A few beginner questions

[northuser]

Hi, I'm new to trading, but I have some background in betting with traditional bookmakers, mostly for fun. However, I've been reading about exchange betting and trading in general, and interested in learning more.

Just a couple of questions that I've been wondering about and searching online, but no one seems to be able to answer these clearly:

1) If you lay a lot of bets with high odds, you must have relatively large amounts of money in your account for liabilities. For Winner betting (in golf), there are of course dozens of players that one can bet on, but only one will win. In this case, if someone were to lay bets against multiple players, will I be required to have the total sum of liabilities in my account, even though only one of these lay bets can eventually be lost (there can be only one winner)? This would not seem to make sense, and would put a lot of funds at risk.

2) If Betfair goes bankrupt (or an equivalent scenario), are customers' funds somehow protected? Compared to, for example stock market trading, where if you own a stock, it should not matter if your broker goes bankrupt - you still own the stock. However, if the betting exchange service provider goes out of business, what would be the likely outcome for your account and funds? I'm trying to get an idea of how big of a risk it is to have funds in your account. Obviously, this would affect the strategies I'd be willing to play.

3) In financial trading, you can trade on margin (broker borrows you money to invest). Do betting exchanges provide the same type of service?

Thanks all, and sorry if some of these questions seem stupid. I can assure you, I have thought about these quite a bit and tried searching for answers, but these are still quite unclear to me.

[sa7med]

Hi, I'm new to trading, but I have some background in betting with traditional bookmakers, mostly for fun. However, I've been reading about exchange betting and trading in general, and interested in learning more.

Just a couple of questions that I've been wondering about and searching online, but no one seems to be able to answer these clearly:

1) If you lay a lot of bets with high odds, you must have relatively large amounts of money in your account for liabilities. For Winner betting (in golf), there are of course dozens of players that one can bet on, but only one will win. In this case, if someone were to lay bets against multiple players, will I be required to have the total sum of liabilities in my account

I can't speak to question 2 or 3 with certainty but when you lay multiple entries you only need to have the maximum liability in your account. Not the sum.

[Diacritical Quark]

As above you only need the biggest liability in your trading account, so if you're laying at 2.0, 3.0, 4.0 you only need to ensure you have enough to cover the liability of the 4.0. With regards to Betfair going bust I'm under the impression it's similar to a spreadbetting account with a bucket shop rather than investing in the underlying market in your example. So with a bucket shop such as IG Index they segregate your funds, should they fold your funds will be returned albeit after a lengthy process, I think Alpari went bust a few years ago and all customers have only just received their money back. I would imagine Betfair will segregate funds in much the same way (although I'm not sure what would happen if you were to have an open position with a large exposure on say an ante post market, if Betfair were to be bought I think the new company would normallly look to honour those but as I'm never in a market longer than the length of a football match I don't really care). And no, you can't trade on margin with exchanges, they're not leveraged products you're just betting on the price movement 1:1.

[Dallas]

The answer to question 2 is your funds are ring fenced so will always be safe even if BF went out of business, or if they are taken over (which they were by Paddy Power in 2016) it wouldn't have any effect on any open positions.

[Kai]

2) If Betfair goes bankrupt (or an equivalent scenario), are customers' funds somehow protected? Compared to, for example stock market trading, where if you own a stock, it should not matter if your broker goes bankrupt - you still own the stock. However, if the betting exchange service provider goes out of business, what would be the likely outcome for your account and funds? I'm trying to get an idea of how big of a risk it is to have funds in your account. Obviously, this would affect the strategies I'd be willing to play.

You obviously don't need to actually keep your entire trading bank (which can be a relative term for a trader) on Betfair, only the minimum/optimum amount that you need for trading, depending on your strategies, whether you're daytrading or taking some longer term positions, so people usually keep withdrawing anything over that number.

Even if you're a top trader averaging 1k a day, on football you may need a bank of like 1k on your account, or as little as 100 for inplay racing. My point is, if you're doing well from trading (full time etc) losing your funds for whatever irrational reason is probably not the end of the world for you, but losing the ability to trade on an exchange just might be.

[northuser]

Thanks everyone for replies!

One more question about liabilities:

Let's say that I bet on the Winner of a golf tournament and back 5 different players at the beginning of the tournament at high odds. Then, at the end of the first day, I want to trade out of those positions by laying bets against each of those players, effectively neutralizing my position. Is it still the case that I only need to have the highest liability amount in my account (out of those 5 lay bets)?

Since golf tournaments include 4 rounds (a cut after 2 rounds), often the bets do not have an outcome until after 4 days. So if I open new positions (place backing bets) at the beginning of each day and close them by laying bets at the end of each day, I'm wondering what that would do to my liability requirements (whether the liabilities accumulate, or if it is always just the highest amount totaling for one player)?

What if I only trade one player, by repeatedly backing and closing the position once the price moves? Wouldn't this accumulate the liabilities over this one player, even though there is no real open risk since I also have placed the backing bets? But Betfair would still require me to have an ever increasing amount for liabilities in my account?

[Kai]

What if I only trade one player, by repeatedly backing and closing the position once the price moves? Wouldn't this accumulate the liabilities over this one player, even though there is no real open risk since I also have placed the backing bets? But Betfair would still require me to have an ever increasing amount for liabilities in my account?

