Sports Exchange Trading

An introduction to Sports Exchange Trading, by Bet Angel guru Peter Webb

If you could find a market that gives you regular price swings of over 30% every ten minutes, where you only pay commission on a successful trade, where there is no spread, where you have direct market access and where transaction costs are small, would you be interested? Of course you would. Welcome to the world of the modern sports trader.

Until recently, sports markets have not been viewed in the same light as trading markets. However, the advent of betting exchanges has changed perceptions significantly, heralding an age where sports risk could be traded in similar ways to traditional financial instruments.

At their core, betting exchanges offered people the simple choice of backing to win or laying to lose any selection in a sports market. They also cut out the middle man by allowing users to place orders directly on the exchange which were then matched by other users, rather than a bookmaker.

Underlying that simple concept though was an accidental creation, a mechanism that acts more like a traditional financial market and one that is very intuitive if you are already a trader on financials.

Modern sports markets are much more similar to a spread betting market than a gambling medium, but they also possess some key advantages over the spreads.

The initial attraction of betting exchanges were the better odds available to traditional gamblers, but as liquidity grew shrewd users started to trade the movements of odds on the exchange.

These participants did the same thing as in a traditional financial market. They made a judgment on the direction of the movement of those odds and ‘traded? them just like a spread bettor. As a result traders now account for a large amount of the volume on betting exchanges.

When you place an order on a betting exchange, you are essentially buying or selling risk. The risk you are trading is the risk that something will or won’t occur in a sports event. At its simplest, it’s similar to trading insurance risk. When you lay on an exchange, you are effectively ‘selling? a risk premium and you are willing to put up some potential liability in return for that premium. When you back, you do the opposite.

If you view the market in such a manner, your objective becomes clear. It is to offer the lowest liability when laying and accept the highest payoff when backing. Your clear objective is to lay at a lower price than you back at or vice versa. When you do this, you net the difference between the two in profit.

A simple trade

Imagine trading a particular horse race. First you lay (become the bookmaker) £1,000 at a price of 2.63 (around 13/8 in its equivalent fractional form), before backing at a price of 2.28 (around 5/4) and completing the trade.

When we laid we accepted a premium of £1,000 for offering potential liability of £1,630. When we backed at a higher price we only needed to place an order with a value of £931.93, and we now net the difference between the potential profit on that and the potential liability, £68, across the market.

Because we have done this even before the race has started we are now assured this profit regardless of what actually happens in the race itself. This trade took just a couple of minutes to complete.

Hopefully, the similarity between sports trading and financial trading or spread betting is clear. There are several key differentiators however.

The first is that the betting exchange model charges commission only when you win, not when you lose. You also have direct market access, so you are free to place orders anywhere on the exchange; you can make the spread if you wish. The current model also has minimal transaction costs.

But the big advantage to this is that you can place and pull orders at high frequency across the book, at will, with little or no cost, and with obvious benefits. Our first trade only made us £68 for putting a grand on the line, but imagine multiplying this across seven races in a meeting and several meetings a day.