The Betfair exchange, Inefficient efficiency

One of the questions that people often ask me is whether the markets are easier to trade than they were 10 or 20 years ago? Are the markets following efficient market theory on the Betfair exchange, so are they more efficient now?

Eugene Fama was ‘famous’ for the efficient market hypothesis, though his work was mainly aimed at the stock market and working out whether you could beat the market by using an active manager or whether you are just as well off making your main investment strategy one of just buying an index fund, or sticking it in a generic mutual fund.

The argument has raged for decades.

You can’t beat the market if it’s efficient, but some people do beat the market. I’ve beaten the betting exchange market for 20 years. So is the Betfair betting exchange efficient? Inefficient? Which is it?

The full answer is an odd one!

Are the markets efficient?

If you ask me, are the markets more efficient? I can say to you yes and no because, curiously, as the markets have evolved both situations have transpired at exactly the same time. It’s something I hadn’t thought about, I’d always imagined they would just get more efficient. But as my time in the markets grew, I realised something else was going on.

This is not a theory, it’s a fact. One of the reasons I’ve been able to outperform the market for 20 years, is because the market keeps changing and I adjust to it. It’s always been really important to me not only have a strategy but to actively fully understand it. That is because it allows me to understand what’s going on in the market, and if the market shifts slightly, then I’ll adjust the underlying strategy.

Efficient markets

The market is an efficient pricing mechanism in aggregate, I think that’s well understood.

The average of all the market participants guesses and the discounting of information, produces a decent aggregate price. Though you should think through carefully where you sit on that bell curve. To get a good average, every bad guess needs a good one and when you dig through the bad guesses you will find that if you avoid them, your average guess improves against the crowd. A lot of bad guesses are often not statistically based.

One way to measure efficiency is the book over-round. When I first start on Betfair it was large and the markets generally had less competitive pricing. Now it not unusual to see the market hovering near a 100% book, even on a very competitive big field market. Something that would make traditional bookmakers shudder!

Smaller over-rounds means the market is more efficient as you are losing much less to the other side of the book. You can bet or trade at random and the net outcome has less and less slippage.


The contraction in the book percentage and lack of margin it generates means there is less money to be made, or lost, depending on which side of the outcome you are on. So while some mourn the slack books of years gone by, generally speaking, people lose less than they would many years ago.

The odd thing about this competitive price and contraction of the overound, is that outright betting strategies are viable. A lot of these were not many years ago.

Here’s the ‘but’ though. The level of volatility in the market has shot up in recent years.

The two are intertwined to some point as part of the increase was influenced by Betfair introducing cross-matching. The tighter the book is, the quicker and further it moves when something wants to get on a selection, the book stays tight but the prices move. Cross-matching ensures there is no slack in the market.

So in a sense, it’s less efficient, it’s getting harder to get a decent size order filled without influencing price.

The only way to ensure you can get an order filled it to take a worse one. In a lot more markets now, you see the price gyrate from one extreme to the other. This means that while you get in at no theoretical loss, due to the book overround being so low, you may just end up with a naff price anyway.

I’ve lost count of the number of markets that close at roughly the same price that they opened but moved significantly in between. It’s much more common now. My guess is that Betfair introducing cross matching has created this effect.

The Upshot

The upshot of all this is that you have highly efficient markets that are producing much more variable outcomes. The market has mysteriously got more efficient and less efficient at the same time. You can get a good price with only a little slippage, but getting that price has become a little more elusive.

It means that if you were looking for a strategy that involves low volatility, you are less likely to find them. But if you looking for big price moves then you will benefit from this shift in the market.

It’s a half glass full or empty moment. Spotting the shift in the market over many years made me think long and deep about strategies that would work that wouldn’t in the past and vice versa. So I’ve found plenty of opportunities. But it’s obvious that some people that didn’t see this shift or didn’t evolve their strategies, have probably been pushed out of the market.

My mantra is, there are always opportunties, you just need to find them!

There are a number of facets to this, too many to discuss quickly. But I hope it’s pointed you in the right direction. It doesn’t feel like it’s about to change, but I’ll be keeping an eye on it anyway. I suggest you do to if you want to stay one step ahead of the market.

Eugene Fama

Leave a Comment

Your email address will not be published.