Is Betfair running a dark pool?

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JayBee
Posts: 46
Joined: Wed Nov 10, 2010 11:26 am

To the uninitiated a 'dark pool' in finance is an unregulated exchange. They are set up by commercial banks for their own customers and other banks to trade financial instruments in.

They are called dark pools because trades are not transparent. Front running (as mentioned in another forum post viewtopic.php?f=5&t=9560) is rife whereby small trades are flashed to all dark pools to judge sentiment before the larger trade (stealthily packaged as smaller trades) is fed into the exchanges.

Some traders such as the high-frequency traders get preferential treatment with rebates and zero commission rates. They also get special order types that are not available to other traders.

This leads me to believe that Betfair (and probably all the other exchanges) have their dark elements too. I have been approached by syndicates in the past and told of their discussions with Betfair for different treatment due to the liquidity they can provide.

A lot (if not the majority) of morning trading on the horses is bot driven. Without providing any evidence I can imagine bots working in tandem creating an apparent liquid trading environment. Of course, the bots trading between themselves are going to incur commission charges but that will be more than exceeded by the profit margin. By faking a trend and getting other traders to follow them on the jaunt is going to be profitable for these bots. You only have to watch a horse racing market reset itself after a few ticks of movement to know that all the orders were automated with not one human involved, unless he was the one getting turned over.

As in a poker game, the big stacks bully the little stacks. Assuming a £2 back or lay to be a timid bet, it would be quite easy to push that bet around far into the red with larger bets, which makes the bettor gives up on it and 'reds out' for a few tens of pennies loss. A small loss for the beginner/timid trader but adding up all those pennies for the bots working in tandem and other concerns adds up to a lot of pounds.

Also, Betfair has the opportunity to know the account ID attached to every BetID. That opens up a whole area of machine learning and herding of the small-time traders. Herding the bigger traders will run into problems when the insiders start placing their bets nearer the off. But why else would a market be opened the evening before and allowed to be traded upon up until the 15 minutes before the informed money starts lumping on?

As I mentioned in another forum post there are some obvious bots out there. The '400' bot as I call it is, I am pretty sure, related to Betfair's fixed odds activity. Of course, Betfair must use its exchange in tandem with the fixed odds betting as a way of deriving odds and offsetting.

If only there was the data to examine who exactly is doing what. Fracsoft only provides data for the last 20 minutes or so of the pre-race market.

For me, making bots is an intellectual exercise and not a profit seeking one but the more I work in this area the more glaringly obvious that Betfair's exchange is rife with bots pushing prices ever closer to fair value within a few minutes of any information entering the market. Or, more likely, taking the market on a merry-go-round whilst keeping the fair price as a target after hoovering up commissions either side.

As with the financial world, automation has its price and people end up cheating to make an honest bob. The closer the sports exchanges get to providing (somewhat) efficient prices, the less interested people become in gambling. That forces exchange providers to create illusions in their dark pools. False trends and momentum can be created to lure in traders before snapping the price back to hoover up the commission.

Obviously, bigger trading concerns than mine and fundamental traders do make profits (albeit smaller year on year - as markets become ever more efficient at aggregating information). Smaller traders and hobbyists need to know they are not standing on a level playing field. You need to find your niche and accept the crumbs that come your way.
Last edited by JayBee on Wed Aug 27, 2014 10:45 am, edited 2 times in total.
Seabird
Posts: 70
Joined: Thu Apr 16, 2009 1:31 pm

Fascinating post Jaybee. I've dabbled for many years, a typical low-level layer. I've often had unproveable hunches about the strategies you mention. In the last year though I have found a niche, stuck to it and taken the crumbs. This has been far more profitable and less-stress making than the preceding years and I'm pleased to receive reinforcement that niche and crumbs might be the way to go.
PeterLe
Posts: 3715
Joined: Wed Apr 15, 2009 3:19 pm

I would be very surprised if there wasn't an element of this going on. The traders who live and breath betfair every day can see the changes over the last couple of years.
Dark pools are complex though. For anyone not familiar with the concept or phrase I would definitely recommend reading Flashboys by Michael Lewis. As I read it I could similarities with what I could see on Betfair. (A good read, but once you get the gist of it and the theme of the book, it does labour the point a little. Still worth a read)
When you think about it; with over 800 races a month and £300- 500K (?) traded, these markets would never escape the attention of those clever enough or able to extract money from them
Regards
Peter
JayBee
Posts: 46
Joined: Wed Nov 10, 2010 11:26 am

I've read Flash Boys and commented on your reading of it in the "Anyone read any good books?" section of the forum.

It is possible to take all HFT/Dark Pool techniques to their logical conclusion on Betfair but that would require collusion on many levels. Still, that area is unregulated in betting so who knows?
steven1976
Posts: 1744
Joined: Tue Jan 19, 2010 6:28 am

Why would bots trading with themselves pay commissions? You buy 10 pounds on one account and sell it on another and then do the opposite trade to create zero profit and loss on both accounts, or have I missed something?
JayBee
Posts: 46
Joined: Wed Nov 10, 2010 11:26 am

steven1976 wrote:Why would bots trading with themselves pay commissions? You buy 10 pounds on one account and sell it on another and then do the opposite trade to create zero profit and loss on both accounts, or have I missed something?
I think that would be a little too obvious to Betfair. Unless, of course, Betfair is in collusion, in which case your assumption is correct.
steven1976
Posts: 1744
Joined: Tue Jan 19, 2010 6:28 am

As discussed in another thread, they probably wouldnt care as long as you are not avoiding PC. However, probably better to ask them first and tell them that you are looking to help create liquidity in some random market that doesnt have any volume! ;)
steven1976
Posts: 1744
Joined: Tue Jan 19, 2010 6:28 am

Actually, just reading through some old emails. It seems that it would not be as straight forward as I thought above. You should either contact their VIP section and ask in advance if you have any good ideas for the exchanges by generating commissions. This is from a long time ago, so i don't know if their stance has changed over the past couple of years.

"You will have no problems in doing this. We receive a report of all customers who match there own bets, because we don't really like our customers to do this. If there is a valid reason for it, such as your own, we can add an exception to your account."
PeterLe
Posts: 3715
Joined: Wed Apr 15, 2009 3:19 pm

Well we may nver know if Betfair are runnig a dark pool ;) ...but we know barclays are!:-
http://www.bbc.co.uk/news/business-35472996
steven1976
Posts: 1744
Joined: Tue Jan 19, 2010 6:28 am

British based banks are shite. I've had so many problems with hsbc and barclays due to their own internal dodgy dealings that get passed on. DBS all the way!
LinusP
Posts: 1873
Joined: Mon Jul 02, 2012 10:45 pm

The term 'Dark Pool' isn't great as it sounds dodgy but is supposed to be the opposite!
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Euler
Posts: 24777
Joined: Wed Nov 10, 2010 1:39 pm
Location: Bet Angel HQ

You could argue that the sportsbook is a dark pool, as Betfair control the flow to the exchange through the sportsbook but often choose not to. You also can't see what is going and they choose not to publish the details.
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