Betfair spins into financial trading

Online betting exchange Betfair has spun off a new venture called Tradefair which it hopes will allow it to cash in on the retail derivatives space - a market it estimates is worth at least £650m per year.

Betfair, the peer-to-peer betting site launched in 2000, has around two million registered users, 500,000 of whom were active last year.

The company set up an internal VC unit to explore other ways to exploit its exchange technology - Tradefair, which launched in late 2007 as a subsidiary of Betfair, is the result.

The website currently only offers financial spread betting - and a high low betting game based on movements of the FTSE 100 - as it awaits authorisation from the FSA, expected in early 2009.

Martyn Holman, commercial director of Tradefair, said: "We put together a plan to address what we call the retail derivatives space. That sits between ordinary financial betting - as you would bet on an outcome - and ordinary financial trading - i.e. buying a share or a bond as you would through your online broker. It encompasses two products: spread betting and instruments called CFDs (contracts for difference)."

Once the Financial Services Authority gives the thumbs-up, Tradefair will be able to offer its users the ability to trade and bet on CFDs - equity derivatives that enable investors to speculate on share price movements without actually having to own the underlying shares.

"Instead of buying a share you buy a CFD… you don't have to put up all the cash, you put up a portion of the cash but you benefit in the same way from the underlying share moving," Holman said.

"We estimate that the global audience for spread betting and CFDs is about £650m per annum retail operator revenue, growing at a rate of about 20 to 30 per cent per annum. And we think that that number is a significant underestimate of the actual market because there are various other forms in which people participate in this derivatives space," he added.

As with Betfair, the business is dependent on technology that can ensure a formidable level of performance - or what Andy Phillips, head of systems at TradeFair, calls an "extreme transaction processing system".

The exchange was inspired by Betfair's Flywheel betting engine tech but takes it to the next level, according to Phillips, and is able to support 100,000 customers concurrently.

"We've got effectively a zero contention design. If you look at what we can do, we're now clocking around about at 190,000 orders per second," he said.

By contrast, he said long established institutions such as the London Stock Exchange "can maybe handle a couple of hundred customers connecting to them simultaneously".

Phillips added: "[Our exchange] can complete with the best in the world - the latest financial exchanges."

Martin Thompson, chief technology officer of Tradefair, said one way Tradefair delivers very fast transaction performance is to ensure all of the data needed to form that transaction is in memory - so there is no need to wait while a hard drive is accessed.

Phillips added: "Latency [the amount of time taken to process an order and get the acknowledgement back to the customer] is really a key thing… And certainly within the FS space, latency is one of the key things that you measure an exchange about.

"Very often you find that people will trade latency for manageability or core security but what we've done is we've very carefully designed both the hardware and the software together - so that… [essential features such as] security [also don't] impact the speed of the exchange."

Tradefair also makes "heavy use of virtualisation", Phillips added.

The hardware running the exchange includes 43 servers, 14 switches, 12 firewalls and 2,700 network cables, while the IT team is modest at: 10 developers, eight systems administrators, two business analysts and two quality assurance staffers.

The system runs on the Red Hat Linux OS - which Phillips said is preferable to closed source offerings as it gives the company the flexibility to change things itself. "If we need to fix the kernel then we can fix the kernel and recompile it," he said.

Phillips added: "We've chosen best of breed technologies - all the latest things and we're also looking a bit beyond that to 10GB Ethernet and to the use of iSCUSI instead of storage area networks so I think we're trying to look 20 minutes into the future with this design."

Asked when he expects the company - which is fully funded by Betfair - to be profitable, Holman said would not give a timeframe but said in the "short term", adding it would be "well within" five years.