Football Index Podcast

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Football Index's IPO Conundrum

So first and foremost I will try and address the question on everyone's lips, the debate at the centre of every Football Index group chat-the phrase every man, woman, child, dog and cat has heard uttered in the last week: "why are IPO prices so damn high?"

Well, there's no definitive answer to this, but I'm of the opinion that Football Index should have conducted more thorough research on player stats, using this season's statistics as an indicator rather than last years to some extent. Look at James Milner for example: last year he would have been classed as a midfielder playing at LB, on penalties and rampaging forward at every opportunity. £2.30 would have been steep, but far more justifiable last season than 2017/18, where he's had a bit part role at Liverpool at best. Secondly, the situation that Football Index were unfortunately faced with can be summarised rather simply: should they price players too cheaply it would more or less force the hand of many traders, as they slowly sell off their portfolios to raise capital for particular IPO's. Imagine if you could have bought Malcom for anything between £0.25-£1.20, a rise to £2.09 (current price) from £0.25 would have required (under the assumption that purchasing 100 futures causes an increase of 1p) over £21,000 in capital to take him to that price. People aren't constantly depositing, many drip-feeding money in when they're paid at the end of the month- so where would this money have come from? If you imagine there's maybe 3/4 Malcom type calibre players per 100 released, that's still 100's of players that would have seen an influx of this level of cash (Otamendi, Sokratis, Ghoulam) which would have resulted in a mass sell-off in my opinion. Don't tell me you'd be keeping hold of your dear Sanchez, Coutinho or Messi if you could use that capital to potentially double, triple (being conservative might I add) your money? What would you be keeping for? A hat-full of 8p's down the line? Weigh that up against buying 400 Malcom at 50p and literally quadrupling your capital- this is the thought process that I believe led Football Index to increase those IPO prices until they were somewhat vastly overpriced.

This directly leads onto my second point. Now that James Milner is £2.30, how do Football index as a market-maker create a market for that player? i.e How on earth do they get someone to buy James Milner at £2.30? The answer is: it's as likely as Jack Wilshere playing a full season of football injury-free i.e highly improbable, won't happen, impossible etc.

So from here on in I'll discuss, very briefly how I think Football index could go get around this issue. You won't agree with some of the proposals, if any- but keep this in mind: if the players can't go below IPO price, then that means people could genuinely purchase player X for £y, knowing that he cannot fall below that IPO price. What would Football Index gain from that? That's basically to some extent free money being given away, along with the fact it would encourage holding and subsequently decrease volatility which decreases the amount of commission that they as a company take. Remember that this wonderfully unique business model is fuelled by commission, its at the centre of the platform. Another really prevalent issue is that those players who have previously IPO'd at £0.25p before the squad IPO's, have more futures in circulation than some of the upcoming squad players, who may be trading at £1.25 but only actually have 500 futures in circulation.

So how do they solve these rather difficult to solve issues? I've thought about it for a long period of time and the following is what I've come up with to try and solve the following issues:

  1. Players falling below IPO price
  2. Matching the supply/circulation of players that have IPO'd for more than £0.25 to those who have IPO'd at £0.25

Manual Adjustment

This would be probably the easiest method to implement, but would also cause mass trader dissatisfaction from the discussions I've had with both vastly experienced users and relative newcomers. The idea here is that Football Index would manually reduce the prices of players bit by bit, until there is some demand for said player (creating a market for this player). Now this wouldn't be a problem for players that have had no price action whatsoever, i.e no one actually owns any of the player. The problem becomes more prevalent when implementing this method to players that have only one owner. If I bought Milner at £2.30 and that's the price he IPO'd at, and furthermore I am the only owner of said player- why should I wake up one day to find out he's been manually reduced to a paltry 60p? The outrage would be gargantuan and would in my opinion cause those unfortunately affected to most probably leave the index. Now Football Index could feasibly notify these users, and potentially buy those players back from the traders in order to mitigate this issue as well as the second one(future circulation), but that becomes far more difficult with someone like Thauvin who has 1400 futures in circulation (again standing by the assumption that 100 futures = an increase of 1p) where they would have to buy all those futures back. To conclude, this is an option that Football Index undertake, but it would leave a sour taste in the mouth of those who are the sole owners of a player.

Algorithm Adjustment

Now this was actually suggested by FootballindexRC in conversation once, so I won't take credit for the idea. The premise is that Football Index would adjust the algorithm of squad IPO's who have come in above £0.25, so that more than 100 futures would be required to take them up £0.01. This would basically increase the amount of futures that are bought from Football Index, thus increasing the circulation of said player which therefore eventually balance that "circulation issue" that I keep mentioning. Great idea and with some clever coding I'm sure the folks at Football index could implement this easily, however this doesn't solve the inherent issue at hand for players with 0 demand. If no one buys the player at all over the 3 year period, then how does the algorithm change solve the underlying issue? A question I'm sure Football Index could probably brainstorm and offer a solution to but personally speaking this idea would have to be coupled with a solution that creates a market for players with 0 demand. Whether this is manual adjustment or another one of the solutions I propose I'm not sure, but the solution mentioned here would certainly be a piece, if not half of this quite complex puzzle. On the other hand, would users be happy with players who increase in price less often or slower than existing players? Perhaps. But there are those who would then conclude that their money is better kept in existing players who basically require less demand to increase in price, and thus require less demand for you make money.

Just Leave it as it is....?

Strange one I know, but could Football Index actually plan on leaving things be? It would be the easiest thing to do of course- and this "solution" would be based on the assumption that as existing players increase in price, the demand for IPO'd players increases gradually. I guess this is what they currently have in mind (I don't know this by the way, this is simply an assumption), but wouldn't this to some extent stagnate the market? They could implement the "algorithm adjustment" proposal when there is demand for players however this whole process would take an absolute age. If you think this is a viable solution, which it could very well be- consider the following question "How long away are we from the idea that buying James Milner at £2.30 becomes a good idea with the potential to profit?". If you answered any longer than 6 months, and I would concur, then this is not a viable solution. Why? The stagnation between and now and when Milner is actually worth £2.30 would in my opinion hurt the market as well as decrease the amount of commission received by Football index. Detrimental to both the platform and its users! Now if you answered less than 6 months or so, you're expecting some serious, serious money to come into the market and I admire your optimism, but I think we can safely say no sane person would purchase Milner at that price anywhere between now and mid may.

Blind Bidding

Again this solution would have to be coupled with something similar to the "algorithm adjustment" solution to match circulations across players. In addition to this, a solution would have to be offered to those players with some but not great demand at their prices i.e. Thauvin. The idea here is that users bid what they would pay for an IPO'd player, and the highest bidder is granted the first 100 futures. Now this would offer traders a chance to bid what they actually think the player is worth, mitigating the issue of paying over the odds for someone you really want. However- could there be some nutters out there who outlandishly bid and overprice these players? Potentially yes, but it would most probably create demand for more players on the market than what we are witnessing.

Now I know I've not offered a definitive solution, which is why I personally think Football Index are still refining a strategy that can effectively counter both issues. I do think however that players must be able to decrease below IPO prices to create a fair environment where people aren't effectively given free bets by buying at high IPO price. The reason I've written this blog post is due to the significant amount of people that have asked me about these two issues and the truth is I don't have the answer. I can only speculate, and give what I think are potential solutions to the problems at hand. This being said, once these quite minor issues in a broader perspective are rectified I think Football Index will continue to go from strength to strength, chipping away at the market share existing gambling companies currently have.

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