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Betfair Customer Services 19 Mar 18:27
Dear BetFair, I hope you will answer the following:

Under current UK regulations you are not required by law to inform your customer base of changes in advance, but under FSA regulations and European Law you would be. Given the strength with which you defended the GC’s consideration that exchanges should be FSA regulated when the Gambling Bill was first drafted, don’t you think it would have been wise or prudent to satisfy the most basic of FSA regulations too – and advise your customer base of material changes to the bet matching algorithm: the key component of the exchange software we all trade on, and one which matches wagers totalling billions of pounds in the UK today.

I am not sure you are correct here: what we were doing here is entirely in line with our licence and what we have always said we do. If you look at repeated statements made about what we are, I (this is Mark [Davies]) have always stated publicly on behalf of the company that the best definition of a betting exchange is a bookmaker which uses technology to manage its risk perfectly. This is what we were doing here: matching bets in a manner which meant that we, as an operator, had no exposure to the outcome of the event. People have always described Betfair as P2P and told me that our description of the company in these risk-based terms was spin. The reality is the opposite: Betfair is a many-to-many system where demand between customers is matched such that the operator of the exchange does not have risk to the outcome of the event. It is precisely on this basis that we have always been licensed as a bookmaker.

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Mark Davies

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Bet Matching Forum Q&A Session 19/03/08

Betfair Customer Services 17 Mar 11:50

As announced last week we’ll be hosting a Q&A session on the forum this Wednesday evening (19th March) between 6pm and 7pm (UK Time). The purpose of this Q&A session is to answer questions regarding BetFair’s new bet matching logic. To help us get through as many questions as possible you can send them in advance to livechat@betfair.com. Unfortunately it is not possible for us to respond to each Email individually but we will attempt to answer all questions raised via the live Q&A session.

We realise that customers would appreciate the chance to have questions answered on other topics too, but we want to focus this initial session on just the new bet matching logic to ensure that we answer as many questions as possible. For those customers who have questions for Betfair that aren’t related to this topic we’ll be reintroducing regular forum Q&A sessions over the coming weeks. We’ll post more information about those sessions nearer the time.

We hope you find this session helpful and informative

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Betfair Customer Services 19 Mar 18:00

Welcome to the Betfair livechat.

Answering the questions this evening are Mathias Entenmann (MD of Betfair’s UK and Ireland business); Mark Davies (Betfair’s MD Corporate Affairs) and members of their teams.

We have received a number of questions in advance which we will start to answer now. If you have any questions which you have not already submitted, please email livechat@betfair.com and we will attempt to answer between now and 7pm (UK time), when the session ends. Please note that you will not be able to post in the relevant forum section.

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Betfair Customer Services 19 Mar 18:02
Chatname – Lee (Genuine Scouser)

Do Betfair employ traders to bet in their markets?

There is a trading team based in Malta which manages the risk around the multiples product. They have software which tells them what the risk is associated with a potential result is and suggests what hedge bets can be placed to mitigate that risk at current exchange prices. They then place the hedge bets to manage the risk. They place the bets using the same software as everyone else using the site and respecting any in-play delays.

The multiples product is run under Betfair’s Maltese bookmaking license and is regulated by the LGA there. Therefore the team has to be based in Malta. The operation is an arms-length operation – there is no special access to any functionality or data from the exchange. Betfair Malta is charged commission on winning bets in the same way as any other customer in order to comply with relevant regulation and law.

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Betfair Customer Services 19 Mar 18:05
Chatname – NB

- Why did you choose not to announce this significant change to your clients? Was it in the hope that we just wouldn’t notice?

Betfair frequently makes changes to it’s software and we always have to weigh up the balance between keeping customers informed against inundating them with information. In this particular case we’d agree that we’ve done a poor job of assessing the reaction of some customers and communicating appropriately, for which we can only apologise. We’re committed to doing a better job of communicating with customers in future, and this Q&A is the first step in that process.

- You appear not to be using the new bet matching engine on those events that run under the Australian wallet. Is there a particular reason as to why not?

Events run under the Australian wallet are processed on hardware located at our office in Hobart, Tasmania. If we make a change to the software on the UK exchange it isn’t just a case of choosing to switch Australian wallet markets on or off. We have to install the software on the Australian exchange itself. Keeping both systems in sync imposes an overhead, and it’s an unnecessary overhead if, as in this case, there are further changes imminent. We’ve made the decision that our efforts are better spent getting to the complete solution we want in the UK, with price improvements and those bets we could match across selections displayed, and then to look to implement that for the Australian exchange just the once.

- When the SP product was released you announced it in advance and couldn’t advertise it enough. Why then did you not announce this fundamental change with the same enthusiasm?

Announcing and promoting Betfair SP has had a significant effect on the amount of new customers we’ve been able to attract to Betfair. Once we have the ability to offer price improvements to bets matched across selections, and we can display all the bets we could match, we’re very confident that the vast majority of customers will recognise that as beneficial. Even then that’s still not going to be something that’s going to make a compelling advertisement.

