You can turn a dull, stagnating market into an exciting money-making opportunity with binary betting or a punt on a betting exchange. Shares' Mike Boydell chairs a panel of experts in the field on the advantages and characteristics of these innovative services.
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Mike Boydell, Shares: Today we're talking about binary betting and betting exchanges. First, what is binary betting and how can traders profit from market moves?
Dan Moczulski, binarybet.com: It's a little removed from spread betting or traditional share trading. We resolve any financial instrument into two outcomes - either it does happen or it doesn't happen. Let's take the FTSE - either it will finish up on the day or not.
We subscribe two numbers to that using this binary method: zero if something doesn't happen and 100 if it does happen. At any point of time before the actual outcome occurs, we will provide prices for people to deal on the possibility of either outcome.
Say we were making a price of 49-51 on the FTSE. If you expected the index to finish up on the day, you'd buy at 51. If it did finish up, the bet would finish at 100. You would have bought at 51 and therefore would have made 49 points. If you had traded £10p per point that's therefore £490 tax free.
Christopher Sparke, Binexx: It's the same with our product except that binarybet.com is purely a market maker whereas with Binexx there are market makers on the exchange. The principle of the 0-100 finish is exactly the same but a client has the opportunity to place an order on that market and potentially match with other clients on the exchange itself.
The way we settle the binary market on a 0-100 basis is different from how a fixed-odds market is settled on a betting exchange such as Betfair, but the risk is exactly the same - it's just how it's expressed to the user.
Boydell: How do betting exchanges differ from using a normal bookmaker?
Tony Calvin, Betfair: Betting exchanges are probably the ideal bookmaking model - they are bookmakers that don't have any risk whatsoever. They do this by providing a sophisticated betting platform by which punters bet between themselves and can set their own prices.
You have an added bonus. Once the tapes go up in a horse race, that signifies the end of the betting for most people. But betting on a horse that's running, for example, accounts for 10% to 15% of our racing business and is probably the most popular aspect of it. Second by second, there are always prices available.
We also do financials - betting for example on whether the FTSE or Dow will be up or down on the day and that is one area where we would look to grow.
Boydell: I understand that with betting exchanges you bet on the time result - what will it finish at an hour later?
Calvin, Betfair: Yes - the FTSE is a classic example. We bet by certain times of the day - will it be over or under a set price, and will it be up or down on the day.
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"If there's no price or you're not happy with the price you simply request one. You can put your own price in. Once you get a lot of people requesting prices, that's when you get the two-way prices, because liquidity tends to breed liquidity."
Boydell: Do I have to wait until the end of the event to settle a binary bet or can I settle any time from the start of my bet?
Sparke, Binexx: You can settle a bet whenever you like. It's similar to spread betting in that you can open or close a position whenever you like. If you wait for the outcome to happen and the outcome occurs, then the settlement of 100 happens. If the outcome doesn't occur, we know the settlement is zero. But you can come in and out of a position as many times as you like.
Boydell: Is there always a two-way price being made?
Moczulski, BinaryBet: We always guarantee two-way prices, 24 hours a day. It makes no difference to us whether clients are looking to sell or to buy, they'll have the same availability of pricing and in large size.
Boydell: Do betting exchanges have the same sort of model?
Calvin, Betfair: Some markets are very, very liquid - some golf and cricket markets, for example - so nearly all the time you're going to get a two-way price. Not only that but a great deal of the time you're going to get a far better deal on betting exchanges and Betfair in particular.
When we're talking about financials, there's obviously a liquidity problem as we don't have as many financial punters, so there isn't always a twoway price. However, the beauty of betting exchanges is that if there's no price or you're not happy with the price you simply request one. You can put your own price in. Once you get a lot of people requesting prices, that's when you get the two-way prices, because liquidity tends to breed liquidity.
Sparke, Binexx: We sit between Betfair and binarybet.com. Binexx is a binary betting exchange in itself so the risks we are looking at are in a binary format. However, if you don't like the price available in the market you can leave an order. That order doesn't necessarily have to be matched by a market maker, it can be matched by other individual clients. This means higher liquidity and better prices.
