Why is this market broken?

There are lots of small things we could pick at but in my opinion there is only one real game changer: we have to get these spreads tighter.

Tight spreads usually reflect confidence, a liquid market with lots of people happy to trade in that stock. Popular assets tend to have tighter spreads, and often, this means the profits available are fairly moderate too.

Wide spreads indicate the opposite – a lack of confidence and a limited number of people who are trading that stock. Smaller companies will tend to have lower trading volume for example as fewer people are happy to trade in that asset. This can also mean that the profit available is far greater – provided you really have spotted a bargain.

So to translate that all to FI – in a healthy market we’d see the majority of the top 200 with tight spreads (5-10%?). With obviously some exceptions for players who hit major problems.

Outside the top 200 lots of spreads would be wider – but that should be the case. We’ll have the opportunity to get a bigger profit by speculating on more unknown players. 

That’s the healthy market we want to see.

But right now it’s a bloodbath – vast numbers of even the top 200 are lacking any sell price at all. 

So how do we get from where we are now to where we want to be?

You tighten the spreads – and this requires co-operation from both traders and FI.

The main provider of red button sell prices is, and always will be from now on, us traders. That’s the reality of the Matching Engine. It’s extremely unlikely that is going away. And there is absolutely nothing wrong with it in principle. 

A huge problem is that the main liquidity provider – us traders – are utterly drained of confidence by this miserable 2020. 

Corona led to FI quickening the pace of implementing the Matching Engine. Markets don’t like uncertainty at the best of times. And 2020 has not been the best of times.

Whether you blame FI for that or not can be discussed but it’s not likely to help us at all. I don’t see complaining about the Matching Engine overall as particularly fair – this was always the plan and has been for years. 

Where you can legitimately criticise FI in my opinion is the timing. They had a judgement call to make – do they bring forward introduction of the ME at a time when Instant Sell was turned off anyway and get it out of the way? Or should they have waited and introduced it in the middle of the new season (maybe around now?). 

If they hadn’t done it then, they’d likely be doing it now instead and we’d currently be discussing what the impending Matching Engine meant mid-season. Which is uncertainty in itself. And in all likelihood 2020 would have been pretty grim anyway because 2020 has been pretty grim.

We’ll never really know which of these approaches would have been better.

What it definitely has led to though is FI being slow to bring third party liquidity providers on board – and this is a vital peice of the puzzle. Had they been there properly from the start I don’t think trader confidence would have ever got as low as it is now.

Give us more Market Makers. Fast as you can.

This has to be our key ask from FI. They’ve committed to making progress on this before the end of the year already. And with Christmas the end of the year is practically around the 20th December. That’s just 5 weeks away.

If on Friday we can at least get a concrete timeline here I’d call it a big win.

Why is it so slow? Well. Who do you call if you want a liquidity provider for FI?

There are obviously firms familiar with doing so on traditional markets. But this is FI – it’s a novel concept that mixes betting with elements of trading. Do you actually want someone more like a bookies odds setter? Probably you want a mix of those two skill sets.

These are not easy people to find. It takes years to build up the expertise in a market to a point where you’d be trusted to splash millions around in it. Are they going to ask experienced traders? Haha. No. They need a professional outfit.

So it doesn’t surprise me at all that this is not like flipping a switch or ordering a liquidity provider off the menu. These people/companies are going to need time to be attracted, trained and gain experience.

FI can’t just do it themselves either – this is heavy handed market intervention which will create all kinds of problems for them later particularly if they want a spread betting licence. 

With trader confidence shot, FI need to make the first move and get that liquidity into the market.

There is so much value available in this market that if FI just get those prices creeping up I have little doubt that traders will follow. 

In the site Scouting section is recent weeks I can honestly say I have never seen so much obvious, slam dunk value in this market.

And the dividends available are just huge. We have had those sorts of weekends recently where lots of underdogs have been winning but that happens sometimes – the cream does rise to the top eventually though.

The value proposition has never been more attractive. But traders need some reassurance first.

This is it for me – I think if you get those spreads closed up all the other niggles will fade into the background. FI has never been a perfect platform mechanically but has done very well despite that. It doesn’t have to be perfect, just good enough.

What about those other niggles? 