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Betfair Customer Services 19 Mar 18:07
Chatname : CLYDEBANK29

- My understanding of the new cross bet matching logic is that it offers neither best execution or common pricing in most circumstances. Is this correct? (By common pricing I mean that if one of my bets is matched using this method it will be matched at that price by another customer).

That’s not correct I’m afraid. The majority[b1] of the bets that have been matched by the new logic so far have been matched at prices where no price improvement would have been possible. While there’s inevitably a temptation to focus on situations that aren’t typical, most Betfair markets aren’t hugely volatile, for example soccer match odds markets. For those markets where prices are more volatile, for example in-play tennis, as I’m sure you’re aware the vast majority of the betting activity takes place on the favourite, so the proportion of bets matched across selections is relatively small.

- What commitment do you have to introduce best execution and common pricing on this new cross bet matching logic? and if you are committed to providing it why have you introduced this change before it delivers either best execution or common pricing in most circumstances? (By common pricing I mean that if one of my bets is matched using this method it will be matched at that price by another customer).

Our developers are already working on providing price improvements when bets are matched across selections. The only factor limiting when we’ll introduce this is how quickly we can develop and test it.

We introduced the current change even without the ability to offer price improvements because we considered it an improvement over the previous situation. One of the biggest barriers to becoming a regular Betfair bettor for new customers is the concept of an “unmatched” bet, an experience they won’t have had when placing bets with our main competitors. Anything we can do to address that and give them a better chance of getting a bet matched immediately helps the long-term growth of our markets. Clearly for customers who’ve been with Betfair for some time, and for whom unmatched bets and what to do about them are second nature, that isn’t going to be obvious.

- Can you understand why some customers think that because this new matching logic doesn’t offer best execution or common pricing in most circumstances that they view you effectively as a player in the market skimming overbroke situations and who is beating the in running delay and therefore cheating on your own exchange to achieve this? (By common pricing I mean that if one of my bets is matched using this method it will be matched at that price by another customer).

I’d suggest that focussing on the in-play delay is missing the point, although it’s easy to understand why a customer might mistakenly come to that conclusion

The purpose of the in-play delay is to prevent someone watching an event either live at the event, or using pictures with a shorter delay, from selectively matching orders on one side of the market or the other following a price changing event(like a goal or break of serve). As the process only matches opposing customer bets, and no bet is matched by this process selectively based on anything that’s happened in the event being bet on the in-play delay isn’t applicable.

Backing one selection is (and has always been) equivalent to laying the other selections in the market. In-play bet matching takes place as soon as the in-play delay has expired on a newly submitted bet request. If we have a bet request to back a tennis player, say, then it would clearly be unfair to match a request to lay that player as soon as the in-play delay expires while imposing a 2nd delay on a customer looking to back his opponent.

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Betfair Customer Services 19 Mar 18:14
Chatname : askari1

- How much money has the engine / arber made for Betfair so far? If commercial confidentiality prevents you from quoting a figure, could you give some indication in terms of the total turned over on a typical event e.g a televised tennis match and / or the typical post-game commission taken by Betfair?

The biggest market the new code has operated on was the televised tennis match between Andy Murray and Roger Federer a couple of weeks ago. Approximately £6.85 million was matched in the market, and the amount accrued as a result of our inability to offer a price improvement when bets were matched across the two players was £882.91 . Obviously in well-traded markets like a big tennis match the amounts won and lost by customers are much less than the headline volume figure too, but as a percentage of what’s won or lost in each market the amount is small.

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Betfair Customer Services 19 Mar 18:18
Chatname : askari1

- Please could you give the company’s working definition of the terms ‘best execution’ in cross-matches and ‘of holding a position’? According to these definitions, does ‘holding a position’ differ from ‘holding a liability’? Do you apply the same definition to ‘best execution’ in the case of cross-matches as you do to matches in the case of single-runner sub-markets?

“Best execution” means never less than the price you requested, with the prospect of a price improvement where we can do so, if we can deliver that.

By “holding a position” we mean taking an outright position against a customer, rather than matching opposing customer bets.

The definition is the same for bets matched across selections. As and when we have the means to provide a price improvement we will.

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Betfair Customer Services 19 Mar 18:20
Chatname : astonvillain

Hi,
how can betfair users be assured that in the case of a market which suspends with a delay such as football, that betfair owned bots will not match bets which are out of line at the time of suspension? there is a big trust issue here.

The times at which Betfair will match bets across selections are identical to the times at which regular matching (backs vs. lays) takes place. If the market is “active” (not “suspended”) and there are opposing customer bets that can be matched then we’ll match them. If the market is “suspended” then no matching takes place, either backs vs. lays or across selections.

