Some very well thought out ideas on Betfair's pricing strategy, and their 'crack' trading team, written as a comment on Mark Davies' blog by Graffiti and deserving, in my opinion, to be read by a few more eyeballs:
Betfair’s problem is a very simple one. Have they ever put enough thought into their pricing?
Market liquidity operates along an S-curve / sigmoid function. Initially it is hard work (the first early players can’t get matched at a fair market-clearing price, or bets they leave up are unmatched). Once a market reaches a critical mass, then the conflicting opinions kick in, and the betting turnover starts increasing at a much faster incremental rate, with only a proportionately smaller increase in the number of players.
Betfair need to address the S-curve with their pricing. It just isn’t good enough to have the same pricing policy for a major liquid market, as it is for a side market where there is a danger of liquidity drying up.
If a layer operates in a big main market, they pay normal charges. But someone putting liquidity up into a side market adds a much greater value to Betfair’s diversity of markets/betting events. There has to be the introduction of a financial incentive for people, especially key big layers, to make it cheaper to operate in a market which will be in essence a lot less profitable for them (their bets won’t get matched as easily/often, they will have to give away value to get anything matched).
Betfair’s pricing is almost exclusively based on profit/loss, whereas it needs to be changed to reflect liquidity, especially urgently needing to focus on favouring people who leave bets up in illiquid markets. The time and effort people put into side markets makes them proportionately much harder work and more hassle. This must be reflected by Betfair in its pricing, and is why Betfair’s current pricing is, well, a bit meh.
Betfair needs at the extreme, where a market has dropped below critical mass, to not just offer zero commission to big layers, but if the little fish come and nibble away, paying 5% commission on their side of the bets, why not give maybe even half of the commission to the layer. You would then in effect have NEGATIVE commission on bets in these markets to the layer, whilst a boost in turnover overall, with Betfair getting half of the commission, is better than getting none at all, surely?.
A market maker would suddenly find that markets which were much more costly to them to price up (not just in pecuniary terms, but in time terms too) would suddenly be back in play and worthwhile participating in.
You then reduce these discounts/incentives once sizeable liquidity has been reached.
There is something intrinsically valuable to Betfair in having as many markets being offered, with as deep liquidity as possible. Ever thinner and narrower side markets drive people away. The reason side markets have shrivelled is solely because of a faulty mix of pricing/incentives to people to get involved in them.
There is also huge room for a new type of market-making. The “crack trading team” is a throwback to the stone age of bookmaking, and an embarrassment for Betfair. What is obvious, is the crack team often don’t understand pricing in the internet era. The crack trading team needs to be disbanded, it is a waste of time and money. Betfair haven’t spotted what to replace them with. I remember Betfair buying a small company/startup which analysed betting patterns (to stop linked accounts, through intelligent analysis of them..?). That is where the future of pricing is, that is where Betfair will find the answer to their liquidity problems.
A large part of me thinks the Betfair sportsbook and exchange separation is a huge mistake. Ebay made a strategic decision to show less information/clutter to new users, to keep it initially simple, but more frequent users were allowed a much more full set of information. I think the exchange and sportsbook should be merged, where someone who logs on in the UK (to keep things simple), they will see say 5/6, and take 5/6 on a bet, but behind the scenes you could actually give them 1.95 or whatever the current higher price available is on the exchange. That would keep things simple for Joe Public, but bearing in mind Yu and Morana’s epithet when they spoke together on record saying they could see that people kept coming back and playing more when they got a better run for their money (hence why Yu was in favour of the Betfair education/statistical database tools etc), this would combine great value, with simplicity. I suspect the crack trading team don’t care how profitable Betfair is, they probably care how much money is diverted onto their poor prices (often with knockback size).
Betfair should be a £5billion+ company. It should be the biggest and best bookmaker of all. I don’t even think that gambling bets should be the flagship profit for the Betfair exchange to match, but that is by the by.
It would be great to see Betfair in 2015 aspiring not to be Paddy Power 2013 “Lite”, but to be Betfair 2013 “heavy”, if you see what I mean.
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