Random Friday: Spoofing, Volume Dips, and Yahoo

A little more on spoofing, the slowdown in market volume, and Yahoo! Inc.'s (YHOO) entrance into Daily Fantasy Sports

Apr 24, 2015 at 10:11 AM
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What did we learn this week? We learned new uses of the words "spoofing" and "layering" -- as in, "Spoofing and Layering by One Guy in His U.K. Basement Caused the Flash Crash." Except it probably didn’t, seeing as how it was a common practice before, and remained a common practice after. But ... whatever. How about some random thoughts? Careful though, I may have written an algo that automatically pulls the links as you click on them (though probably not).

A little hazy on what spoofing and layering actually mean? Here’s a good quick video description from Bloomberg (h/t @sellputs). Also, thanks @sellputs for a great Twitter discussion on what the powers-that-be could actually do to curtail said spoofing and layering.

If exchanges/regulatory bodies really wanted to limit or end spoofing, there are any number of avenues. They could have "fixed" execution windows, i.e. only pair off every two or five seconds or whatever. They could make all orders stay live for X seconds. They could charge some nominal fee for cancels (that’s done in some form by brokers in spots, but likely not ever for big customers, and if they did they would rebate it in some form anyway). And I’m sure there are other ideas. If it's costly somehow to enter an order that you have no intention of filling, few will keep up the practice. But alas, the exchanges like the volume it all begets, so don’t hold your breath.

Speaking of volume and algos, those news-reading options bots must be scaring traders away -- average daily volume is actually down slightly in 2015 year-over-year, via numbers from The Options Clearing Corporation (OCC). Futures volume has ebbed modestly as well. I’d guess it's more about so-so volatility (so far) than anything else.

Or perhaps "public" money has shifted out of options and into Daily Fantasy Sports (DFS) games. Yahoo! Inc. (NASDAQ:YHOO) certainly thinks so, as it plans to enter the fray with the FanDuel-DraftKings oligarchy. This, via Seeking Alpha:

"Yahoo's entry into the daily fantasy sports vertical is a natural extension of its fantasy sports business, which has traditionally hosted season-long fantasy games. Judging by the growth of FanDuels and DraftKings, each valued at $1b, I expect YHOO's fantasy sports to be as equally successful as the leading players, given YHOO's longer operating history and user base. While I acknowledge that the daily fantasy sports industry has been bubbly over the past several months with hundreds of startups coming online to capitalize on the fantasy sports market, there are an estimated over 40m fantasy sports participants in North America. That said, FanDuels and DrafKings only account for 5% of the total user base, which suggests plenty of room for YHOO to leverage its existing fantasy player base and fantasy news source, which are critical to participants when they select their lineups. While management did not give much color on the specifics, we can expect YHOO to have a launch by this summer, and I believe YHOO can be a formidable competitor to FanDuels and DraftKings on both PC and mobile fantasy sports."

I believe that 5% number refers to DraftKings'/FanDuel's share of the total fantasy sports market, because they currently control something near 100% of the DFS market.

And yes, Yahoo will instantly cut into that. But don’t sell your stake in DraftKings or FanDuel just yet (if you were lucky enough to get in somehow). Yahoo likely just grows the overall size of DFS more than it cannibalizes the existing marketplace. The newbies will simply have a small share of an even bigger pie.

And if Yahoo’s doing it, we can surely expect ESPN and CBSSports to jump in. The leagues themselves run traditional fantasy games, though it's tricky for them to enter DFS, seeing as they have tie-ins with DraftKings and FanDuel (as I’m reminded every three minutes during Mets games).

Of course, there is some risk to the "rake." DFS sites keep about 10% of the entrance fees in each game. Sportsbooks keep about 5% of the dollars wagered on actual sporting events and they have much higher overhead, and they seem to do quite well. I'm guessing Yahoo and other future entrants have lots of room to compete on cost, if they so choose.


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