Bet Against The Crowd! Liquidity And Volatility. Betfair Vs. Equities. Part 1

In a bull market, everyone assumes that trading is childs play and they can make easy money.

But woe-betide anyone who enters without fully understanding the dangers of volatility on the equity markets.

In June 2005, the London Stock Exchange listed one of its biggest offerings since 2000.

Investors couldn’t help themselves while doling out over $1.9 million which all went to the initial founders of the company.

Although Partygaming was based in Native American territory in Canada, 90% of its revenue came from U.S residents, where this particular business model for internet gambling had already been officially declared illegal.

In their official prospectus to investors the company declared all these facts openly and without reservation and declared defiantly that the company managers…

“take comfort in an apparent unwillingness or inability” of the powers that be take action under the current legislation.

October 13 2006 was a bad night for investors.

The U.S authorities effectively eclipsed foreign online casinos with one swift piece of legislation, providing undeniable evidence and intention that the party was well and truly over.

Money transfers between US territory and offshore internet casino sites were outlawed.

Investors were crying into their cornflakes as the LSE saw the stock go into a 56% meltdown on opening the morning after the bill.

Investors could take little comfort in the news that the original owners of the company still held 70% of the stock. Poor souls. 56% of $1.9 billion would still pay the rent.

Couldn’t happen in America.

A notable lawyer for Greenburg Traurig commented publicly.

“Such companies wouldn’t even be allowed to go public in the U.S.

The Securities & Exchange Commission wouldn't have been satisfied with the risk disclosure in the prospectus. The threat of class actions would have been another obstacle.”

Q/ What has all this got to do with trading on Betfair?

A/ Absolutely ziltch, nothing! Except for the fact that it represents a clinical piece of living history that represents an important analogy for your new trading career.

The quintessential link between liquidity (cash) and volatility (news).

The platform is irrelevant, be it stock market day trading, Forex, spread betting, or the niche in question, Trading on Betfair.

The moment it appeared on LSE in 2005, the online casino was hot property, the media loved it. Glamorous, exciting, novel, high tech and high risk, bound for dizzy heights and global expansion.

Everyone loved it and for months investors pushed the price higher and higher way beyond its true value as determined by the usual markers of price to earnings.

Only seasoned investors would remember the dotcom boom and bust, 1997 – 2001. The new wave of bull traders and small investors couldn’t care less.

In exactly the same way the racing press comes to this conclusion about this horse or that horse, the true value is something that can only be determined by the true likelihood of success.

Stock Brokers, Investors and The Herd Mentality.

During a bull market volatile equities are the must have investment.

The press were all over it, strong “buy” recommendations were coming from everywhere, the tipsters loved it, advertising for the product itself was everywhere at sports events on the TV and all over the internet.

A few weeks later Partygaming was into the FTSE 100, the LSE’s talisman index, valued at well over £9 billion.

Investors were falling over themselves, the warnings of illegality were pushed to one side even when highlighted by cautious commentators.

Indeed, even while the US senate was drawing up legislation to enforce the existing illegality of internet gaming the share price kept rising and rising.

From initial float at 116p to 176p in a matter of weeks, that’s a full 66% return on a brand new stock, no track record, no balance sheets, nothing.

The picture I am attempting to create is one of the power of the herd and how fear and exclusivity drive people to insane trading decisions.

The mentality that drives markets, the fear of being left behind, the excitement of being part od a bull trend.

The mindset that is needed to spot these bubbles and the confidence to act against them to make true and tangible profits when the bubble bursts. All of this stems from being able to realistically value the product you are trading on, the confidence in your assessment of value and your ability to stick to your guns once you have made that decision.

If an example like the one above seems extreme, imagine this,

“a market where such extreme plays can be ridden and scalped dozens of times a day in time frames of 15 minutes or less”

Think about it this way.

Lets consider the following:

If full time day traders, investment bankers, stock brokers, pension fund managers and their ilk can be so frivolously wrong about a major equity, with their skill, their experience and insider information, what sort of scenarios do you think the market can create for itself when thousands of members of the public are placing their bets on their so called “insider” information on Betfair and the betting exchanges.

You guessed it “organised chaos”.

Now experienced traders and insiders will have seen the online casino bubble, read the signs coming from the US, kept close watch on their charts and will have scalped the market well and truly when the switch came.

The bears spotted the bubble sold near the top and bought back at the bottom, thereby tripling their stock.

Once the switch event came, the majority of investors sat and watched as the value of their stock was flushed away.

Only experience enables a trader to know just when is the best time to sell.

So what is it that allows an experienced trader to know just exactly when to buy or sell. In the next part of this article we examine market indicators in greater detail.