How bookmakers make money
Back when, ‘I was but lad’, I stumbled into the world of bookmakers.
I arrived there via the football pools and thought I’d apply similar techniques at the bookmakers. But I soon realised there were a few problems doing this.
Problems
The first problem I had was getting the bet on, I couldn’t really bet in the size I wanted without being limited. Secondly, I could only do plain old vanilla betting. If I tried something more complex I’d often get my bets rejected and it was too painful to go through the process when I didn’t know if I had an edge. I came up with a really smart way of capturing value on improbable events, but it involved placing hundreds of bets. Figuring something was up, bookies simply referred the bet to head office who rejected it.
Then finally I realised that, in fact, one thing was the biggest killer and an impossible barrier to overcome. The over-round.
The over-round and house edge
The over-round is the theoretical margin a bookmaker makes when they price a market. At decimal odds of 4.00 a selection has a theoretical 25% of winning. You would calculate your selection’s chance by dividing the decimal odds into 1. So 4.00 = 1/4.00 = 0.25 or 25%.
If you have a four-runner race then add of these together and that equals 100%, that’s a fair market. Any one of those selections has a chance of winning, so the chance of any one of those winning is 100%. If you had a field of four priced at 4.00 the market is ‘perfect’ and in the long term punters wouldn’t win or lose against a 100% book. At 100% the book has zero over-round, zero house edge.
How bookmakers make money
The reality is that Bookmakers never price a market like this. It’s more likely to be five selections at 4.00 for a 125% book. So that means that, over time, they will return 125% for only ever risking 100%. The general rule of thumb is the bigger number of selections the larger the over-round.
If you want to play around with this concept, fire up a copy of Bet Angel and you can ‘be the bookmaker’ and play around with prices and the over-round. It will give you some decent insight into how to price a market and how prices will influence odds in a market. Click on the ‘manual’ column so you can play around with the prices and see how they affect the book value.
Differences between bookmakers and the exchange
I took a sample of races and found the following at bookmakers. A 17 runner, 130%, 8 runner 112%, 20 runner 130%. So you can see that some metrics come out of that immediately. Now, compare these to the over-rounds at SP on the exchange, these were 98.7%, 97.7% and 100.2% respectively for the same races. Yes, that’s right the prices on the exchange we so competitive that you could have backed at better than the chance of the event occurring on two of those three races and the third was only out by 0.2%!
If you look at the Grand National the book often reaches 150%+ but on the exchange is only slightly over that magic 100% mark.
Summary
In summary, even excluding skill factors and other favourable characteristics, on sportsbooks you can’t possibly win in the long term; on the exchange you can. That, in a nutshell, is why exchanges are just so much better places to bet than sportsbooks or traditional bookies, by a country mile.
The over-round is so low on exchanges that I have come up with value-based strategies based purely on picking off prices that are just too good to not take.
But hopefully you can see why there is no good reason not to place your bet on a exchange and not with a traditional bookmaking service. I never dreamed 20-30 years ago that prices would be so competitive and therein lies the opportunity.
Category: Betfair, Trading strategies
