A Sports Hedge Fund?

I was alerted to the creation of a new sports hedge fund by Pyckio. Not for the first time has a company attempted to put their sports trading activities on a similar footing to a hedge fund, Centaur Galileo being the most prominent, in that it soon collapsed.

The most likely reason for the collapse of Centaur was market capacity, with too much fund money being traded in a market such that the fund became the market and eroded the fund's edge.

As I have repeatedly said on this website and in Betfair Trading Techniques, too many novice traders have some initial success, usually through variance (luck) and then run a compounding spreadsheet to forecast their future wealth.

The upshot of the erroneous compounding exercise is that the novice imagines they will soon be a millionaire. In reality, the size of the novice's trades will have to increase such that there will not be enough money on the other side of the spread to match the novice's trades.

A trader must always take into consideration the amount of money they can match against the edge they have found. Put too much money into the market and you can easily end up trading against yourself if the spread moves against your edge.

Pyckio is a tipster aggregation website and such websites can inadvertently (or otherwise) become the victims of survivorship bias. Joseph Buchdahl in Squares & Sharps, Suckers & Sharks has performed extensive research on tipsters and tipster aggregation websites, revealing that most winning tipsters are merely lucky and some aggregators are fraudulent.

Assuming Pyckio is reputable, and there is no reason to doubt that if Buchdahl advertises Pyckio's fund without query (Buchdahl is actually a partner at Pyckio), then any attempt at creating a fund using winning tipsters will run into two problems.

The first problem relates to edge. If tipsters are lucky then they will mean revert and anyone investing in the fund will see their capital gains eroded by the loss. Any fund administration charges will further erode the fund such that investors will lose money in the long run.

The second problem relates to market capacity in that every winner needs a loser to compensate them. Pyckio will be limited to how much money it can put into a market by the amount of losing trades that are entered into the market.

A sports betting market is in no way comparable to a financial market. A single betting market might see a few million pounds changing hands. Compare that to the trillions in financial trading. There is much more capacity for a financial hedge fund to manoeuvre within.

If Pyckio is successful in its enterprise then it will become the victim of that success. Why bother betting or trading when you can get a handsome return from Pyckio's fund? The more people that join Pyckio's fund the less edge it will have over the market because there will be fewer losers.

Losing traders will join Pyckio's fund and will no longer be losers. You cannot have a market where 100% of participants are winners and so Pyckio's edge will dwindle. This means that Pyckio will have to limit the number of people that join the fund and fund members will have to pay a premium for that exclusivity. Again, eroding any edge a fund member may think they have.

Pyckio are walking on a tight rope with this venture. I wish Pyckio well with their fund but more so anyone investing in such a fund.

Why bother for meagre returns?

The title of this article results from a comment I made on Twitter, in reply to something said by someone else. Twitter's 140 character limit precludes me from writing a full answer and so I will reply on this website.

The excellent @BettingScams on Twitter wrote, "Think I've lost all patience for stupid punters. If you're thick enough to pay anonymous blokes on twitter for tips, you deserve to lose" (original post here). My reply was "There is no easy money in financial or sports trading, just hard work and a meagre return."

This reply befuddled a novice by the name of @sealionalf who asked, "meagre return? I am confused, why write books about how to trade then?" A reasonable question from a beginner.

The novice trader might mistakenly expect to make a lot of money from little outlay or little effort. This will result in high variance trading with the result that they will lose their small outlay.

Expert traders turnover large sums of money for a meagre percentage return. In financial trading a firm might turnover billions to make millions. Likewise, sports traders will turnover millions to make thousands. If you don't have the financial and intellectual muscle then you are probably not going to get far in trading.

The reason why I write books is given clearly in my About page but boils down to providing sports traders a chance to avoid the mistakes of beginners.

Me and My (Betting) Shadow

I saw a question on Twitter that I often see being asked. The question was, "When I put a big bet on @Betfair_Aus why does a small bet for $14 almost always suddenly appear one tick better than me?"

The answer lies in automated (aka program) trading. As I argue in my book, Betfair Trading Techniques, all sports trading and betting is, in one form or another, arbitrage.

In the case of the questioner, a bot has been tasked with forcing the questioner to move his position until a pure or statistical arbitrage is offered to the bot. (again, see Betfair Trading Techniques)

In early, pre-race trading, a syndicate with inside information is going to have a better idea of fair odds than the average punter. A bot can then look out for naïve positions and tempt them to move the spread in favour of those "in the know".

If you find yourself being marched up and down a trading ladder in third-party trading software then you are most likely trading with a negative edge and you must re-evaluate your strategy.

