The Advantage of Sports Trading

The main advantage of sports trading is the control of risk. That statement will need some support so let us proceed.

If you have read my article on efficient market hypothesis then you will understand the following

1) The wisdom of the crowds ensures that the price on a sporting proposition is directly linked to the chance of it occurring. For example, horses at SP odds of 2.0 generally have a 50% chance of winning.

2) As a market gets closer to the end of the event the less volatile a price will be as it tends towards the true probability (hence price) of that proposition being true. For example, in an "In Running" market the price of a winning proposition tends to 1.01. And, a price will tend towards its true SP just prior to the sporting event starting.

3) Unlike financial trading, the market for a sporting event has a defined beginning and end.

4) In a financial market, there is always another day so any price only represents all that the crowd know at this moment in time but that there is always another day to shock the market and wipe out your position. Not only that but even when financial markets are closed during the night, there is still a market. In the morning there is no guarantee that last night's price is going to be today's starting price so positions can be wiped out overnight with no chance of getting out.

5) Are their shocks that could enter a sporting event? Yes but they are all manageable.

a) If a horse is pulled out of a race before the off then you get your money back.

b) If new information creates a run on a horse's price then the prices on all the other horses have to move to keep the overround close to 100%. These price changes will happen over a manageable amount of time, allowing the trader to get out of a losing position and minimise losses.

c) Price shocks are not as manageable in a financial market where price crashes often result in a cessation of trading whereby traders cannot close their positions and must take a large loss.

6) In financial markets the price of an instrument is potentially infinite but in a sporting event the probability of a proposition occurring is going to have clearly defined bounds. Not to mention that the prices available can only ever range from 1.01 to 1000

7) Sport is less corrupt than finance. Of course, we can never be sure if a horse race is true run or if a football team has agreed to throw a game. However, there is a neverending stream of news about the rigging of just about all financial markets. If you are not a market maker in finance then you probably shouldn't be in that market.

In conclusion, sports trading offers an investment opportunity with excellent opportunities to control risk.

The Spread Trade

You don't always need a price trending in one direction to make profit. As long as money is changing hands then the price does not need to trend. The spread trade takes advantage of a market that is not trending but which is still liquid.

A spread trade is the simultaneous placing of orders to buy and sell on either side of the spread. The offers are placed at the best prices available. These prices might be separated by more than a tick early in the lifetime of the markets or the prices maybe next to each other nearer then end of the market's lifetime.

Each order is known as a leg and the trade is complete when both legs have been matched. For example, you notice a market where a horse is being traded at 2.8 to lay and 2.78 to back. There are takers of both prices so you decide to place a spread trade. You offer £100 to lay at 2.78 and £100 to back at 2.8 and if both legs are matched then you make a profit of £2, which can be hedged to yield a profit for all horses in the market.

Care must be taken to ensure the market does not suddenly move one way or the other so be prepared to scratch the trade. For example, your lay may get matched at 2.78 but the back price drops to 2.78. You must now change your back position to 2.78 and scratch the spread trade. So long as new money keeps entering the chosen back and lay prices then you can continue making spread trades.

Overround & Underround

The overround is the inbuilt profit in a betting market. In a fair market all odds would add up to 100%. If the book is over 100% then layers make a profit, below 100% and backers make a profit.

Imagine a coin toss. The odds of a head or a tail is evens (2.0 decimal) so fair odds for either outcome would be 2.0 decimal. However, there would be no profit for a bookmaker so the bookmaker would initially offer slightly less than evens for both outcomes and then alter the odds depending on the weight of money bet on each possible outcome.

The overround for any market (assuming decimal odds) is the sum of the reciprocals of all the odds to back.

In the picture below we see a typical market on Betfair. To the left of the word "Back" we see 102.9%. This tells us that the market is overround to back and backing the whole field would lose us 2.9% of our wealth, over time.  If we look across to the value next to lay, we see 99.6%. This is what the bettors would like to back the selections for an underround (also known as overbroke) book. Being lucky enough to be laid at all the odds in the pink we could make a profit of 0.4% over time.

The overround is given by


(1 / 3.5) + (1 / 4.6) + (1 / 7.4) + (1 / 10) + (1 /10) + (1 /10.5) + (1 /18.5) + (1 /36) + (1 / 75)


= 0.286 + 0.217 + 0.135 + 0.1 + 0.1 + .054 + .028 + .013


= 1.029


= 102.9%

Occasionally the "Back" column is momentarily underround and for a fleeting moment offers the suitably equipped arbitrageur a guaranteed profit.

Trading Bots

Anyone interested in trading bets on sporting events will eventually come across the term Trading Bots. A bot is simply a software application that runs automated tasks over the Internet. Trading bots developed out of Internet robots, spiders and crawlers whose task it is to analyse web pages and the links between them. Without bots, search engines like Google would not be able to offer the service they provide.