No, that's kind of the whole point of trading, in efficiently managing your risk and liabilities by opening and closing trades etc. For example with a bank of 10 pounds you can make as many 10 pound trades as you want on a golf outsider, provided you back first and close the previous trade before opening a new one etc.

As for the rest of your questions, you can get all sorts of replies from people but I would suggest to use practice mode to understand and test how liabilities work firsthand, I think practice mode trading banks mimic real ones so you can probably use it for that purpose.

[northuser]

What if I only trade one player, by repeatedly backing and closing the position once the price moves? Wouldn't this accumulate the liabilities over this one player, even though there is no real open risk since I also have placed the backing bets? But Betfair would still require me to have an ever increasing amount for liabilities in my account?

No, that's kind of the whole point of trading, in efficiently managing your risk and liabilities by opening and closing trades etc. For example with a bank of 10 pounds you can make as many 10 pound trades as you want on a golf outsider, provided you back first and close the previous trade before opening a new one etc.

Ok, thanks for clarifying this. This is the way I originally expected sports trading to work. I got confused when I asked this question elsewhere, and got the answer that I need to cover all liabilities by funds in my account, even if I close the positions by taking the opposite side (I was very surprised by this answer)

[Derek27]

Your P/L for a selection is £back bets * (average price - 1) - £lay bets * (average price - 1) + £lay bets on others - £back bets on others.

But as Kai said, place a few back and lays in practice mode and see the result, it's all calculated automatically.

Trading is very similar to buying and selling in that once you've sold an item (or closed your position) the funds are returned to your account. The only fly in the ointment is if you have very large profits cancelled out by very large liabilities, a non-runner can potentially upset the balance and turn a green book into a red book and vice versa.

[Kai]

I got confused when I asked this question elsewhere, and got the answer that I need to cover all liabilities by funds in my account, even if I close the positions by taking the opposite side (I was very surprised by this answer)

Bear in mind that their support employees most likely don't have any trading experience, I'd say that most of the info that they provide to various queries is just copy/pasted without any real understanding behind it. That's why you can get inconsistent information.

Best to find the answers to easy questions on your own, really shouldn't be getting in the habit of asking them these things, there are much harder questions waiting for you ahead and they can only get progressively harder as you go on

May sound harsh but problem solving and finding answers is a big part of trading, by the time I made my first forum post I was already paying PC every week. Very often you have to keep going in uncertain directions without having all the answers, that can drive a certain type of person insane but that's trading in a nutshell.

[northuser]

By the way, how are commissions calculated in Betfair exchange if I always close the position before the winner is determined? I would hope that it is just a percentage of your total winnings for each player, but is this the case? Instead, if commission is paid on each winning bet that you have made, then wouldn't commissions accumulate very fast if you trade one player multiple times (repeatedly opening and closing positions throughout the tournament)? In this case, your total winnings for trading just one player might be negative, yet you would still end up paying a lot of commissions because some of your bets paid off...surely this cannot be how commissions are calculated?

Another way to think about this is the following scenario:
Let's say you back a player to win the tournament with high odds (say you get your money back 20x if the player wins). However, you close the position long before the tournament is over, making a small profit. Then, that player eventually ends up winning the tournament, and your original back bet ends up paying off, while the counter trade (the lay bet) is lost. The winnings are gigantic (20x), and so would be the commission based on that winning. Effectively, you would probably always lose money if that player ends up winning because the final pay off is so high, and you closed the position early making just a small profit. Is this really how it works? I hope it is not, can someone confirm?

[Dallas]

By the way, how are commissions calculated in Betfair exchange if I always close the position before the winner is determined? I would hope that it is just a percentage of your total winnings for each player, but is this the case? Instead, if commission is paid on each winning bet that you have made, then wouldn't commissions accumulate very fast if you trade one player multiple times (repeatedly opening and closing positions throughout the tournament)? In this case, your total winnings for trading just one player might be negative, yet you would still end up paying a lot of commissions because some of your bets paid off...surely this cannot be how commissions are calculated?

Another way to think about this is the following scenario:
Let's say you back a player to win the tournament with high odds (say you get your money back 20x if the player wins). However, you close the position long before the tournament is over, making a small profit. Then, that player eventually ends up winning the tournament, and your original back bet ends up paying off, while the counter trade (the lay bet) is lost. The winnings are gigantic (20x), and so would be the commission based on that winning. Effectively, you would probably always lose money if that player ends up winning because the final pay off is so high, and you closed the position early making just a small profit. Is this really how it works? I hope it is not, can someone confirm?

You only pay commission on the amount you have won (if you win) when Betfair settles the market.
It doesn't matter how many individual trades you do in a market and if they were profitable or not.

[ShaunWhite]

https://www.betfair.com/aboutUs/Betfair ... /#charges1

See section 4.2
"4.2 Betfair charges a Commission on your net winnings on a market. If you have a net loss on a market you do not pay commission."

This section will also explain how your individual commission rate is calculated.

[northuser]

See section 4.2
"4.2 Betfair charges a Commission on your net winnings on a market. If you have a net loss on a market you do not pay commission."

This section will also explain how your individual commission rate is calculated.

Excellent, thanks.