Information and Prices on a Betting Exchange: A Study of the Market Microstructure and the Efficiency of a Betting Exchange
Abstract: We study the market microstructure of betting exchanges and investigate whether this new betting market is efficient by looking at 50 561 transactions conducted by 214 traders. Given that betting exchanges have many characteristics in common with financial exchanges, we hypothesize an odds clearing equilibrium framework in order to study efficiency on this specific market. First, we find that the adverse selection problem inherent in the odds of regular betting markets still exists on the new betting exchange although it has decreased. Second, we find that a few informed professional bookmakers skim the regular noise bettors through adverse selection and market power. These “sitting-duck” bettors participate in the loosing zero-sum game being less informed and not possessing the skill of properly assessing the fair probability and odds (price) of an outcome. We argue that the reason for these bettors’ demand for unfavorable odds is rooted in irrational behavioral factors such as a risk-loving utility curve, overconfidence and gambling with small amounts for pleasure. Hence, we conclude that the market is weak-form inefficient. Seeing as the benefits of the bookmaker position is open to anyone on the exchange, we suggest bettors and arbitrageurs to take advantage of our profitable trading strategies of betting on favorites and booking on underdogs. With increased competition among bookmakers, the market could become more efficient.
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