The Art of Bookmaking

When a football team goes into battle with the opposition, their coach has usually done hours of research in an attempt to gain a winning advantage. The coach will look at how the opposition plays, the systems they have in place and what tactics they have used in the past. The coach is attempting to gain an edge over the opposition by mapping out a plan that will hopefully see his side triumph.

The same rules apply for punters who bet with a bookmaker. It’s important to understand how the bookmaker works; how they set their odds, why they change them as the betting progresses, why they have maximum bet amounts and the types of bets bookmakers gain the most money from. Of course, the latter is very important because a bookmaker gains what the punter loses and just like a football coach, if we fully understand how a bookmaker works, then we can gain the edge over them.

Bookmakers have numerous ways of setting their odds but to understand it fully, we have to look at the bookmakers which are generally the first to ‘price-up’. Bookmakers such as William Hill in England, the VicTAB in Australia and BetCris in the United States, are usually the first to produce odds for certain betting markets. In doing so they will generally have a team of experts amongst them that formulate prices based on their opinion. Setting odds at the start can be a very risky business. Their opinion might differ to that of the betting public, which may result in some heavy action on the options the market determines to be mispriced. It’s no coincidence, therefore, that the bookmakers who produce the earliest of odds have large bookmakers’ margins.

A bookmaker's margin is basically the net return that bookmakers should profit over the long term. William Hill, for example, currently has tennis prices for the quarter finals at the French Open. They are listed below for the match between Chela and Henman.

Chela 1.53

Henman 2.37

The bookmaker's margin here is calculated by summing the reciprocal of the odds as below.

Lets say that $6,535 was bet on Chela and $4,219 was bet on Henman. No matter what the outcome, William Hill here would make a profit of $755. Given that $ 1 0,754 was bet on this event, their profit on turnover is equal to , which of course is good for bookmakers but a far less desirable market for punters.

Bookmakers who release odds earlier than other bookmakers will price-up in a conservative manner by reducing their prices and thus increasing their margin. The margin can be thought of as a ‘buffer’. The greater the buffer, the less their potential liability they will have as a result of pricing-up incorrectly.

Of course, in the example above, the exact amount quoted won’t always be as balanced, and more often than not a bookmaker’s book will not be balanced. What this means is that more money has been bet on one side than the other, to the extent that they could lose money should one of the players win. This, however, will result in an increased gain should the option that has been laid loses.

This is where we as punters come in. Bookmakers with margins of around 107% will never make 7% on turnover in the long term but will usually make an amount smaller than this because what the punters bet on will influence the bookies price. Prices move because too much money has been bet on one outcome, giving the bookmaker a large liability should that player win. Like punters, bookmakers are always looking to reduce their liability and to do this, they will attempt to attract money on their opposition. In essence, they attempt to balance their book. To do this, the bookmaker will increase the price on the opposition to make the price more appealing to punters while shortening the price of the team which has been well backed in an attempt to discourage further investment on that team.

Let’s assume that we had the same amount of money bet on Chela and Henman, as listed initially above, before assuming that a lot of money has subsequently been bet on Chela. There could be injury concerns on Henman, or perhaps other bookmakers have opened up the betting on the market, with prices leaving William Hill the best price for Chela. In other words, later opening bookmakers rate the chances of Chela higher than William Hill and offer prices of 1.48 and 2.5 for Henman and Chela respectively. This will result in punters betting on Chela going to William Hill and bettors of Henman going to the later opening bookmakers, as these are the best prices available.
We assume, $10,000 is bet on Chela at his current odds of 1.53. At this stage, should Chela win, William Hill will be out of pocket $4,544, but would gain $10,754 should Henman win. William Hill can do a number of things. They could lay off the bets, which we will talk about later, or they can change the odds to be more in line with other bookmakers.

Let us say that they decide to change the odds, and re-price Chela at odds of 1.45 and Henman at 2.60, which still keeps their bookmaker’s margin of over 107%. If $5,884 is bet on Henman at these prices, William Hill’s books will be exactly balanced and they gain a profit of $1,340. Their profit has gone up because their turnover has increased. Their bookmakers’ margin, however, has in fact gone down. Now out of the $26,638 that has been bet, they are only now making a profit on turnover of 5%, as opposed to the earlier 7%.

As stated before, bookmakers will never make the amount that their margin is calculated at. Of course, in the above example it might not matter how much the bookmaker decides to change his odds, he may never balance his books. In fact, bookmakers rarely do and are not fussed with losing or gaining money on any one individual event. They are primarily concerned about the long term profit (which should be our aim as punters too!).

So what other options does William Hill have if they don’t balance their books? Well, they could take the risk on for this particular match and hope that the outcome will favour the side that they will gain money on.

However, it could be that one of the players is under a serious injury cloud and they decide that it’s best to “lay-off” so as to eliminate any risk and potential loss. Because William Hill has a high bookmakers’ margin, this means that they will easily be able to find several bookmakers that have good odds that are better than their own. Let’s just say that even though they changed the odds, no other bets got matched, and hence they have $16,535 bet on Chela at odds of 1.53 and $4,219 bet on Henman at 2.37.

As other bookmakers have better odds despite the odds changing, William Hill has found odds for Chela and Henman at 1.5 and 2.75 respectively. By matching the $10,000 bet on them with $10,000 of their own at odds of 1.5 they eliminate any risk that they might incur. It is also quite often that bookmakers will ‘layoff’ on betting exchanges, so even though you believe you are betting against other punters, you are in actual fact also betting against other bookmakers on the exchanges.

William Hill no longer has any liability for this event and will make a profit of $456 if Chela wins and a profit of $754 if Henman wins.
William Hill also offer odds for set betting for Chela vs. Henman and the odds given are as shown below:

Chela              3-0      3.75
Chela              3- 1       3.75
Chela              3-2      5.0
Henman          3-0      8.0
Henman          3- 1       6.0
Henman          3-2      5.5

If we calculate the bookmakers’ margin for the odds listed above, we obtain a result of 120.6%. This is a lot larger than before and means that punters have to be 20% better than the bookmakers in order to start gaining a long-term profit by betting on these results. This ultimately means that it is very hard to find an edge betting in such markets. In fact, the more possible results there are in a market, the higher the bookmaker margin will be. This is because if there are more options to bet on, generally the odds will be higher. The added bookmakers percentage insures against the potential liability from the bookmakers perspective.

What you will find is that bookmakers make a large amount of money from punters betting on events where there are a large number of betting outcomes possible. This is no surprise, as the bookmakers’ margins are so high. Unless one can pick obvious errors in the bookmakers’ prices, punters are best to stay away from such high percentage markets.

This leads us to the favourite / long-shot bias that is found in bookmakers odds. As we mentioned above, bookmakers compensate for the larger liability by increasing their margin, so as to gain a large amount in the long term. The same actually happens when we have events where there are big outsiders.

Let’s suppose that William Hill are pricing up the odds between St. Kilda and Hawthorn in the AFL, who currently occupy the top and bottom position on the ladder. Let’s presume that they believe St. Kilda has a 90% chance of winning. Given this, they should price St. Kilda at and Hawthorn at odds of . If we calculate the bookmakers’ margin for the odds listed above, we obtain a result of 120.6%. This is a lot larger than before and means that punters have to be 20% better than the bookmakers in order to start gaining a long-term profit by betting on these results. This ultimately means that it is very hard to find an edge betting in such markets. In fact, the more possible results there are in a market, the higher the bookmaker margin will be. This is because if there are more options to bet on, generally the odds will be higher. The added bookmakers percentage insures against the potential liability from the bookmakers perspective.