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Betting exchanges – a new world in betting

The emergence of betting exchanges has allowed the public to keep a greater share of betting turnover and allowed a knowledge of sports betting markets to be rewarded. In this post I also cover the concept of value betting and probabilities.

Chance and probabilty

All us punters have one thing in common. We are all trying to beat the bookie. Or, with the emergence of betting exchanges, the guy on the other side of the bet. For the average punter betting is just entertainment, a few quid on a Saturday at the bookies or between friends in the pub. A detailed assessment of the likely outcome is given only moderate consideration. The entertainment is most often in making the bet and the excitement of having a few quid on whilst watching the event. Collecting the winnings of course also has its pleasures!

Whilst the word “chance” may be used it’s not considered in detail. “Your team has no chance” is a term we may all have uttered. Of course, we do not mean it literally. Both teams in a match have some chance of winning. My question is, can that chance be accurately measured?

The answer you may be surprised to hear, given the leaning of this website, is “no”. It cannot be accurately measured but it doesn’t need to be either. Fortunately, it is possible to calculate the likely or ‘probable’ chance of a team winning. And, if you can on average predict this more accurately than your opponent then over time you will win.

Long run outcomes and “white noise”

Let’s say Man U are playing Derby. If it were possible to play this match 10 times on the same day Man U may well win 9 of those matches. The odds before the match will likely reflect this as they would Derby’s 1 in 10 chance of winning. However, on 1 of the 10 occasions Derby will win. The result does not suggest Derby are better than Man U. Indeed the result on it’s own does not say anything other than Derby beat Man U on one occasion. The win will likely have been by 1 goal and it may have been a shocking penalty decision which led to the goal. Or it may just have been that on this one occasion Derby played better than Man U,

Random events are often referred to by managers as ‘bad luck’ and they occur in matches all the time. They include referees having an off day, a ball bouncing badly on the pitch and so on. And sometimes, rarely, but sometimes they are enough to lead to an unusual match result. This is known as “white noise”. It is the immeasurable part of the outcome which over time has no significance. That is to say, ‘luck’ or randomness evens out over time.

We cannot and indeed do not need to measure this randomness. We are no more disadvantaged by it than the bookie or our betting ‘opponent’. What we must measure are those variables which are measurable. And to make a profit we must measure them more accurately than our opponent.

Information and efficient markets in betting

The efficiency of financial markets is an extensively covered topic. One requirement for perfectly efficient markets is that all participants have access to the same information. Most financial markets are not efficient as there are barriers to accessing relevant information.

In horse racing this is also an issue and one much discussed. In football however it’s less of an issue. Certainly in Premier League football where the stakes are so high I do not believe that either games are fixed or that information is not quickly and accurately disseminated. At least the inside knowledge in Premier league football is insignificant relative to the volumes being staked. Remember the end of last season when most of Tottenham’s players had food poisining. We all knew about it before the game because there are sports journalists in the hotel whose job it is to get that information out to us quickly. Sure, when it comes to the national team we even know what players have for breakfast and who the manager is sleeping with!

My point here is that we all have access to the same information with which to make our decisions. We have as much information as the bookie. And what’s more with the advent of betting exchanges and the liquidity of the Premier league betting markets we have access to as much information as our opponent on the other side of the bet.

Finding value in odds and a profit in betting

We cannot measure randomness, by definition. What we can measure however is probability. This can be done by assessing the available information as discussed above. This may include the previous results between 2 teams, the recent form of the teams, the injury list, so on and so forth. This information is available to us all. Some of it admittedly just before the game but enough to make a very good estimate of a team’s chance of winning.

When you use this same information better than your opponent you will find value in the odds being offered. As long as we do not all have the same opinion and therefore the same pricing of odds there will be perceived value in the market. And, if you calculate the probabilities better than your opponent in the long run you will earn a profit.

Bookies’ profits and the emergence of betting exchange markets

The bookie does not have a magic machine which tells them the correct odds. They use the information available and make an educated guess. Sometimes they get the odds wrong because they don’t do their homework. The bookies however have made millions not just because they know the markets and do their homework but also because they control the market. Or at least they did.

Bookmakers it is estimated fixed odds some 12% in their favour below the true or fair value odds. That is to say they calculated the odds of a team winning and on average deducted 12%. This 12% was their gross profit and was needed to pay the wages and shareholder returns. In the old world of betting it would only have been reduced by efficiencies or new bookies coming into the market.

Now we have a new world. When Peter bets against Paul on Betfair they have no overheads related to the bet. There is no inbuilt profit margin. The only leakage is in the commission paid to Betfair. Currently this is 5% with Betfair, 3% with WBX. Therefore if you are able to better assess the probabilities than the rest of the market by more than 3% you can earn a profit. Not a consistent one but a profit nonetheless.

What’s more is you can specialise. You can learn everything there is to know about Hungarian darts and then take money off someone else who just fancies betting on the weirdest sports events they can find!

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