The new TradeSports “fee structure” is positively appreciated by the experienced traders (Cisco, Abacus, Todd, mplisky). They have plenty of remarks and suggestions, though.
[...] Think of a person buying a binary contract at p that has a probability p of paying off and holding to expiry.
With no fees, expected value is p*(1-p)-(1-p)*p = 0.
With this fee structure, EV is 0.96*p(1-p)-(1-p)*p.
I.e., expected fees are 0.04*p*(1-p). This is a parabola with a peak at 1% at p = 0.5. So worst case, this is like roundtrip fee of 10 cents per $10 contract. For a contract priced at 0.9 or 0.1, fees are a little less than 4 cents.
So maybe a little better than the current structure, actually. And assuming people understand it, this structure should help with some of the weird fee generated trading and non-trading at extreme prices.
I do miss the 2005 level of fees though. I honestly whether volume wouldn’t more than double if fees were halved.
UPDATE: David Stalcup…
Bettors have been contacting Tradesports about offering a flat fee on profits only for years, but it was unexpected that Tradesports would choose to charge double the percentage charged by Matchbook.com, a major competitor.
Eric, I guess I don’t see the parabola for actual fees, only expected.
Let’s say I buy a contract at 10.0, or $1.00. I expire at 100.0, or $10, and I am charged 4% of my $9 of profit, or 36 cents.
I am not going to buy a contract hoping I will avoid paying any fees–that would be like hoping to get a job and avoid paying any income taxes. I will be at least expecting the contract trades past 10.5, otherwise I wouldn’t buy it in the first place.
I still like my liquidity-incentive fee structure better.
I concede that I have no serious evidence that liquidity would double if fees were halved and liquidity incented. But I would bet my account balances that liquidity would increase, given my experience trading with Island vs. other liquidity sources in the secondary stock market.
Conversation with Todd
caveatBettor: hey todd, so u like the new fee structure?
caveatBettor: it does look like an improvement
****73NJ: Yes I do like it.. alot
****73NJ: Just dont like how close Im going to need to monitor it
caveatBettor: you’re a high frequency guy, in and out, so getting rid of the trading fees is helpful
****73NJ: Last night I paid $41 in fees in a game where I lost $12…. would have paid 0. So its a big change.
****73NJ: HAd a large early bad play…
****73NJ: Made a large reversal… recovered my money.. but paid huge fees
caveatBettor: I understand if you would not like a structure where you paid 3 cents to take liquidity but you were rebated 1 cent for supplying liquidity
caveatBettor: my theory is that it will draw more bids and offers, and tighten spreads considerably
****73NJ: They need to do something in addition to the new fee structure to benifit large traders. but this will ***.. bc now 98.5 thru 99.5 are in play
caveatBettor: it would be worth it, if you paid 3 cents, but spreads moved from 30 cents to 10 cents, see, win-win
caveatBettor: i disagree, they need to attract more traders–the big traders will benefit from the added liquidity and also noise
****73NJ: Yeah that is a good point on the spreads…
****73NJ: And I agree they do need new traders… but as evidenced by the current situations …
****73NJ: most new traders dont stay around
caveatBettor: you know i manage pretty large balance sheet–i am incented to trade spu mini futures and spy etfs, because they are so cheap to trade on the transaction costs. i also direct as many orders to Island as I can, because they pay me for adding liquidity
****73NJ: I agree on incentive. TS jumps the gun… They should have put some feelers out to see what people wanted.. but instead they just come up with a new plan
TradeSports Cost of Service Charts
http://www.midasoracle.org/2007/06/28/tradesports-cost-of-service-charts/