Arbitrage. Risk free betting, or is it?An arbitrage opportunity occurs in a sporting event when prices offered by different bookmakers disagree and it becomes possible to gamble on both sides of the bet and make a profit no matter the result of the event.
It often occurs in horse racing when a horse is backed at an early price and then laid at a shorter price nearer race time, but let’s start with a simple example to get the feel of how it works.
In an imaginary contest between Joe Jackson and Psycho Willie to win a race, two bookmakers may disagree on which competitor has the best chance of winning. Bookmaker Bertie Smart may price up the event like this;
J Jackson 4/6 (1.67), Psycho Wullie 5/4 (2.25) while another bookie, Robin Git, may disagree and offer J Jackson 6/5 (2.20), Psycho Wullie 4/7 (1.57).
Simple arithmetic shows an arbitrage is available by betting Psycho with the first bookie and Jackson with the second, thereby guaranteeing a profit no matter which of them wins the race. The percentage is not big, but if the stakes are large enough a healthy profit can be taken almost risk free.
In horse racing better opportunities arise daily as informed bettors place bets on horses at least a day before the race at fixed odds, gambling that as race time approaches the odds on the horse will shorten -allowing them to take a bookmakers stance and lay the horse to lose thereby creating an arbitrage where their profit is guaranteed wherever the horse finishes.
For instance, the horse is backed for $20,000 at 6/1 in the informed hope that as race time approaches the price will run down to nearer 4/1. The arb expert then offers to sell the horse to all and sundry at 5/1. If the animal wins he collects 120,000 and pays out 100,000 for an instant 20,000 profit.
If the horse loses his 20,000 stake on the horse is cancelled out by the bets he has taken from those gamblers who took his price offer of 5/1. If he’s lucky and clever enough he will take slightly more in stakes than 20,000 to guarantee a profit no matter the result of the race making the event a true arbitrage opportunity.
In Hong Kong the Jockey Club are at war with teams of computer analysts who use sophisticated software to place bets across a range of races and dozens of horses with online betting organisations taking vast sums away from the on-course market and causing huge falls in revenue as they pounce on arbitrage opportunities in fluctuating markets.
Complex mathematical formulas are often used to determine the likelihood of an arbitrage opportunity becoming available as computer programmers use ever more sophisticated algorithms to seek out their targets.
Online betting exchange Betfair have suffered several high profile outages as their website ground to a halt under the onslaught of these software ‘bots’ trawling through the markets instantly placing bets and lays as momentary underground books appeared.
Of course, betting outside of the Jockey Club’s sphere of influence is of legal question in Hong Kong and here we see one major obstacle to the so called ‘risk free’ opportunities sought in arbitrage.
Another less dramatic but still painful risk comes in the very nature of arbs themselves. They often only appear for a short period as the market is temporarily unbalanced leaving the arb hunter little time to place his money on both sides of the bet.
It has happened many times that as one side of a bet is covered the odds on the other side move leaving the arber exposed without his required cover and facing a potentially huge loss. Nevertheless, the rewards can run into hundreds of thousands of dollars, often millions, making the risks calculable and acceptable to many people.
In Asia the risks are further compounded by some bets being placed with bookmakers who themselves are illegal thereby introducing the risk that a winning bet may not be honoured, but still the arb-sharks continue to hunt down their plundering opportunities as the very best of them make huge sums of money despite all the pitfalls along the way.