I have read several threads regarding the introduction of market makers which have differed greatly and wanted to post my understanding of them and how I think they will eventually improve things.
Firstly the traditional role of a market maker is to do as the name says is to create a market for others to trade on. So on Betfair they act like a bookmaker offering a price to both back and lay on an event and those prices are usually very close to the odds you could get elsewhere with say paddy power. If a customer wants to then offer more favourable terms then they can do that but the market maker ensures that there is an attractive market if no customer is willing to offer a fair price.
Here at FI until full order books are in place it is impossible to know exactly how the MM will operate but it is worth noting that currently.
LP1 is owned as a separate limited company by Football Index
It’s role is to provide liquidity to the index
It’s not here to profit from us it is to help keep the market moving
Initially it looks like it will be buying massive amounts of new shares in the higher priced players.
The idea behind this is that it reduces the market sell queue of these players and frees up traders cash for reinvestment in other players.
This does tie up say a couple of million of FI funds but will sit on the balance sheet of the new company and either make them a few quid or lose a few quid dependent on how it is set up (do they pay commission/do they waive dividends).
Currently this action will have limited effect on spreads as to start with some cash will leave the platform as unhappy traders get cash out at market price and leave. Others are listing at Market Price hoping LP1 buys there shares to hopefully buy back at a lower ME price. Others are using the cash to buy goalkeepers not the lower priced outfield players.
However over time and probably when we get to the start of the new season we may start to see this approach change behaviour because of the following reasons.
Those that want to leave should have left so less negativity will surround the product
Mass marketing campaign will generate new traders
Goalkeeper frenzy will have finished
Traders setting up portfolios for the new season
Traders will know that if they list to market shares will sell as MM does buy from the market sale queue
This in turn will push up instant sell price as it will need to be attractive to make it worthwhile selling quickly rather than waiting.
If FI can convince external MM’s to join this will accelerate the benefits to all as if there are several entities buying shares at market price it means there may be no queues which means FI sell more new shares and player prices rise so both us and the MM make money.
Eventually it would not surprise me to see LP1 or some other entity start to hoover up some shares in the lower priced players - the effect would be that a majority of traders list the player for market sale thus driving down the players price to a more reasonable level the entity buys them up and with less shares in circulation trading becomes more normal due to supply and demand.
There is a lot to happen and market makers need time before we really see the benefits and these are just my assumptions but by Christmas I think we will see some real benefits but it will need several MM’s each with a few million to get things right.