Friday, July 13, 2007

A great article on the Tradesports fee structure change

Jay Graziani:

Tradesports could have avoided this confusion quite easily by explaining their position more clearly well before the new fee structure took effect. This would have allowed those who wanted to hold onto their positions to know that they would not be charged higher fees than they expected going into the trade. It would also allow those who did not want to hold their contracts to completion to exit the market prior to the new fee structure. Ideally, Tradesports would have offered traders a few days grace period where they could close existing positions without incurring the new fees, or even offer to buy back or sell outstanding shares to traders at a preset baseline price, to allow them to exit the market.

While hardly a travesty, the transition could have been carried out better. Existing contracts have not lost any value, as long as the current holder holds them until the end. Yes, traders have lost the liquidity that exchange betting brings, but this is a minor glitch in a long-established operation. But to maintain the goodwill of their customers, Tradesports needs to avoid such glitches in the future.

For future rules changes, Tradesports should consider shutting down active markets permanently, with at least a few weeks advance notice. This would allow traders to decide whether they were willing to hold their positions until the end, or whether to get out before the new rule change. For instance, the existing World Series future market could have been closed to further trading as of June 27th. Anyone still holding shares as of a set date would be stuck with them for the duration, when they would be paid out under the old structure. A new World Series market could have been opened immediately, now trading under the new rules. This scenario allows all traders in a given market to participate under the same set of rules, and eliminates the ambiguity that caused trader confusion in the present case. Having both the new and old markets open simultaneously would allow further liquidity, as traders hedged their risk on long-term versus short-term holdings.

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