Modelling Market Efficiency With A Coin

I feel as though I am still not getting through to some people with regards to market efficiency. What can you do to convince people who possess a reality distortion field and who think they can beat games in which they have no edge? It is undeniable that in the long run the wisdom of the crowd predicts the correct probability for selections in a sports betting market.

Another problem I have is getting people to understand what "the long run" means. We can't judge the efficiency of a single betting market, any more than we can judge whether a coin is biased or not after a single toss. The markets and the coin have to be repeatedly tested.

To demonstrate what the long run is and its implications I created a simple coin tossing simulator in a spreadsheet.

The spreadsheet determines the ratio of heads to tails and then charts are created for various simulation trial lengths. The random number generator for the simulator is set up to simulate a fair coin and so we would expect the ratio of heads to tails to be even (1:1) but only in the long run.

If we look at a chart after 10 trials we see the ratio is nowhere near 1:1 (1.0 on the chart). In fact the chart looks more like 2:1, refusing to go below the 2.0 line. What can we say about the coin after 10 trials? Nothing. The same with 10 horse races. Our system might be winning after 10 races but is that down to luck or skill?

The simulation was continued for 50, 100, 500 and 1000 trials with charts displaying the heads to tails ratio. After 50 trials the chart was showing a trend towards 1:1 but could we now say the coin is fair? The actual ratio might be below the 1:1 line.

After 100 trials the chart appears to be settling above 1:1. Is the coin biased towards heads?

After 500 trials the chart is now showing a ratio for heads to tails of 1:1. The coin has reverted to the mean expected ratio. Our horse racing strategy might now be at breakeven but losing through commission payments.

And again after 1000 trials. We might be confident that the coin is fair and has regressed to the mean. However, run the simulation again and you might not get 1:1 after 1000 trials of a fair coin. I have run this simulation many times and after 1000 trials it can settle far from 1:1. I know that I have created the sim to be fair but it will take many more trials than 1000 to get consistent results. You can never be too sure about the coin.

These observations are true about sports betting markets too. With just a few races in a data set nothing can be said about the efficiency of market prices. Over hundreds of thousands of races, over many years, it is shown that prices tend towards their true value. Those who bet on horse races and who use starting prices should beware.

A bettor creating a strategy must understand that prices tend towards fair during the course of a market's lifespan. Most who think they have tamed the markets are either very lucky or haven't been trading or betting long enough for mean reversion to drag them back to breakeven (minus commission - i.e. a loss).

Most traders and bettors create systems with a limited life span and so they won't get the chance to take advantage of the long run. A losing system can have good luck or a winning system can suffer bad luck because they haven't been traded with long enough. You need an edge to have a chance of beating a market in the long run. As the simulation shows a negative edge can initially look like a positive edge and vice versa but in the long run you will mean revert if there is no edge and you will lose through commission losses.

Another way of looking at the charts above is that they are time lines towards the start of horse races. When the line reaches the 1:1 ratio the market has happened upon the long run efficient prices. Before then everything is up for grabs. You can bet on value or you can trade the mean reversion. But what if you don't know if the coin is fair or not. What then? Maybe the coin is biased 2:1 in favour of heads but you don't know that it is.

This is the main reason why I do not waste my time studying form and betting on fundamentals. I much prefer technical trading, working with mean reversion rather than against and preying upon other traders who get caught up in an exuberant market. I don't know what a price should be, I only know that when a race is about to start, prices will be fair in the long run but until the race starts there is the opportunity to take advantage of the indecision of the crowd until wisdom takes over.

There are some good fundamental traders who can determine the optimal time to bet. Usually they have access to private data and the odds are against you being such a person.

Lucy, Lie Down and Take a Pill Love

Following on from my recent article on How to Read a Sports Trading Website I shall take a look at a prime example. We have all heard the old marketing maxim, "Sex Sells!" If you want to sell something to men then the best way to do it is with a louche lady. Take a look at Lucy Collins, with her head cocked disdainfully. I bet you'd read anything she wrote.

Of course, that's if Lucy is a lady. You see, online people can be anyone they want to be. A man can be a lady. A lady can be a man. An ageing Crystal Palace fan can even be a 17th century mathematician, if they want.