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Betfair Customer Services 19 Mar 18:21
Dear BetFair,

I hope you will answer the following:

Q. Why did you feel it unnecessary to inform your vast customer base of the changes to the bet matching algorithm in advance and take feedback; or accept that a trial period may have been a more appropriate way to introduce the changes?

It’s Mark here. I made that call and the judgment was based on the fact that I saw this as a product enhancement which was a benefit to users, and we do not announce every one of those every time. It was doing what we have always said we do – using our technology to match demand between customers – and it was just doing it more broadly than directly backer to layer. We have frequently made the statement that we are a bookmaker which is using technology to match demand, and to my mind this fell directly into that.

I think that if you consider a situation where a 100% book saw backers all sit and look at each other (for example, in a two-outcome event, I think it is daft that two backers, one of each outcome at 2.0, should not be matched), that is easy enough to understand. I also feel that in a situation where there is, say, a backer at 2.0 and a backer at 1.98, it is silly for us not to match those bets: we were doing so at the price requested, not worse; and therefore the customer matched was getting the best price that we could offer them, bearing in mind the limitations of our technology currently preventing us from giving a price improvement. If we left a backer at 1.98 and a backer at 2.0, people would think we were daft; and equally, if the price was matched by another customer seeing the arbitrage, the initial customer would only be getting the same price.

I accept that I did not consider the difference in-running, as it relates to people mistakenly posting the wrong price, which would take the book over-broke by a significant margin. But I did not think we needed to make an announcement about the fact that we were using our technology to match bets. That is the business we are in.

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Betfair Customer Services 19 Mar 18:22
alexe
19 Mar 18:13

Didn’t anybody at BF imagine this will drain quickly the markets?

Absolutely not – we expected this to increase liquidity and make it easier for our customers to get bets matched. On markets where we’ve had this in operation, that’s exactly what we’ve seen happen – the markets have been more efficient.

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Betfair Customer Services 19 Mar 18:23

Andy Fuller: I will email this question but if you read it here first please reply BF – what have you done with the money you have collected from clients unfairly as you admitted to earlier today?

Under our UK bookmaking licence, these revenues are legitimate profits and have been treated as such. The amounts involved are not what some people were speculating and some people have suggested that the money made should be donated to charity. However, be assured that we will be donating to charity this year far in excess of what the bet matching process has made!

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Betfair Customer Services 19 Mar 18:24
Chatname : lippy

Are these changes an attempt to boost betfairs profits for an impending IPO?

There are no plans for a Betfair IPO.

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Betfair Customer Services 19 Mar 18:25
Chatname – Get On MASSIVE

Do you ever plan to stop the skimming and give best execution to your customers and if so when?

Betfair has always given a price improvement to bets placed wherever possible, and that approach has never changed. We’d like to be able to offer price improvements across selections too and it’s something we’ve been working on, but it’s much, much more complex than many people imagine , and we don’t have a way of giving customers that improvement yet. We’re hopeful that we’ll have that in place in the next few weeks.

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Betfair Customer Services 19 Mar 18:27
Dear BetFair, I hope you will answer the following:

Under current UK regulations you are not required by law to inform your customer base of changes in advance, but under FSA regulations and European Law you would be. Given the strength with which you defended the GC’s consideration that exchanges should be FSA regulated when the Gambling Bill was first drafted, don’t you think it would have been wise or prudent to satisfy the most basic of FSA regulations too – and advise your customer base of material changes to the bet matching algorithm: the key component of the exchange software we all trade on, and one which matches wagers totalling billions of pounds in the UK today.

I am not sure you are correct here: what we were doing here is entirely in line with our licence and what we have always said we do. If you look at repeated statements made about what we are, I (this is Mark) have always stated publicly on behalf of the company that the best definition of a betting exchange is a bookmaker which uses technology to manage its risk perfectly. This is what we were doing here: matching bets in a manner which meant that we, as an operator, had no exposure to the outcome of the event. People have always described Betfair as P2P and told me that our description of the company in these risk-based terms was spin. The reality is the opposite: Betfair is a many-to-many system where demand between customers is matched such that the operator of the exchange does not have risk to the outcome of the event. It is precisely on this basis that we have always been licensed as a bookmaker.

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Betfair Customer Services 19 Mar 18:30
Chatname : MoreTea

- Once it was established that best execution was no longer being provided in the new system (in conflict with your own T&Cs and help area), why was it not turned off immediately and an apology made, and why is it still running now?”

- Why did you make a material change to your product which breaks your own terms and conditions and the description of your product in the help area without announcement or warning?”

There was no change to our existing matching process – if a bet could be matched against an opposing bet, that would be done giving the best price available. Adding cross-matching gives another chance to get a bet matched – something we thought, and still think, is an improvement that benefits the vast majority of our customers.

