Most Bookmakers Do Not Like Winners - Part 2
Posted 15th May 2013
Read part 1 here.
Having been refused three times by Meridianbet to bet a two-figure stake at their publically quoted odds it was clearly time to abandon this bookmaker. At the same time I decided to file a complaint about them with Sportsbookreview.com, an unofficial online watchdog of bookmakers. Sportsbookreview lamely took the view that the practice of putting "sophisticated" players on a 'delay' to allow traders time to assess the liability of a price was a bookmaker's right which allows them to manage risk as they see fit. That is perhaps understandable (although I would argue still unacceptable) if a punter has become well known to a bookmaker for his winning practices. In this case, however, how was Meridianbet able to determine whether I was a "sophisticated" player from my first requested wager? If the answer to that is because I have targeted a price that is out of line with the rest of the market then the implication must be that any punter attempting to back such a price, even if for their first bet with the brand, will be faced with the same barrier. By extension then, it becomes impossible to back certain prices as advertised by Meridianbet. Either this means that Meridianbet's price management technology is not fit for purpose or it means that it leaves inefficient prices 'out there' for advertising purposes. Probably the answer is both, the latter because Meridianbet wish to be seen to be value-friendly (by popping up all over the odds comparisons) and the former because it doesn't see enough volume due to an absence of active customers.
At this juncture, it is worth ruminating on exactly why a bookmaker will refuse his customer a bet at a quoted price, and what this has to do with risk. Of course, all sports betting is really just a game of probability, where there is never a 100% guarantee that one result or another will be observed. The best that we can do is make predictions about the most probable outcomes, based on things like past performance and current "conditions" (which might include the stake of the team or player and their opposition, the weather, motivational factors and so on). This goes for both the backer and layer of a bet alike. When a layer decides to offer a price, really what he is doing is taking a risk position concerning the outcome of an event. The backer, in choosing to accept the layer's price, is doing the same thing. Presumably, where both the backer and the layer mutually agree to strike the bet, both believe that the other may have overestimated the chances of their chosen result occurring. In terms of risk, each party believes they are taking less of a chance than the other. Presumably also, if one party decides that he might be taking more risk than the other, he can choose to opt out of striking the bet. Betting after all is purely a consensual exercise that requires the agreement of both parties.
Such a model of betting might be described as "them versus us", being as it is a battle of egos. A "them versus us" betting model is adequate to describe what might take place between two individuals, but is it really suitable to describe the business model of a bookmaker who, after all, is striking potentially many thousands of bets on any particular market and for all possible results, whilst attempting to manage and balance liabilities? Presumably, his job is to try to ensure that, with bets taken on all possible results for an event, he will make a profit no matter what the outcome of the event. Sadly, on the evidence of limitations, restrictions and outright bans, it would appear that for many brands the answer to that is yes. In my opinion, this does not represent the best business strategy for the bookmaker.
The prime, indeed sole, objective of a bookmaker, like for all profit-making companies in a capitalist society, is to make money, either for its owners or its shareholders. That being the case, the most sensible business model for a bookmaker is the one that will maximise the risk efficiency of his returns, that is to say maximise profit whilst minimising the risk taken to generate that profit. What happens if the bookmaker plays the game of "them versus us"? Let's construct a simple scenario.
Egobet, a bookmaker who thinks he's pretty good at laying odds, decides he can offer 2.0 for Nadal to beat Federer, believing that Federer has a 55% chance of winning, for whom he sets his odds at 1.73. Meanwhile, the rest of the market rate Nadal's and Federer's chances equally, and offer odds of 1.85 for both of them. The overrounds for both Egobet and the rest are more or less the same. At this point "sophisticated punter" shows up wanting to back the 2.0 for Nadal. Egobet realises he might have made a mistake so refuses to let "sophisticated punter" place his bet, offering instead a price of 1.9, which the punter declines. Egobet, meanwhile, refuses to drop his price for Nadal, hoping to use it to attract a few "mug punters" who just happen to see it, but know nothing about betting value or using an odds comparison to check best prices. "Limited punter" now attempts to back the 2.0. His stake is refused, and he's offered the 2.0 but only at one tenth of the amount he originally wanted to bet. He doesn't bother. Later that day, "limited punter" receives an e-mail from Egobet telling him that because his betting patterns have been identified as potentially loss making for the bookmaker his account has been closed forthwith. Throughout all of this, few customers are bothering with Egobet's 1.73 for Ferderer, since they can get 1.85 everywhere else. Eventually, Egobet decides to shorten Nadal to 1.9 and lengthen Federer to 1.8. He manages to take some money for Nadal, but again restricts a number of his "limited" customers to small stakes, whilst still seeing little interest in his 1.8 for Federer. The match begins with Egobet having taken just 4 figures of trade on the event. Meanwhile, Egobet's limited and banned customers have decided to write about their experience at "knowledgeable betting forum".
