Sports Arbitrage Trading Chapter (7) - Cutting your transaction costs

One of the most important and central tools that any sports arbitrage trader will need is a UK or EU bank account. Sounds straightforward enough? Sometimes it isn’t. If you happen to live abroad, opening such an bank account can be difficult, and take up a lot of time. However anyone expecting to trade without an EU or UK bank account will find the road to success as a sports arbitrage trader will less smooth. May expatriate Britains will have an EEC passport and may require the services of a lawyer or notary public to prove that they are the person who appears on that passport.

Having a UK address is also a prerequisite, and many expatriate traders are registered as living with their favourite Auntie to overcome this hurdle. In the event that you have run out of Aunties, it is even possible to purchase a UK forwarding address for a fee that will more than justify the expenses involved.

For those living in the UK, and for the others who may well be suffering in the Bermuda sunshine, once the UK bank account and address issues are taken care of, then it is possible to begin trading, while at the same time assessing the transaction costs involved and finding ways to reduce them.

If you are not keen on having your bank know exactly what you are doing with the money in your account, you may prefer to deposit your money and make your transactions through what is known as a "web wallet." These are a form of online banks that handle transactions of all sorts, but are particularly geared towards the gaming industry. Online bookmakers know them very well, and transaction costs are low.

Reaction time is fast, and they are a pretty good way for an sports arbitrage trader to handle their finances. There are a number of online cash processing facilities that have become attractive to online gamers; the current market leaders, in terms of gaming, are MoneyBookers and NeTeller. They take a lot of the headaches out of processing money on line.

What many arbitrage sports traders fail to grasp when they are first starting out in the profession is that they will be managing an enterprise which, even in its smallest scale, will be turning over at least £20,000 a month, theoretically derived from the conservative estimate of a trader with £5000 capital turning his funds over four times in a month. To do this, he’d likely place at least 80 bets over that period.

Even if each of these transactions were to cost a measly one pound every time, it doesn’t require financial genius to figure out that profit margins would be severely eroded if the issue of bank charges and how to keep them in proportion were not thoroughly investigated and not considerably reduced.

It is all very easy for the start up sports arbitrage trader to get carried away on a wave of euphoria, and calculate that they will make a 5% profit from each trade so what does a miserable £1.00 matter. Yet taken in proportion that paying £1.00 deposit and withdrawal fees on a trade that might have earned a total of £25.00 is bearable, the same ratio doesn’t look so appealing when the gross profit before overheads is only £5.00. That makes for 40% of a traders profit going on transaction fees.

Whilst it is possible to argue that a smart trader will only deal on trades that will guarantee a gross profit of at least 4%, these trades are not guaranteed to come along every day, and a trader who wants to be active and turnover money will be looking at trades that will gross 2% or over. So the trick of the successful trader is not to be too dependent on only finding high profit margin trades, but also to find ways to cut their transactions costs.

Traders starting off with a short stack are especially vulnerable to erosion of profits, and many have fallen by the way side as a result of it.

A successful sports arbitrage trader should be, by nature, capable of analyzing figures, and even enjoying doing so. Before making a single trade, most would try to calculate what they expect to gain from taking up this new profession. The principal aim should be to be earn as much money with as little risk, and as few headaches as possible. This is a reasonable goal, and one that can be arrived at without too much pain as long as you are totally analytical in the way that you handle your cash.

The first step in achieving this will be to analyze how you will be making your trades.

Let’s assume for argument’s sake that you start off with a working capital of £10,000. Assuming that your bookmakers pay out after three days, and assuming that you intend to actively trade every day, for at least part of the day, you will have a sum of around £3,300 (or one third of your capital) to trade with each day as you wait for the balance to move from your bookmaker accounts to your bank account.

From this you can find ways to make your processes more efficient. For example, if you have money on deposit and you wish to use some of all of it to for trades, all you really need is a debit or credit card to enable you to carry out your trades, with a debit card being preferable. If you have set up a bank account specifically for this purpose, you can have a pretty good idea of fixed costs. The advantage of fixed costs is that the more trades that you do, the less they cost on a pro rata basis. If you make just a few transactions every month, the cost per transaction will be higher. Conversely, if you make a lot of trades during an average month, then the transaction cost per trade will be low.

One very important aspect of transaction costs is the speed that trading capital comes back into circulation. Online bookmakers will take at least three days to return winnings and stake money to a trader. What this means that a traders capability to trade is being cut by up to 60% at any given time, and if they are carrying out low value trades this can make a major dent in overall profitability. Whilst there is a of talk about introducing a speedier processing system for the major UK banks, where online transactions will be completed within one day, for the time being this appears to be put on hold.

Many experienced traders overcome this barrier by making deposits at the bookmakers that they intend to be working with, to overcome this problem, free their capital and maximize their profitability.

What it means is that instead of waiting three days for the working capital to be released, it is in held on account at the bookmaker till the next trade comes along. In theory taking advantage of this option means that turnovers can be at least doubled and theoretically trebled as rapid access to working capital is easily available. It also helps to speed up the process of executing sports arbitrage trades and this is extremely important, as prices change quickly in today’s markets.

The downsides are that bookmakers don’t pay even token interest, and might be vulnerable financially.

As ever the best situation is a compromise, and there is a line to be found between leaving money on deposit at your bank, in web wallets and loading your bookmaker accounts. As your experience as a sports arbitrage trader grows and deepens you will discover the happy medium in handling your finance and extracting the maximum value from the money you invested as well as the money you have earned.

Sports Arbitrage World - The Professional Choice
Guides, software & community for sports arbitrage traders