Luckily, Lucy has given us a link to her website Already, the alarm bells are beginning to ring with a URL like that. Lucy generously provides us with an About web page, in which she tells us that she is from a "horsey background". Immediately, I have images of playful gymkhanas on father's estate in mind. Lucy has kindly supplied us with an address to see the estate, which I enter into Google maps. Oh. I see father has fallen on hard times and is now living in a rather run-down semi in Sheffield. Never mind, upwards... and occasionally downwards.

There is also a business name attached to the address and like all businesses they must file accounts so off we go to do a company check on CityMan Business Solutions Ltd. However, I see no mention of dear Lucy. Could Nigel be having some identity problems? I am doubting the identity of Lucy even more. Let's have a look at the content of Lucy's website.

Oh dear. Page after page after page of affiliate links. Only if something can be linked to via an affiliate link is it "reviewed". Of course, the reviews are always gushing, even if the system is obviously rubbish, otherwise nobody is going to click the link and lucky Lucy doesn't get to hear, "kerching, another idiot mugged!" There's also the classic eBook that can only be bought through the vendor's website and not on an independently run site like Amazon.

I have no idea who is behind this Lucy character but if it's gambling related then it is probably a male. A male who doesn't know much about sports betting and trading but who does know how to get mileage from affiliate programs. The business name suggests someone associated with the business owner. I can't believe an IT contractor would waste their time on this drivel so maybe it's his son.

As I said in How to Read a Sports Trading Website if a website deletes pages then you can use the Wayback Machine to look for them. However, any attempt at using the Wayback Machine for will not return any pages as the owner of the site has set up a robots.txt file to stop certain spiders and robots from indexing the site and that includes the Wayback Machine. Something to hide, maybe?

I am sure the majority of you looking at the site will regard it as amateurish and an obvious attempt at making money from the gullible. Of course, all publicity is good publicity so I've upped the page view count for the young lad over the next week or so. But as you will know by now, the website is just a click bait website. Nothing to see here. Move along.

Was it Something I Said?

A certain CEO of a multi-billion dollar global empire (not Cassini) has again deleted his trading blog and, this time, his Twitter account too. Most likely he came to his senses, realising that earning obscene amounts of money as a corporate CEO is a lot easier than throwing in the "job" and living off his wits as a sports trader, earning about 1/1000th of a CEO's net salary.

If it was something I said then I am truly...... glad I said it. I don't write articles to suck up or gloss over. It's part of what I am. The subtitle of this website is "Helping sports traders to achieve their potential" and you don't help people by telling them trading is easy, that anyone can do it and that everyone is a winner.

Assuming the average player on Betfair pays 5% commission then if we are "all winners" then we are all still losers to the tune of 5%. If we are all to do equally well then we all break even minus the juice Betfair creams off for itself. It's as simple as that. Every profitable winner needs more than one loser to keep their head above water.

If I think someone is talking out of their A, be they traders, vendors or teachers (unqualified) then I will say so. I know that I have ruffled feathers without mentioning names and yet, I have seen more than one trader, vendor or "teacher" get upset. Why is that, if I don't mention any names? A guilty conscience?

Not everyone can trade. In fact, most can't. Anyone who says they can take a random person off the street and make a trader out of them is lying. Look at Million Dollar Traders video again. The majority hadn't a clue, even after training. The ones that could trade didn't make a fortune. To be paid off, a big winner needs many losers.

Trading, as with face to face gambling such as poker, is an unpleasant game. You are there to clean people out. I had no real friends in the casinos in which I played poker during the 1990s. I knew actors. I knew Sir Clive Sinclair. I knew Victoria Coren. We were cordial. We put on our masks. We went to work trying to mug each other. When I see a new bot getting cleaned out because its programmer is incompetent, I don't think "Poor chap", I think, "I want some of that." Just as I did when a beginner or tourist sat down at the poker table.

The only time I am considerate is when I write articles or books. In these situations I am a teacher (qualified - graduate teacher at university and adult education college) and I am attempting to impart knowledge without handing over my edge on a silver platter. If I don't think I can produce content that is any good then I don't bother. You won't find me making a scalping video and then saying, "See what I did? Easy! Now go away and replicate what I did." (Whilst I delete the videos that didn't work out the way I wanted them to.)

Another crossover I notice from poker is that many people like to boast about their winnings but never talk about their losses. Rarely do you hear people talking about consecutive losing trades any more than a poker player talks about losing runs. No, all you hear about is the winning. You don't sell product if you list its failures. Negative advertising doesn't work in this game.

