September 18th 2002 - issue 17
1. Overview
As discussed in issue 15, TradingSports have set up as a business to business proposition giving sites the opportunity to set up their own p2p offering without the expense of providing their own infrastructure. Pooled activity from the members of the combined sites, should, the theory goes, give significant liquidity to all. So far Trading Sports has attracted Cricinfo, the internet's biggest cricket site, Tradindex, a significant trading site and whilst the programme was on, the official Channel 4 site for Big Brother 3.
The principal target for TradingSports, however, are the regular bookies themselves. Every time someone leaves an online bookmaker to play on a p2p site they run the obvious risk that the customer will never return. TradingSports offers a solution by enabling them to have a self branded p2p offering so customers can bet p2p without leaving the site. It also offers bookies a cheaper solution than creating their own service and the combined liquidity from the various participating sites should give them greater credibility than they could achieve by themselves. Whilst they would probably like to have signed up more bookies by now, they have succeeded in signing up a major site in www.sportingbet.com and more bookies are apparently lined up.
TradingSports employ the Intrade 0-100 system where you buy or sell a team or player at a price which in theory reflects its % chance of success. Each share is worth £1 or zero on expiry depending on the outcome (except in the event of a draw as discussed below). If you were to buy one share at 20, your exposure is only 21p, giving even the smallest punters a chance to participate. The idea of the 0-100 scale is that the current price is supposed to reflect the % likelihood of an outcome eg if the price is 75 and you believe that the team has an 80% chance of success, then by your calculation the price is too low and you should buy.
This is a straightforward concept but when you actually trade, it's not as easy as it sounds, especially when you are nipping in and out of sites offering decimal and fractional odds. We are used to thinking of likelihoods of outcome in terms of odds, and this type of betting requires a different mindset. This type of betting is more closely aligned to city trading than betting, and it is no real surprise that many of those behind this site have a trading background. Whilst this system may seem complicated to those who are not used to it, it certainly has the potential to offer opportunities to those who make the effort to understand it, as discussed below.
A disadvantage with this type of betting is the size of increments between one price and another. The equivalent of 20 in decimal odds is 5.0, whereas the next price point of 21 is equivalent to 4.76, quite a jump when you consider that on Sporting Options you can bet at 4.8, 4.85, 4.9 and 4.95 between these two points. This means that the spread in the event of a perfect market is greater on TradingSports than on other sites. A welcome feature would be to give us the opportunity to buy and sell shares in increments of one tenth of a penny which would resolve this issue and give us much greater flexibility. It remains to be seen whether Trading Sports make this option available in due course.
Another limitation with any site which uses the 0-100 model is that it only allows for the possibility of two outcomes. TradingSports have managed to introduce a third option, by valuing the draw at 50 in events where this outcome is possible. It's more difficult in events with numerous entrants such as a golf tournament where it would be necessary to create a separate market for each possible outcome, which is very cumbersome compared with the exchange model. In fact, what they tend to do is select the favourite and pitch them against the field. In the British Grand Prix you could only bet for or against Michael Schumacher, betting for example on Barichello was not an option. This will be a limitation with markets on horse racing.
2. Commission
As with Intrade you pay commission whether you win or lose, although the rates on TradingSports are higher than Intrade. Because you have to pay commission on losing bets, you have to take the commission into consideration when calculating your downside. If, for example, the price was 9p and you were prepared to lose £10 you would only be able to buy 100 shares because you have to take into consideration the commission you would pay in the event of a loss:
9p + 1p = 10p potential loss per share
100 shares x 10p = total potential loss of £10
So you have bought 100 shares at a price of 9p each. If you have correctly forecast the outcome each share will expire at a value of £1 giving you a profit of 91p. You do however, still have to pay the commission of 1p per share on this amount, reducing your profit to 90p per share:
91p - 1p commission x 100 shares = £90 profit
The decimal odds equivalent of 9p is 11.1. If you were to invest £10 on a conventional exchange at these odds your potential profit is £10.10. Working on a maximum commission of 5% your net profit would be:
£10.10 - 5% = £95.95 profit
Therefore in this example your bet on an exchange would return £5.95 more than on TradingSports. If on the other hand you were to risk £100 at a price of 50 this would enable you to buy 196 shares ie £100 divided by 51 (50p + 1p commission payable in the event of a loss) If you have correctly forecast the outcome this would give you a profit of:
50p - 1p x 196 shares = £96.04
The decimal odds equivalent of 50p is 2.0. If you were to invest £100 on a conventional exchange at these odds your potential profit is £50. Working on a maximum commission of 5% your net profit would be:
£100 - 5% = £95 profit
In this example your bet on TradingSports would bring you £1.04 more than if you had invested the same amount on Betfair with 5% commission.
Overall it is fair to say that the commission on profits offers greater value on most bets than the 1p per contract TradingSports system. In the case of very long shots or red hot favourites it becomes impossible to bet on Trading Sports. Take the example of buying 100 shares at 98p, the equivalent to 1.02. Your exposure is £99 (98p + 1p x 100) and your potential return is £1 (2p-1p x 100) meaning that half of your profits are going on commission.
