Real-money versus Play-money arbitrage, starring Betfair
July 23rd, 2008If you're new here, you may want to get Mercury's Blog by Email or subscribe to my RSS feed. Thanks for visiting!
I’m fascinated when real-money markets can be directly compared to play-money markets, particularly when I can potentially make some money.
For those of you that haven’t read my research paper, I created a series of play-money prediction markets on rowing events in the summer of 2006. The results were as what you might expect; quite accurate. When there were just 16 or more traders involved in a market, the results could be relied upon for good forecasts. I’ve turned that project into a longer-running project, which has also taken place last summer and this summer. (I’m collecting data to analyze how the number of traders required has changed since Inkling adopted Robin Hanson’s MSR, which wasn’t in place for the original research.) It’s proven quite popular amongst amateur rowers in the UK.
[I'd like to thank Inkling for providing the platform; I plan to analyze and publish the results of the last two summers' research this fall once the Olympics markets are closed out.]
A few weeks ago I created a prediction market for each of the 14 Olympic rowing events. A few days ago I was checking Betfair and realised that they had also created markets for all 14 Olympic rowing events. (Both to determine the winners as well as the podium places for each event.) When I compared the two marketplaces there were some potentially profitable discrepancies.
There seem to be two types of market-makers in the Betfair markets. One simply entered lay bets for each entrant at very poor odds (ie, 1.01 decimal) just so there was something to trade. That’s not very useful. But another type of market-maker entered more realistic odds, but odds that were dramatically skewed toward long-shots. For example, in the Men’s Double Sculls event, the play-money prediction market forecasted a win for New Zealand with about an 80% probability. However, I was able to buy shares on Betfair at 2.56, or about 39% probability! While the over-round on the market was quite large, it was because the odds on the long-shots were unreasonable. Odds on the favourites in these markets were very good, and this was the case on as many as half of the events.
So if my play-money markets are accurate (as I expect them to be), I should be able to make a little money on the Olympics, courtesy of the initial market-makers on Betfair. Some people may argue that the play-money predictions won’t be as accurate because they don’t involve real money, but looking at the current Betfair market there’s so little liquidity to have quality forecasts. Unfortunately the lack of book depth means that the mis-pricing won’t last long and won’t be hugely profitable in absolute terms, but that should be interesting to watch.
I think this is an excellent example of where a play-money market can profitably inform real-money market trading.
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