Inside Edge magazine: Sports arbitrage vs Value betting
With the ripples of the fallout in the US financial crisis spreading all over the world, many are questioning how did all this happened. A majority of people are saying that it all boils down to greed. Though it may be true that greed played a major role in this crisis, another which many overlooked is transparency. A decade ago, a young British trader was dealing with complex financial derivatives in Singapore. As a direct result of his trading activities, Baring Bank lost $1.4 billion in the futures market and closed its doors after 233 years of banking traditions. The doors also closed on Nick Leeson when he was sent to prison for four and half years for the fiasco.
That incident begs the question why a twenty eight years old trader was allowed to deal with such complex and exotic financial instrument like derivatives without any supervision. The main reason was that no one knew any better. The bosses in London just knew the books were showing a huge profit. None of them actually knew anything about derivatives except its name. What Nick Leeson serves to highlight is the generational gap between the top management and those at the trading desk. As long as everyone was making money, everything was okay.
Today the same situation is repeating itself on Wall Street with the proliferation of exotic instruments like CDOs and MBS. Besides the financial institutions themselves having difficulties knowing what they have on their assets portfolios, the Federal Reserve Board and US Treasury are also hard pressed to find a mechanism to value these “toxic assets”. The situation has resulted into this mess as there is a total divorce in corporate responsibility from one’s action. This is a classic case of what “ignorance is bliss” all about. It’s a great excuse for greed.
Five years ago, the US economy faced a similar crisis though on a smaller scale as compared to today. The issue at hand then was the Enron scandal. Hailed by Fortune Magazine as the most innovative in the US for six consecutive years (1996 to 2001), it later became an icon to symbolise American corporate excesses. It also represented the largest bankruptcy in US history back in 2001. Enron collapse played a major role in shaking up investors as it was able to hide its losses for five years through creative accounting. Due to lack of disclosure about its corporate activities, the audit committee of Enron was unable to fulfill its responsibility. In addition, the auditors of Enron also had close ties with the management and this gave them little incentives to pursue further questioning to discover the true nature of Enron‘s financial health.
Besides hiding its losses from investors, Enron’s management was also involved in insider trading and was excising their stocks options just before the collapse of the company. The irony was that, they were also encouraging their employees to invest further into Enron’s’ shares with their pension funds. The result was that a majority of the employees lost their life savings. On February 22 2005, the Bush Administration met with senior Federal financial officials to discuss what to do with the situation. The majority of those at the meeting were against the idea of holding corporate chiefs responsible for the activities of their companies. Most were contented to let the market sort its own problems out by doing nothing. The only two dissenting voices that were speaking out against corporate corruption were Alan Greenspan, the ex Federal Reserve Chairman and Paul O’ Neil, then the Treasury Secretary for the Bush Administration.
The result of that meeting was a half measure adopted by Congress as the Public Company Accounting Reform and Investor Protection Act. The problem was that the Act was more towards holding auditors of the company liable for the accuracy of their client’s balance sheet rather than holding top management responsible. Today, the Bush Administration is asking Congress to approve a “blank cheque” of $700 billion so that the omnipotent Treasury Secretary Mr. Paulson can buy toxic assets from financial institutions with taxpayers’ dollars. Apart from being a direct beneficiary, (Mr. Paulson own an estimated $700 million worth of shares in Goldman Sachs Inc), the plan also call for unquestionable decisions to be made by the Treasury Secretary. There is no provision for any oversight committee to see through the execution of the bailout plan.
We in Australia also face the same complacency as shown by the Australian Securities and Investment Commission (ASIC) with regards to the Fincorp fiasco. When questioned for its lack of regulatory activities, the ASIC claimed that it was not responsible for approving prospectus but rather that task lies with the issuer and the advisors of the issuer. This had brought little comfort to the 8000 retail investors who had lost A$300 million. After Fincorp, came the WestPoint, whom the financial planners touted as a safe investment. The irony was that all the financial planners were licensed by the ASIC.
