Trading on markets

**Peregrine Stoop** · 11-08-10, 12:02 PM

this is a really thought provoking OP

I've kind of given up on being ahead of the market in information, except when one of my scout or rivals forums talks of an unknown injury at practice that day and I can hit a line before the injury comes across ESPN's bottom line.

**luegofuego** · 11-08-10, 06:56 PM

Op,

what you're doing is called anchoring in the financial world. I'm sure we're all guilty of it when line shopping. We see a line at +155 and our brains automatically think "If I could only get it at +160, I'd have great value", but if we saw the SAME GAME at +145, there's a great probability our brains would have told us "If I could only get it at +150, I'd have great value". This highlights the value of making your own lines before looking at the odds available.

If you see a game at +155, why would you wait until it hit +156? If you saw it at +156, would you wait until it hit +157? Do you see how that makes no sense?

**George7904** · 11-08-10, 11:40 PM

The problem is that it may never go down to your price and you may miss a huge gain because you wanted it one cent cheaper. It can also work the other way. Basically, it is a fool's errand because you will never know which way it will go.

**Ominous** · 11-09-10, 09:46 AM

Originally posted by luegofuego

Op,

what you're doing is called anchoring in the financial world. I'm sure we're all guilty of it when line shopping. We see a line at +155 and our brains automatically think "If I could only get it at +160, I'd have great value", but if we saw the SAME GAME at +145, there's a great probability our brains would have told us "If I could only get it at +150, I'd have great value". This highlights the value of making your own lines before looking at the odds available.

If you see a game at +155, why would you wait until it hit +156? If you saw it at +156, would you wait until it hit +157? Do you see how that makes no sense?

I agree, it is a form of anchoring bias. But I motiveate my anchoring by saying that I think the market prize is reasonably fair.

As for stock tradig for instance I honestly do believe that you cant make a accurate prize from scratch by using you own model that is really competetive. My brother told me that he did an econ assignment in the university where they tried to prize a stock from cash flow analysis and depending on the assumptions they ended up more than 20% over or 20% under the market prize for the stock. Does that mean that they should invest their life savings in said stock (or sell it short), probably not

. However, if they would have had a solid model and experience it is possible that they could identify value in buying or selling short even if they cant accurately prize the stock.

For sportsbetting I guess it is probably somewhat easier to make your own analysis. But to be completely honest I dont think you can predict an accurate prize for a complex wager. However, you could possibly highlight that one side is underprized or overprized. When you have done this you would like to invest in the side you favour. (Still, you dont have all information and it could be possible that some guy has inside info that one side will rest a star player or whatever and will come in and move the market prize)
If you want to bet on matchbook or similar for instance the same problem as described in the OP will be presented to you. Should you take the prize that someone is offering you or should you lay out a wager and hope that someone else will accept it and thus give you a better prize?

**luegofuego** · 11-09-10, 10:14 AM

Sorry but it just doesn't make sense. You're defining "fair market price" as the FIRST LINE YOU SEE. That's a completely arbitrary definition with no useful application. Again, if you had came in five minutes earlier, the line might have been +150 and your brain would have identified +155 as great value. Now, you come in five minutes later and suddenly +155 isn't worth it, but +160 is. It doesn't make any sense.

**Ominous** · 11-09-10, 11:34 AM

Originally posted by luegofuego

Sorry but it just doesn't make sense. You're defining "fair market price" as the FIRST LINE YOU SEE. That's a completely arbitrary definition with no useful application. Again, if you had came in five minutes earlier, the line might have been +150 and your brain would have identified +155 as great value. Now, you come in five minutes later and suddenly +155 isn't worth it, but +160 is. It doesn't make any sense.

Without any additional information, the market prize is the most accurate measurement of the prize of any asset.

A slight clairification. The above statement is true at any given moment. If the prize is first +160 I would assume that this is the most fair prize for that bet. If the prize one hour later is +140 this is the most fair prize at that time. What has changed is that the market has reacted to NEW information which, unless you have specific reasons to think otherwise, probably is sharp. That is, the prizechange reflects new information that impact the best probabilistic estimate of the outcome of the game. (When prize is +160 I would think that the bet would hit about 38% of the time. When the prize is +140 I would expect the bet to hit about 42% of the time. Whereas the prizechange does not affect the actual game, it can have a REAL effect on the best guess of the outcome of the game.)

If you have reason to believe that the market has not taken a certain piece of information into account, or that the market is bias in some specific way, then it logically folllows that you can expect there to be value on the one of the sides.

---------
Either way, what you attack is that it is possible to find value without being able to accurately define the right prize, a critisism which may have some merit but I am not yet convinced.

It does not however answer or make irrelevant the original problem posted. Suppose you intend to buy one side for whatever reason, would you rather take the prize that is currently availible or would you try to buy it slightly cheaper?

**u21c3f6** · 11-09-10, 12:42 PM

Originally posted by Ominous

I am wondering how, from a thoeretical view, you optimaly trade on a market. ...

I used to worry about optimal but I gave up that ghost many years ago.

