Comparing the Effect of Market Liquidity in Financial Markets and Your Sportsbook

Mark Lathrop

Tuesday, June 23, 2015 10:58 PM GMT

We compare the stock market with how sportsbooks set and adjust the lines so you can grab the betting odds at the right time.

When you are putting your hard earned down on a wager at your favorite sportsbook sometimes it is good to step back and assess how that line was put together in the first place. Why is there a spread at 30 cents on an early line? Why do lines get pulled from the sportsbook?

Just like in the stock market, the amount of players willing to take a side on each wager at your sportsbook affects the efficiency of the market. In the financial markets this is known as liquidity. The most liquid asset of course is cash, as there is no discount given to trade the value of that cash for some value of another commodity, such as food (Exchanges between the notes of different governments aside). There are a near infinite number of parties that will take your cash at face value as we all know. On the other end of the spectrum are thinly traded equities and bonds, such as penny stocks and junk bonds. The number of people willing to purchase those equities is much smaller, so the spread between the bid (to buy price) and the ask (to sell price) is high. A comparison between a penny stock bid/ask spread and a highly traded stock could be as follows:

 

Apple Corp. (AAPL): Bid 130.00 (100 Shares) – Ask 130.13 (100 Shares)

Liquidmetal (LQMT): Bid .12 (500 Shares) – Ask .14 (5,000 Shares)

 

The spread on a stock such as Apple is miniscule as there are millions of shares traded each day and thus many ‘players’ in the market to find a willing party on the other end of a wager on the future value of the company. The equilibrium of 50/50 supply and demand is a very thin line. The spread may equal just .1% of the value of the underlying equity, or less. However, on a thinly traded stock such as the example of LQMT above the spread may equal a swing in value of over 10%. When one person bites at the ask price of .14 all of the sudden every account that holds LQMT gains over 10% in value on that stock alone. But unless you have more parties out there willing to pay 14 cents, that stock is only worth what the few people will buy it for at 12 cents. Again, an over 10% swing in value. This is the essence of a market lacking liquidity as you are stuck with an asset that few people want to buy at the price you want them to buy it for (See: U.S. Housing Market, 2009).

As mentioned in the previous article, in comparison to stocks, the market maker at the sportsbook is selling ‘units’, with the goal of 50% of the value of each betting side of an event going each way, leaving the juice as profit. The effect of a thinly traded, or wagered, market is that the spreads between each side will widen. A great example of a thinly wagered market is restricted opening lines. For example, opening MLB totals lines found on Bovada often have a spread of 30 cents, i.e. Over -120, Under -110. Since the goal of the sportsbook is to attain 50/50 status in selling units on each side of a wager, widening the spread while the line is thinly bet makes sense, especially if the book knows which way the public will hammer an opening line. They have that notion of which way the public will lean, but what they don’t initially know is the wagered amount, or number of ‘units’, coming in on each side. They literally don’t know the size of the market, which is at odds with the stock market where the number of shares being bid on is completely transparent. Widening the spread lowers their risk until enough volume has been bet that they can ascertain at greater certainty that they will reach their goal of 50/50 status. What could happen if they opened the line with a tighter spread? Well, if one of the few early bettors out there was a whale they could lay down such a large wager as to corner the sportsbook into a situation where a 50/50 equilibrium wasn’t possible without moving the line a considerable amount. Moving a line a great amount opens sportsbooks up to hedging and all other sorts of great strategies… for players.

Keep this need of the sportsbooks in mind the next time that you look at an early line at SBR Odds and remember the ‘goal’ of the sportsbook at all times. If an early line opens up with more juice on one side, know that the sportsbook is expecting more volume on that side of the wager; and furthermore that they are protecting themselves from being cornered into a position where they can’t reach their goal of 50/50 ‘unit wagered’ status.