Of course this scenario is absurdly simplistic and wholly unrealistic, but the theme of it is relevant to this argument. In terms of flow of money, what are the consequences for Egobet with regard to the management of this Nadal v Federer book? Not only has he severely limited the amount of money taken on the market by limiting and/or refusing bets on Nadal at the superior price (compared to the rest of the market), he has also potentially created a greater liability because none (or very few) of his customers have bet his inferior price for Federer. If Federer wins, great, but if he loses, Egobet is faced with losses, albeit not large because he restricted the flow of money on Nadal, but losses nonetheless. Meanwhile, his reputation has taken a beating with the likelihood that existing customers will just give up on him and potential new ones will just look elsewhere.
This whole scenario arises because of Egobet's attitude to risk. In the first instance he takes the view that because he knows a thing or two about tennis betting, be believes that he has out-thought the rest of the market by pricing Nadal higher than everyone else, with the effect that customers will be attracted to his market leading odds. However, should a disproportionate amount of interest be shown in such a market leading price, Egobet is then faced with a choice of how best to manage his market liability. On the one hand he could choose to limit the flow of money on Nadal by restricting the size of permitted stakes; on the other hand he could more rapidly shorten Nadal's price in an attempt to increase money flow towards Federer. Of course Egobet, as his name would suggest, takes the view that he's better than all his customers at predicting tennis match outcomes. He offered his 2.0 for Nadal precisely as a challenge to his customers to take on his traders. When many of them decided to take up that challenge, he chose to limit their stakes and keep Nadal's price unchanged. The consequences of this strategy were twofold: 1) too little money was taken for Federer, and 2) money taken for the market as a whole was restricted. Less turnover means less profit in the long run. Egobet might have had a big ego but unfortunately it would seem his bank balance did not measure up in the same way.
What if Egobet had swallowed his pride an decided to drop Nadal price to 1.85 early on? More generally, is there a better way for a bookmaker to do business here than merely treating his customers as enemies to do battle with in a war of probability and prediction? I would argue yes. Let's call it the "exchange" model.
When the betting exchange Betfair showed up a decade or so ago, it changed the face of online sports betting. Here was a company that not only allowed customers to back outcomes; it also permitted them the opportunity to lay them as well. In fact, Betfair was merely facilitating its customers to strike and lay bets against each other, taking a small commission from all winning outcomes. As such, Betfair was a neutral and passive bystander, caring nothing for who actually won the bet or the sporting event its customers were betting on. All it had to do was maximise turnover to maximise its profits. Betting markets would drive themselves towards efficiency, with the weight of money from customers driving prices one way or another according to the available information about the betting market. For Betfair the risk was essentially eliminated.
Bookmakers, of course, are slightly different to betting exchanges, since they are still in the business of laying the odds to their customers, and therefore still face risk dependent on the flow of money and the outcome of sporting events. However, because bookmakers are laying all possible outcomes in a betting market, they have the opportunity to control the flow of money by manipulating the odds. If too much money flows in for one side, he can drop the price, raising the one for the other side to attract more money there.
Seeing the genius of the Betfair exchange model, Cleverbet decided he could do much the same thing. Instead of holding tight on published prices and limiting stakes to control liability, he realised that if he just let the flow of money drive the prices without actually taking a view on what the "true" probabilities of sporting outcomes might be, this business model would much more readily allow him to balance his risks. Furthermore, his "sophisticated" customers would more quickly drive his markets towards efficiency anyway, since their stakes would quickly drive the market towards where it wanted to settle. Let's rerun the scenario above.
Cleverbet decides to follow Egobet's lead and price Nadal and Federer at 2.1 and 1.8 respectively. He's more generous that Egobet because he knows that his business model will generate more turnover, thereby affording him the opportunity to offer a reduced overround and profit margin. "Sophisticated punter" quickly arrives and dumps a large stake on Nadal at 2.1, which is gladly accepted. Realising the 2.1 was clearly too ambitious, Cleverbet immediately shortens Nadal to 2.0 and again to 1.95 and 1.9, lengthening Federer to 1.9, 1.95 and 2.0. As Nadal's market leading price disappears, Federer becomes more attractive in the eyes of his customers, outperforming the rest of the market and Egobet, who is still stuck with 1.73. With Federer now at 2.0, an excess of money begins to flow in for him, so Cleverbet readjusts to 1.95. As so it goes on, with the prices for Nadal and Federer repeatedly changing to reflect the money flowing in for them. All the while, Cleverbet limits no stakes and sends no e-mails out to customers telling them that they are no longer wanted. Perhaps a little note is added to "sophisticated punter's" account to alert traders that this chap has a profitable edge and can be used to help the brand move to more efficient markets more quickly. By the start of the match Cleverbet has taken a 6-figure trading volume on the Nadal v Federer market, and because his prices have been actively managed throughout, with no personal regard to what he thinks might actually happen, he is looking at a 2.5% profit regardless of whoever wins.
