Market Makers on Football Index
Updated: Jun 26
As Football Index continues to grow, and new technology is introduced, how can the market continue to operate in a balanced way and ensure buying and selling opportunities are maximised? How can market liquidity be retained in times of stagnation? For many, the introduction of Order Books and the subsequent likely introduction of Market Makers to compliment this new technology is huge step in the development of Football Index, but what are Market Makers and how would they operate?
Whilst this article gives a brief overview of how Market Makers operate in traditional markets, it's important to remember that these are yet to be confirmed or introduced by Football Index, and therefore this is more speculative, with the aim of provoking a discussion about the pros and cons of how these may operate. It's also worth noting, that Market Makers may already be in place at Football Index and we are unaware of their presence. Either way, I hope this article succeeds as a basic introduction to them and their place on Football Index.
The timing of this article is important. At the time of writing, we are in the middle of the worse global pandemic for centuries, which has affected all of our daily lives, as well as stockmarkets worldwide. Football Index is certainly not immune to this, and my hope is that this article will provoke some thought about potential solutions to problems we are seeing in the current market, and enable us to move forward.
Why are Market Makers Needed?
The first question to address is why Market Makers are needed, what are the problems they address and how do they provide a solution?
In short, Market Makers enable buying and selling when this isn't possible otherwise.
More on what Market Makers are in a second, but for now let's look at why they are needed.
As Football Index has developed, there have been significant periods of growth, which is fantastic for the whole trader community. With positive sentiment and optimism from all. To offset this, there is inevitably going to be periods of stagnation and some dips along the way. It is these periods of stagnation and dips which we will be discussing here, and how Market Markers provide a solution.
In a basic sense, when players prices are rising, more traders are Market buying than listing for sell. Listing players for sell on Football Index, causes their price to drop. More on the process of Buying and Selling in the designated posts. For now, it's important to understand what happens when Buying and Selling doesn't occur and why. There can be many factors to this, with the main one being market sentiment, and consensus in the community that Football Index is moving in a positive direction, or the flip side, where there are concerns in the community and trader confidence is low.
At the time of writing, we are seeing low confidence in the market. This is largely due to the following
Current economic crisis we are facing as a result of the Coronavirus pandemic
Changes in technology
Emergency measures taken to protect portfolios
These three factors have combined to create a very difficult trading environment and market stagnation. Economic crises will come and go, and stockmarkets will always reflect this with confidence reduced disposable income, and greater need to withdraw capital.
Alongside this, changes in technology have meant that, for the short term at least, trading can be difficult and even undesirable. With the introduction of the Matching Engine, Football Index has enabled those wishing to leave the platform, to do so, by providing new functionality where the traders can place bids for players which in turn populates the Instant Sell price. On balance, this was broadly the best decision to make and enable traders to leave, but also ensuring Football Index was not overexposed which would in turn have been detrimental to all of us. However, the Matching Engine, although successful at it's purpose, has created something of a standoff between buyers and sellers, where current bids are too low for sellers to accept, and buyers not willing to pay higher prices, as there is the option in some cases to buy lower.
Reduced liquidity in the market is bad for all. There is no commission earnt by Football Index, reduced profit and loss and reduced trading which in general reduces confidence amongst traders.
Although the above is clearly due in large to the current economic crisis, it's important to know that there will always be quieter periods and stagnation on Football Index, and that Market Makers will be required at different times for different functions.
Step forward Market Makers.
What are Market Markers & How Would They Operate?
Now, we need to look at what Market Makers are and how they would operate on Football Index.
As described above, Market Makers enable buying and selling when it can otherwise be difficult. Their role on Football Index would potentially be best described as acting in the interests of the overall market, and at times, in the interest of Football Index themselves. Some examples of their potential use and purpose are below.
Providing Bids & Offers
One key purpose of Market Makers on Football Index would be to provide bids and offers for players to encourage trading and stimulate market movements. For example, by putting bids in place to buy a player at a specified price, and/ or sell the same a player at a separate specified price. This would, in the short and long term regulate spreads on players, and thus likely provide more favourable conditions for trading, with the Market Maker profiting from the lower buy price at which they purchase the shares, and then selling for the higher Sell price which they set.
It is clear from the current market at the time of writing, and at times of stagnation, that this would greatly increase the volume of trading, generating commission for Football Index and improve overall liquidity. Not being able to trade at reasonable price points has the effect of not only reduced liquidity, but poor trader confidence, frustration and discontent.
Maintain Trader Confidence
On the subject of discontent and trader confidence, Market Makers would, as well providing more favourable conditions for trading, also have the advantage of raising confidence, and improving overall trader sentiment. As Football Index continues to mature and grow, this is vital for existing traders with large amounts of money held on the platform, but perhaps more importantly, for new traders joining.