Boydell: To clarify the three platforms for the readers: there's the Betfair model in which Betfair itself doesn't make a market but lets users make the market; there's the Binarybet model, where the firm just makes the market. And there's the Binexx model, where both the user and Binexx make a market.
Sparke, Binexx: There is a market maker providing prices on the Binexx exchange as well.
Boydell: So there's always liquidity there.
Sparke, Binexx: Binexx can't guarantee liquidity 100% of the time because you can't, just as with any exchange. But we do tell clients that, although sometimes markets don't have a huge amount of liquidity, we will have market makers providing liquidity in there.
We're trying to give them the best of both worlds - there is liquidity provided and you also have the opportunity to leave orders.
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Boydell: It's interesting - we've got three very similar systems but actually three quite different systems, which is good for the users as they can pick and choose.
Calvin, Betfair: In their nature they're very similar. The margins these guys work to are highly defensive but then if they are laying on the betting size they would argue that they provide guaranteed liquidity in that price.
Sparke, Binexx: As we are an exchange, the margins don't have to be great. When liquidity is high in the markets the percentages come down. The market makers are there to provide liquidity - the clients don't have to take it and can leave orders wherever they like.
Calvin, Betfair: And I suppose, if you get the initial prices up, people come in and make the margin smaller. If you are a market maker in betting exchange terms, we call that seeding, though we don't actually do that any more.
Boydell: Which financial markets can I trade through your companies?
Moczulski, BinaryBet: In terms of financial markets, we quote stock indices, from the FTSE, Dow, S&P and Nasdaq to the more exotic ones such as the Korean KOSPI. We offer a huge range of currencies, shares and commodities. Importantly, there are extensive ways of trading these on an end-of-day or end-of-hour basis or even a five-minute basis. You could set a 10-point range that if the market finishes within that particular range the bet will come good. You can trade on a one-touch basis, so that if the market ever reaches a particular level at any time of the day you will make a profit on the back of it. You can profit from 'tunnel' bets in that you make money if the FTSE stays in between two particular levels. There are a variety of ways of trading, not only which markets but on the way you trade that particular market.
Sparke, Binexx: There is a very similar range of instruments with us - FTSE, Dow, Nasdaq, foreign currencies. I think it's important to add that with the binary style it's not just the actual underlying financial market that we're looking at, it's the types of market available. Binexx also offers a client a different form of leverage and gearing.
The variety of types of market means that given any market situation - low volatile, high volatile, extremely high volatile, no volatility at all - there's always a market available.
Boydell: On Betfair, I understand you've got things being added to the financial model?
Calvin, Betfair: Yes, we bet on the FTSE, Dow Jones, daily currency markets, interest rates. We've just recently introduced a house-price market whereby you can bet on what price the Halifax index is going to be at any particular point. You can bet on that every month now.
We're always looking to improve the financial area, it's very much 'watch this space' for Betfair.
Boydell: How are your prices set and how does this flow through to charges.
Calvin, Betfair: On Betfair, we provide a platform for punters to set their own prices. If you'd fancied Tiger Woods to win the Open, you would have put a price in to back him, and if you wanted to oppose Woods - that is to lay him, to back him not to win - you would offer a price for other punters to take from you.
To do that you must have in your account enough to cover your maximum possible loss - there is no credit on Betfair. A bet is never accepted unless we can immediately hedge it off somewhere else. We match punters with opposing views at prices acceptable for them to back and lay. It's a very high-tech business and a big undertaking to actually provide that kind of betting platform.
Betfair takes commission between 2% and 5%. The more you bet, the less you pay in commission.
Moczulski, BinaryBet: Binary betting is a new product and for people to get into it they have to have liquidity on the whole range of markets that we offer. Clients need to know they can get out at any time at the prevailing price. Therefore we thought the best model for Binarybet was to be a market maker. Any one of our markets is good on £100 a point at any one time. The other positive of a market-making model is that there is absolutely no commission.
Sparke, Binexx: At Binexx, we provide market-maker facilities on the exchange so there's always liquidity there. We also allow users to place orders on an exchange and match with each other. I think that is an important point. Yes, there is commission on exchange but given liquidity and given that clients are able to place orders at any price they like at any time, that always comes to a very tight price.
Liquidity is high and therefore matching takes place between users. Hence they get a competitive price at
a low cost.
