Wednesday, August 14, 2019

Fixed Odds Betting Solutions Seem Simple, Because They Probably Are

You might've heard a lot about fixed odds betting over the last few months.

In horse racing, some quarters believe that fixed odds wagering would be welcomed, primarily due to the failings of the pari-mutuel system - namely, money dumps at 1 minute or closer to post, making the odds board look like barely a suggestion. I'm one of those people, in theory.

The gripes about fixed odds wagering frequently revolve around the immutable truth that, at times (especially if you have a clue what you're doing), your wager size will be limited, or the book will not even accept your bets - the "no sharps allowed" phenomenon.

This is not difficult to understand, of course. If someone is making 1% or 2% returns with lots of volume, your book can get killed in a hurry at $5,000 or $10,000 per bet. In a sport like horse racing, with billions wagered, the inside money, the sharps; it could be pretty hellish for those taking the bets.

What I find curious about this whole system is that the problems are completely obvious, but we've seen a solution that's already been vetted and works - a betting exchange.

If you wanted to bet $20k on a soccer game in the UK, it wasn't overly difficult with an exchange. Ditto if you wanted to get $1,000 down on a horse, or even an NFL game. There was usually someone there to match your price - there's sharp money on both sides after all - and if there wasn't, you'd hang your bid (or offer, if you prefer) at a more attractive price and would probably get matched.

The advantages of this system were pretty clear. There was little risk to the bookie and the consumer could place a bet of virtually any size, seamlessly, at takeout rates which encouraged volume and sticky LTV's. In addition, those who were "stuck" in a position, either personally or owning a book, could lay off action, or balance. It could be used as a clearing house.

Earlier this decade, though, the largest exchange - Betfair - went public, and then was swallowed up, as we often see in the current M&A century we live in. Perhaps the new owners needed more margin per customer and the book itself was better for that, or maybe there was another reason (or fifty); but for whatever reason, the exchanges were not marketed.

Despite this technology and its numerous advantages, it's not being used like it even was a decade ago. It's the cousin you forgot you had.

Meanwhile, markets have long taught us that when there's demand, there's going to be supply. In the Far East, unregulated betting exchanges and similar services have popped up. One exchange alone is rumored to be doing over $50B in matched markets - a good deal of it in horse racing. This excahnge was rumored to be bringing in close to 20% of Hong Kong racing's turnover, although that's probably high. There are several others, some in my view pretty scary, which are linked to money laundering and organized crime. 

As well, new unregulated full service betting companies are doing what we describe above - using the exchange as a clearing house. I won't link the site, but I noticed one betting service scours the web for your price, and if your price is not available, it will automatically place your bid for you on the exchanges. With some regulation it would be pretty much the perfect betting ecosystem. It's exactly how this is all supposed to work.

What if racing - with its near monopoly, regulatory capture and $500M or more in subsidy - created a system like this for the sport a dozen years ago? Perhaps in 2019, Draft Kings and other books, now happily taking sports bets, would be a forgotten cousin to the racing exchange.

Fixed odds betting is fantastic for horse racing. Placing a bet at 5-2 when you like the horse at 5-2 and getting 5-2 is the way things should work. However, it's simply not the way it is, or it appears it's ever going to be. For that we should not blame fixed odds, we should blame the system the power brokers have created.

Have a nice Wednesday everyone.

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