Inefficient Markets and the Profit Opportunity US Exchange Wagering Will Provide

The first year or two after exchange wagering becomes available in the United States should provide some incredible profit opportunities. However, the bulk of those won't last forever, and they'll begin to dry up right around the time that most people are becoming aware of them.

The reason for that has to do with the natural progression that any new market tends to go through. Initially, there are relatively few participants and most of them don't have the knowledge or experience to wager or invest wisely. New (or immature) markets are inefficient. If you know what you're doing, you can make a killing against the weak competition. Over time, a number of things tend to happen that gradually make the markets more efficient and the competition tougher. Those who started without experience, gain experience and become more skillful 'opponents'. Those who were skillful from the start gradually accumulate more of the money and their player comes to make up a larger proportional of the overall market. And as the overall market grows, the amount of money at stake grows more and more of the smartest potential competitors. By the time the whole world knows about the market, competition is so tough that you need to be one of the best to be profitable.

This pattern takes place in one market after another, including a lot that people don't think of as 'markets'. In 'Market Wizards' by Jack Schwager, a number of the interviewed options traders describe this phenomenon. They all seem to agree that anybody with a calculator and the knowledge of basic options pricing formulas was able to make money when options first began trading. That easy opportunity was gone by the late 1980s. One of my other interests is fantasy sports, and the same situation exists there...each new contest format starts out easy to win for the first year or two, and then the competition becomes tougher and tougher.

The main difference from one market to another is how quickly they become more efficient. The more money at stake and the less barriers to efficiency there are, the faster it happens. In a future post, I'll talk a bit about what those 'barriers to efficiency' are.