Successful investors like Warren Buffett and George Soros do not face this sort of situation because they adopt their own approaches towards investing. While everyone was herding towards the credit default swaps market, Warren Buffett warned that these instruments were “financial weapons of mass destructions” as early as five years ago. George Soros made his billions when everyone else was losing money. The main reason George Soros emerged a winner in the currencies market was that he adopted a system of investment called statistical arbitrages during trading. By using mathemical principles, the arbitrages trading system allows an investor to hedge his investment regardless of the market outcome. (To find out more read, Sports-Arbitrage – How To Place Riskless Bets & Create Tax-Free Investments). Initially pioneered by Morgan Stanley Equity Desk Operations during the 1980s, the system today have advanced tremendously to using softwares like the ArbAlarm to allow investors to locate situation for arbitrages within mere seconds throughout the entire world.
The fact of the matter is that despite what the financial experts or government regulatory bodies claims, no investments is totally safe when control goes out of your hand. Before, bricks and mortars were considered “fail safe” investment as you have the physical asset to rely on. But with the subprime lending crisis that is happening around us today, we can see that everything is very much dependent upon external factors beyond our control. Superannuation returns and share prices are dependent on the global financial market. Property prices now are also affected by global economic conditions which are dictated by the very people who had caused the credit crunch crisis in this world.
Sports arbitrage trading can be pursued from virtually anywhere since most of the bookmakers involved are on the web and can also be reached by phone. However, there are some issues which specifically affect participants in the US.
It is legal for US-residents to trade. However, it is questionable whether or not it is legal for sportsbooks to accept bets from US-residents and this makes it necessary for US-resident traders to make more preparations than others. There are indeed many US-resident traders enjoying considerable success with sports arbitrage.
Interestingly, in the US it is clear that all betting is fully taxable and the IRS expect betting profits to be included in full on tax returns. In this case, you should be sure to also include all of your betting-related losses and expenses in order to minimize the tax liability.
Up until recently, regulation of gambling in the United States was left exclusively to the State Legislatures, who determined the legality or otherwise of gambling activities within their jurisdiction. Some states legalized many forms of gambling, while others legislated to make it illegal to participate in any form of gambling other than the state’s lottery. Nevada is the obvious example of a State which has embraced gambling as a legal form of commerce, while Utah is a noted for its strong anti-gambling stance, and laws deeming all forms of gambling within its jurisdiction illegal.
US State gambling laws were all drafted long before the advent of the Internet, and they do not have provisions dealing specifically with online gambling.
US Federal Gambling Laws
So far, US Government attempts to pass legislation dealing specifically with online gambling have been unsuccessful. Separate Bills sponsored by Sen. Kyle and Rep. Goodlatte, each attempted to ban online gambling but failed to attract the required 2/3 majority Senate vote required to become law. Whilst it is likely that there will be more attempts to pass legislation dealing specifically with online gambling (either to to regulate or to ban), until such legislation is passed existing federal legislation serves as the only guide on this issue.
Federal laws relating to gambling were passed by Congress to deal with inconsistencies in State based gambling laws, especially as they applied to interstate commerce. Although passed recently, US federal laws applying gambling activities were all drafted before the advent of Internet gambling. There are a number of current federal laws that have indirect application to online gambling. These are discussed below.
1. The Wire Wager Act
The Wire Wager Act is the statute that may be applied most directly to restrict the use of the Internet as to gamble. It prohibits the use of a wire transmission facility to foster a gambling pursuit. It provides, in part:
“Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both”.
Exactly how this Act applies to Internet wagering is hotly debated. One school of thought in legal circles is that the Wire Act broadly covers any interstate use of the Internet that is related to placing or receiving bets. A second school of thought is that the Wire Wager Act cannot be applied to online gambling generally for two reasons. First, the words “wire communication facility” only apply to transmissions that use wires and the proliferation of wireless Internet access would therefore fall outside the scope of the Act. Second, reference to “bets or wagers on any sporting event or contest” implies the Act might only apply to wagering upon sporting events (not card games or other games based upon chance).
