Countdown to launch…

So here we go. After months of waiting for news on the next steps in the evolution of FI, they drop an announcement on us at the end of the day on Friday. And it’s a long one – lots to digest at this stage. If you’ve not already seen it, I highly recommend you take a look here (but grab a cuppa first).

This all comes hot on the heels of the dividend review just over a week ago which effectively doubled the underlying value of many of the players on the Index.

I’ve been critical of FI in recent months but the last couple of weeks have gone a long way to restoring my confidence in the product. The comms has been spot on and it really does look like they are trying to approach these announcements in a more mature way (without the rocket emojis). I appreciated the honesty in acknowledging that they didn’t get the review right the first time, and Adam Cole taking a step back from personal contact with traders, handing this over to a new Communications Officer, is also a sign of FI maturing. Most importantly of all, they’re hitting the timelines they originally gave us.

I’ve always said that the successful introduction of order books depends on clear communication from FI and, most importantly, launching it into a rising market where sentiment is good. So far, it looks as though they are winning.

Breaking down the announcement a bit, we’re moving into a transitional phase (another one!) from 10th September until 1st October. During that period we’ll be in a sort of hybrid market where traders can use the order book system (setting sell offers as well as buy orders) but also continue to sit on players in sell queues in the hope that they may still sell. There are a couple of important points to note here.

“Traders will be able to add Offers within the Offer Zone alongside existing Sell Queue Orders. When prices are the same, Offers will take precedence over Sell Queue Orders. This will allow Traders to familiarise themselves with Offers and provide flexibility in how they manage their Portfolios before the Sell Queue is dissolved.”

I think this makes it pretty unlikely that much will shift from the sell queue during this period (as has been the case for a long while now). There’s a big incentive here for traders to unlist their shares, especially given this additional point:

“During the Transitional Period, Shares within the Sell Queue will continue to follow our current supply and demand pricing mechanism, and will be sold in chronological order.”

FI are confirming that the pricing mechanism (prices drop by 1p for roughly every 600-900 shares listed, and rise by 1p for roughly every 600-900 shares bought) will continue to apply until the 1st October. So unlisting shares before then should mean that prices gradually rise upwards for those remaining in the queue but also pulls the ‘floor’ and ‘ceiling’ upwards, benefiting all sellers. I think this is deliberate from FI, forcing us to pull prices upwards as much as we can before full order books come in (which is likely to cause some initial drops).

It’s also a liquidity issue. Many of us will have had thousands of pounds worth of shares stuck in the queue for months – that money is trapped. Better for us to start selling those players via offers and reinvesting that money into other holds (and throwing some commission at FI along the way).

So here we are – it’s really happening. Whether you are new to FI or an veteran, now is the time to make sure you’ve got your mindset ready for this change. As I’ve said before, order books will significantly alter the dynamics of FI and we need to be ready for that. Some of the strategies that we used to rely on in the past won’t work so well from now on. It’s time to adapt.

The actual mechanics of order books should be fairly straightforward, even if it doesn’t feel that way reading through the initial comms. I fully expect FI to give us more information about this before the 10th (probably an explainer video) so that everyone is clear about how to buy and sell.

There are some things that remain unanswered however. Below I’ve put some thoughts on the bits that remain murky at the moment and will need clarification before 1st October.

How will FI set the price for the minting of new shares?
This is the big one really. The current pricing mechanism, (described above, also called the delta) is only certain until 1st October. After that, it seems as though traders, and traders alone, will be responsible for setting the buy and sell prices on each player (within the restrictions of the zones).

There is a bit of info about share issuance in the comms: ‘Football Index will facilitate this sale by placing a controlled volume of Sell Orders at each price level including and above a footballer’s IPO price. The number of Shares that Football Index issue at each price level on an individual footballer basis is known as the Issuance Curve.

I look forward to seeing more information on this. Hopefully the FI issued shares won’t jump in front of traders offering shares at the same price point.

The other question is what happens when FI need to offer shares as there are none already on the market. Will they start at the last sale price? Or a price that relates to the original delta? Does this have the potential to cause some quite sudden and dramatic jumps?

I’m not clear on this at all but my best guess is that they go back to the delta for this. I think the recent Messi scenario is a good example of why. His peak price, based on the delta, is over £8. His last sale was probably at around £5.50. If all the current holders withdrew their shares from sale, meaning that FI would have to start minting shares again, would it make more sense for FI to mint them at £8 or £5.50?

I think the answer is £8. Why? Because the only scenario in which traders would want to continue to hold rather than offer their shares for sale is when his price is moving upwards – so FI have to go high initially and then wait to see if that prompts any traders to start to undercut that.

Since IS was turned off in March, no shares have been removed from the market – this is presumably still going to be the case, or will the market makers carry out this function?
I don’t think they will and I’m not sure yet whether this is something we need to worry about. The players buy price will be largely set by traders, rather than by the delta, so perhaps the number of shares in circulation isn’t something for us to worry too much about.

This certainly looks the case given that the Buy Now price will now be the average of the 300 lowest offers. These offers don’t have to be taken up for the price to move upwards – they could be cancelled and it would automatically move up to the next lowest 300. In that respect, I think it’s pretty clear that we are now in control of the prices and the delta probably only applies when there are no shares in circulation.

However I do think we need to be wary about what happens as players reach retirement. Let’s take Messi as an example again. He’s recently peaked above £8 so we know that there are an awful lot of shares in circulation. When he finally decides to retire (or move to the MLS) the holders of those shares will all be wanting to sell. Even with his price gradually reducing, I’m not clear that there will be anywhere near enough willing buyers to take them so there could be tens of thousands of shares just left in limbo at the end of it. Holders will be left with them in their portfolio as a ‘lost bet’. And what happens then? Do they eventually just get wiped?

As I said in my previous blog post, the game has changed and some of us need to lose for others to win. I just worry a little about how many people are going to get burned by situations like this in the future – especially given that we’ve not really seen a big retirement since the platform started.

What happens when the remainder of the sell queue is ‘dissolved’ on 1st October?
It’s not clear to me what price these shares will go back into traders portfolios at – whether the delta will still apply at this point, and whether that will have a knock-on effect on anything else, as mentioned above.

What I do think is clear is now is the time to unlist if you have shares in the queue. Unless you are right at the front of the queue and your shares are selling, there’s really little benefit to keeping that money tied up now. If we see a wave of unlisting now, that will help to pull up the offer zone before this all kicks in.

How dynamic will the market floor be?
FI indicate in their comms that it will be a different percentage for each footballer. Hopefully this means that they can be quite responsive to changing demand e.g. dropping the floor on less in demand players to encourage bidding and improve liquidity across the platform.

Why have FI capped the ceiling at 10p above the Buy Now price?
This is a curious one to me and I am a little surprised that they’ve done this at a flat rate rather than proportional to the Buy Now.

I imagine this is probably just part of the transition, to stop things being too volatile at the start and buyers getting accidentally stung by traders working together to move prices. I also wonder whether it’s part of protecting the revenue stream for FI, ensuring they can benefit from any FOMO rises by minting new shares. It probably means there’s little sense in traders putting in speculative sell offers at the ceiling price though, as we’d probably prefer to hang on and let the FOMO kick in to rise the price, rather than get caught with our pants down and accept a measly 10p on a large rise.

If you’ve got thoughts or questions about all of this, feel free to get in touch with me on here or over on twitter at https://twitter.com/Football_MDJ.

P.S: Unlist! 😉

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