Trading blogs come and go but mostly go. There is no hiding. You can always use the WayBack Machine to reminisce about those who fell by the wayside. Especially if they make a come back then you can point out to them all their previous losses that they have decided to ignore. I'm looking forward to a new blog, maybe by someone who has now moved up through the boardroom to become the owner of a multi-billion dollar global corporation. And yet, they will always have that yearning to be roughing it with us plebs.

Some feel they have a boastful duty to tell everyone that trading is easy. Maybe they have something to gain (financially or egotistically) from saying so. I feel I must tell people how difficult it is with 90% being the often quoted figure as the failure rate for traders. Strange how those who tell you how easy it is to profit from trading never give you that figure. Why not ask them why?

I Can't Do It When You're Watching Me!

A curious post "Luck and Skill in Trading..." from Peter Webb on his vendor blog who says, "Of course, you can’t guarantee that you get it right and also talking and trading is pretty hard. When trading you need no distractions to be able to trade effectively. A room full of people is a major distraction!" 

I wonder how traders in financial markets manage to trade sitting next to each other in huge trading rooms with all the noise, hustle and bustle, let alone the former open outcry traders pushing and shoving in their trading pits? Come bonus time and a trader doesn't get any extra for his year's work can he say to his manager, "I would have made more but everyone was looking at me!"

[EDIT: Two can play at this game. Financial traders have noisy squawk boxes, television screens and other traders shouting orders into phones whilst they themselves trade. 14 winning trades in a row is nothing if you have been trading for a long time. I have tossed a coin and gotten 14 heads in a row but that doesn't make me a genius tosser. Just a tosser!]

Jospeh Buchdahl discusses luck and skill in his excellent book Squares & Sharps, Suckers & Sharks and, as usual, he backs his statements up with facts and figures rather than anecdotes. What Joseph more than amply demonstrates is that at the top of the game, be it in sport or gambling on sport, is that as the skill gap closes the luck factor increases. 

Soccer has always been a little backward in going forward, which you can read about in Soccernomics. Sport science and big data has only recently entered the realm of that sport. Putting aside Leicester's outlier in the 2015/16 season (Leicester has since mean reverted) the vast sums of television money that now buys players and support staff means a bunching up at the top of the Premier League by those teams owned by the super-rich. There could well be a lucky moment or two this season that decides who takes the league title.

In trading too, with all the available data and the technological improvements to process that data it gets harder every year to find an edge. The future will probably see markets predominantly filled with algo-traders and high-frequency operations, less of the old-school manual traders "scalping" a tick or two. As with pit traders in finance, the manual trader in sports will become marginalised. Reactions to late-breaking information will be more rapid than today and as in the Premier League it will be the wealthy operations with the latest technology that truly profit.

Another snippet from Mr Webb's post mentions, "If you assume that my ability to get a winning trade is just that of a coin toss, a 50-50 chance, then what is the chance of me getting all 14 traits (trades) correct?" I can't help but think that the little imp has been reading my website again and suffering from a little cognitive bias in jumping to a conclusion that isn't there.

I did say in my article Scalping and The Winning Combination that in a directionless market a (noise) trader has only a 50% chance of success. If a market has direction then the chance of trading market movements is no longer 50/50 but then I did say, "If they had asked, 'In an upwardly trending market.' then I might have said something different."

Betting Market Efficiency - Citations

Discussing betting market efficiency is guaranteed to start arguments. Some believe that betting markets are efficient whilst some believe there are inefficiencies in betting markets. The truth is that both beliefs are correct.

Betting markets are efficient at aggregating information into prices but not in zero time. Starting prices for horse races are long-term efficient (over many races prices represent the true chances of a horse winning) but when a betting market opens the prices are rarely at their starting prices. 

Early prices are at best a guess, many hours before the race start. New information flows into the betting market by way of the wisdom of the crowd and their betting intentions. As the number of bets increases, the market's prediction becomes ever more accurate (by way of publicly available data, late breaking information, non-runners, private information, observations from the parade ring and during the canter to the start etc.) until the start of the race when all public and private information has been aggregated into the starting price.

Because betting markets take time to aggregate information, fleeting ineffciencies occur and a trader has to take advantage before the rest of the market participants arbitrage out that inefficiency.

There now follows a list of citations for academic research on betting market efficiency. Papers with links can be downloaded from here. Pages without links might be found by those with JSTOR accounts.