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Betfair Customer Services 19 Mar 18:33
Chatname – Getting Better

Can you confirm that you will not be applying the new matching process to markets such as horse racing that have a reduction factor? If you did I fear that you would be open to abuse on occasions where there was a known or likely non-runner.

Yes, we can confirm that the new bet matching process will not be used on horseracing markets any time soon. If this changes we will let you know in advance.

Betfair Customer Services 19 Mar 18:37
Magician: Specifically did the GC APPROVE this change to the matching algorithm – or where they simply made aware of it and did not grant or reject formal approval

We did not seek Gambling Commission pre-approval for cross matching before we launched it because we don’t believe that this was required. However, we were in dialogue with the Commission in relation to the licensing status of cross matching and we would always be happy to address any questions the Commission has on any part of our business.

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Betfair Customer Services 19 Mar 18:37
Feck N. Eejit
19 Mar 18:33
Have they answered mine yet? “Why do horse racing people all wear funny clothes?”.

John McCririck here… just stopping by Betfair towers, on my to the Ivy, looking for a new gig, what do you mean by funny clothes?

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Betfair Customer Services 19 Mar 18:39
the man marcus
19 Mar 18:31

£882 on a 6 mill traded game?

yeah right

We expected to make more money as a result of this change because we believed it would make our markets more efficient and increase the volume matched – the amounts retained through the odds differential are much much smaller than all of the forum speculation would suggest.

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Betfair Customer Services 19 Mar 18:40
Chatname Frog

Questions:

1. Is it true that Betfair have started matching bets across selections while not offering best execution? e.g. if two customers want to back different selections in a two outcome event at 1.9 Betfair would lay both outcomes at 1.9 and pocket the overround for themselves.

This is what we were doing but we have announced today that we would take it down until we can deliver best execution as you state it. However, I (this is Mark Davies) think that ‘best execution’ is moot in its definition here. Best execution for me means the best price at which we can execute the bet; and it is not trivial to offer a price improvement on a cross match.

Given the situation I have already suggested, where you have two backers of a 2 outcome event, one at 2 and one at 1.98, I believe that we ought to be matching those bets. Ideally, we should be matching them at 2 and 2, but our technology is not currently able to do that. For me, we should therefore match the bets at the prices asked for.

If you think about there being three options here: that we don’t match those bets; that we match them at the prices asked; or that we match them at the ‘best execution’ you suggest (by which you mean giving the price improvement implied), then clearly the philosophy of the company is to do the third of those. This is what we are working towards. In my judgment, it was better in the interim to do the second, than to leave it at the first. However, clearly many of our users disagree, and this is why we have rolled back to where we were. Personally, I think the second point is a better place to be than the first. I accept that bot users who previously benefitted from that arbitrage will disagree. But, looking back to the early days, many (and I think you were one, frog) objected to bots coming in and taking that arbitrage. You could argue – I would – that it is fairer that we should take that arbitrage, and pay tax and levy on it, than that someone should have a free lunch. However, it is clear that customers disagree and would prefer to leave that arbitrage to the bots. We have therefore decided that we will not match those bets until we can do so with the price improvement.

2. If (1) is the case, is this permanent or do Betfair guarantee they be implementing a best execution algorithm for this in the future?

I think I have answered that above.

3. If (1) is the case do Betfair guarantee that they will never change the current policy of best execution for bet requests on the same selection? For instance if I put in a request to back a horse at 2.0 and there is someone offering 2.5 on Betfair on that horse will Betfair never back it at 2.5 with that person and lay it back to me at 2.0?

I think that goes very much against the philosophy of the company as we set it up, and I would resist it very strongly myself.

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Betfair Customer Services 19 Mar 18:41
Chatname – flapjack

- When will you introduce best price execution on the new matching system for all bets?

We are working on it but it will take a number of weeks.

- On another forum recently, someone made the comparison between Betfair and the bankers in the current Natwest adverts, i.e. you are not remotely interested in what your customers want or what is in your customers’ best interests? Are you aware that this is how a lot of people see you?

We have read all the criticism. Some of it is unfair, in my view (this is Mark here); some of it pointed out things that we had not considered. Unfortunately you’ll never please everyone. I hope that your assessment that ‘a lot’ of people see us like that is an exaggeration. I think we do spend a lot of time listening to customers, and working to produce a product that they like, and if the perception is that we are not remotely interested, I think it is a misconception. I think we spend a great deal of time listening to customers’ feedback.

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Betfair Customer Services 19 Mar 18:43
Chatname – The Magician

Where some users or third party developers informed about this proactively from betfair. Is it betfairs future intention that when changes are made ALL users received the same information regarding the operations of the betting markets

No, customers were informed preferentially. We made the decision that we would answer inquiries individually, and the first question was submitted by a third party developer which was then disseminated more widely. We’ve recognised that we should have communicated this issue to the customer base more broadly, a misjudgement for which we can only apologise, and we’re committed to doing a better job of communicating similar issues in future.

