When is a bet a derivative?

by Stubborn Mule on 29 September 2010 · 8 comments

Roulette WheelAlmost 6 months ago, the Australian Securities and Investments Commission (ASIC) was rattling its sabre, threatening to “shut down” online betting agency Centrebet if they continued to allow punters to bet on stock market and interest rate moves.

Peter Martin reported at the time in the Sydney Morning Herald that ASIC had written to Centerbet saying:

it has come to the attention of the Australian Securities and Investments Commission that you may be carrying on a financial services business without holding a financial services licence.

In particular we believe the financial bets you offer over the ASX 200 share index and RBA interest rate changes may be ‘derivatives’, as defined in the Corporations Act.

It seems that anyone in Australia in the business of offering financial derivatives is required to hold an Australian Financial Services Licence (AFSL) and adhere to a raft of regulatory responsibilities. Centerbet, apparently, did not have such a licence.

It was a little bit surprising, therefore, to see an article about the soaring Australian dollar in today’s Herald feature the following commentary from another online betting agency, Sportsbet:

Sportsbet.com.au, which has taken bets on US dollar parity of up to $2000, says there has also been a plunge on the Reserve Bank raising interest rates next week.

So what has changed? A quick call to ASIC confirmed that a business offering bets on financial instruments would be required to hold an AFSL and that their records indicated that Sportsbet did not in fact hold such a licence. I asked them how this requirement was enforced and they told me that if they received a complaint, they would investigate it. They could neither confirm nor deny whether they had received any complaints about Sportsbet.

I will be listening out very carefully for the sound of ASIC’s sabre!

UPDATE: further digging revealed that even while ASIC was clamping down on Centrebet back in April, Sportsbet were taking financial bets. The difference in treatment is quite mysterious.

FURTHER UPDATE: Sportsbet have now taken down their pages for betting on interest rates and the Australian dollar. It may be temporary, or it may be that ASIC are investigating them…It’s now back up, so it appears to have only been a temporary suspension.

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{ 6 comments… read them below or add one }

1 Danny Yee September 29, 2010 at 9:36 pm

Heh, they should offer bets on a house price crash!

2 BernardK September 29, 2010 at 9:40 pm

Mule, one question:
“Why do you hate freedom?”

3 JamesGlover September 29, 2010 at 10:23 pm

they are basically selling digital call options on FX rates or ASX aren’t they? I wonder how the implied vol compares with say the std call option market – are they underpriced or overpriced? Is there an arbitrage?

4 Stubborn Mule September 30, 2010 at 3:15 am

BernardK only when it comes at the expense of equality! If it’s ok for betting agencies to provide these “derivatives”, then there’d be a few no advice brokers who would feel that they should be able to operate without an AFSL as well.

5 Mark L September 30, 2010 at 5:06 am

@JamesGlover I interpret “reaching parity with the US dollar by the end of the year” to mean we’re talking about One-Touches, which pay if the exchange rate reaches 1.0 at any time this year, as opposed Digital Calls, which pay only if it is above 1.0 at year end. Using the spot rate mentioned of 96.45c and current 3m interbank interest rates (0.3% on USD; 5% on AUD), the odds of 2.85 for reaching parity and 1.38 for staying below correspond to an implied volatility market of about 8.05/9.35 (under a standard Black-Scholes risk-neutral diffusion). This seems low (although I can’t find an easy and free source of implied vols to check what market levels actually are). Allowing for skew (which would almost certainly be positive at this point) would make the above implied volatilities lower still, and given AUDUSD has around 14% realised volatility over the last 9 months, I doubt if market implied vols could be so low. So if you can bet in a large enough size, I reckon there’s an arbitrage there: bet at $2.85 with Sportsbet, then sell the One-Touch anywhere above 9.35.

6 Marco aka Cracticus September 30, 2010 at 10:21 pm

Stubborn,

I suspect “freedom fighters” also love equality… in the following terms:

“All animals are equal
but some animals are more equal than others”.
George Orwell (Animal Farm)

Just saying…

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