How to trade a low volume market

With the tennis circuits kicking back into action this week, it's a perfect time to learn how to trade a low volume market.

Being a head-to-head market, bookmakers' margins on tennis are relatively tight (average of 108%), but that doesn't mean you can't find value on an exchange - it comes down to judgment and timing.

Judgment

How exactly are you making your selections? Do you do plenty of research before working out a set of prices (or percentages) in your head, or do you use someone else's prices as a guide? There is no single way to profiting on an exchange - there are many different ways to trade. Some people like the constant action, others like to pick and choose where they play. Either way, you need to have confidence in the prices you are using as a basis for your trading.

Let's use a hypothetical match between Lleyton Hewitt and Tim Henman on a hardcourt surface. You look at their respective lead-up form, noting what sort of players they have lost to or struggled against. Is each player in top form? Is this their favourite surface? Do they have a good record at this event previously? Are they fully fit? What is their head-to-head record?

Do not look at any other prices until you have formed your market. This will only skew your judgment.

After going over all the statistics, you come up with a market of Hewitt 1.67, Henman 2.50 at 100%. Now you can look around at the bookmakers' opinions - you note that in Australia, Hewitt is marked shorter, whereas in England, Henman is shorter - bookies catering for the parochialism of their client base. Overall though, your market is pretty close, the average is 1.57 for Hewitt, 2.30 for Henman, and this is reflected in the opening market on the exchange. If your market is out of sync with the rest of the world, you may need to adjust your ratings accordingly.

Now comes the fun part. Everyone can read the 'back' prices on an exchange and compare them to their bookie, but can they look at the 'lay' side as well? Say that you wish to bet on Hewitt at any price better than your assessment. You have two options - ask for a price on Hewitt well above the market (which will probably stay unmatched), or you can offer to lay Henman at what looks to be a good price, but in effect is only offering you the price you want on Hewitt.

One Man's Bet is Another Man's Lay

How does that work? In a two-horse race, backing one runner effectively offers your layer (or bookie) the reverse price on the other runner. Think of it in fractions. If you having a standard bet with a mate on a football match, you usually will bet at even money or 1/1 - $5 of yours against $5 of his. But we all know not all contests are even. If you want to bet your selection at 4/5 (1.80), then the person laying the bet is receiving odds of 5/4 (2.25) on your selection NOT winning. This could either be 5/4 on the other player in a tennis match, the whole field in a horse race, or the other team and the draw in a soccer match.

Back to Hewitt v Henman. You want to back Hewitt at 1.70, but the best price on offer is 1.62. Henman's price is currently 2.34. Try offering 2.36 for the Englishman - if matched, this would deliver you a price of 1.735 on Hewitt. Remember that early on, liquidity in these markets can be quite weak, however by laying in a 108% market, rather than 100.2% at the close, you can snap up some extra value. If you are confident in your ratings, you can go up before any other prices are available and post a wider margin, and see if you can pick up some easy money from punters too impatient to wait for the market to form.

Patience and Timing

If the largest bet size on the screen is only £50, putting up an offer of £500 will most likely scare punters away. Be prepared to take small bites to achieve your overall goal. Timing and patience are crucial. You will have to factor commission rates into your projected profits, plus the potential need to vary your prices to get all of your bets matched.

If you manage to lay Henman at 2.36, giving you a price of 1.735 for Hewitt, you can then improve your price by laying some back.

Trade for a Better Price

Laying $100 at 2.36 gives you a risk of $136, a profit of $100. If you laid Hewitt for $50 at 1.64, your position would then become Hewitt wins +$68, Henman wins -$86 - a nett price of 1.79 for Hewitt, and a price almost impossible to find anywhere else!

Trading on an exchange gives you more options. You can trade in and out of positions, put up offers on both sides according to your ratings and play bookie, or just follow the money trail and go with the flow.