The above issues aside, it is clear that even if the Wire Wager Act can be applied to Internet gambling, it can only be applied to those “being engaged in the business of betting or wagering.” It cannot apply against the online gambler or Internet service providers.
2. The Travel Act, The Interstate Transportation of Wagering Paraphernalia Act, The Professional and Amateur Sports Protection Act, The Federal Aiding and Abetting Statute
The above 4 Statutes all contain provisions that could be construed to apply to internet gambling. However, as for the Wire Wager Act, the question of the validity of their application is hotly debated, and even if they could be adjudged to apply to Internet gambling, their application would be restricted to operators only, and not players or peripheries (ISP’s etc).
As a result of the current situation, a number of credit card issuers in the US now refuse to authorise any transactions which look as though they may be with any type of gambling site. This can seriously hamper your ability to fund your accounts. You will also find that a most UK & Australian bookmakers will currently not accept business originating in the US.
Having made a decision to become involved with sports arbitrage, your task becomes one of taking measures to enable you to trade with all books without restriction. Most US-based traders spend some time setting up either UK or Canada-based forwarding addresses and then go on to establish bank accounts in the respective country. This enables them to trade with all sportsbooks without restriction.
Once again, traders have detailed an extremely profitable month of trading. Last month a myriad of profitable arb trades came from the almost the whole range of sports activities covered by global online sports bookmakers.
In November, there was a total of 24,529 sports arbitrage trades from 1042 separate matches and games. The average profit margin from these arbs was 4.25 %.
On the whole, soccer afforded the most trading prospects – exceeding 16,500 trades. Tennis featured over 1700 arbs.
In addition, traders of the US sports Basketball (NBA) & Ice Hockey (NHL) did well with over 1700 arbs in each sport. The majority of these were created by BetCris/Yabet, The Greek and 5 Dimes. Many of these arbs exceeded the 4% profit margin mark. These bookmakers together also managed to provide over 1000 arbs in these US Sports.
Concurrently, the Darts & Snooker events that occurred gave PaddyPower, Stan James, SkyBet and Unibet the opportunities to generate several hundred surebets in the 2% to 3% range.
“The Greek” , “Victor Chander” and “William Hill” were prominent in the numerous Golf events that took place, with arbs ranging from 1% to 5%.
With over 200 sports arbitrage trades involving their prices in many of the fighting/combat/boxing matches last month, 5 Dimes was also an active participant here.
Despite the year drawing to an end and many people getting ready for the Christmas season, there are still excellent opportunities left for you to take advantage of with several major tournaments drawing to an end. The Davis Cup final tennis tournament will be ending on 2nd of December. I expect there will be plenty of arbs in this event, as usual.
This coming December will also be an active month for Golf with several Tour events taking place. The Dubai Ladies Master on its last leg of the European Tour will be playing off in Emirates Golf Course, (Majlis Course), Dubai, U.A.E. from 11th to 14th December. The Volvo Masters of Asia will also be taking off in Bangkok at the Thai Country Club on the 18th to 21st of December. Be sure to check out the sports arbitrage calendar for more details on the sporting events that are held all over the world for the month of December.
There are also quite a few prospects in December to you to capture some extra free money from bookmakers offering bonuses. Bet 365 is offering up to £200 in free bonus money and Canbet has up to $400 up for grabs as a deposit bonus. If you are in doubt how to take advantage of these bonuses, take a look at the Sports Arbitrage World bonus-scalping tutorial.
And remember that ArbAlarm has a special bonus-trading feature which makes bonus-scalping hassle-free for you by automatically finding risk-free trades which involve the bookmakers you have bonuses with. If you haven’t done so already, click here to sign up for your free TraderZone account and you’ll get full and immediate access to all of Sports Arbitrage World’s software & services.
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