Personally, I'm all for efficient markets...

[randomness]

...but how does this differ from sports gambling, exactly?

Red Sox Reward Futures Traders Who Favored Them Over Yankees

"The Boston Red Sox, who became the first team in Major League Baseball history to win a playoff series after trailing three games to none, rewarded the futures traders who made them favorites against the New York Yankees.

"The payoff was even greater for speculators who wagered on the Red Sox when their futures contracts were selling for pennies on the dollar.

"Traders were paying more for Boston contracts than for New York futures before the American League Championship Series, even though the Red Sox haven't won baseball's title since 1918, and the Yankees have won four of the past eight.

"``It's phenomenal how efficient the sports markets are,'' said Mike Knesevitch, a spokesman for TradeSports.com, an online exchange where futures contracts were traded on the series. ``I'm always amazed.''

"Traders on the Dublin, Ireland-based exchange who were betting on a Red Sox victory were able to redeem contracts that were almost worthless four days earlier. Traders were able to increase their investments 40-fold if they bought Boston contracts at their low and held them until today."

http://quote.bloomberg.com/apps/news?pid=10000103&sid=aMJUmSbh.O8o&refer=us

Comments

[skreeky]

I have absolutely no idea what a "futures contract" is.

[r-ness.livejournal.com]

Don't know if this helps but the article goes on to say:

"Futures are agreements to buy or sell assets at a set date and price; futures on events are paid off in cash."

[statisticalfool.livejournal.com]

That's right, but maybe an example will make it clearer. In a futures commodities market, you'll buy a contract which will say:

"On Jun 1st, 2005, deliver 50 tons of live cattle to the owner of this contract."

You buy that contract for $1000 right now. You get the cattle next summer. If those cattle are worth more than the $1000 , then you made money, and if not, then you lost money (inflation and risk-free returns aside).

What TradeSports did is change this to (in a famous example last year):

"On Mar 31st, 2003, this contract is worth $10 if Saddam Hussein is out of power, and $0 if he still is in power."

The more likely you thought that the war was over before the end of March, ther more you were willing to pay for that contract.

Tradesports, of course, does sports, and in a certain sense, it's just gambling: people risk money on the outcome of sports games. Yet, the actual process is a whole lot more interesting, since the entire process is market driven: there's no bookie that sets the odds of the Red Sox winning at 5:2. People put out, just like a real futures market, bids (requests to buy) and asks (requests to sell). Assuming $10 contracts ($10 if the Red Sox win, $0 if they lose), I put out an offer into the market saying: "I'll pay $4 for up to 10 contracts." Other people in the market decide whether to take my offer or not: if they do, I'm not betting against tradesports, I'm betting against someone else's exposure. Furthermore, in probably the most interesting part, you can take the exposure you have and get rid of it at any time. I buy my 10 contracts pre-game at $4 (paying $40, with a payoff of $100). As the Sox starts winning, the market starts moving up: by the time it's 8-1, those contracts are going for $9.50, and when Pedro comes in and gives two runs up, they dart back down to $9. I can sell off the 10 contracts I have for $9 and lock in $50 in profit.

Here's how the Rams vs Patriots superbowl traded on Tradesports, as the game was going on: http://www.tradesports.com/jsp/tradesports/help/HTML/Superbowl.htm

Why people get excited about futures markets is that they are a way of combining people's information together in ways which aggregate knowledge: the idea is that the people willing to bet on with their own money whether Kerry or Bush will win are going to be smarter than those without the financial interest. There have been plenty of examples of this being the case: Weather futures markets in Florida made up of oranges farmers are better at predicting the weather than meteorologists; the Iowa Electronic Markets (a fully legal futures market sanctioned by the US), has been better than polls at predicting presidential outcomes.

The current big use is as just mentioned, predicting the election: the community of Tradesports put the Bush presidency as 60% likely to win; the IEM market puts it at 57%. The great thing is that if you disagree with those odds, just sign up, and you can make money.

--stu


PS: Tradesports makes money by charging $0.04 per contract bought or sold.

[awfief.livejournal.com]

neat. so it is a zero-sum game like the stock market.

[totient]

So the thing about futures traders is that they're in there because they think the market is not 100% efficient, and they want to take advantage of any inefficiencies they can find. In sports, the obvious inefficiency is that individuals have inflated ideas of the capabilities of particular teams; this is probably more true of the Red Sox than anyone else and is reflected by the odds being only 40:1 rather than the 62:1 you'd expect from historical evidence. Bookies suffer from the same inefficiency since their job is not to reflect the actual chances but to set the odds such that no matter what happens they can pay out. If 90% of everyone is betting the same way on a coin toss, the bookie has to adjust the odds so he won't get burned.