One of the questions that people often ask me is whether the markets easier to trade than they were 10 or 20 years ago and are the markets on the Betfair exchange more efficient or less efficient now. The answer is an odd one.
Are the markets efficient?
If you ask me, are the markets more efficient? I can say to you yes and no because, curiously, as the markets have evolved both situations have transpired at exactly the same time.
This is not a theory, it’s a fact. One of the reasons I’ve been able to keep my edge for nearly 18 years it’s because the market keeps changing and I adjust to it. It’s always been really important to me not only have a strategy but to actively fully understand it. That is because it allows me to understand what’s going on in the market, and if the market shifts slightly then I’ll adjust strategy.
Efficiency
The market is an efficient pricing mechanism in aggregate, I think that’s well understood. The average of everybody’s guess and the discounting of information produces a decent aggregate price. Though you should think through carefully where you sit on that bell curve. To get a good average, every bad guess needs a good one and when you dig through the bad guesses the origins you will find that if you avoid them your average guess improves against the crowd. A lot of bad guesses are often not statistically based.
One way to measure efficiency is the book over-round. When I first start on Betfair it was large and the markets generally had less competitive pricing. Now it not unusual to see the market hovering near a 100% book, even on a very competitive big field market. Smaller over-rounds means the market is more efficient as you are losing much less to the other side of the book. You can bet or trade at random and the net outcome has less and less slippage.
Inefficiency
The contraction in the book percentage and lack of margin it generates means there is less money to be made, or lost, depending on which side of the outcome you are on. So while some mourn the fat margins of yesteryear, generally speaking, people lose less than they would many years ago. The odd thing about this competitive price and contraction of the overound, is that outright betting strategies are viable. A lot of these were not many years ago.
Here’s the ‘but’ though. The level of volatility in the market has shot up in recent years. The two are intertwined to some point as part of the increase was influenced by Betfair introducing cross matching where they could. The tighter the book is, the quicker and further it moves when something wants to get on a selection, the book stays tight but the prices move. Cross-matching ensures there is no slack in the market.
So in a sense, it’s less efficient, it’s getting harder to get a decent size order filled without influencing price. The only way to ensure you can get an order filled it to take a worse one. In a lot more markets now, you see the price gyrate from one extreme to the other. This means that while you get in at no theoretical loss, due to the book overround being so low, you may just end up with a naff price anyway. I’ve lost count of the number of markets that close at roughly the same price that they opened but moved significantly in between. It’s much more common now.
The Upshot
The upshot of all this is that you have highly efficient markets that are producing much more variable outcomes. The market has mysteriously got more efficient and less efficient at the same time. You can get a good price with only a little slippage, but getting that price has become a little more elusive.
From a trading perspective that means that if you were looking for a strategy that involves low volatility, you are less likely to find them. But if you looking for big price moves then you will benefit from this shift in the market.
There are a number of facets to this, too many to discuss in a simple document, but I hope it’s pointed you in the right direction. It doesn’t feel like it’s about to change, but I’ll be keeping an eye on it.
