Seizing OpportunitiesBetfair capitalises on the financial markets with Tradefair.
The scope of Betfair’s influence in the online gaming industry only seems to grow and strengthen as other companies struggle to stay afloat. It was a tumultuous 2007 for a host of online companies but Betfair, on the heels of the greatly successful World Series of Poker in London, has launched into the great new frontier of betting: financial markets. Betfair’s new financial markets exchange Tradefair is akin to an in-house venture capital outfit and is poised to become a major force in the rapidly growing arena of online financial betting.
Set up by Betfair’s David Jack and Martyn Holman as an independent company within the Betfair sphere, Tradefair began just over a year ago with a binaries trading exchange and a traditional spread-betting offering aiming to become the financial trading site of choice with great products offered in a simple, reliable and competitive way—true to the Betfair credo. Ultimately, seeing as there are other reputable and firmly established companies offering similar services like SpreadEx, IG Index and Cantor Index, one of the main motivations to branch into financial markets was to simplify and popularise financial derivative markets and bring them to a more broad retail audience.
Another huge incentive was that Betfair customers were asking for it. “They’re showing keen interest in other markets,” says Jack, who previously led the engineering and R and D teams at Betfair. “Betfair has been successful enough to look for new things and we believe we can bring a value proposition to the market.”
Never known for idling or resting on its laurels, Betfair, which has developed the world’s largest betting exchange with a billion page impressions, are always on the lookout for the next big opportunity to go after. Their position in the market as a games exchange, working when there is high volume, mass participation and small margin, seamlessly enabled the expansion into financial markets.
Since the exchange technology is the same for Betfair and Tradefair—enabling anyone to set the price, be the market-maker and drive the best price on a range of major financial markets—the transition for customers from Betfair’s traditional betting markets to financial markets is a smooth one, making a unique and wholly organic experience. “The behaviours are already there,” says Holman, who shifted from heading Betfair’s strategic business development function to become the other director of Tradefair. “We have an education task with our customers to walk them through investor platforms and to show the benefits. But you could say that every one of Betfair’s customers has made an effort to understand a way of interacting with these markets on sports markets that’s a little more complicated than what’s offered at a traditional book maker. They’ve already made that emotional and intellectual commitment. Clearly that’s a great step to get into financial markets. All our focus now is to take those people and show them this slightly different way of presenting probability in a different set of markets.”
At the moment, the most popular markets are major indices since it’s easy to see what’s happening, there’s a lot of information available, they’re not vulnerable to a particular stock, and are volatile enough so a trader can get involved in movements in a way he or she might not do in a low-liquidity stock.
Already, there’s a lot of crossover with people into the financial markets. After all, Betfair is a huge network of poker, casino and game players, as well as sports bettors and the fascination is there. But it’s not just everyday punters with sufficient capital they’re after. Tradefair Spreads, the formal name of Tradefair’s traditional financial spread betting product, is hoping to encourage leading financial businesses and institutional market makers to participate on the exchange in order to generate liquidity and intra-business trading, and even hedge their own exposures.
Obviously, financial trading is an age-old institution, but its online incarnation is still a fledgling concept. But the penetration of broadband over the past five years has made it more feasible for customers to interact with what was on offer, and it’s quickly getting up to speed as a massive trading (or betting, if you prefer) sector impossible to avoid. “We saw the market was worth about half a billion pounds and growing 25 percent per annum,” says Holman. “A far greater rate than online sports betting.” For Betfair, a company with a lot of cash at its disposal, massive growth opportunity and a team set up to look for those opportunities, it was a no-brainer to go full steam ahead into financial markets. “We first launched at the end of last year and although this is new territory, Betfair has a history of launching new products,” adds Jack, a self-proclaimed serial technologist since launching a number of start-ups before spearheading Tradefair. “It’s very early days, but we’ve seen a huge amount of interest in our spread products and we’re very pleased with the take-ups so far.”
The exchange also offers traders the ability to gain exposure and knowledge of markets that drive the world economy, like central-bank decisions and employment data. Currency pairings and commodities markets are available as well to a strong retail customer base, but the range will inherently grow, and ultimately succeed, with the capability of their exchange technology.
As they make inroads into the market, Tradefair won’t compete with IG or Cantor but will, as Jack says, extend the market to people who are happier and more familiar with the Betfair brand. “Everyone out there already, like Spreadex, IG and CMC is positioned slightly differently in terms of brand rather than our product,” he says. “We’re seen more of a broader retail brand.” Those in the core investment end of the spectrum, like Cantor and IG, have gone both ways in that they offer sports betting one side and more sophisticated derivative products on the other. Ladbrokes and Paddy Power offer financial products too. In Betfair’s case, however, the retail derivatives space is directly adjacent to where they operate as a sports exchange. It’s retail based, the risk and stake sizes are generally similar and the brand is naturally expandable into that space. Holman elaborates: “We differentiate ourselves with a binary offering where users can interact with each other in the same way they can in the sports betting markets. You can use the spread-betting platform as a speculation tool and you can mirror what you’re trying to achieve with your investments.
“What we’re driving for in the long term is real differentiation. We aim to provide a platform into this market that’s never been done before: a margin trading facility where customers will trade against each other, and where multi partners from the exchange will bring in prices and, hopefully, bigger volumes over time.”
At the moment, Tradefair isn’t pushing into the market with any external marketing campaigns. They want to get the foundation rock-solid with its existing customers first, and they want to be seen that they’re growing the overall market, not challenging it head on. Only then will they proceed with expanding internationally. “We just continue Betfair brand principles of transparency, value and fairness to a broad spectrum of participation,” says Jack. “Betfair has the best representation of probability on sports, so there’s no reason Tradefair can’t take on the same dominant position.” Betfair CEO David Yu certainly echoes that sentiment: “[Tradefair] is a clear demonstration of Betfair’s continued commitment to growth and innovation, and we hope to have the same revolutionary impact on the financial market as we have had on the sports betting market.”
KNOW YOUR…Binary Exchange
Binary trades are expressed in straightforward language based simply on whether an event will or won’t happen, e.g. ‘FTSE up by end of day.’ Users can agree with the binary outcome and ‘buy’ a position or disagree and ‘sell’. The pricing of binaries reflects the current market consensus of the probability—between 0 and 100 per cent—of an event happening within a given time frame; ‘FTSE up by end of day’ trading at 49.8-50.2 simply means that exchange participants believe the market is equally likely to be up as it is down when the market closes that day. Binaries are clearly suggestive of the way in which the market expects prices to move. So in the earlier example, if FTSE opens the day at 6,564 and, with an hour to go, is at 6,570, but the ‘FTSE up by the end of day’ binary is trading at 31-32, this indicates that market participants expect a late sell-off.
“The binary product is essentially the same as a fixed-odds bet,” says Holman. “It’s just a lot easier to trade a binary product. So your exposure is the same as in a fixed-odds bet, just in a different way. You express your user stake rather than your exposure. You always know how much you need to trade out of a position to make a profit with a binary.”