Mansion change in format? Sellers now pay 1% and buyers 0%?...

[TLD]

I believe quite a few have attempted it over the years, zero successfully.

[Ganchrow]

I believe quite a few have attempted it over the years, zero successfully.

Indeed.

Link to JREF Million Dollar Paranormal Challenge webpage

Link to JREF Million Dollar Paranormal FAQ

[bookie]

Specifically, we would expect that (in general) most Mansion sellers are more sophisticated investors than their buy side counterparts.

Why would we expect that? Why would anyone make an offer on a dimeline sport to (with commission) overcome a penny or two of juice when the risk of being blind-sided by a screen-blackening twenty cent move is a constant presence for even the most sophisticated bettors? Close to post, maybe could see it--but not at any other time--especially since offers over $200 are (IMO) rarely accepted at Mansion.

[Ganchrow]

Why would we expect that [(in general) most Mansion sellers are more sophisticated investors than their buy side counterparts]? Why would anyone make an offer on a dimeline sport to (with commission) overcome a penny or two of juice when the risk of being blind-sided by a screen-blackening twenty cent move is a constant presence for even the most sophisticated bettors

Remember that betting exchanges, while relatively new in the world of sportsbetting, have been around for centuries. The Amsterdam Stock Exchange (ASE), founded in 1602 for the purpose of trading shares of the Dutch East India Company, is commonly considered the world's oldest exchange. Prior to 1602, if you had wanted to transact in a financial instrument, your only option would be to locate a "dealer" (think bookie) and ask him to make a "bid" or an "offer" (a price quotation indicating where he would either buy from or sell to you respectively) for the security in which you wanted to transact. This is what's known as a "quote-driven" market and is fairly representative of the manner in which the NASDAQ market functioned up until about the mid 90s or so.

The ASE provided the investor several advantages over the earlier “proto-exchanges”, one of which is particularly relevant to the current discussion. Specifically, the ASE allowed market participants who were not satisfied transacting at the prevailing market price, the opportunity to set their own prices, effectively permitting them for the duration of their order’s activity to serve as sort of “mini-dealer”. Now this might seem obvious, but it really is a very key point: When you place an order on a betting exchange you are effectively acting as a bookie and as such appropriating a portion of the bookies’ profits for yourself.

Now, this should shed some light on the extreme vitriol with which the online sportsbooks in general seem to treat the sports exchanges. Indeed, I remember seeing exactly the same on Wall Street in the mid 90s. Dealers (be they bookies or market makers) dislike exchanges because the exchanges tend to make the dealers superfluous. Remember that while the marginal cost of booking an extra bet is small, there are still many fixed costs associated with setting up a bookmaking operation: You need to hire staff, lease office space, pay web designers and systems people, and well the beat goes on. On the other hand, the only fixed costs borne by an investor placing an offer at an exchange are de minimus financing costs (fund transfer fees and time value of money). The exchange fees (which I believe will continue to drop as exchanges pick up speed over the next decade) are a marginal cost and as such serve as no barrier to entry.

The argument given above by bookie as to why placing an exchange offer is not in a player’s best interest (the cost savings is small and it opens a player up to adverse selection risk) is not novel. I remember hearing precisely the same clarion call from the institutional equity salespeople with whom I did business when the ECNs (the NASDAQ equivalent of betting exchanges) were starting to appropriate large chunks of market share from the market makers in the 90s. But as I’ve been arguing, this argument is woefully transparent and self-serving. If exposing limit orders to public viewing were so unprofitable, then why do so many bookies drive such nice cars?

Barra, a financial risk management company, came up with a very interesting means of modeling transaction costs in any market trading environment which they call their “Market Impact Model”. (Purchasing this tool for the US Equity Markets will run you about $100k a year – which is more testimony to how overpriced Barra is than to the quality of the model). The core idea as it relates to this discussion is as simple as it is intuitively appealing. Namely, by using a limit order (in this case a limit order would be the equivalent of selling on an exchange) as opposed to a market order (buying on an exchange or from a bookie), you are specifically being compensated for taking on adverse selection risk. In other words, it is because (to quote bookie) the “risk of being blind-sided by a screen-blackening twenty cent move” exists that selling on an exchange provides excess value over buying from a bookmaker. Indeed if the aforementioned risk didn’t exist then there would be no financial incentive to place an exchange limit order.