Typically, a bot performs tasks that are both simple and structurally repetitive, at a much higher rate than would be possible for a human alone. In financial markets, bots are used in High-Frequency Trading (HFT), a trading system that algorithmically selects a stock to trade, hold for less than a day and sell for profit when the opportunity arises. (see Dark Pools)

As you can imagine, analysing financial instruments, then buying and selling them in just a few fractions of a second is not something a human can do, hence the rise of the bots. HFT requires very low latency between the market and the trading algorithm and, a highly liquid and volatile market. To that end many look to co-locate their bots on servers in data centres owned by the exchanges they trade in.

In financial markets bots not only trade but also use their technological advantage to act more quickly by "front running" (an illegal activity) or through harvesting rebates from maker-taker rules. These advantages create a near risk-free environment for financial market bots but such trading is not possible in sports trading. (again, see Dark Pools). Sports trading markets are somewhat different to financial markets. There are no loop-holes such as maker-taker for large HFT style sports bots.

Types of Trader Bots

Market Makers - price up an event using statistics and look to make a profit from spread trading either side of the perceived probability of the event taking place.

Arbitrageurs - look for price mismatches between exchanges and bookmakers and also between related markets on a single exchange.

Traders - These bots look to make short term trades as sentiment changes on an event. They use many of the technical trading systems from the financial world to determine when to go long or short and when to exit a trade.

Concluding Remarks

There is plenty of scope for building bots. At present I am automating my trading to do simple repetitive tasks that require no human intervention. All three types of bots will be utilised in my trading environment.

See Also

More articles on bot trading

Write Your Own Betfair Software

Greening algorithm for Betfair bots

Weight of Money

Weight of Money (WoM) is an indicator derived from prices on a betting exchange and is used to determine whether or not a price is going to lengthen or shorten. The term is similar to Depth of Market as used in finance. The WoM indicator can be used to quickly show the balance of back and lay offers on either side of the spread. If the weight is in favour of the lay side then it suggests the price has bottomed out (for how long, we don't know) and that the market is willing to lay in the hope that the price goes out. Conversely, if the weight is in favour of the back side then the price is expected to fall.

An algorithm for calculating WoM is given by

WoM = Money on Best Three Best Lay Prices / (Money on Best Three Lay Prices + Money on Best Three Back Prices)

and yields a value from 0 to 1.

The indicator is read thus

WoM = 0 to 0.33, more lay money entering the market so price is expected to rise

WoM = 0.33 to 0.66, money to back/lay are roughly equal so price is likely to remain stable

WoM = 0.66 to 1.0, more back money entering the market so the price is expected to fall

Example

= (£33 + £25 + £126) / ((£33 + £25 + £126) + (£15 + £44 + £104))

= £184 / £347

= 0.53 (price is expected to remain stable)

Using WoM

In the financial world much has been said about high frequency trading and market manipulation. Complaints are made about computers creating false signals by placing large orders on one side of the current bid/ask spread for an asset, thus creating a false signal of intent. The order creates the illusion of demand and some traders may jump into the market because of this. As soon as the price moves in the desired direction the large orders are removed and a smaller stealth position has profited from the price movement.

On Betfair you will sometimes see an order (many times bigger than current orders) placed a tick away from the current spread, which skews the WoM. The order is removed a few seconds later with none of the order having been traded. I think most experienced traders are aware of this occurrence and take this in their stride. However, naive traders using bots might get trapped into a manipulative trade if their algorithms solely use WoM as a trigger.

There is also the chance of bots working through two different accounts backing and laying at the same price to create the illusion of liquidity. Of course, such activity is going to attract a commission so those who do this self-matching will have a low commission rate and will have some idea of where the price is going to move to. No doubt they will have orders elsewhere on the price ladder to take advantage of this.

Does WoM Really Work?

Yes and no. You are as likely to find as many cases of WoM giving a false signal as a positive signal, in certain situations. It all depends on how and when you use it. All trading software will have the WoM signal and my self-coded trading software has it too but it is only a small part of my view of the market.

Our "scalping" friends will tell us that they can simply look at WoM and get a feeling when the market is going to move. I would challenge a room full of scalpers to press a key the moment such an event was going to happen. The result would be 50% right or wrong. You can never pin a scalper down to a figure, just a feeling.

Of course, you will see the scalpers piling in on one side of the spread when it looks as though a move is about to begin. But this happens so fast, close to the beginning of a horse race, that looking at WoM is more of a distraction than anything else. I don't need to look at a WoM indicator to see money entering the market.

