Friday, 28 February 2014

Lay Back And Simplify

I was reading a paper called THE EXTENT OF PRICE MISALIGNMENT IN PREDICTION MARKETS by David Rothschild David Pennock* and while the subject matter is probably not of much interest to anyone until October 2016 (the paper looks at the arbitrage opportunities which existed during the 2012 Presidential Election, and I like to be prepared), there were a few general market observations of interest, including this line:

For example, buying and selling are logically identical yet almost every exchange makes selling more confusing; ideally, traders should see no difference.
Most of us grew up on the punter side of the betting fence, with its limited choices of betting on something to win, or not betting at all. In theory, the lay option was there in the clumsy form of backing every other outcome with varying stakes, but this was rather impractical for any event with more than three possible outcomes.

On the bookmaker side of the betting fence, laying has always been the order of the day.

It’s not that selling (or laying) is more complicated, it is simply that laying is not what most people are used to.

For many of us, the arrival of betting exchanges provided the opportunity to learn and use the previously unavailable bookmaker’s side of the equation.

And that’s all it is – an equation, which by definition is “the process of equating one thing with another".

What is risk on one side is reward on the other. Laying may have added another string to the punter’s bow, but it is not a silver bullet (to mix metaphors) to profitability.

In the early days of the Betfair Forum, or at least fairly early since I didn't join until late March 2004, many people espoused this view, which always seemed a little naïve to me.

A lay is simply a traditional bet (a back) in reverse. There is, and never was, anything magical about it, and the same laws of mathematics apply – if you have value, you will make a profit, and if you don’t, you won’t.

Most of my betting is done in binary markets, so whether I back A or lay B, the bet is essentially the same. (One option may be slightly better than the other because of rounding differences so it does pay to check). 

With one of my strategies being that of ‘laying low’ (much catchier than ‘backing high’) I am obviously extremely comfortable on the lay side of the fence, and with practice anyone can be, but the comment in the paper raises a good point, which is that exchanges do not need to have two prices on a binary outcome.

If Roger Federer is 1.5 to win a match, then the interface could simply list the two outcomes (WIN or LOSE, along with the opposite result for his opponent) and one price rather than the four prices as now. I’m not sure the alleged confusion is really that bad, but I do agree that the exchanges could make the process simpler.

But then the cross-matching profits would vanish, so it’ll probably never happen.

* The views expressed in linked blogs, posts, articles, papers or tweets are of course those of the authors of the blogs, posts, articles, papers and tweets and do not necessarily represent the views, opinions, or positions, of myself.

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