Federer wins. Egobet is feeling pretty chuffed with himself, having taken the correct view about the match and taken a decent profit over turnover from the event. Unfortunately the turnover was limited to 4 figures, so the absolute profit is limited too. Cleverbet just enjoys the game. He takes a 2.5% profit of his 6-figure turnover knowing that it would have been the same had Nadal won. Next time Egobet might not be so lucky. Nadal might win and then he'll be showing a loss. He then discovers that Cleverbet has taken far more profit than him anyway. He doesn't half feel like a chump.
To reiterate, such an account is quite extreme. It goes without saying that most bookmakers are far more sophisticated that Egobet, and are far more active in controlling liability through price adjustments than he was. Nevertheless, the point of the account is to illustrate how and why some bookmakers will also use staking restrictions and account closures to control their risks, and why I believe that this is a completely misguided approach for a bookmaker to adopt. The consequences for the bookmaker who chooses more of a "them versus us" approach over an "exchange" or "hedge fund" methodology are stark: limited turnover, greater liabilities and damaged reputation. All of these will mean less profit. If that is so, one might wonder why some bookmakers still choose to see betting as a war of egos.
For "Cleverbet" read Pinnacle Sports and the newer bread of Asian bookmakers. For "Egobet" read some of the smaller UK and Irish brands with a history in the high street and may of the online European bookmakers. A brand like Pinnacle Sports can see prices change on a market in the run up to the start of an event perhaps 100 times or more. By contrast, dinosaurs like Interwetten might not change a price once, whilst others like Stan James can be observed to be advertising market-leading outliers long after the rest have shorterned, presumably in an attempt to attract the custom. But what's the point of attracting that custom if you won't let it repeatedly take advantage of the outliers and inefficiencies? It might come as no surprise that both these brands have attracted an unwanted reputation for banning winnning punters. It might also come as no surprise that both brands sit outside the top 20 bookmakers as ranked by Top 100 Bookmakers for traffic (and presumably by extension cutomers and turnover). As previously discussed in part 1, having less turnover in the first place will make the balance of liabilities on betting books more problematic. If the turnover has been limited precisely because of the type of business model employed by the bookmaker, so the negative feedback sets in. "Them versus us" drive down turnover; lower tunrover increases risks; increase risks means more restrictions; more restrictions means less turover; less turnover means..... and so on. So much for "them versus us".
UK and Irish bookmakers in particular and perhaps understandably have their roots in a "them versus us" mentality that is still very much in evidence amongst the on-course racing bookmakers. Many of them were established by individuals who doubtless still see themselves as forecasting experts who enjoy the cut and thrust of a wager. When punters cleverer than they are take away some of their profit, it appears simpler just to stop them doing it. This account surely identifies why that is not the right approach. Not only do winning punters help bookmakers identify mistakes and drive markets more quickly to positions of efficiency, they also ensure that the flow of money on the markets remains healthy. Despite some large egos in this industry, there will always be customers better at forecasting sporting outcomes than they are. Once the old-school bookmakers realise that it is actually the winners who drive the markets, and who create the opportunities to deliver the turnover and profit margins for them, then so much the better. Once the old-school brands understand that it is the losers, not the bookmakers, who are paying for the winners, once they stop believing that they are pitting their wits against their customers, and embrace the idea of the full exchange model for the management of bookmaker liabilities then their owners and shareholders will be that much more rewarded. If instead Egobet just beats his customers into submission by refusing to let them bet publically quoted prices, refusing to let them bet full stakes and ultimately just telling them that they are not wanted, he will forever remain underachieving, unrespected and unused. In the extreme Egobet will disappear. Bluesq, recently swallowed up by Betfair for a price of just £5 million, was a brand whose previous owners had been unable to make any profit on. Was that because of the way it was managed? If my account closure after just one bet on a Conference football match is anything to go by, I would argue most definitely yes.
Patrick Veitch, writing in his book Enemy Number One: The Secrets of the UK's Most Feared Professional Punter made the observation that under currently legislation, in the UK at least, bookmakers are permitted to advertise prices only to refuse to take a single penny if they are too wary of placing the bet. Meridianbet, with a dysfunctional approach to risk management had, with me, clearly taken the meaning of "wary" to the next level. Whilst I agree with Patrick that it is high time the regulatory framework governing online sports betting considers the introduction of minimum trading standards for bookmaking such that any firm is obliged to accept a minimum level of bet based on its liability, I fear that this will be a long time, if ever, in coming. Bookmakers, naturally, will always be able to fall back on the argument that whilst betting requires the consent of two parties, it remains their right not to accept a bet if they choose. In the meantime, therefore, it is essential that customers continue to vote with their feet. Bookmakers like Meridianbet and Corbettsports have no place in the world of online sports betting, and the sooner such brands can be consigned to the scrap heap of history where they belong, the better. If punters refuse to bet at all with such bookmakers it will only be a matter of time before they fold and disappear. Low turnover brands and those who despise winners are of little use to the sophisticated sports bettor, other than to make a quick buck before the predictable restrictions are imposed. If you're not being restricted then it probably means that you losing money, and if you're not losing it yet, "Egobet" believes you soon will be.
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BeGambleAware
