Betfair Race Trading Strategy Part 2 Liquidity Cash News Volatility And The Herd Mentality

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One of the biggest Stock Market losers of recent times came in the form of a UK owned online casino operator

Listed in June 2005, it was one of the London Stock Exchange’s (LSE) biggest offerings since 2000.

Investors splashed out $1.9 billion, all going to the founders rather than the company itself.

Operating from computers in a Native American territory in Canada, the company drew nearly 90% of its revenue from U.S. residents, where online gambling has always been officially illegal.

The company made no attempt to physically hide these facts in its prospectus, stating openly that its directors “take comfort…in an apparent unwillingness or inability” of authorities to enforce the available legislation.

That changed overnight on Oct. 13 of this year, when the U.S. officially banned, outright, money transfers to offshore gambling sites, stating in black and white its prohibition and intent with regards to foreign online casinos flouting their rules.

First news of the legislation hit the UK on Sept 29 and Shares of the company plunged 56% on the LSE.

A spokesman for the company said “the original owners still hold 70% of the stock and have suffered too”, oh dear!

Too Risky for the US

Jeffrey R. Houle, a lawyer at Greenberg Traurig put the disaster in perspective stating clearly that such companies wouldn’t even be allowed to go public in the U.S.

“The Securities & Exchange Commission wouldn’t have been satisfied with the risk disclosure in the prospectus. The threat of class actions would have been another obstacle.”

The tale however sad is a great analogy to use in understanding the essential relationships of Liquidity (cash) and Volatility (news) in relation to trading on horse races.

Floating on the London Exchange in 2005, the online casino magnet proved an irresistible pull for the world’s media; Exciting and glam, a great “gamblers” punt destined for huge and rapid expansion. They loved it. High tech, high risk, the return of the dotcom stock destined for global expansion. Sound familiar?

Indeed, all too familiar to experienced traders who will still remember the dotcom boom and bust between 1997-2001 with glee or despair depending on their personal outcome.

Brokers and the Herd Mentality

Papers, magazines, tipster sheets all waded in with strong “buy” recommendations. Online poker was all over the internet.

Within weeks of flotation it’s a big player in the FTSE 100, the LSE’s flagship index, worth over

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