The London Stock Exchange handles 16 million trades per day; Betfair handles nearly eight times as many. That's a lot of business and a lot of information.
All markets display similar characteristics, and betting markets are not dissimilar to financial markets in their behaviour. In financial markets, you purchase an asset in the form of a share, currency, or commodity; in betting markets, you purchase a state-contingent asset, the return on which is dependent on the outcome of a horse race or sports event.
Fair Exchange is No Robbery
Let's consider why any one of these millions of trades on betting exchange Betfair or, indeed, the London Stock Exchange takes place. A trader or a punter is privy to information or "news," as it is termed in the strictest market sense, and acts on this information to place a trade, back a horse to win, or, if they are so inclined, lay a horse to lose.
Each trade in a market is a result of the person responsible for the trade receiving news. This news or new information is what spurs this person into action. This is classified as new information to that person at this point in time, and it can come in many forms. In financial markets, it may be a results announcement; in betting markets, it may be that a horse is in good spirits in its homework or that a soccer team's star striker has had to pull out due to injury.
Two or more traders may back a horse for the same reason, but do so at different points in time. Thus, it is important to consider that news dissipates across the market at varying rates, and there are varying degrees of actions resulting from this news. You might back a horse this morning based on what you read in
The Racing Post; however, another punter may have backed the same horse last night based on the exact same information that he read on the Racing Post website. Both actions are for the same reason - but at different points in time.
I might instinctively be aware that a stable's runners perform well at a given racecourse. If I read this in a paper, it is not news to me; however, another punter, who to this point was not armed with this knowledge, might read this in the paper and trade based on it. He was not armed with the same information as me at a point in time, but acted in a similar manner based on the information.
All of this information and all of these trades affect the market. Positive information will likely see an asset price increase or a horse's price get shorter. Negative information will have the opposite effect.
It follows from this that the person who is first in possession of a particular piece of information stands to benefit the greatest from it. The first and purest form of information is classified as inside information. In financial markets, users of inside information are liable to penalty; however, in betting markets, inside information grants the holder first-mover advantage in the market, and it is rarely used in a format that is deemed to be liable to penalty.
Information in Betting is King
It should be noted that the use of inside information by a punter in a betting market should not be construed as a bad thing. All information, even that which is initially considered inside information, will find its way into the general public domain.
As you watch a ticker for a financial market or stock, each spike is a result of positive news and each dip comes on the back of negative news. Those living in an information vacuum but with access to this financial ticker would gain information from this alone, which they could apply to their investment strategy. Punters in betting markets should do the same.
When a punter is coming to the decision to place a bet, he is doing so based on the information that he has available to him. However, there is likely to be gaps in a punter's information set that do not exist in another punter's information set.
Complete information exists in the market place, but it is not held by any one individual. This, as pointed out above, is because the news dissipates across the markets at varying rates; there is no centralised database that contains a complete information set. Therefore, the punter's information set will contain gaps, which if filled will enable him to make a more informed decision on his bet selection.
So, how should a punter seek to compensate for his lack of information? How should he seek to fill the gaps? Collectively, the market participants, both punters and bookmakers, mould the market based on their individual knowledge. Therefore, assuming those armed with the knowledge participate in the market, it is then a representation of the complete information set. Based on this, punters should look toward the market in an effort to complete their information gaps.
That is not to suggest that a punter sit at home in his armchair watching the racing channels and back blindly every horse that moves from 5/1 into 3/1 in a bad all-weather handicap. Nor should it suggest that he lay every uneasy favourite on Betfair. What is being suggested is that punters use every available tool in their artillery in their quest to beat the bookmakers. Market information is one such tool.
Market Movement and Moves
Let us consider again the inside information and that it bestows upon its holder first-mover advantage.
The Racing Post indicative prices for a race are published the evening before. In the absence of prices from the high-street bookmakers, these
Racing Post prices act as a proxy for the market. When the market for a race opens on Betfair at 8 p.m., one should note activity that doesn't readily fall in line with the proxy Racing Post prices.
If a horse is a suggested 5/2 favourite on
The Racing Post and there is strong liquidity in the early market on the lay side at 100/30 or 7/2, this is highly indicative of one of two things:
The Racing Post price is incorrect or a market participant armed with a more complete information set than others is keen to utilise this to his advantage.
Conversely, if the 5/2 shot has strong liquidity, looking to be matched at 2/1, it also may be indicative of inside information. However, the punter needs to be capable of using his judgement on this matter.
The monitoring of betting markets should not be restricted to exchanges on the eve of a race in the hunt for inside information. The day-of-the-race market is also very important. Punters should be knowledgeable enough to form their own opinions on a horse's price and then consider why deviations exist. Are there factors that they have not considered? If a firm seems content to offer a value price about a hotpot, one also should consider its rationale.
In the live market leading up to the race, when liquidity is at its strongest and when people are acting on as much information as possible, a punter should observe closely the market direction. If you fancy a horse and he is drifting from 3/1 out to 5/1 and you're failing to understand why, maybe this is the opportune moment in which you should refrain from having a bet. Be aware that you obviously do not, at this point in time, possess information that others do.
Information is power. Punters should be aware of the deficiencies in their information set and seek to fill the voids. Examination of the betting markets can tell them when one isn't wanted, or, likewise, could set them onto a live one. Successful punting is a fine line, and a punter needs to utilise all of the available tools, and it is highly recommend that punters add market examination to their artillery.
