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New Fee Structure At Tradesports Causes Confusion...By Jay Graziani (and sister operation, have long been at the forefront of exchange-based sports wagering and futures markets. In operation since 2002, Tradesports represented the first real exchange open to Americans, long preceding eventual rivals Mansion and Matchbook.

The Tradesports fee structure has long been the subject of player confusion, at least for in-game betting. Previously, trades were subject to trading fees, and the holder of the shares at expiry was also charged expiration fees. Tradesports recently reconfigured their fees to be more in line with other exchanges. The new fee structure calls for a 4% commission to be assessed on the net profit on any market, regardless of the number of individual buy/sell orders placed.

The new fee structure, in general, has met with approval from traders, as it should increase liquidity on in-game betting, a niche market which Tradesports has mostly cornered. The elimination of transaction fees means players won't be penalized for actively trading in a market. And while the new commission structure is undercut significantly by Matchbook (charging only 2%), it is generally cheaper for most scenarios than the preceding fee structure at Tradesports.

The previous structure also allowed pre-game trades to occur commission-free. Now all trades, regardless of time placed, will be taxed at the same 4% commission level. Tradesports has given up the big price advantage they had by offering pre-game trades with no commission, one area where they were cheaper than competitors. Perhaps Tradesports is aiming more towards the European market, and trying to undercut BetFair's 5% fee. Tradesports has a lot of catching up to do in that market, however, and Tradesports still fails to offer the volume discounts that BetFair does, a big benefit for heavy traders.

One point of controversy is that Tradesports is charging the new commissions on long-term market contracts that were in existence prior to the fee change, and which have been trading under the old rules. This is not the first time Tradesports has retroactively changed fees on markets already trading, having faced similar complaints in November of 2006. Of course, the issue is that an exchange like Tradesports, with markets constantly trading, never has a "downtime" to make major changes like reconfiguring fee structures. It is impossible to smoothly transition to new rules in an active market.

Following trader outcry, Tradesports relented and promised to refund the excess fees for any shares that were already traded prior to the implementation of the new commission structure. However, all future trades would be subject to the 4% profit tax, even if the market had been actively trading for months. This prevents traders from trading out of their current positions without suffering the 4% profit tax. While Tradesports did notify their traders of the fee increase a week in advance, the ambiguity regarding whether fees would be applied to pre-game trades as well as to existing contracts was not clarified until after the new fees had gone into effect.

Tradesports could have avoided this confusion quite easily by explaining their position more clearly well before the new fee structure took effect. This would have allowed those who wanted to hold onto their positions to know that they would not be charged higher fees than they expected going into the trade. It would also allow those who did not want to hold their contracts to completion to exit the market prior to the new fee structure. Ideally, Tradesports would have offered traders a few days grace period where they could close existing positions without incurring the new fees, or even offer to buy back or sell outstanding shares to traders at a preset baseline price, to allow them to exit the market.

While hardly a travesty, the transition could have been carried out better. Existing contracts have not lost any value, as long as the current holder holds them until the end. Yes, traders have lost the liquidity that exchange betting brings, but this is a minor glitch in a long-established operation. But to maintain the goodwill of their customers, Tradesports needs to avoid such glitches in the future.

For future rules changes, Tradesports should consider shutting down active markets permanently, with at least a few weeks advance notice. This would allow traders to decide whether they were willing to hold their positions until the end, or whether to get out before the new rule change. For instance, the existing World Series future market could have been closed to further trading as of June 27th. Anyone still holding shares as of a set date would be stuck with them for the duration, when they would be paid out under the old structure. A new World Series market could have been opened immediately, now trading under the new rules. This scenario allows all traders in a given market to participate under the same set of rules, and eliminates the ambiguity that caused trader confusion in the present case. Having both the new and old markets open simultaneously would allow further liquidity, as traders hedged their risk on long-term versus short-term holdings.

More important is the lack of attention this move has received in the online gambling community. This may speak to the fact that Tradesports' profile in the online gambling arena has diminished significantly in recent years. Outside of some isolated message board posts calling foul for changing prices after bets are made, this topic has received scant attention.

The new fees likely have set Tradesports back significantly in the pre-game betting arena, as they now will offer prices closely in-line with traditional sportsbooks, and will be twice as expensive as closest competitor It appears the only real niche Tradesports may have is in-running wagering, as traditional sportsbooks have failed to expand live betting options, and the selection of opportunities at Matchbook is still limited. The new fee structure should provide added liquidity to the in-game markets, and this may become the ultimate niche for Tradesports if they are unable to compete in fees with other exchanges. If Matchbook were to step up their in-game selection, and market liquidity, they might price Tradesports right out of business.

Jay Graziani

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