Building Our First Bot - Part I, Theory

OK: we've done a lot of theory. Now, let's actually build something that can actually trade. What we're going to do is a very, very simple version of a market-making bot. Why so simple? Because we want to minimise risk during this learning experience, and also because it'll be easier to understand what we're doing. We'll build out this 'bot over the next couple of weeks and months, but this should get you started.

First things first: what's this bot going to do?

Well, it's going to act as a very simple market maker. It will offer liquidity, for a given selection, at a slightly better price than the best price currently offered. Every few minutes it will check whether it is still the best price, and will move it if price change around it. Should our meagre offer be taken, it will jump to the other side of the trade, offering up a price for someone else to take.

Simple? Well, let's explain it using some pictures. A typical Betfair selection looks like this:

Tottenham Hotspur vs Arsenal

	Back	Lay
Tottenham	2.2	2.4
Arsenal	1.5	1.7

Now, for the purposes of our super-simple 'bot, let's simply look at one selection – Tottenham. So, we have an option to back them at 2.2, and to lay them at 2.4.

What out 'bot will do is this: it will offer to back Tottenham with a £2 (the minimum) bet at 2.38.

Tottenham Hotspur vs Arsenal

	Back	Lay
Tottenham	2.2	2.38
Arsenal	1.5	1.7

Now, the market will look like this. (I've highlighted the bet that is ours.) Our 'bot will then monitor the market every 30 seconds or so. If our bet is taken (and nothing else happens), then the market will look like the first figure again. And we will have a profit of £2.76, should Tottenham win.

But we're not interested in whether Tottenham wins or not – our goal is to make money by supplying liquidity to the market. So, what we'll do now is offer to lay Tottenham at 2.22.

Tottenham Hotspur vs Arsenal

	Back	Lay
Tottenham	2.22	2.4
Arsenal	1.5	1.7

Should someone take our bet, then we'll have a (£0.32) profit irrespective of whoever wins.

This will be the simplest Betfair 'bot in the world: it will monitor somewhere between 1 and 100 selections, and will attempt to grab a small chunk of the action by acting as a (very limited) market maker.

But what happens if no-one takes my offered back bet, or if the market moves away from me? Well, no great loss. You can just reset the level of your bet, so that it is inside the best lay price available. The 'bot needs to be smart enough to only put bets on when there is a reasonable (say 3%) gap between the back and lay prices.

And what happens if someone takes my offered back bet, but then no-one takes my offered lay, or the market moves away from me so I am making a guaranteed loss? Well, the 'bot has two possible choices: it can always stay inside the best back price, and so sometimes it will take small losses. Or it can leave the bet in place and hope the market returns. Because the amounts we're playing with are so small, the worst that happens is that we end up with a small uncovered back bet on Tottenham.

This 'bot will work best on markets where the odds move around a lot. And it will work least well on odds which will tend to trend for long-periods in certain directions. It will also work very poorly for in-play markets – not least because it will only be checking on prices every 30 seconds or so. The 'bot needs a reasonably, but not excessively, liquid markets: we need to have a gap between the back and the lay prices, otherwise we're not offering anything useful. (The aim with this 'bot is to get paid for the provision of liquidity.) We'll work on some algorithms that find appropriate markets and selections down the road.

In the second part of this post – which will hopefully be tomorrow, but may be Friday – we'll actually program this 'bot, and get it trading on some real markets.