Boosting for Traders

A new article from Sports Trader concerns Adaptive Boosting and provides plenty of detail and references for those wanting to learn more about this particular form of machine learning.

My only query is the application, determining the winner of a horse race. Any approach to this problem falls at the first hurdle because it usually lacks private information.

Any machine learning methodology can be used to trawl through public data in a reasonable length of time - also brute force search - to determine fair odds. See Betfair Trading Techniques

Without private information or the ability to act upon late-breaking information more quickly than other traders, filter rules based on public data are unlikely to give a significant long-term edge.

This is why I base my research around taking advantage of novice traders and others who overreact or act too late in dynamic markets.

The Sage

A recent article on Cassini's website concerns Warren Buffett and what he does to accumulate wealth. Some might be surprised to learn that most days Buffett eats a cheap McDonald's breakfast. Many of the world's billionaires are misers and so it is not surprising that Buffett eats a cheap breakfast. Although $2.61 is a little pricey for my liking. I can just about eat for a whole day on that amount.

Too many people who aspire to being rich think only of the things they want to buy when they run into good fortune. Think of all the lottery winners who lose their millions in a short space of time. People don't become multi-millionaires by spending money. The exact opposite is true. The rich go out of their way not to spend anything at all.

You are not going to get rich by constantly spending your capital on items that lose value the moment you hand over your cash. Only through the purchase of assets that appreciate in value are you going to increase your wealth.

I came to the realisation that you must apsire to be a producer or, at least, not a consumer so that you can attain and grow wealth. Desiring the latest gadgets only enriches the billionaires, which is why billionaires invest in advertising to coax you into throwing away your hard-earned money. Filling your life with consumer items is a waste of money that should be used to buy assets. Trading simply to fill your life with trinkets that depreciate in value is not a sensible idea.

My Fun Has Only Just Begun

A new vista tonight, overlooking the Atlantic Ocean. A little breezey perhaps. It is so good to be back in the green, verdant green that is. I can see much tennis and sailing ahead (N.B. Cassini, I don't own a yacht!), plus newly inspired writing.

During my journey here I was reading about something called Stockholm Syndrome, whereby a kidnap victim or hostage begins to have feelings of trust or affection towards their captor, the longer they remain with them. 

Such a thing has happened in famous kidnapping cases, where the victim has spent many years with their captor. Once released from captivity their first concern is for their captor and not their long-lost relatives.

This had me wondering if there is also a financial version of the syndrome, whereby those who have paid monthly subscriptions, over many years, for something they believe is going to make them wealthy. This would count as a form of captivity and even though they never get any wealthier, they keep on subscribing. If told that they are wasting their money they will attack those trying to help them see sense.

What shall we call it, Oslo Obsequiousness? Maybe that is too big a word for some victims to understand.

It Doesn't Get Any Easier

Cassini has published a run of articles on sport trading's very own Chuckle Brothers, who have been promoting in-play tennis trading as a way of staving off the winter blues.

If you have read my How to Read a Sports Trading Website article then you will have seen through those vendor articles. As Cassini points out, trading tennis in-play is only for syndicates with court-siders plugged into algo-bots. Sitting at home with a delayed video feed will do little more than earn trading profits for the syndicates and subscription profits for the vendors.

My last article, The Paradox of Skill, received a reply from a commenter, confirming the paradox of skill from their own experiences. To recapitulate, the paradox states that as the skill level of a group of traders in a market increases, the abilities of the traders will even out such that all traders will have an equal chance of winning - i.e. luck plays a greater role.

Imagine an idealised market with only two traders, one is an expert and never makes a mistake. Whenever they back a selection the price falls and when they lay a selection the price rises. The other trader in the market is a beginner, they are always on the other side of the expert's trades, the wrong side. In our idealised market, the expert always wins and the beginner always loses, therefore the expert overcomes commission costs and makes a profit. 

The beginner goes away to lick their wounds and decides to learn how to build better trading strategies. They are successful and their skill level is now equal to that of the expert trader. Because the two traders are equally skilled and there are no other traders in the market, the two traders end up pushing money backwards and forwards, between themselves, whilst paying commission.

Sometimes the former beginner gets slightly ahead only to mean-revert and sometimes the expert trader performs in a similar manner. That is expected variation and in the long-run their net profit is zero minus the commission paid to the exchange.

A third trader - another beginner - joins the market and for a brief time the two experts compete for the losses incurred by the beginner. Eventually, that beginner learns how to be an expert trader and once again all traders are now losing to the tune of the commission rate.