Oversupply

This is the idea that the market is broken because you can make new shares when the player is popular but you can never burn those shares when the player is unwanted. I think this is applicable to real markets but FI isn’t a real market. It’s a football betting game with market elements.

There is no fundamental reason why you have to have “scarcity” on FI with a limit on the number of shares total. The value comes from the dividends paid and as long as FI are happy to stand behind that you can have as many shares as you want. 

It’s not actually a major problem for FI because if a player ever gets really popular the price will go up and up and so will their commissions. And if the player becomes unpopular the price gets deflated by the bids.

I haven’t done the economics behind that but presumably FI are happy with this commitment or they wouldn’t have just doubled the dividends.

So I am not concerned by this oversupply issue. Where there is a short term problem with supply here is because of the 1p limit placed on Offers.

This is another factor that is contributing to the outrageous spreads. The Red Button price can move instantly – the Blue Button price is always going to stay much higher because it currently takes a lot of traders to ratchet it down 1p at a time.

I agreed with this step – it is important to keep those portfolio values stable or people would freak out even more. 

But it needs to go and FI have said it is temporary already.

This is where a large number of shares in circulation can crash the price – effectively punishing a player for their very popularity. It’s easy for Sancho to drop by 50p for example because so many people hold him and can make that 1p downward adjustment to the price. 

A relatively unknown 75p player? Not so much chance of a drop of 50p because he’s being traded a lot less. 

But we shouldn’t over emphasise penny drops – percentage drops are more important. It’s just the way the FI interface automatically sorts the risers/fallers in pence tends to skew our perspective of what is rising/dropping the most. A 10p drop for that 75p player is far worse than 50p off an £8 player.

But when lots of people hold shares in a player it is easier for them to get this death by a thousand cuts as each listing shaves 1p off.

I would say this is one reason why we are seeing large drops for popular players – though it is also because many popular players have had very high prices often beyond a rational value. 

It is dangerous to just think “This is the fault of market mechanics” and we should consider the real worth of our players too.

There is a mood shift away from hype and speculation towards the security of real dividend returns – which is very natural in a market that lacks confidence. 

The irony though is that this is the opposite to how it should work in a healthier FI market in future.

Popular players should be the most stable in a healthy market. If 10,000 people hold shares in Player X then a lot of them have to decide to sell in order to drop the price.

But if just 100 traders hold that player, just 10 of them selling could have a big impact on the price. That will make them more volatile.

“VWAP”

Clearly the “VWAP” is a problem (I hate that term – marketing death if trying to explain this platform to new traders). This is just the average of the cheapest 900 shares offered that makes up the Blue Button price.

900 is clearly too few and doesn’t represent the depth of the market. Players are priced on the say so of a tiny number of the most pessimistic traders this way and it’s not quite right. 

I hope we see some action on this. Increasing the number of shares from 900 to a bigger number that is harder for a whale or trading group to shift would seem an easy win. If they can come up with something even smarter – bonus.

“Are traders the problem?” 

Well yes and no. We are our own worst enemies sometimes. But people are acting in what appears to be their self interest and you can never expect traders to do any different. 

I say “what appears to be in their interest” for a reason because it is more likely that by listing players for sale they are just crashing the price of their own player.

There is a theory that “Well if I list all my players I might get lucky – some idiot might buy them – then I can buy back cheaper.”

Well. Maybe. But when bids are so low nobody is going to be paying Blue Button prices when they know they don’t have to. There are bad traders out there but very, very few are quite that stupid. You have to give people a little credit!

There is a conspiracy that a market maker would buy on Blue Button but if they have been doing this – I’d expect them to quickly realise how dumb this is. It would incentivise listing. Market Makers should focus on closing spreads by bidding hard and maybe even a little too generously at first.

I think it’s more likely that a small number of players were bought on Blue Button prices by fools or rookie Market Makers. And then it gets shared on social media so everyone tries to have a go. But I’d be surprised if this was wide spread. 

It’s far more likely that by listing players with wide spreads we are just poisoning our own well. Very slim chance they get bought – and we’re just killing confidence in that player by crashing the price.

I think traders will play ball eventually and stop the shenangians but for that to happen we need tighter spreads. 

Traders are the main liquidity provider and the incentives are there in terms of value and dividends but crucially at this point – FI are going to need to make the first move. 

Traders will follow if they get that right.