Monday, 17 September 2012

Janus Day

Although this is most definitely not a P&L blog, it's hard to not mention that a key milestone in my trading life is finally here, and I have mixed feelings about it.

When the Super Premium Charge was first announced by Betfair last July, I really didn't think that it would be more than a year before I was paying it, given where I was at that time. The delay in triggering this charge was in part because some activities have been migrated to a purple trading platform, but the announcement also had a de-motivating aspect to it, which meant that I've started being more selective about my Betfair activities. I've started to take more days off for a start.

As I updated my numbers following the day's NFL this morning, it is almost certain that I will join the 500 in a new tax bracket next week. I say 500, because that was the number quoted 14 months ago.
Betfair say that "about 500" users will pay the new charge. The majority are likely to be running automated systems which, in effect, allow them to flip the coin many thousands of times every day. Over weeks and months, the money inevitably becomes concentrated in ever-fewer hands.
Really? I can't speak for anyone else in the 'club' but I can tell you that I have never even attempted to run a bot. Every bet has been placed using the standard Betfair interface, except for a couple of test (and losing) bets using Geek's Toy one afternoon, which did not suit my needs and was soon abandoned.

I've told my Betfair story before, but in short, I started in March 2004, with a deposit (after fees) of £98.50, and spent the rest of that year and 2005 going up to a four figure sum, then down to a low two figure sum, and within £20 of going bust, at which point I would have walked away. I'm glad that didn't happen. With rare exceptions, I don't mess around with horse-racing and I don't think I've ever opened a dog market. Not only do I find them uninteresting as sporting events, but there is also the significant problem that insiders in those sports would always have an edge over me, the reason my trading in tennis is also similarly infrequent.

Pre Betfair, in early 90s London, I had accounts with several bookmakers, and would scour the one or two pages of the Racing Post that were dedicated to 'sports', i.e. anything other than horses or dogs, looking for value bets, before looking for a phone box to place the bets. 

I also kept basic Elo ratings on English and Scottish football in those days, and was selective enough with my investments to have my Corals and Ladbrokes accounts closed down. A game that I could only play if the rules were against me wasn't of any interest to me, so I pretty much gave up for many years. For me, betting was about making money, and most events I would bet on, I never bothered to watch.

It's all a very different world 20 years on. Elo ratings are no longer kept in a notebook, and phone boxes have all but disappeared. 

When I stumbled across the exchange concept, my interest in investing on sports was reawakened. No closed accounts after a few wins. Betting against others, and the opportunity to close a position before the end. It seemed almost too good to be true, hence the overly cautious deposit of £100.

I'm realising that this post is becoming anything but short - and many of these fascinating details can be found in the interview I did with the Sultan down at the Red Lion last November and continued in Part Two here.

Rather than have me repeat everything, pop over there for a look, but do come back. The key is to watch games and markets, watch how they move, and learn to recognise instinctively - the 'blink I have mentioned - when they are wrong, and act decisively. You won't always win, but if you are getting the value recognition right, your wins will exceed your losses. 

