The Transition From Trading Stocks To Sports

This article will primarily touch on the act of arbitrage trading. In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets. This strikes a combination of matching deals that capitalize on the imbalance between different markets, with the profit being the difference between the market prices. Let's take a look at how this was applied in the stock markets, and then in the sports betting markets.

Arbitrage In The Stock Market

With today's technology, the pricing of stocks is updated within a few milliseconds of real time. Since this is exponentially faster than what a human is able to accomplish, it's extremely difficult, if not impossible, to find arbitrage opportunities in the financial markets. To get around this, firms are now using computers to perform algorithmic electronic trading at speeds impossible for any human to match. The way algorithmic electronic trading works revolves around the idea of providing a computer with a set of instructions, which will trigger it to buy or sell stocks. The concept of algorithmic electronic trading in the context of arbitrage is highlighted in the non-fiction book, Flash Boys, by Michael Lewis. Flash Boys provides an in-depth account of how high-frequency trading (HFT) firms utilized a super fast fiber optic table that connected the financial markets of New York and Chicago to perform arbitrage trading. The cable, costing $300MM, reduced the journey time for data from 17 to 13 milliseconds. This advantage enabled HFT firms to obtain better prices on their trades in comparison to their competitors.

Arbitrage In The Sports Market

The difference between arbitrage in the sports betting market compared to the stock market is that sports bettors buy and sell bets on the outcome of events, such a football game or a basketball game, as opposed to stocks. What makes the sports betting market potentially more interesting than the stock market is that the sports betting market is much more inefficient compared to the stock market, which in turn creates more arbitrage opportunities. When arbitrage opportunities exist within the sports betting market and if executed accurately, the sports bettor will be guaranteed a profit regardless of the outcome of the match. However, although the majority of arbitrage opportunities will occur at the soft sportsbooks as opposed to the sharp sportsbooks, this can lead to several practical disadvantages, highlighted below:

1. Soft sportsbooks limit sports bettors who are able to win consistently. That is, these soft sportsbooks will close the accounts of sports bettors who consistently profit.
2. If the odds deviate too much from the rest of the market, sportsbooks are able to void bets placed on that game or limit the amount that can be wagered on the game. If this happens and you've already placed bets through other sportsbooks for the arbitrage, you'll be unable to complete your arbitrage wagers, which will result in a high negative expected value on the bet.
3. With the risk associated with soft sportsbooks, you must distribute your capital across a very wide range of sportsbooks to take advantage of potential arbitrage opportunities.

Private Investors

While there are risks associated with arbitrage opportunities within the sports betting market, investing in the sports market over the stock market still makes more sense for private investors. For private investors in the stock market, they'll be forced to compete with HFT firms, which simply does not make much sense from a tactical standpoint. Additionally, the gap in access to information held by hedge funds compared to private investors have increased dramatically over the last few decades. If there are pricing inefficiencies in the stock market, this will surely be exploited by HFT firms and hedge funds before the private investor gets their hands on this opportunity.