Other traders may join, some become expert, some leave because they don't want to learn how to become experts and maybe a few are wealthy enough not to care that they lose money. It is the careless that the experts depend upon for their profits but if every trader is an expert then only luck can create a winner.

As the number of beginners in the market increases, the probability of a beginner getting lucky increases. A lucky trader might post a short-term profit (not to mention, starting a boast blog) only to mean-revert in the long-term and lose.

We can use the preceeding thought experiment to explain the consequences of trading courses. Imagine an educator has cornered the market for trading courses and has personally trained each and every trader in our hypothetical market. All traders have the same expert knowledge and so they too will push money between each other and lose the rate of commission in the long-term. We might call that the paradox of education, whereby being as equally educated as everyone else garners you with no advatange in life.

Why then would a vendor train people up to trade as they do? It can only be for one of two reasons. That the educator is not training his students to trade as he does but is misinforming them solely to get them to enter the market so that he can take a contrary position in the market. Alternatively, the educator doesn't care what these traders do because his main income is from teaching and selling other products.

You might ask if this paradox occurs in financial markets too. Indeed, it does. How do financial traders get around this problem? Well, they use high-frequency trading, dark pools and keyboard readers to intercept discretionary trader orders. All so that they may front-run other traders' orders before they go on to the exchange. Volume is bought ahead of the discretionary order by an algo-bot that has been tipped off to the trade and acts as a middle-man, taking a cut.

If all else fails, traders cheat. LIBOR and forex fixing, and the sub-prime mortgage scandal whereby the mortgages of people who had no chance of repaying the loans on their houses were sliced and diced with triple A loans to create CDOs that could be palmed off on the unwary (i.e. Deutsche Bank). 

Today, financial markets are so informationally efficient and so much processing power is thrown at the trading problem that in order to get the bonuses that traders crave for there is no option but to use underhand methods. Hence, we now have court/track/pitch-siders and match fixing in sports.

The commenter wrote:

I wanted to say thanks for writing your latest book, and this seemed as good a place as any.

I've been trading algorithmically for 4 years and am always happy to buy any book that may be able to give me a sniff of an edge. I can now confirm that you are telling the truth when you say this book doesn't offer one, but it's reassuring to see so many similarities between approaches, and I would recommend it to anyone taking their first steps into algorithmic trading.

In terms of this post, I can definitely confirm things are getting tougher all the time. My simple rules based code from 4 years ago has got much more complicated over time, but I'm currently making less with machine learning models than I was with the simple rules a few years ago. I always thought this an inevitable reality, but a few things do worry me. First, the introduction of the fee to use the betfair API can only reduce the number of new traders. Second, Betfair have a virtual monopoly in the sports exchange market, and whilst I have nothing against them, we are all at risk of changes to their terms (I may be doing BETDAQ a disservice, i haven't used their API for a few years). Whilst 10 years ago it may have seemed that the sports exchange was the future of betting, now it's not entirely clear if the sports exchange has a long term future, and it worries me every time I logon to betfair and realize that to a new user they're primary a sports book these days. This is one of the main reasons this remains a hobby for me.

It appears that I've stumbled upon a community of like minded people, so whilst I have no desire to share what I think are my edges, if anyone's interested in sharing some notes, let me know!

I am always happy to hear from other algorithmic traders even though edge is never shared. Algo-trading is not the glamorous (glamour seeking?) side of trading. Manual traders can play at being Bud Fox in Wall Street or Jordan Belfort (Heaven forbid) in The Wolf of Wall Street. Algo-traders have no pin-ups. With no ego to massage, algo-traders tend not to boast about their trades. "Getting it quietly" is definitely the catchphrase amongst algo-traders.

To be honest, I look forward to the day when all markets, both financial and sports, are filled with expert (most probably AI based algo-bots) traders who neither win nor lose. D-Wave's quantum computers may be edging us towards that day. Financial markets will return to their originally intended purpose, providing capital for economic growth and the eradication of poverty. Sports exchanges will be places where the poor don't lose their last pennies.

Does the sound of that bore you? Not I. The AI of the future, which creates efficient markets that are difficult to lose money in will probably be powerful enough to ensure that nobody needs for anything and there will be better things to do than risking money for gain. Maybe money itself will become obsolete. Until then, you have to hope that you are on the side of the informed and not the uniformed (or misinformed).

Of course, some sports exist solely as a conduit for gambling. Horse racing being the most prominent. There is nothing I can say that would console those who would mourn the loss of horse racing, but if given the choice I'd rather live in a world without want of food and shelter than one with a want for horse racing.