Runaway Gaps

One of the problems that most bloggers must face at some point is that of finding new and interesting topics to write about. It’s not so much of a problem if your blog theme is a little broader than that of sports investment, but for me it can be a challenge. When I started thinking about my post yesterday, I was pretty much drawing a blank, but there in the comments section was something that made it easy to post.

Again today, another comment, asks about something that certainly does mark a difference between most of the markets on the betting exchanges and those on the Financial Exchanges.

Stop losses. Defined by Investopedia as “An order placed with a broker to sell a security when it reaches a certain price”

The question asked by Dave is this: Do you think we will ever see the day when Betfair will introduce the facility that allows the trader/ investor to set a stop loss?

It’s a good question. It gives me something to write about, but this is also a topic that I have pondered myself in the past…

Technologically, it wouldn’t be that difficult for the exchanges to allow stop-losses to be entered, (getting them matched is quite a different problem), but I’m not surprised that they haven’t introduced it yet. More on that later.

First, let’s be clear what a stop-loss is. In investment terms, a stop-loss “is an order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order.”

However, and this may well be why the exchanges have not implemented the technology, stop-losses are not a 100% guarantee of getting the desired entry/exit points. For instance, if a price gaps down, the trader's stop order will be triggered (or filled) at a price significantly lower than expected.

I suspect that Betfair etc.have no desire to introduce stop-losses and set expectations which are unlikely to be realised in most markets.

The problem with betting exchange markets is that “gapping” is the norm. 

Prices on the winner do not slide gently down to 1.01 in the minimum increments. In some sports the descent is smoother than others, but in general they gap frequently. These are called “runaway gaps” – which are best described as gaps caused by a sudden increase/decrease in interest, as information reaches the market, and a stop-loss would not be exercised.

In my futures trading days, the massive liquidity in the market offered some protection against gapping, but there was always a risk, especially if you were in a position while the market was closed. Buy Orange Juice at 50, put a stop in at 40 and you might be unlucky (a sticky situation one might say) and get stopped out at 35, still a bad loss, but not a wipeout.

How could the exchanges allow stop-losses?

Currently, if you Back at 2.0, your imaginary stop-loss (a Lay) might be desired at say 2.2. The problem is that if you enter a Lay at 2.2 when the current price is 1.99 / 2.01, it will be matched immediately – at 2.01. Not the desired effect.

What the exchanges could do, is to allow you to put in what I shall call a ‘ghost’ Lay of 2.2 - ‘ghost’ meaning it is there in the system, but it would only get exercised, or become ‘live’, once the Back price hits or exceeds the Lay price. Betfair already have the concept of ‘persistence’ on bets, i.e. they can differentiate between bets to be cancelled and bets to turn in-play, so the idea of a ‘ghost’ bet shouldn’t be insurmountable.

This might be useful in some markets, not so useful in others. More often than not, I suspect the stop-loss would be passed, but it could be a useful feature in some markets.