Betfair Customer Services 19 Mar 18:44
Another question to Betfair: To ensure people do not make figures up and blow things out of proportion – you say you made £882.91 on the biggest market, but can you confirm that was the biggest takeout you have had from a single event? If it was not can you state what the biggest take out has been and on what event. I think this is important to stop people thinking you are exploiting this situation any more than they already think you are.

TIA. andyfuller

I (Mathias) can assure you that the example given was not unrepresentative or misleading (and cross matching was switched on for the entire market in question). I hope you understand that we have never given out commission data in relation to a market so are not particularly keen to go any further.

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Betfair Customer Services 19 Mar 18:47
Chatname : mugsgame

Hi,

I would like to know your intentions regarding using the new bet matching engine on horse racing markets, particularly in play.

There is no immediate plan to operate the new matching process on horse racing markets. There are a number of additional issues with horse racing, particularly withdrawals. If we match bets across runners in a horse race and one runner is subsequently withdrawn we would have to void the bet on the withdrawn horse while honouring bets placed on those that come under orders. Having the ability to offer price improvements where possible is a higher priority, and we’ll revisit horse racing once that issue has been resolved.

Would it be possible for you to put some text into the market rules window stating if the matching engine is being used?

It’s a fair point to want to know if the new matching process is applicable in a particular market. It’s unlikely we’ll make changes to the market rules tab to communicate that, but we will announce future changes to the matching logic and the markets affected in the Service section of the forum.

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Betfair Customer Services 19 Mar 18:47
Robin Ewe
19 Mar 18:34

Can you assure us that Betfair will never at any point in the future begin actively trading in the sports betting markets other than to hedge the risks from your multiples product?

No – but Betfair is not in the business of risk-taking on sports markets. That said, we’re always looking for better ways to meet the needs of our customers.

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Betfair Customer Services 19 Mar 18:48
Chatname : drifterwins

How much tax will you be paying on money “skimmed” from the new system?

The Betfair bookmaking company (which is separate to the exchange) which operates cross matching pays tax at 15% on its profits (like any other UK bookmaker).

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Betfair Customer Services 19 Mar 18:55
Lori
19 Mar 18:46

to paraphrase:

“We think it fairer that we take the arbitrage and pay tax on it, than those who already pay us commission on it, which we then pay tax on”

I don’t use a bot, and wish that bots were not an inevitable competitor to me when I trade, but they’re still owned by paying customers, and I think the customers in a “customer vs customer” site deserve the money more than the site. At least they don’t have to make decisions regarding voiding markets etc.

Also, not all of arb money goes to bots. Also, why not just have one runner in a tennis match

“Federer win, yes = 100″

Questions to Betfair

How can you convince us that you can remain neutral as an arbitrator when you have skimmed money from the market?

Why do you believe you’re going to be popular taking more money from a market than advertised commission rates?

If cross matching at best execution is so difficult, why not just have one-runner in two horse races and settle at 0 or 100 like many other places.

To the first point, we’re not taking a position – merely matching bets that otherwise would not have been matched. Most of our customers simply want to get bets matched, so we believe improvements in our matching process are in our customers’ interests. Having just one runner in 2-runner races would make cross-matching unnecessary but it’s confusing as most people expect to see both names.

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Betfair Customer Services 19 Mar 18:58
The Magician (1)
19 Mar 18:54

another quick Q.

why dont you add this new matching algo to the horse racing SP calculation (with best execution), it would certainly make it more robust than it currently is

We are considering adding the cross matching with best execution to our SP markets in the future. However, this is a complex calculation and therefore will only be done at a later stage.

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Betfair Customer Services 19 Mar 19:01
Chatname (WH)

Why is giving best execution so difficult?

If 2 people are backing at 2.0 and 1.8 in the same market, it is surely simple to ensure that the person whose request came in first gets the odds they requested and the second person gets better odds than they thought they would get

eg if 2.0 is waiting to back player A and someone submits 1.8 to back player B, then both get matched at 2.0.

if 1.8 is waiting to back player A and someone submits 2.0 to back player B, then A is matched at 1.8, B at 2.2

i cannot see why this is so difficult

It isn’t difficult to calculate for a single instance. Unfortunately Betfair’s bet matching process has to be able to calculate this across multiple markets for thousands of bets each second, and it would be an unacceptable customer experience if doing so caused any delay to the bet matching process. The existing bet matching process has been refined over years, and making fundamental changes to that means coming up with a whole new set of refinements. We’re working on this now and we will have it in place as soon as we’re satisfied the solution gives the performance customers expect.

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Betfair Customer Services 19 Mar 19:02
Thanks very much taking part in this discussion. We’ll continue to answer the questions we receive on this subject, via e-mail, and post the relevant Q&As here for you to read at a later date.

