Applying Principles of Trading and Investing to Betting Exchanges

Here's an introduction to how principles from the world of trading and investing can be applied to the world of tradable betting exchanges. Before I got involved in sports betting, I tried my hand at crypto trading for a while. I wasn't very good at it, mainly because whenever I'd build up a head of steam, I'd get distracted by political betting, which is far less technical and more driven by gauging the mood in the room, so to speak. Nonetheless, several concepts of trading can be applied to trading on betting exchanges.

1. Makers vs takers - The primary advantage of a betting exchange is that you can not only take a bet at the price that it's offered, you can also set a price at which you'd like to enter a bet. The first option is to be a market taker, entering at someone else's price, the other is to be a market maker, which you do via a limit order. When you bet at a bookies, you are in effect forced to be a market taker, which is where the bookies' overround kicks in underpays you for your wins. With limit orders you can negate this entirely or even turn it to your advantage.

When you see an order book on an exchange, the highest price at which you can sell an event contract is known as the bid. The lowest price at which you can buy a contract is known as the ask. The overround on a binary yes no market is very simple - it's the difference between the bid and the ask in units of percent of a dollar, known as the spread (not to be confused with the Asian handicap spread). If you want to enter a bet at market (50c say) you can do so instantly, but if you're a little more patient, you might be able to get filled by placing a limit order at 49c. Hypothetically you could turn around and sell that contract back at 50c if you set a limit order and it gets filled, thus benefitting from a potential underround - but that's not why we're using limit orders, we're using limit order to juice out a better entry for a position that plays to our edge.

2. Taking advantage of the order book spread - when a market is created, you'll often see a bigger spread than 1c. This is because the order book tends to be thin and there is not yet certainty on what the fair price should be. This is comparable to the manner in which a sporting event's opening spread tends to differ from its closing line value, its price is underoptimised at open. Whereas at a bookmaker you can take the side you think is underpriced at market, on a betting exchange you can set a limit order somewhere in the order book gap and hope to get filled.

To estimate how far you can go and get filled, take a look at the odds on regular bookmakers. Whatever the best price you can get is, you can normally go down a cent or two and get filled, especially if the market is new. Now if you get too greedy (which I sometimes do), the line can move the other way and you'll be left chasing it. On the other hand, the line might move into your order and you'll have missed a better entry; however, if you're getting filled at limit, in the long run you'll get better value than entering at market. Generally if you put a limit order halfway between the bid and the ask, someone will be happy to take your order at market. For events with a fixed start (such as sporting events), the order book will fill up as you approach closing line value, so you may find it much harder to get filled on a limit order. Because of this, you generally do wanting to be getting your orders in early because you can juice that extra bit of value out of your entry.

3. Trading psychology. One of the crucial difference between betting here and at a bookmaker is you're betting peer to peer. That means you're betting against other human beings with their own emotions and psychologies. Of course, this is true with a bookmaker too but bookmakers bet against the public. On betting exchanges, you can bet against the public too. Like with bookmakers, the public likes to bet on what they see either as likely outcomes or big payouts. I'll deal with these one by one.

For the public betting on likely outcomes, this is visible in the tendency of the general public to bet on favourite in sporting events. If you want to estimate your likelihood of getting filled on a limit order, check out the recent orderbook activity on Polymarket (I don't know if Kalshi has this option too). If recent trades are veering one way over another, you can gauge how greedy you can be with limit orders or whether you're better off just entering at market. If you're taking the underdog and the recent action is mainly going into the favourite then you can do the same as what a bookmaker does, selling (hopefully!) overpriced bets to the public by taking the other side.

Now for the public betting on high payout long shots, this has the same psychology as the public taking parlays - it is in effect a low probability outcome but with an alluring payout so that a miss doesn't feel that bad. If you see long shot markets the general public is going to want to bet yes on them more often than no because they want something to get excited about, they don't want to be hoping for a long, boring resolution. You can set a limit order for no at price that will tempt them to take yes but (once again hopefully!) is overpriced for them, and hence underpriced for you. This is applicable to meme markets where the long shots might come off every now and again, but generally there is more profit to be made selling yes contracts to the public than buying them.

4. Support and resistance - in the world of trading, there are certain points where price tends to rebound from when it reaches. These are known as support and resistance and generally occur where price has rebounded in the past. This is not as easy to apply to tradable betting exchanges since every market is a new market to some extent and thus involves a certain degree of price discovery. When a goal is scored in a football match (and similar analogues in American sports), the outcome prices will jump to a new price that reflects the impact of that goal. These new prices are the dynamic supports and resistances in this case.

Estimating points of support and resistance is useful because it gives you good points to take profit on a limit order, after which point you can enter lower if you so desire. Estimating them accurately is a far from easy task and you also have the possibility of being front ran - the price rebounding before it reaches that level because sufficiently enough orders come in before you get to that point. One immediately prescient point is you want to be careful setting limit orders in game because when a goal is scored, the order books between the current price and the new price will get eaten up almost instantly. If you have any resting orders in the gap they will get filled, and not at an optimal value given the goal.

5. Buying and selling premium - Event contracts are analogous to options in the trading world. You can buy or sell an option to avail of the possibility of an outcome happening, the cost of the option is known as its premium and the premium approaches 0c or 1$ as the event deadline approaches (or the acceptance criteria are met). The event deadline is analogous to the expiry of an option. The price of an event contract factors into account the probabilities of various events that influence the final outcome of the underlying event upon which the contract is predicated. As the event deadline approaches, the price will drift towards one outcome of another. This is due to time decay (analogous to theta in options trading) and takes into account the reduced amount of time for one side or the other to seize a definitive initiative.

You generally want to be buying premium when you think an event is underpriced and selling it when you think it's overpriced. At a bookmaker you can't sell the premium on a bet (though you can mimic it by Dutching the other options if applicable) which is often what makes arbitrage difficult. When you have a betting exchange that lists the same event as a bookmaker, your telltale sign of an arbitrage opportunity is when a betting exchange has an outcome trading higher than on a bookmaker by at least as much as the implied value of the order book spread. In that case you can Dutch the outcome at the bookies with the no on that outcome on the betting exchange and that way you can guarantee profit.

6. The risk of fuckery - I will keep this point brief because I already wrote a post on this yesterday but like with any probability based money wagering enterprise, there's a degree (some would say a very large degree) of "gamesmanship" and other forms of smoke and mirrors. Always verify the market you are betting on and what its acceptance criteria are. If you're in any way unsure, don't place the bet and if you already have, sell out of your position. There is always a non zero probability of some weird wrangle happening that leaves you out of pocket and this was the case with bookies going way back and it's the case with tradable betting exchanges too. The world of trading in general is fraught what can to the untrained eye look like scary price fluctuations but if you have a tested edge and proper bankroll management, you should be able to combine this with a proper assessment of the risk of fuckery to minimise the impact of this in the long run.

I hope these are of help and keep your eye out for new trading opportunities in this new wild west of betting. Just remember to stay safu!