Sports betting and finance share many common characteristics but for various reasons, such as regulation, the industries have developed different strengths. The area that sits closest to sports betting within finance is financial spread betting/CFD trading and in this article we look at what some of the main differences are and whether sports betting can learn anything from its long lost cousin, financial spread betting.
For those not familiar with financial spread betting, providers such as IG, CMC, Core Spreads and City Index are the equivalent to the bookmakers.
Lesson#1 – Hedging
In general terms bookmakers don’t hedge whereas financial spread betting providers do if required, instead bookmakers move their price in an attempt to balance the risk. Risk is risk, a bet on the most liquid Asian handicap line and a day trade on gold are very similar equations. Both industries have clients that have an edge and win. In sports betting these winners are normally restricted whereas in financial spread betting they are hedged. Why is it so different?
In financial spread betting hedging is the norm, a winning client can be moved off the risk books automatically into the market by a network of bank run prime brokers. This is possible because financial spread bets are based on underlying instruments and the hedge can be placed into the enormous liquidity of say the FX markets. Financial regulation and tax law has been written to allow for efficient cross border hedging.
This doesn’t happen in bookmaking for several reasons. Firstly, there is no underlying instrument to hedge against. For example, buying physical gold, gold futures, gold CFDs and synthetic gold funds are all possible hedges for a spread bet of the price of gold. Sports bets are not underpinned by such hedging alternatives.
Secondly, unlike finance there is no EU common market for betting, each country sets its own laws because it’s deemed a cultural decision and not economic like finance. This means, even when there is a jurisdiction where betting is legal, betting duty and other taxation laws are not harmonised making it very complicated and difficult to move risk around efficiently.
Thirdly, it is very difficult to hedge anonymously in sports betting and the last thing the Head of Trading at Bookmaker A wants to do is call up Bookmaker B and ask them to take some risk off their hands, it suggests they haven’t managed their book correctly. Until Betfair there was no anonymous, scalable way for bookmakers to hedge and even now Betfair can cost a lot to use if you are a bookmaker with winning business (data fees, premium charge etc).
Despite these three pretty sizeable barriers, sports betting is changing; in football Asian liquidity is now being used to hedge unwanted risk. New operators are popping up to sit between the bookmakers and provide an anonymous hedging service.
Lesson#2 – Quantitative modelling
Over the last decade, sports betting has taken a more quant-driven approach to risk. The fact the Sports Trading Network exists clearly demonstrates this trend. This is an area the sports betting industry risk takers are learning from finance. There has been several success stories where finance professionals have taken quantitative techniques used on the financial markets and applied them on horse racing, football and generally any sport which has enough liquidity to justify the outlay. In the London based betting sector, there is osmosis of quants from the City; this is bringing a more statistical and automated approach to sports pricing and betting.
Lesson#3 – In-Play
When financial markets are open it’s all in-play, a spread bet on USD/EUR can be made 24 hours a day and 7 days a week. A financial spread bet provider quotes a bid-offer price continuously. The moment this price steps out of line it gets jumped on by arbitrage traders. Getting this right 99.99% of the time is a huge technical challenge and spread bet providers have spent tens of millions getting this right and they’ve been doing online trading for more than 15 years now. Only really in the last decade has in-play taken off in sports betting.
In a similar way to the quants moving over, some developers in finance have also shifted focus and are applying their skills to sports betting.
To conclude there are a few aspects sports betting might learn from financial spread betting and the wider finance industry, there are also many areas where finance can learn from sports betting but that is for another article. It’s important both industries keep innovating and skilled developers, quants and other key skills keep moving between the two to ensure best practice is retained.
For those looking to learn more about financial spread betting or to try a demo go to www.corespreads.com. Core Spreads is an independent spread bet provider offering tight spreads, trading credit (terms and conditions apply) and trading across mobile, tablet and PC.
Don’t fear risk, understand it. Financial spread bets are leveraged products, which means you could lose more than your initial deposit. Full risk warning.