to the way the price would react to the money. If there was £6,000 on the lay side for example split £2,000 apiece on the three prices showing, and only £200 split across the three back prices showing, then the common thinking indicated that the price would shorten.
Over the past several months I've given this a great deal of thought and also studied the statistics available from Betfair by joining the developers program. On both counts I've been unable to make the same connection. I'm not saying its not there, just that I've not been able to prove it to my satisfaction. Lets ignore the statistics for the moment and concentrate on the actualities.
We will start with a simple example.
If one person wants to back a horse at 3.05 and wishes to wager £1,000 and another person wants to lay a horse at 3.0 with a liability of £1,000 we have a straight forward risk/reward equation. The first punter is willing to risk £1,000 in order to win £2,050, and the second punter is willing to risk £1,000 in order to win £500. The amounts on Betfair would show £500 on the back side @ 3.0 and £1,000 on the lay side @ 3.05 (this was probably the hardest thing I had to come to terms with in the early days that back bets appeared on the lay side and vice versa). In the above scenario we have twice as much money on the lay side as the back side, and according to common wisdom the price will shorten (I know that this is simplistic, but is a workable hypothesis).
However, there is nothing inherent in the above example that would indicate a shortening of price. The first punter is not going to accept a lower price than the 3.05 he/she wants, and the second punter is not going to lay at a higher price than the 3.0 he/she thinks is acceptable. It is a complete standoff, unless one of the two weaken. I have not been able to understand why this one-on-one scenario is any different if we extend it to take in hundreds of punters, each with their own requirements for prices.
The problem with betting exchanges is no-one knows who's money is on the board.
Money is there for one of three reasons:
Someone genuinely fancies or doesn't fancy a particular animal.
The bet is there and will stay there until the end of the race (there is no trading intended).
Someone is trading and will back and lay a number of times before the race goes in-play.
This theoretical someone is a professional trader, an amateur trader, a professional gambler, an amateur gambler, or a bookmaker squaring up his on-course and off-course book. Without knowing where the money comes from, I fail to see how we can make informed decisions as to whether the price will shorten or lengthen simply based on the volume of money.
Lets look at how a traditional bookmaker operates.
If a punter comes along and tries to place a bet, the bookmaker will make a decision on how much to accept based on whether or not the punter is known, and the type of punter. A known mug punter will find bookmakers falling over themselves to accept the bet; even to the extent of offering an extra half point to attract the trade. On the other hand, if a known face comes along, then bookmakers will be scrubbing prices from their boards faster than a London traffic warden can slap a ticket on your windshield. Bookmakers have survived for years by knowing clever money from mug money. Yet we are all trying to make money on betting exchanges without that most important piece of information. It is not the volume of money that is important, it is where its coming from, and that information is not available.
I tried this theory out with a spreadsheet attached to Bet Angel. The idea was quite simple. I took the weight of money and automated a lay/back bet (scalping), with a stop loss set in. The results were less than impressive (to say the least). More often than not the market moved in the direction opposite to that expected and I ended up with stop losses firing off all over the place and the resultant drain on capital became worrying in a very short period of time. Again, I'm not saying it is impossible to trade successfully, simply that it is nowhere near as easy as many people try and make it seem. I returned to the statistics and studied them carefully. I do not claim infallibility, but I have to admit that I could see no direct correlation between monetary volume and price movement.
This led to another consideration. In any given race we an see that approximately £400,000 will have been traded (rough figures but workable). Yet we also know that only 2% of Betfair accounts are run in profit. Take the volume traded and the number of profitable accounts and we can start to see that the profitable accounts are very profitable indeed (it is impossible to extrapolate accurate figures from the information available, but I would argue that there a small number of people making a lot of money, and I would go further and say these people are, in the main, bookmakers). The reason why I put forward this argument is twofold.
Firstly, they have the resources to help create such large volumes. Secondly, they are the only ones (possibly) that can take the long-term view at such levels. If this is the case, then the betting exchanges are simply another way of letting the old enemy make more money. Is this going to stop me betting on the exchanges? Certainly not. What it will stop me doing is trying to trade in the non-live market, as I believe that the bookmakers money distorts the market so much that it is impossible to understand the likelihood of movement.