Sharps vs. Bookies: A Brewing New Encounter

Despite massive amounts of data, bookmakers are still very vulnerable. Groups that want to take advantage of perceived weakness of bookmakers don’t need at that data—just a smart strategy. Gaming veteran Bruce Merati (l.) explains.

Sharps vs. Bookies: A Brewing New Encounter

An article issued in October 2017 edition of “MIT Technology Review” discusses in detail a report by a team of researchers headed by Lisandro Kaunitz at the University of Tokyo. The team developed a straightforward method to profit from online betting, however when they put their strategy into practice the sportsbooks banned them from betting. The paper calls on governments to regulate the gambling industry to prevent this practice.

The article titled “The Secret Betting Strategy That Beats Online Bookmakers” covers a 10-year history of online betting on European soccer teams and argues that promoting goods or services with the intent not to sell them as advertised is false advertising and carries pecuniary penalties in countries such as U.K., Australia, and the U.S. The research team demonstrated that the betting market is inefficient and illustrated how the sports gambling industry compensates its market inefficiencies with discriminatory practices against successful bettors.

Rather than building a forecasting model to compete with bookmakers’ predictions, the team developed a simple betting strategy that exploited the probability information implicit in the odds publicly available in the marketplace to identify bets that were mispriced. For example when a large number of fans are expected to bet on a local event, a bookmaker tends to hedge its risks by offering more favorable odds on the opposite outcome to minimize large-scale potential losses. This strategy creates an opportunity for those who spot and exploit them when they happen.

The approach that the researchers developed was a methodology that can identify these kinds of opportunities. The strategy assumes that bookies are good at setting odds and the prices they offer are an accurate reflection of the real probabilities of a win, draw, or loss, plus their own margins. Their conclusion was that a simple average of the odds offered by all the bookies, a kind of wisdom of the crowd, was remarkably close to the real probabilities. They suggest that once a mispricing is identified then it is a matter of analyzing all other odds offered, finding the outliers and calculating how favorable the outlying odds are. If they are good enough, then the bet strategy should pay off over time.

In the past, when Nevada was the only state offering legal sports wagering, this kind of strategy was not as viable in the U.S. as it has been in Europe, which has numerous soccer teams in different countries and regions competing with each other, each one having its own diehard fans rooting for their teams by placing wagers online. As more and more states offer sports betting, mispricing will be rising rapidly in the U.S. The first highly visible instance was the 2019 Super Bowl where the sportsbooks on the East Coast saw heavy actions on New England Patriots and West Coast operators saw more bets on Los Angeles Rams.

With the spread of sports wagering across the country, clashes will brew up where successful bettors will be accusing casinos with false advertising if their wagers are denied. Even though casinos in some states have been somewhat successful in defending their practice of refusing advantage players from playing a game such as blackjack within the boundaries of their property, the same argument will not hold now that sports betting is getting legalized nationwide especially with operators making their odds publicly available online. One can reasonably argue that bookmakers cannot, at their sole discretion, discriminate against online players, also chances are that they can’t even do it at their properties.

Anther factor that makes U.S. operators even more vulnerable is that they have regulatory geographical boundaries that their Europeans historically have not had so far. By confining their activities to the boundaries of a specific jurisdiction, U.S. sportsbooks are more exposed to undue risks, exacerbating their exposure and making them even more susceptible to exploitations by the sharps. Nevada operators over the years learnt how to protect themselves from the wiseguys, however the landscape has now changed. Casinos will recognize that they are not insurance companies and should not be in the business of taking risk on the outcome of an event that is beyond their control. A sportsbook is a B2C business with the legal mandate to facilitate the process of taking wagers from consumers and making payments when they win.

One thing gaming operators have to be careful about is the danger of a new legal encounter with consumers that will give the leagues and the federal government the reason and the justification that the industry by itself cannot manage the business fairly and they need to intervene to manage it better.

To overcome the regulatory and jurisdictional challenges facing U.S. bookmakers, licensed B2B odds providers should act as the conduit between casino operators and B2B odds and risk management providers. These two B2B service providers manage the risk for all the participating B2C operators, allowing them to layoff their risks into a cooperative exchange. Alternatively they may take a wager without any risk and get paid a percentage of the wager as a rake or commission, a scenario that would make a lot of sense for an international event that the operator does not otherwise want to offer because of its risk.

By generating dynamic odds with the goal of balancing the wagers on each side of an event for the group as a whole, the sportsbook industry can create a more robust business rather than each one constantly be worried about the risk associated with an event. Without such a structure, a group of individuals spread in different parts of the country can partner up to profit from the price imbalances of a number of fragmented markets at the expense of the operators and the states who rely on them for their tax revenues.

The securities industry discloses the terms and conditions that clearly explain the quoted prices are only good for a minimum quantity of stock. Broker-dealers are only obligated to buy or sell at those prices for a pre-defined amount of shares. Once it fulfills that obligation, the market maker can change the price, after that it is up to the buyer or seller to accept the new price. To avoid the risk of complaints, sportsbooks should develop and follow a similar practice. The minimum wager amount could vary depending on the sporting event, however it is critical they are clearly disclosed. Backing away entirely from a punter’s wager could create legal challenges and long-term ramifications.

Overall, sports wagering is a game of expression of opinions that fans play with each other where a book is the referee and like any other game there has to be one referee that manages the game, having several linesmen making the final calls will cause chaos.

Articles by Author: Bruce Merati

Bruce Merati is cofounder of BC Technologies, a sportsbook system provider and CEO of Uplay1, a gaming IP company.