Thoughts on the Matching Engine

I’ve been on FI for nearly 3 years now but I’m struggling to remember a topic as divisive as the Matching Engine, the feature introduced a few weeks ago. I thought I’d give my take on this but be warned, it’s a bit of a long read…

The Matching Engine was introduced by FI as a way out of the COVID crisis. I’m almost certain that it wasn’t on their original roadmap. Order books certainly were – and still are – but the Matching Engine is not the same as an order book. It’s a lop-sided, buyer takes all kinda deal.

The context is crucial. We’re in the middle of a global pandemic and all football had stopped. This is a completely unprecedented situation. FI had to act quickly in March to stop money draining out of the Index. They protected our ports through a combination of carrot (bonuses) and stick (turning IS off). We should commend them for how they responded as their actions not only protected us as traders but also protected the product, which is still fairly early in its development. We could have all lost our cash. We didn’t.

What they did next was to plan and deliver the Matching Engine in 8 weeks from start to finish, which again is a pretty impressive feat. However, I doubt they had much time to focus on the wider impact of the introduction of this, or how it would sit alongside their other business objectives. This was a focused, task and finish, project with just one objective: to reduce FI’s liabilities and allow them to turn IS back on safely.

At this point it’s worth remembering that FI is a business. They’ve allowed us to make a lot of money out of their product but that’s not their overall objective. We don’t know exactly what they have in their longer term business plan but growth, expansion into overseas territories and then, perhaps, selling it all on for a profit, are some of the things that will feature. Some of these things may benefit us as individual traders, some won’t. That’s not their concern. We need to remember that.

The Matching Engine has fulfilled it’s main objective. It’s shifted the liability from FI (as IS) onto traders (as matched bids). They’ve very effectively ‘trapped’ all the money in the market. If you want to sell a player now, you have to find someone else to sell him to. This is a very sensible position for a business to take at this point in time, nearly 5 years into its development with a deep, global recession on the horizon. I don’t blame them for doing this at all.

Had they have simply turned IS back on in its previous form, I’ve no doubt that we’d have seen a lot of money leave the market. This would have had to come straight out of FI’s coffers with the resulting impact on their credit rating and damaging any future prospects for increasing dividends or any other incentives.

Alternatively, they could have gone straight into full order books. The thing is, I tend to think that full order books will only see the majority of prices drop even further still. We’ve already learnt that the ‘market buy’ price is almost meaningless but we currently have a stand-off between those that are low-balling bids and those that are stubbornly trying to market sell – but this does at least keep the market buy price on screen artificially high.

If sell orders had come in straight away, we may have seen a rush of sells, depressing the market temporarily. Traders may have seen their portfolio value drop through the floor overnight and that could have quickly snowballed. Better that they let us down gently and allow us to adapt to the new circumstances we find ourselves in.

Not only that, but I suspect introducing the next stage is more complicated than people realise, hence they want Nasdaq involvement in this. They have to have a plan for minting new shares into the market (how, and at what price?) and deciding what figures they show for our profit/loss, market depth and all of those other things. Everything we’ve come to understand about FI could change overnight – I understand their caution.

Reading this back, I guess this doesn’t sound too positive. I suppose what I’m trying to say is that I completely understand why some traders aren’t happy with the Matching Engine. It has made selling pretty damn difficult. But I don’t think it was introduced to make things easier for us as traders, so I’m not judging it by that. I see it as a necessary step to keep the business alive and moving in the right direction. It doesn’t mean I have to like it.

Let’s be fair though – it’s been great if you have money to spend. I’ve picked up some players at a huge discount. The issue is the lack of liquidity – market selling is almost impossible now, even on a good performance – but then I’m not buying from the market at the moment so why would I expect someone to allow me to sell to them at market price? We can’t expect to have our cake and eat it.

And remember, it’s also a really weird time for football, with extra subs, half-fit players and lots of dead rubber games being played out in the heat of summer. That’s got to have a some impact too.

We should try to be patient. FI have shown us what to expect next – full order books through Nasdaq – so let’s allow them to get that delivered. Then hopefully things like div increases, MB being fixed and all the other things that have been on their to-do list for ages will follow. We may really want them to introduce the sell side right now but I doubt it’s as easy as that. So we should buy and sell carefully, even sit tight for a bit or reduce our exposure if we’re really feeling unsure. If we’re feeling really confident, we should deposit more and sweep up the bargains while they are on offer.

We should also look at our own trading and think about how we’ll feel about order books coming in. If FI can continue to grow, which it should do, then natural growth within our portfolios is still possible but it won’t be the same mechanic as we’ve been used to. Up until now, FI has been several thousand mini-Ponzi schemes brought together under one Index. If I can convince someone else to buy the player I’m holding, I know his price will go up and I’ll profit – that has been the mechanic for capital appreciation, with somewhere between 600 and 900 shares moving the price by 1p.

That all changes with order books. Convincing someone else to buy a player is unlikely to directly impact on their price. We could see some fairly wild swings from week to week, depending on how other people feel about the intrinsic value of a player (dare I say, look at Footstock for an idea of how that might work – a real rollercoaster!). There probably won’t be a clear link between the number of shares in circulation and the price of a player.

Instead, we come back to dividends – the bedrock of the product. As more people join and trade, FI increase the commission they earn and (hopefully) this goes into an ongoing programme of div increases. This increases the intrinsic value of players and traders increase their bids as a result.

It also means that the product is now very much ‘trader versus trader’. If you want to make a profit by trading in and out of the spread, that means someone else has to lose. There is a big risk here for FI. If things get too complex, too difficult to ‘win’, we may see casual gamblers leave the platform. At some stage, they really need to decide who this is aimed at – the weekend punter or the serious trader. They’ve pitched their marketing and product changes at both in the past few years, often lurching from one to another. At some point they need to pick sides.

So in summary, I’m not excited about the Matching Engine but I understand that this is how it needs to be right now. Yes, it’s pretty dull at the moment and frustrating when you can’t sell but we’re in a transition phase so that’s understandable and let’s be honest, they probably didn’t take the time to think this through properly.

The next 3 months are key. FI need to give us some clear timelines for the next stage – ideally going straight to Nasdaq and full order books if they can. I imagine they’ll introduce this alongside a juicy deposit bonus and/or dividend increase to sweeten the pill and so that we don’t notice the fall in our portfolio value on screen (which is just a notional figure now anyway). If you don’t like the direction of the platform, that’s your time to get out – try to sit tight for now if you can.

I’ll be watching this closely too. I’ve all but abandoned any hopes of a ‘challenge’ this season as I can’t move out of my current positions. I’m checking spreads to see who I can sell and buying players that I’m happy to hold for a longer period. I think I’ll be a passive, sit-tight, trader for a while rather than try to push against something I can’t move. I’m still very positive about FI as a product, despite these bumps in the road.

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