If having bought or sold contracts you subsequently decide to close the contract by buying or selling an equivalent amount to cancel out your earlier trade, this is treated as a separate transaction for which an additional penny per contract is payable. The effect of this is that you need to see a favourable movement of 2p per share in order to break even, and anything in excess of this will bring you a profit. This makes buying and selling on a regular basis during an event to take advantage of small movements in the market a difficult proposition to achieve profitably. If this is how you like to bet, you really need to be on a conventional exchange where you only pay commission on your net profits on the event. Another drawback with the site at present, is that you need to maintain a balance which would cover your losses from both transactions in isolation, even though they cancel each other out.
3. Opportunities on TradingSports
Whilst commission is an important factor when comparing bets at similar odds, it becomes insignificant when the odds on offer are much better than available elsewhere, and I have found this to be the case on a number of occasions. Possibly the best example of this occurred during the Wimbledon's men's singles finals where someone was seeking to buy 1100 shares in running on Leyton Hewitt at the astonishing price of 77. Taking into consideration the commission, this meant anyone accepting this offer was risking 78p to win 22p, equivalent to odds of 4.55, at a time when the going rate elsewhere was 11.0 or 12.0. I immediately bought all I could with my existing balance and deposited additional funds to buy further shares. Unfortunately, this was quite a lengthy process, involving going back to the main tradindex site, entering all credit card details, then transferring funds from my investment account to my sports exchange account. Needless to say, by the time I had done this, the rest of the contracts had been snapped up. This underlines the value of maintaining healthy balances at all sites, (if you can afford to) but also shows the potential returns available to an astute bookie free bettor, able to quickly and accurately compare the potential returns from different ways of articulating odds.
In issue 15 I discussed the unique feature whereby a draw expires at a value of 50, giving both players a return. I speculated that some members would struggle to get to grips with the statistical implications of this, and this has certainly proved to be the case. When there was a strong favourite, the price on offer compared for the favourite was generally longer than those available elsewhere, because the person backing the favourite got the benefit of a return in the event of the draw, but those making the offers generally underpriced the favourite, failing to fully understand the impact of the draw.
This is best explained by an example. In the Brazil v Turkey semi final I was able to buy Brazil before the match for 69 giving me a potential profit after commission of 30, compared with a potential loss of 70. In the event of a draw I would have lost 20. The method of comparing these odds with those available elsewhere is to calculate the % likelihood of each result, then multiply them by the potential profit or loss. This can be easily done by looking at www.betbrain.com which aggregates the odds available from a huge variety of bookies and uses these to calculate the % likelihood of each outcome. Alternatively, in markets where there is a minimal spread you can take the midpoint from the Betfair market board as a reference point to calculate the % likelihood of each. The effect of this in the Brazil game was as follows:
Betfair % likelihood Profit/loss Impact
Brazil : 1.63 61% +29 +17.79
Turkey : 8.10 12% -71 - 8.77
Draw: 3.85 26% -21 - 5.45
Net + 3.57
In this example I was able to buy Brazil at 70. This gave me a 61% chance I would win 29, a 12% chance I would lose 71 and a 26% chance I would lose 21, all after commission was taken into consideration. Multiply these figures out, add them up and if you have a positive figure then you have a good value bet. By backing Brazil on this site, then backing Turkey and the draw on Betfair in the appropriate proportions, I was able to guarantee myself an overall profit regardless of the outcome, which in the event was a victory for Brazil.
Throughout the World Cup I was able to place such bets on a surprisingly high number of matches, perhaps as many as half. Unfortunately, unlike the Hewitt example, the amounts available were pretty limited, suggesting that I was betting against a cautious beginner finding his feet. In the long run it is likely that these novices will drift off as their losses mount up, making such opportunities less common. However, I am convinced that the 50 for a draw will continue to catch many people out and I expect this site to provide more arbitrage opportunities than the other sites where the probability is more transparent and easily comparable for all.
4. Conclusion
The TradingSports concept of supplying bookies a p2p offering is an excellent idea that deserves to be a huge success. To make this a non competitive option to sit alongside their regular offering, the 0-100 trading system would appear to be an important feature, after all few bookies would entertain an alternative with odds which are clearly superior to their core offering, which would be the case if they offered a decimal or fractional p2p structure.
The problem is that this trading system could prove to be too big an obstacle for many punters to overcome. Whilst the 0-100 system is quite logical if you make the effort to understand it, the public will need educating. The question is do the public who are already nervous about the betting exchange model really want to be educated? For many punters it will prove to be too great an intellectual challenge that does not sit comfortably with what is after all a leisure activity.
Whilst the commission structure is the decision of the partner site, the 1p win or lose system, currently in operation does not compare favourably with the "normal" betting exchanges, therefore it is unlikely to divert business from the likes of Betfair. A competitive commission structure based on a low % of profits may make some impact, but Betdaqracing's failure to dominate the UK market so far despite a 0% commission rate shows that it takes more than that to really succeed.
Overall, the site is professionally run and well organised. For it to be a success, however, it will need to accelerate its programme of getting other sites on board, to contribute to a healthy overall pool of liquidity. At present they have signed up Sportingbet, undoubtedly a major scalp, but other bookies have been slow to go live, with the result that liquidity at present is poor. For bookie free bettors it is definitely one to watch, as the 50 for a draw as discussed above is likely to throw up some good arbitrage opportunities. However, for this to be really worthwhile we need to be betting at higher levels than are currently available on most markets. Tradingsports can be accessed through the host sites www.sportingbet.com www.tradindex.com or www.cricinfo.com. Alternatively you can go to www.tradingsports.com where the latest partner sites are listed.