Previously:

- BetFair Malta’s combo market maker (trading algorithm + human market makers) operating on the multiples

- BetFair withdraws / improves its brand-new matching-bet logic, which was (kind of) endorsed by the Chairman of the Midas Oracle Advisory Board.

- One un-hired job candidate and one HammerSmith employee tell all about BetFair Malta’s combo market maker (trading algorithm + human market makers) operating on the multiples.

Hollywood Ending – Trader Daily – October 4, 2007 – by Robert LaFranco

A decade ago, a Wall Street trader and an L.A. dealmaker united to remake the movie industry in the image of the markets. They had capital, ambition, securities-industry savvy and an American public captivated by money and celebrity. So whatever became of the Hollywood Stock Exchange?

In late March 2000, Max Keiser and Michael Burns were tucked away in the VIP lounge of Hollywood’s House of Blues, gleefully presiding over one of the town’s hottest Oscar parties. The duo surveyed the scene: a throng of industry insiders, journalists, style-savvy party crashers, even Ron Jeremy, all descending on a buffet table brimming with enough gourmet fare to feed a small former Soviet republic. Spinning tunes was Moby — among the world’s best-known DJs at the time — while Earth, Wind & Fire prepared for their headline set. Outside, a crowd of wannabes loitered anxiously around the velvet ropes, angling for a way to get in.

It was a heady time for Keiser and Burns, two former finance whiz kids who five years earlier had teamed up to start the Hollywood Stock Exchange. Their dot-com-era high flyer was going to change the movie business by revolutionizing the way movies were paid for — giving independent filmmakers a way to raise money online from the public and other investors. The way they saw it, soon anybody with a credit card and a computer could become the next Robert Evans.

Already, Keiser was a regular on Entertainment Tonight and The Howard Stern Show. Two months earlier, the HSX had proven the surprise hit of the Sundance Film Festival — publicity-wise, anyway — as Keiser and Burns’s rented cafe drew hefty crowds who came for free cappuccino and a chance to check their e-mail. But the best buzz had come a few weeks later, when the HSX unveiled an enormous, colorful ticker in the heart of West Hollywood, offering live updates of “star stock” and “movie bond” prices scrolling along the side of a 7,000-square-foot piece of prime real estate like a newfangled companion to the Hollywood sign.

“We were going to change the way Hollywood worked,” says Keiser today. “It was an industry ready for change.”

But like many rising stars in Tinseltown, Keiser and Burns — and the exchange they created — would eventually flicker and dim. Not long after Oscar night 2000, the already buckling stock market cratered with sickening ferocity and sank into a three-year tailspin. For HSX, it was the moment in the movie when the ship hits the iceberg.

Today the founders and original investors in the Hollywood Stock Exchange are scattered around the globe with little to show for their efforts but a curious line item on their résumés. It’s likely small solace to them that hedge funds and Hollywood are now converging like at no time in history — at least proving that their notion of an impending sea change in the way movies are financed was somewhat prescient. And it’s probably salt in their wounds to know that in June, Dallas Mavericks owners Mark Cuban and Todd Wagner launched their own Hollywood financing firm — in their case, for buying out and bundling profit-sharing deals. For their part, Keiser and Burns remain the hapless protagonists of that rarest of Hollywood productions: a decade-long epic without a happy ending. And for every trader who has ever longed to close his positions, take his profits and stumble from the trading floor in pursuit of his dreams, theirs might be a reminder that not all markets are meant to be made.

It wasn’t supposed to be this way. In 1995, Max Keiser, a 35-year-old former stockbroker and one of Shearson Lehman’s biggest options producers, had come to Hollywood to work on a movie project that his old buddy Alec Baldwin had gotten placed at Miramax. Michael Burns, an investment banker with Prudential Securities in Los Angeles, was a 37-year-old with strong ties to the movie industry. Burns and Keiser met while working together at Shearson Lehman in the ’80s, but in 1990 went their separate ways, Keiser to Paris to live off his Wall Street gains. One day, while sitting in a Hollywood cafe called Barney’s Beanery, Burns and Keiser alighted upon the idea for an exchange in entertainment futures. Perhaps it was the high-octane espresso talking, but the way they saw it, their notion was revolutionary. The inspiration had come to them while thumbing through an industry trade publication, where they had seen a printed weekend box-office tally.

“It looked just like the listings for the S&P 500,” Keiser says. “I suddenly looked at the movie industry like Michael Milken viewed the bond market. The original business plan of HSX was an exchange for predictive products that would lead to re-monetizing the industry and breaking up the Hollywood cartel. Using this platform we would allow many, many, many more people to have access to funds.”

Based on his knowledge of the NYSE, Keiser began mapping out an exchange. He mimicked the double-action trading environment of a real exchange, setting up the whole thing in a virtual environment. He established a currency and treasury function, a virtual banking system, a virtual interest-rate function and other virtual back-end trading functions that he would eventually patent as the Virtual Specialist. Then he and Burns set about seeking approval to operate as an exchange that could democratize the insular movie business.