So it’s just two sides of the same coin: There is additional risk involved in placing a sell order on an exchange, but while this risk might cost a trader in the short term, over the long term it should provide excess profit in that many (if not most) sports betters will pay money to actively avoid that risk. You can opt for immediate market gratification by choosing to place a buy order and make the bet immediately, or you can choose to place a sell order on an exchange, and while on the average you expect to do better, you are opening yourself to the risk of occasionally doing much worse. The point is that a sophisticated investor, much like a sportsbook, is better able to quantify (either explicitly or implicitly) and manage said risk than would a recreational gambler.

[bookie]

Ganchrow...Do you use Mansion to sell large orders? How's that workin for ya?

I think you make reasoning too easy on yourself by characterizing my argument as one against a particular kind of market institution. I would love for Mansion to be wildly successful. My point was not about the exchange idea, but about the pricing incentives that will make it flourish. In short, I'm not convinced by your assumption or analogy that in this case the bearer of the selection risk should also pay the transaction costs. I'm sure there are other cases where that makes perfect sense, but not here for the reasons cited.

Are we still on for tomorrow?

[Ganchrow]

Ganchrow...Do you use Mansion to sell large orders? How's that workin for ya?

Sorry, that's proprietary info.

My point was not about the exchange idea, but about the pricing incentives that will make it flourish. In short, I'm not convinced by your assumption or analogy that in this case the bearer of the selection risk should also pay the transaction costs.

Fair enough, but the point I had been attempting to make in an earlier post was that from a market efficiency standpoint it shouldn't matter who physically pays exchange fees. In other words, the net effect on pricing should be the same whether it's the buyer or seller paying the fees.

However, because there likely exists a structural issue related to many gamblers wanting to treat the Mansion exchange no differently than they would a regular sportsbook, it makes sense that at least some of these potential market participants (buy side by their nature) might be frightened off by a pricing structure that they didn't fully understand.

So the point is that sell side exchange fees shouldn't be any more of a disincentive for the seller than should buy side exchange fees (well if you want to get technical they should be very slightly more of a disincentive to a positive expectancy sell-sider simply in that he expects to win more frequently, but a pure market market should be fully indifferent), but their absence on the buy side is likely to attract uninformed buyers to the marketplace thereby further incentivizing sell orders.

[TLD]

I thought of the previous system (free for sellers, small fee for buyers) not so much as a way to attract sophisticated “seller-type” customers at the expense of more casual “buyer-type” customers, but as an attempt to convert a few of those more casual customers to sellers. You know, make the more unfamiliar of the two roles as easy as possible so “regular joes” who’ve only experienced normal sportsbooks and not exchanges would be willing to try putting up their own offers.

But maybe what they’ve discovered is that, for now at least, nothing will entice anyone but the most sophisticated to take on the seller role, so they might as well throw in the towel on that and encourage the “regular joes” just to treat it like a conventional sportsbook after all. Perhaps they’re reconciled to the idea that they’ll be putting up the vast majority of the offers indefinitely themselves no matter what they do, and so it’ll be an exchange in theory but very close to a conventional sportsbook in practice.

[Ganchrow]

I thought of the previous system (free for sellers, small fee for buyers) not so much as a way to attract sophisticated “seller-type” customers at the expense of more casual “buyer-type” customers, but as an attempt to convert a few of those more casual customers to sellers.

But is the market really that dense? Maybe, I suppose. Of course insofar as it is, it sure looks to be a great time to be a Mansion seller ...

Perhaps they’re reconciled to the idea that they’ll be putting up the vast majority of the offers indefinitely themselves no matter what they do, and so it’ll be an exchange in theory but very close to a conventional sportsbook in practice.

Perhaps. But I'd suspect that their marketing folk determined that the more they can get customers comfortable using the exchange in any capacity, the easier it will be to get those customers eventually using the limit order facility.

[pags11]

TLD,

I completely agree with that analysis...