Everyone has their own reason for entering a market and their own precise moment to do so. The market is too chaotic for something as simple as WoM on its own to use but in combination with other metrics it can be of help to the trader. For myself, WoM confirms what I have gleaned from other metrics that I calculate and from charts that I observe. I don't take the WoM alone as a signal but merely use WoM as a way of supporting the hypothesis of my current trade.

Weight of Flow - An Alternative Approach

I prefer to look at the weight of flow of money. In this you view the side on which money is being matched. You can see this by using 3rd party software or by coding your own software. If the software is set-up to signal how much money is being traded on either side of the spread then you will see if people are favouring the back or the lay side. This is regardless of how much money is sitting on either side of the spread, which is sometimes erroneous and sometimes deliberately so.

Further Reading

Programming for Betfair, a guide to creating sports trading applications includes a section on calculating WoM for Betfair data as it is received from the server. The book demonstrates to the reader how they can build an application to receive data from Betfair, calculate their own trading indicators and trade upon indicator signals automoatically through the creation of a bot.

Betfair Trading Techniques extends on weight of money/flow by showing how volume analysis can open up new views on market activity.

 

Efficient Market Hypothesis

The term Efficient Market Hypothesis is applied to markets that are "informationally efficient". In other words, buyers and sellers in any market have all the information needed to agree a price. On the surface this means that one cannot consistently achieve profits in excess of the average market returns given the information publicly available at the time the investment is made. If that is the case, can we make any money in sports betting markets? Obviously, some people do and some don't.

Remarkable as it may seem, the betting public collectively knows the true outcome of a sporting event through their betting actions. The money going on the protagonists in a sporting event causes backers and layers to alter their prices. Odds shorten on the fancied competitors and lengthen on the least fancied. Prices eventually settle at values that reflect the true probability of winning. The movement of prices is known as price discovery.

When prices have settled at their correct values we say that the prices were chosen by the wisdom of the crowd, whereby the crowd of bettors collectively know the outcome of a sports event even though any single bettor is uncertain of the outcome. Information enters the market via previous performance data and the media (form or handicap analysts, tipsters etc.) which is then digested by bettors and made manifest by their betting actions. The more bettors that believe a certain horse will win then the more money will go on that horse and the shorter its odds will be.

Take, for example, a typical horse race, displayed on Betfair.

Here we see a race with the favourite (Lily Wood) at a price to back of 2.76. As we know, a decimal odds value can be converted into a percentage by taking its reciprocal.

Therefore odds of 2.76 = (1/2.76)*100 = 0.362 = 36.2%

If you were to take all horses starting a race at 2.76 then you would find their win rate was pretty close to 36%. This demonstrates the wisdom of the crowd of bettors. Paradoxically, the odds are not actually true in themselves. A horse going off at 2.76 may or may not have odds of 2.76, it's just that in the long run, all horses priced at 2.76 will win approximately 36.2% of races. There maybe short runs where more than 36% of horses win or considerably less. This is where you enter the scene to discern the true odds from the race odds but it is never a simple task.

In the following graph we can see a comparison of the market perceived chance of horses priced (this time by bookmakers and not Betfair) from evens (2.0 decimal) to 11-1 (decimal 12) for over 45,000 runners during two seasons of racing during the 1990s.

Note how closely the two lines match each other. The gap being the two lines is the bookmaker's overround. A similar graph using Betfair SP would show the lines much closer together thus demonstrating the fairer odds (smaller overround) offered by Betfair.

Assuming markets are never overround (the Betfair example is slightly overround by 1.9%) then betting on all horses at odds 2.76 will result in only getting your money back minus commission. In the example above, if you were to bet on all horses at odds 2.76 with an overround of 1.9% then you will lose 1.9% of your wealth over time.

The beauty of Betfair is that a book tends towards 100% most times thus presenting the fairest prices in the market. Indeed a market on Betfair can be underround (total market less than 100%) and offer a suitably equipped arbitrageur with a fleeting chance of instant profit. Studies show that horse race betting markets are somewhat efficient in that all information about the event is represented in the prices.

New information will create a shock in the market as the crowd determines the effect of the new the information on prices. As prices fluctuate there will be opportunities for traders to make money. There will be expert system builders who uncover a new strategy. However, overtime that strategy will lose its value as the system becomes more widely known and that information is incorporated into future public information. Also, there will be insiders and the market will react to their activity through the herding of outsiders

Further Reading

Betting Market Efficiency - research on the efficiency of betting markets

Efficiency of Racetrack Betting Markets, Donald B. Hausch, Victor S. Y. Lo, William T. Ziemba

Information Efficiency in Financial and Betting Markets, Vaughan Williams, Leighton

William T. Ziemba - citations - includes many papers on the efficiency of sports betting markets