There was, however, just one little problem. The lack of transparency in Hollywood studio accounting practices made actual deliverables an impossible strategy to execute. Meanwhile, their business plan was hamstrung by Blue Sky laws and their inability to secure the CFTC’s blessing. So Burns came up with a new idea: If they pitched the product as a game and developed the whole thing as a virtual economy, they would avoid the regulations — and still have a robust trading environment that could someday be used as a real-money movie-business exchange. Burns invested $400,000 and sent Keiser to the developers at Cambridge Technology Ventures, who finessed and expanded it, turning it into a robust fantasy market. The result was a completely self-sufficient platform for the creation of valuable predictive data but, sadly for users, completely useless wealth.

Then again, considering that this was the mid-’90s, that seemed as good an idea as any.

“When we saw that Blue Sky rules made it difficult to accomplish the trading aspect of it, we should’ve spent more time talking up the community aspect or even building it up as a MySpace-esque environment,” Burns says. Instead, what the company began leaning toward was a consumer portal that would be not just an advertising vehicle but a source of data as well. Movie studios, it should be noted, conduct an enormous amount of market research before dropping $50 million on a movie, and the kind of data HSX was collecting was a natural fit for that purpose: Which demographic groups are buying into which movies and which stars? What is the public interest in horror films? How much buzz is there about the new Judd Apatow flick?

Prediction markets, based on the premise that mob wisdom rules, place trust in groupthink [???] over the postulates of individual experts — and in this arena, HSX would prove to be a resounding success. Since 1998, HSX traders have chosen the top eight Academy Award category winners with 85 percent accuracy. Just this past February, a few days before it opened in theaters around the county, the HSX stock price of Eddie Murphy’s Norbit was climbing through the 70s, while Hannibal Rising was hovering in the 30s. Using a simple formula known to the industry (divide the HSX price by 2.5 and multiply by 1 million), it has been consistently proved possible to predict a film’s opening-weekend box office with a fair degree of precision. (A 2006 Harvard Business School study found HSX to be a relatively accurate online prediction market, finding its opening-weekend forecasts to be on target 77 percent of the time.) According to HSX, then, Norbit would open well north of $24 million and Hannibal at $12 million. Indeed, Norbit — despite withering, often vicious reviews — grossed $34 million and Hannibal $13 million.

Which, for what it’s worth, is a neat trick. But what, exactly, is it worth?

It’s an open secret that for the past few decades, Hollywood studios have used a trio of research companies — Nielsen National Research Group, Online Testing Exchange and MarketCast — to decide everything from cast mix and storylines to marketing strategies and release dates. Thus, while the HSX was initially greeted with interest, it quickly devolved into something of an online sideshow to the research world’s Big Three. The industry was logging on, but getting anyone to pay for the data was a struggle.

Complicating matters, perhaps surprisingly, was the site’s high visibility. By 1999, as dot-com hysteria dominated the cultural landscape, revolutionary hubris was running rampant and HSX was, in some ways, taunting the movie industry. Keiser began appearing on Entertainment Tonight offering weekly box-office predictions based on HSX trading performance. He was a frequent pundit on cable news programs and a thorn in the side of the studios who did not much appreciate the fact that this fast-talking stockbroker was tainting the public perception of their movies by loudly declaiming their prospects before they were even released. At one point, Keiser says, studios threatened to boycott ET; Keiser was pulled off the air. Still, Web traffic to HSX was increasing rapidly, and it wasn’t long before more than 70 investors — including Citigroup, NBC, Travelers Insurance, Keystone Venture Capital and, of all things, the Scandinavian Broadcast Service — had ponied up some $40 million to get a piece of HSX. And although Keiser and Burns were still enamored of the notion of building a real futures exchange, their new investors dismissed the idea outright; they were, instead, eyeing an IPO. HSX built up a staff of about 100, more than a third of them in public relations and marketing, and the company went to great lengths to generate awareness, drive traffic and boost ad dollars — the favored revenue model of the day.

“I was outvoted,” Keiser grumbles today. “It was gut-wrenching. The board bailed on me and my vision.”

Regardless, those were the good times. HSX moved into a former Herb Ritts Gallery office in West Hollywood that it thoroughly revamped. Andy Kaplan, a top Sony television executive, was installed as CEO. They hooked up that giant ticker. They threw lavish million-dollar parties, became fixtures at film festivals and blew still more millions on advertising. Asked what the company spent its $40 million on that could not be considered promotion, Keiser, who still holds onto his dream of someday democratizing media finance, shrugs: “Nothing I can think of.”