Asch, Peter, Burton G. Malkiel, and Richard E. Quandt. "Market efficiency in racetrack betting." Journal of Business (1984): 165-175.

Bird, Ron, and Michael McCrae. "Tests of the efficiency of racetrack betting using bookmaker odds." Management Science 33.12 (1987): 1552-1562.

Dolbear Jr, F. Trenery. "Is racetrack betting on exactas efficient?." Economica (1993): 105-111.

Figlewski, Stephen. "Subjective information and market efficiency in a betting market." The Journal of Political Economy (1979): 75-88.

Forrest, David, and Robert Simmons. "Globalisation and efficiency in the fixed-odds soccer betting market." Centre for the Study of Gambling and Commercial Gaming, University of Salford (2001).

Gabriel, Paul E., and James R. Marsden. "An examination of market efficiency in British racetrack betting." Journal of Political Economy (1990): 874-885.

Golec, Joseph, and Maurry Tamarkin. "The degree of inefficiency in the football betting market: Statistical tests." Journal of Financial Economics 30.2 (1991): 311-323.

Hausch, D. B., Lo, V.S.Y. & Ziemba, W.T. (1994) Efficiency of Racetrack Betting Markets, San Diego, London: Academic Press.

Hausch, D.B. & Ziemba, W.T. (1985) Transactions Costs, Extent of Inefficiencies, Entries and Multiple Wagers in a Racetrack Betting Model. Management Science, 31-4, pp. 381-394.
Hausch, Donald B., William T. Ziemba, and Mark Rubinstein. "Efficiency of the market for racetrack betting." Management science 27.12 (1981): 1435-1452.

Johnson, Johnnie EV, Owen Jones, and Leilei Tang. "Exploring decision makers' use of price information in a speculative market." Management Science 52.6 (2006): 897-908.
Smith, Michael A., David Paton, and Leighton Vaughan Williams. "Market Efficiency in Person‐to‐Person Betting." Economica 73.292 (2006): 673-689.

Snyder, Wayne W. "Horse racing: Testing the efficient markets model." The Journal of finance 33.4 (1978): 1109-1118.

Sung, Ming-Chien, Johnnie EV Johnson, and Alistair C. Bruce. "Searching for semi-strong form inefficiency in the UK racetrack betting market." Information Efficiency in Financial and Betting Markets (Cambridge: Cambridge University Press, 2005) pp (2005): 179-192.

Twomey, Paul. Market efficiency of horse-race betting markets with applications to spread betting. Diss. University of Sussex, 2005.

Vlastakis, Nikolaos, George Dotsis, and Raphael N. Markellos. "How efficient is the European football betting market? Evidence from arbitrage and trading strategies." Journal of Forecasting 28.5 (2009): 426-444.

Williams, Leighton Vaughan. "Can forecasters forecast successfully? Evidence from UK betting markets." Journal of Forecasting 19.6 (2000): 505-513.

Williams, Leighton Vaughan. "Information efficiency in betting markets: A survey." Bulletin of Economic Research 51.1 (1999): 1-39.

Williams, Leighton Vaughan, and David Paton. "Does information efficiency require a perception of information inefficiency?." Applied Economics Letters 4.10 (1997): 615-617.

(This page will be updated in due course.)

Errors of Judgement

Here's an interesting video from BetAngel about being open minded. I agree with the video's sentiment in that I too leave no stone unturned in the pursuit of edge. If I see something mentioned in a forum or on a website that is too good to be true then I don't move on to the next page, I investigate. I have plenty of data of my own but if someone's idea uses data that I do not have then I can easily task one of my price bots to gather the data I need to test validity.

Most of my ideas and yours too come to nothing, which is just the way things are in trading. More often than not we dicover how beautifully efficient markets are. Now, efficiency is an emotive word in trading. The problem is that for many people it is such a rigid definition. Mention "market efficiency" to some and you will hear a chorus of "No they are not!" especially in social media group think.

When I say "market efficiency" I do not say, "Markets gather all available information in zero time and a price in a market is the price it should be therefore betting and trading on sports is not profitable." After all, I do trade on sports markets so obviously that is not my definition of market efficiency.

What I do say is that prices are long-term efficient. All horses starting a race at evens (decimal 2.0 - probability 0.5) will win about half their races. What I never say is that a horse whose odds are 2.0 at the opening of a new market will win 50% of their races. At the beginning of a market's life span there is little or no information in that horse's price and those odds of 2.0 could be 1.80 or 1000.

