Betfair, a form of dark pool?

I recently made a comment on Bet Angel's forum as to whether or not Betfair's exchange is a form of dark pool. There is much talk on the forum with people in disbelief that trades seem to go against them the moment they send their order to the Betfair exchange.

A dark pool is a term from finance. Such a pool is an exchange for the anonymous trading of stock. There is no market depth feed in such pools so traders are in the dark as to what volume is available and at what price stock is traded in the pool. Also, the details of who is trading what with whom is kept secret. Such dark pools led to the creation of high-frequency trading (HFT) firms who flash dark pools with small orders to judge market sentiment before sending in larger stealth orders divided up into smaller chunks, distributed over many pools.

HFT firms act as middle-men, grabbing stock just as a large institutional order is about to be traded and then selling to the institution at an inflated price, much to the consternation of many in the financial world. Think about it, your pension is being eroded everytime this happens. Your pension fund is being built with over-priced stock! Michael Lewis has written an excellent book called Flash Boys on HFT scandals. In many ways Betfair's exchange has elements of a dark pool within it. Trades are anonymous so there is no way of telling if two bots controlled by the one source (but on separate accounts) are trading with each other to create the illusion of liquidity.

More often than not during morning trading an apparent trend can be traded upon in a Betfair market only to see the trend reverse immediately, orders cleared around the spread and bots sending in new orders to reverse the weight of money, sending the trend in the opposite direction. It would appear that for most of the lifespan of a horse race's market (with the expcetion of the last few minutes) it's just a battle of the bots, herding humans and less able bots on a merry-go-round of ups and downs, false momentum and illusory liquidity.

For myself, as a researcher in computational finance and bot designer, this is a challenge, but for others trying to make a few pounds of profit, heartbreak. In a post yesterday I showed that Betfair is running a bot in tandem with its sports book. What if it has other bots in the exchanges too? Bots with no other purpose other than to fleece its customers?

After all, if Betfair is now a bookmaker then it will have a rough idea of where odds are going. Reason enough to use bots to lead unfortunate traders on a dance to penury. With people beginning to see sports betting as an asset class (link requires free registration) like stocks and commodities then it is inevitable that larger concerns start moving into sports betting and bring with them their nefarious ways from the financial world.

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