Soon after the Super Premium Charge was announced, there was an excellent post by Total Brosman which included this: 
From today Betfair want to take more of my profit than I get myself.
I don’t know yet what the future is, but it seems certain the five-year run of trading on Betfair for a living is over. It’s possible that if things go well I could make a living on 40% of my profits, but that would leave no buffer for a bad run, and it’s always necessary to have that sort of buffer in such a risky business. I’ve always known that this would come to an end, and that’s always been the scary part- that at any time, by being overtaken by someone better or by losing my focus, interest or discipline, I could stop winning altogether. But the gut-punch is I feel I’m trading better than ever, but am now being priced out by Betfair themselves.
But they don’t owe me a living. Although I was obviously upset when it was introduced, I understand the justification for the 20% PC. It covers Betfair’s costs of attracting new players, and redresses an imbalance between those trading a few number of outright markets and those punting on multiple markets. I’ve never sought to avoid paying PC, and I don’t even really know what churning is, other than what my stomach does at the thought of paying 60%.
Betfair’s justification for charging 60% is that at 20% they merely break even on my account.
By that logic, at, say, 30% I’d be an extremely profitable customer. At 60% I can’t be a customer at all. It all seems rather short-sighted.
I do believe 60% can be justified for the courtsiders, bot users or cheats, who cream consistent risk-free profits across hundreds of markets a week. That’s not a ‘natural’ strike-rate. But I hate being lumped in with these guys. I might emerge with a fairly consistent profit, but I’m no cheat. I take on a hell of a lot of risk every time I press submit. Once their 20% is covered, Betfair have no risk, and that’s why I think their share of my reward is unjustified.
From what I can tell, my tax rate will 'only' be 50%. What a relief. I'm fortunate that trading is a hobby and not my primary source of income, and I will continue to survive even were exchanges to vanish overnight. I understand that Betfair are "slowly but surely moving towards something called Ramsey pricing. Its based on the inverse elasticity of demand for its product from each user. It is a step towards profit maximisation. It is completely rational, and the premium charge is just an example of how exchanges differ from traditional bookmakers in the pricing model needed".

Had I given up my career a few years back, I might be looking for sympathy, but I didn't and I am not.

No doubt some readers will query whether or not I should mention my tax rate, but I think it's important since it has a clear effect on your betting outlook / trading philosophy, and it may well bring about some changes. It would be less than honest for me to not mention it really, and if anyone wishes to think that I am making all this up, as is often the case on the forum, then that's fine. Most readers can tell genuine from fake though, and I've been around for a while.

Betfair has been good for me. Yes, I do feel that the introduction of new rules while the game is in play is very poor, but this is a risk you accept when you play with a company that is a 'de facto' monopoly. As DStyle put it:
The problem is that it's based on how much you've made in the past not about how much you'll make in the future. Imagine you'd been in your job for four years doing the same thing earning 60k a year. The government taxed you 20% of your earnings, then announces that anyone who's been doing that job for four years or more will now be taxed at between 40% to 60% depending on how good you are at your job (the better you are the more you get taxed). In the meantime, someone else joins the company, does exactly the same job as you, but only gets taxed at 20%.
Well, until I see the deductions in my 'pay check' it's hard to say exactly how I will feel about continuing to trade. I adapted to the 20% version reasonably well, but 50% is something else. As I have written before, most of my profits come from markets that just do not exist anywhere else outside of Betfair, at least not with any in-play liquidity, so do I gross £100, and end up with £50 in my pocket, or do I sulk about the 'lost' £50 and end up with 50p in purple money? What is certain though is that my opportunity cost of other activities will go down.

While I was too far down the path for churning to be of much help, I've also put more time over the past year into the XX Draws, which are perfect for this. Not exactly high volume, but several bets a week and an overall profit, but while I am quite happy to risk four figures on an in-play trade, low three figures are as much as I can currently bring myself to risk on a punt. I really am risk averse. 

I believe Betfair give a little notice when ones status changes officially, perhaps there is even a grace period of a week - I'm not sure, but if any readers can give me some idea of what is involved, I would be interested to know. It will certainly be a challenge to maintain the lifetime daily average at its current level. 

So it's a milestone, but probably not the finishing line. I've said before that with the day job removing any pressure, my trading is relatively stress free, and like most hobbies, fun. I would certainly miss the thrill of it, and in many ways it is not about the money at all. It's about the challenge of proving my opinion right, and money is a good way to keep count. And when I say 'stress free', it's not really. My heart rate was definitely elevated for much of the New York Giants game last night, and the language at times was probably not something you would expect to hear from a hobbyist engaged in, say stamp collecting. 

1 comment:

gundulf said...

Hmmm... not sure whether to congratulate or commiserate. But it's certainly a landmark I would like to emulate, so well done.

Should we look forward to some increased purple liquidity now you're effectively working for a Labour government?