Previously, being able to exit a player previously was easy. There was an Instant Sell price provided by Football Index which fluctuated with market conditions, but the option was always there, and provided a good foundation on which to trade. This was especially apparent for new traders joining the platform and finding their feet. As more experienced traders, we can all look back at some poor decisions and trades we made early on in our Football Index journey, and we have all likely used the Instant Sell feature at some point, to exit a player. Whilst the long term risks for Football Index to provide this indefinitely are clear, there does need to continue to be some form of safety net in place, to maintain confidence and traders. A new trader unable to exit a trade without losing the majority of their stake is not a positive look for the platform, and could be very detrimental for future growth, prosperity and reputation. The vast majority of traders joining Football Index are somewhat unsure in the beginning, and the introductory offer, combined with a very supportive trader community helps to ease these, but without providing options to exit trades at what could broadly be described as reasonable conditions, would likely have a large impact on Football Index at a time when it has the potential for so much growth.
What needs to be considered here, is not only the purpose of a Market Maker in terms of market liquidity, but the impression traders have of the market. If, for example, Market Makers were implemented to ensure there were bids within a designated window to enable the above, it would not only encourage trading, but generate a more positive impression for the market, increase engagement and without doubt, improve retention. The value of this should not be underestimated, and the impact which negative sentiment can have on the growth of Football Index.
Ensuring An Instant Sell Price Is (Nearly) Always In Place
As discussed above, there is much speculation in the trader community about the Instant Sell price, and whether this should always be in place as it has been previously, or whether a bidding system is sufficient for the market. What is clear to all traders is that the lack of Instant Sell on some players, and certain areas of the market, is having, and will continue to have a negative effect on the market. In particular, players at the lower end of the market, who, at times can have no exit point.
Whilst it is understandable that there would be substantial liability if Football Index or in this instance, Market Makers, were to offer to buy these players back, the dilemma can broadly be summed up in the following question.
Do the advantages of providing an Instant Sell option outweigh the disadvantages?
Increase trader confidence knowing there will always be an exit price on players (except under exceptional circumstances)
More forgiving for new traders finding their feet
More diverse market where money is spread more evenly across the player database
Liability to Football Index, or the Market Makers
Too large a database with some players of very little or next to no value
Ambiguity over the level at which the Instant Sell price should be maintained
Addressing some of the points above which have not already been, the topic of diversity and money being more evenly spread across the market will be a matter of opinion. The players at the top of the market will always be the main dividend returners, or those with the most potential. However, what is apparent, is the level to which traders enjoy, and profit from the most basic trading concept of buying low and selling high. Alongside this, the vast majority of traders will not join Football Index and immediately pay the premiums for the top players and instead, test the water with some familiar players at the lower price points. This is in fact a great way to get started and my post on 10 Top Tips for Beginners, includes a section of buying a range of players to get a feel for the market and understand how Football Index works across different times and conditions. Encouraging trading at this level in my opinion, is essential for the reasons outlined above.
On the topics the large player database and some players having little to no value, this would need to be addressed, likely in the form of tidying up the database, and for start removing those who have retired and there are no shares held in them. there is also a large amount of players which are frequently added for international tournaments, but have very little value outside of this. During the World Cup 2018, these players were traded a lot using the Instant Sell function, which supports my points above, but having said that, there does need to be a long term strategy about whether or not these players remain on the market indefinitely.
An option here, would be remove those, with no shares held, and then re-IPO (Initial Player Offering) if they are in demand. In this instance, demand could potentially be gauged by traders placing bids on players not currently live in the market, and once there are a significant amount of bids, the player is IPO'd/ re-IPOd. So for example, if a player IPO'd purely for the world Cup 2018 has no shares held in him and has not been traded recently, he would still appear on the market listing, or possibly a separate 'holding' list where there wasn't an immediate Buy or Sell price function, and instead traders would need to bid for him which would then alert Football Index who would subsequently add him back to the market should there be sufficient interest from the trader community. Whilst this isn't ideal, and there will likely be challenges, it would go some way to controlling the liability for Football Index or Market Makers of always providing an Instant Sell option for every single player, but still making it possible to offer as many options to traders as possible.
On the final point about identifying the point at which the Instant Sell option would be provided, this would likely be a case of offering a window consisting of the Market Buy price at the top and the 'Base' Instant Sell price at the bottom, between which the Matching Engine and Order Books would be implemented. The exact cut off point for this would need to be determined and linked to overall market performance. The FOOTIE (Football Index version of the FTSE) provided is not sufficient for this, but a reworked version which more accurately represents trading volume, activity and growth would form the basis for the Instant Sell threshold.
Thank you for reading and I hope this has given you a broad overview of how introducing Market Makers would be beneficial to Football Index.
Screenshots taken from the Football Index website.
Thoughts, comments and suggestions below please.