The Wisdom of the Crowd is another marvel of market activity. Ask one person what the odds on a horse should be and probably they will be wrong. Ask ten people and they could all give different answers. But ask thousands of people through their betting activity and just before the off, when all public and private information has been teased out of those bettors with something to say about that market, the starting prices will be long-term efficient.

It's what happpens between market open and the start of an event that makes trading possible. Now, I am not a fundamental trader as far as the old-school pre-exchange definition is concerned. I trade market over-reactions, trader naivity, market dynamics and psychology, and various forms of arbitrage. I have created my own metrics for determining when to trade, all are tested for edge otherwise I wouldn't implement such strategies in my bots.

Obviously, there are inefficiencies in markets but markets are efficient at gathering public and private information and reflecting it in a price, only not instantaneously. Only when all public and private information is reflected in a price is that price efficient. Before all information has been reflected in the price then that price is open to speculation, both as to its validity and its trading potential.

So, to make things clear, markets are long-term efficient but there are various informational and technical reasons as to why prices do not immediately reflect their true price until a market closes before the event begins. The majority of us are not privy to private information, public information does not take future news into account (e.g. a horse that will act up in the parade ring, later in the day), beginner traders (especially the scalper variety) add noise that arbitrageurs can trade on, and there are many more reasons besides.

There are lots of ineffciencies that can be traded on but at the same time the market is efficiently gathering information through the wisdom of the crowd. To me that is not a contradictory remark, it is a fact.

Further Reading

Squares & Sharps, Suckers & Sharks: The Science, Psychology & Philosophy of Gambling contains a lot of excellent research on market psychology and efficiency. No trader should trade before reading it.

The Cassini Division

The US presidential election reminds me of Monty Python's Upper Class Twit of the Year, leaving Americans with the unenviable task of choosing the best from a bunch of idiots.

Hillary Clinton wanting the job so badly should immediately preclude her from the job, as Billy Connolly might say. Trump seems never to have wanted the job in the first place and is doing his best to lose. Gary Johnson of the Libertarian Party appears mentally unstable with a whole portfolio of video oddities. I don't know anything about the US Green Party, I just naturally assume it's full of loonies like the UK version. Maybe the ballot papers should have another option: "No President for the Next Four Years". The electorate might get to like that and will be chanting "Four more years!" in 2020.

Cassini, the old master at Green All Over has talked (and talked) the value out of a Clinton victory in next month's US presidential election. Given Cassini's track record with politics and economics it might be wise to see if there is any value remaining in Trump, although the candidate is doing his best to negate it.

Ahead of last June's Brexit vote Cassini was certain of the Remoaners Remainers gaining victory but for some inexplicable reason he didn't bet his house on it.  Maybe his private wire (a la Kelly Criterion) was faulty in respect of that dead cert. Fortunately, the infinite wisdom of the crowd prevailed at the prospect of the UK luring businesses from around the world with a corporate tax policy free of the shackles of the EU.

Before the first Brexit votes had been counted, the betting and financial markets had priced in the short-sighted view of the Establishment, for whom change and revolution are to be avoided. It's odd that lefty radicals in their dotage would hitch themselves to that wagon but this is not a political website so we won't go down that cul-de-sac.

A wise move would have been to buy a fall in Sterling and wait for the Sunderland vote, the first to be announced. Sunderland was very much a barometer for the rest of the country and was widely expected to vote for remaining. If the vote was to remain then there wouldn't have been much more upside in Sterling as the markets had been rising for a couple of days in anticipation of such a result. A bet for Sterling to fall could have been closed out for a small loss in that case. However, a vote to leave would be a different matter, as has been proven. 

British exporters can't believe their luck with the falling value of Sterling and when Ireland (a country sick and tired of being told how to run its taxation policy by the EU) sees the UK luring multinationals away from the Emerald Isle then Ireland will consider abandoning the sinking SS Merkel too. By SS I obviously mean Steam Ship. Honest.

With Clinton regarded as Wall Street's man (sic) because her husband never had his trousers on long enough whilst in the White House, it might be prudent to bet on a fall in the dollar or the S&P 500 rather than laying Hillary (excuse me whilst I heave). Even a hedge trade on a Clinton win and a dollar/index fall for the bonus arbitrageurs might at best win the bonus or better, a handsome slice of profit. I am sure hedge funds everywhere are doing just this, as they did prior to the Brexit vote.