For example, full-Kelly is optimal but I didn't like the wild swings of capital or the stress that it seemed to put on me so I now use (a modified) half-Kelly. For wagering and/or investment selections I used to worry more about getting a "better" price but the most I do these days is look for the best price at this moment. If my set-up is correct, then it should be +EV. In the past, trying to "outsmart" the markets and get a better price has cost me some opportunties and the end result was basically a wash. For all the time I spent trying to get a better price, the times that I wound up with a better price were almost always offset by those times I didn't get a better price and lost opportunites. The end result was that I was spending a lot of time trying to get a "better" price with little forward result to show for my efforts.

Joe.

**luegofuego** · 11-10-10, 09:14 AM

it's "price" ffs

**Waterstpub87** · 11-22-10, 01:48 AM

Originally posted by Ominous

I am wondering how, from a thoeretical view, you optimaly trade on a market. Lets say I want to buy a certain stock on a stock exchange or buy a bet on a sportsbetting market (like matchbook). Presuming (A): Is the best strategy: (1) buy the stock at the prize which it is offered right now, or (2) to lay out a buy order so that I will buy at a certain prize, slightly cheaper(better for me) than what is currently offered. Example: I want to buy stock A and market is as follows; People want buy stock A for 5,05$/stock and people want to sell it for 5,06$/stock. In my mind, the argument for (1): is that I will at least not be "scammed" since I trade virtually at market prize. I pay a small diffrence because I pay 5,06$/stock instead of the "middle" 5,055$. However, I fear that if I would instead layout my order as in situation (2) someone with sharp information push the marketprize in either direction heavily. This will leave me without stocks if the stock prize raises but if the stockprize falls I will pay more than the equilibrium prize after this new information is incooperated into the marketprize. Argument for (2): I believe that micro fluctuation in prize will allow me to score a better deal by trying to buy slightly cheaper than the market prize. Say I put out a buy order for 5,01 $/stock in the above example. One argument for that the micro fluctuations in prize are not sharp is as follows: (3) People who buy with larger volumes of money will unintentionally push the prize slightly when they buy or sell. I can therefore use the fact that I trade with smaller volume to my advantage to get a better prize. I would like to hear your opinions on this subject as I do not know if I should follow strategy (1) or strategy (2). What do you think about (3)? Is there any general theory or does it depend on the market? Anyone got a good approach to this problem?

For the stock market, what your talking about is the Capital Asset Pricing Model. Basically, what you are talking about is if you had a different calculation on the price of a security in relation to its risk/return, would it make sense for you to buy at market price? The answer would certainly be yes. This is what lead Buy and Hold investors such as Warren Buffet in their investment strategies. They feel that the market "misprices" certain security. They then buy the "mispriced" securities and hold them until the price they feel is accurate is met. Then they sell.

For the second question on where to put a limit order on price in order to get the "correct" price on the security. This would depend on how off the price of the security is. If you felt that the stock should be priced at 5.50 and feel that it would reach that soon with little downwards volatility, then you should most certainly buy. However, if you felt that the accurate price was around 5.10 and it would bounce around before hitting this, it would make sense to put out a limit order to get the best price

For the stock market, sharp information is not as effective as in changing prices as it is in the sports betting world. Large amounts of securities are often purchased for different reasons. Firstly, hedge funds and other investment companies may be buying in order to cover short positions. They would buy because they feel the stock is going up, or the short got called and they are forced to cover. Secondly, sometimes news stories that are positive for certain securities push those securities up without reasons. If a company loses 30 Million but was supposed by analysts to lose 35 million, its share price will often rise even though it still took a loss.

I hope this helps and I understand your question correctly. If you are interested in the CAPM, here is the wikipedia link.

CAPM - Wikipedia

http://en.wikipedia.org/wiki/CAPM

**BeatingBaseball** · 11-29-10, 12:13 PM

Stock market professionals generally scale into a position. Once they have made the initial decision to act on a play - they put some of it on at the current price. That way - if the next move in the price is positive - they at least have a piece of the action. On the other hand - if the subsequent move is negative - that works for them also - as they have another bullet (or more) with which to increase the position at a more favorable price than the original stake. It is actually the hallmark of an amateur to go all in when initiating a position.

You could say the same about sports. If you like a side +3.5 - take some of it. If it goes to +3 you made a good play relative to the adjusted price. If it goes to +4 you like it even better - so take more.

I think that people who believe they know so certainly what the next short term price movement will be on anything - certain enough to go all in - are pretty arrogant. And often wrong.

**xyz** · 11-29-10, 01:19 PM

Originally posted by BeatingBaseball

You could say the same about sports. If you like a side +3.5 - take some of it. If it goes to +3 you made a good relative to the adjusted price. If it goes to +4 you like it even better - so take more.

When the market moves against you, it is not a good time to take more unless you are certain the information you have is not already priced into the market. Over time, if the market disagrees with your picks more often than agree, you need to reevaluate your model.

**BeatingBaseball** · 11-29-10, 02:10 PM

Yes, xyz. The scaling in or averaging down tactic is of course designed for use when you are strategically confident in your assessment that the play is +EV.

I wouldn't worry about my call just because the market moves against me short term, however. There are a lot of short term fluctuations on noise and air. What matters to me is consistently beating the closing line - and what matters even more are outcomes.