By then HSX was losing about $700,000 a month. By mid-2000, it had burned through $23 million in VC funding raised the previous year. And after the market crash eliminated the IPO exit strategy, HSX investors tried a back-door exit, linking up with a publicly traded pink-sheet company called Predict-It, another struggling fantasy market. On paper, the two companies could together claim revenue of about $10 million, but that figure was window dressing at best. Not long after plans for the pending merger were filed with regulators, Keiser and Burns checked out of the deal. Subsequently, the company’s 70 investors also backed out, refusing to put up more money to float the venture.

“Everyone was struggling, and we were all trying to climb onto something that would keep us afloat,” says former Predict-It CEO Andrew Merkatz. He has since formed a merchant banking firm, CountryRoad Capital. “Two drowning bodies grabbing onto each other does not make for a good ending.”

Then suddenly, in May 2001, with the Scandinavian Broadcast Service in control of the assets and apparently willing to write the last check, Cantor Fitzgerald stepped in to acquire the company.

“We had launched a sports-spread betting program in 2001 and had interest in diversifying what we offered, and they were cheap and not making money,” says Paul Galbraith, a spokesman for the Cantor Index in London. “But in the end, we never found a market for movie spreads in the U.K. With movies, there were just a couple of people who really knew what they were doing, and they had a lot more time on their hands for the entertainment futures market than our market makers did.”

Slight, presumably, intended.

To be fair, today’s HSX is, if nothing else, highly liquid for a prediction market. Since its inception 12 years ago, the exchange has created 1.7 million trading accounts and developed a sizable, cultlike following among movie fans. On an average day, 20,000 traders on the HSX will swap 2.5 billion shares in more than 40,000 trades, volume that dwarfs rival markets such as the Iowa Electronics Market and HedgeStreet. Compared to In-Trade, an Irish prediction exchange that offers markets in politics, commodities and other products, HSX is the NYSE: In seven years, In-Trade has created just 65,000 accounts, 12,000 of them active.

Still, there is one key difference that separates HSX from its competitors’ sites: money. Traders on the Iowa Exchange, In-Trade and HedgeStreet are all investing with actual currency. At HSX, the $9.9 billion in “Hollywood Dollars” accumulated by the current leader are about as valuable as a photocopy of a dollar bill. Meanwhile, the number of active accounts at HSX.com has dropped to 650,000, an audience too small for Nielsen Net Media to bother tracking.

Keiser (who voted his 10 million shares “no” to the sale) now insists that Cantor has not made good on the deal — which the firm made using eSpeed stock — leaving the original owners with nothing. He estimates the company has since spent close to $20 million developing the exchange software he created, but has not yet taken advantage of the asset the way everyone expected it to. A Cantor spokesman declined to comment on Keiser’s allegations.

The company does finally appear to be building on its prediction-market foothold: Earlier this year, it hired Andy Wing, formerly a Nielsen executive, to run a new division, Cantor Entertainment, with HSX as its centerpiece. Might HSX finally achieve legal exchange status? Consider that it took HedgeStreet two years to win its legal-exchange designation, then another 18 months to get it off the ground. Or that in 2005, In-Trade was fined and placed under tight restrictions regarding its U.S. activities, while the Iowa Exchange, a nonprofit and largely academic outfit, has been granted a “no action” waiver from the CFTC so it can operate in the U.S. without penalty.

As for the founders? Michael Burns, it is safe to say, landed on his feet. Having spent a decade brokering broadcast deals as an investment banker for Prudential Securities’ Los Angeles office, Burns had maintained strong ties with the entertainment business and was helping to build the independent studio Lions Gate Entertainment even as he was working on the HSX venture. Today, Burns is Lions Gate’s CEO.

Keiser, meanwhile, is still relishing his role as a rebel. Leaving both Wall Street and Hollywood in the dust, he spends most of his time in Paris producing films for the Al-Jazeera news network and heading up his latest venture, Kinooga.com. Kinooga, as Keiser explains, is the offspring of his original idea, providing a venue for individual buyers to finance independent media projects. “We’re creating a funding mechanism for independent producers to compete with the entrenched entertainment cartel,” he says. “This is an unregulated piece of business that gives many, many, many more people access to funds.”

As for Keiser and Burns’s original dream, that online Hollywood market that would turn John Q. Public into a mouse-wielding movie mogul? Consider that based on the $1 commissions now being earned by HedgeStreet, a trading business even merely the size of HSX today would generate $30 million a year in revenue. Cantor’s own spread-betting business in the U.K. is now earning $70 million in annual revenue, according to Galbraith. “Any way you slice it, the trading business far outstrips selling research,” Burns says. “I’d be very surprised if a futures exchange is not the business Cantor wants to get into. It just doesn’t make sense otherwise.”

This final scene, it seems, has yet to be written — for both the future of online futures markets and one trader’s crazy dream that simply refuses to die.

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Note: I have permission from the publisher to re-publish this news article. Thanks to Trader Daily. (Contact me.)

The original news article: Trader Daily ($$$)

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NEXT: Cantor Exchange

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