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Pros and Cons of Backing and Laying

There has been much debate recently about the supposed integrity concerns that are raised when customers back a horse not to win (“lay” in betting exchange parlance) on a betting exchange.  Similarly, there have been suggestions that those customers who “lay” on a betting exchange should somehow be treated differently to those who “back”.

Opponents of betting exchanges have suggested that the ability to “lay” on a betting exchange is suddenly undermining the integrity of the sport.  They claim that betting exchanges offer customers the facility to back a horse not to win for the very first time.  This is not true: it has always been possible to back a horse to lose using “traditional” betting outlets such as Totalisators and bookmakers because backing and laying are effectively the same thing.

This note demonstrates why this is the case.  Similarly it also demonstrates why an attempt to differentiate between “backers” and “layers” can not work in practice and would unfairly discriminate against one set of customers.

1. Basic Principles

In a free market betting odds should accurately reflect the market’s view of the likelihood of the outcome in question occurring.

Consider a 4 horse race where all 4 horses are considered equally likely to win.  The probability of any one horse winning is 25%, or 1 in 4. Its odds would therefore be 3-1 before any profit margin is taken into account (ie decimal odds of 4.0.  The decimal odds are the reciprocal of the percentage chance of the outcome occurring).

Customer A wants to back horse 1 to win.  He bets £100 on horse 1 at odds of 3-1 to win £300.  He is risking £100 in return for the possibility of winning £300 if his chosen outcome (ie horse 1 wins) occurs.

If the race is run 100 times, Customer A will expect to win £300 on 25 occasions and he will expect to lose £100 on 75 occasions.  His expected profit/loss over the 100 races will therefore be zero.  This is consistent with the assumption that the market is efficient and that there is no profit margin.

When Customer A backs horse 1 to win he is betting against Customer B who is backing horse 1 to lose.  Customer B must risk £300 in return for the possibility of winning £100 if his chosen outcome (ie horse 1 does not win) occurs.  He is backing horse 1 not to win at odds of 1-3.  If the race is run 100 times, Customer B will expect to win £100 on 75 occasions and he will expect to lose £300 on 25 occasions.  His expected profit/loss over the 100 races will therefore be zero.  This is consistent with Customer A also having an expected profit/loss of zero. Everything Customer B does is the inverse of what Customer A does, starting with the fact that he backs horse 1 not to win at odds of 1-3.

Customer B is actually backing one of horses 2, 3 or 4 to win since if horse 1 does not win then one of the other horses must win.  This proved by the fact that if Customer B wants to back horse 1 not to win he can simply place £100 on horse 2 to win at 3-1, £100 on horse 3 to win at 3-1 and £100 on horse 4 to win at 3-1.  If horse 2 wins he will win £300 on that horse but will lose £100 on horse 3 and will lose £100 on horse 4.  His net profit will be £100.  Similarly if horse 3 wins his net profit will be £100 and if horse 4 wins his net profit will be £100. However, if horse 1 wins he will lose £300 (ie the total stakes placed on horses 2, 3 and 4).

This is exactly the same profile as when he directly backs horse 1 not to win.

This example clearly demonstrates that “laying” a horse, which is merely backing that horse not to win, is identical to backing the field (ie backing all of the other horses to win).

This is the principle on which every single Totalisator system in the world is based.

Exactly the same incentive for skulduggery therefore exists whether punters can bet directly on a horse losing (as they can by “laying” on betting exchanges) or merely on every other horse winning.  What sets betting exchanges apart is their willingness and ability to provide precise details on who is involved in any suspicious betting activity (whether it be backing or laying) so that the appropriate authorities can act.

Detractors of the exchange model argue that once profit margins are included, this theory goes out of the window. They claim that in reality, it is impossible to achieve the equivalent of “laying” a horse on an exchange by backing the field against it. They are wrong. The most recent high-profile examples of horses allegedly under performing as a result of betting exchanges” demonstrate that very clearly.

KEY EXAMPLES

There have, recently, been 2 examples of races in the UK where the opponents of betting exchanges have tried to claim that betting exchanges undermine the integrity of the sport.

They claim that because punters were able to back a horse to lose in each race the opportunity existed to benefit directly from that horse losing.  They sough to infer that this was only possible on a betting exchange.

Looking at the two races in question it is easy to see that in actual fact this opportunity existed with traditional bookmakers as well.

Ballinger Ridge

The first race was at Lingfield Park on 2nd March 2003.

The race was won by the favourite, Rye, which had a starting price of 8/11.  But the race caused controversy because of the way the 15/8 second favourite, Ballinger Ridge, was beaten.  Some people claimed that comments allegedly made by Kieron Fallon, the horse’s jockey (and subsequently revealed in the press) that he thought the favourite would win, were evidence that people had deliberately backed Ballinger Ridge not to win because they knew he would not.  At no stage did Fallon say directly that his own horse would lose; he is alleged simply to have said that he thought Rye would win.  (The obvious link between one horse winning and another horse in the race not winning – so clear here – is the same one denied by those who claim that it is impossible to oppose one outcome simply by virtue of backing the other).

Let us suppose that someone did know that Ballinger Ridge would not win and wanted to guarantee a win of £100 as a result.

Clearly, this person could “lay” Ballinger Ridge (ie back it not to win) on a betting exchange, accepting a stake of £100 and offering whatever odds he wanted.  In this instance, the person would leave an indelible audit trail which would include every single detail of his bet, including his identity.  Furthermore, if the bets were placed at unrealistically high odds then this would alert authorities to something suspicious with the race. 

Alternatively, the person could have a series of bets with traditional bookmakers on the other horses in the race and still guarantee himself winnings of £100.  Had the person backed all the other runners in the field, it was quite possibly, at SP, to return the same £100 profit as he could have managed by ‘laying’ Ballinger Ridge on the exchanges. Given that the vast majority of bets struck in the UK are struck at SP this is a fair assumption.

It is immediately obvious that it is possible to guarantee a known return of £100 by betting with traditional bookmakers if a punter knows that Ballinger Ridge will not win.

All of these bets could have been placed with traditional bookmakers. But if they had been placed this way there would have been no way of linking the bets together or tying them to an individual, known, identity because they could all have been placed in cash.  Similarly, there is no guarantee that there would have been any transparency in the price movements to alert authorities to anything suspicious.

Ice Saint

The second race involved a horse called Ice Saint and took place at Fontwell Park on 8th March.  Again, if we assume that a person knew that the horse would not win then it would have been extremely easy for him to guarantee a win of £100 by placing bets on the other 3 horses with a traditional bookmaker, by taking the SP prices.

2. Conclusion

The two real-life examples above demonstrate that backing horses to lose is not a new phenomenon.  Rather, it is something that has been around since betting began.

The long list of betting scandals that pre-date the advent of betting exchanges is evidence that people have always sought to profit from skulduggery.  All that is new with betting exchanges is an enhanced transparency that highlights when betting patterns are suspicious.  As such, betting exchanges will improve, not undermine, the integrity of the sport.

Many people have tried to claim that the notion that you can back all horses in a race to win except the one you want to lose is fine in theory but does not work in practice. The two examples above clearly demonstrate that this is not the case.

Another clear demonstration that backing and laying are the same thing can be seen in the example below.  There, a punter using Betfair can either directly back a horse not to win by “laying” it or can do so indirectly by backing all other horses in the same race simultaneously.

In conclusion, it is clear that backing and laying are the effectively the same thing.  They are two sides of the same coin, and both have been available since betting began.

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