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Traditional Fixed Odds Betting Systems

Traditional Problems

Attempted Solutions Only Highlight the Problems

Fixed Odds Sports Betting

Limited Fixed Odds Betting on Racing

SA TAB Model

Other Set Price Systems

Traditional Fixed Odds Betting Systems

In various places throughout the world, bookmakers provide betting at fixed odds (set prices). But inevitably, they have to do so by taking bets that give rise to a liability which at some stage, especially initially, exceeds the amount bet on other runners. They then try to “balance their book” by taking bets on those other runners so as to at least cover their previous commitments. They attempt to do this in part by changing their prices. Therefore, this process involves risk; not only are they not able to guarantee a particular rate of commission but they can actually lose money on an event and even on a series of events.

A system that provides fixed odds is often referred to as a “fixed odds betting system”. Many fixed odds betting systems have been proposed over the years. Typically they have been computerised and have operated on the same principles as those used by bookmakers.

Typically, these fixed odds systems use a pool of fixed price bets only. This pool is separate from the traditional pari-mutuel variable price totalisator pool and provides fixed odds by attempting to balance the book in much the same way as a bookmaker would do. Consequently, they cannot guarantee a particular rate of commission and, what is worse, they have a risk of loss just like a bookmaker. Inevitably their operation would lead to traditional problems such as a lesser rate of return than that provided by a pari-mutuel totalizator system and/or a significantly more restricted operation.

Traditional Problems

One of the main weakness of traditional bookmaker-type fixed odds betting systems is that they provide a significantly lesser rate of return than the totalizator, arguably a rate of return only approximating that of bookmakers (about 5%). What is worse, they can actually lose money on an event and even over a series of events.

Variable price totalisators in different jurisdictions are set to produce different rates of commission but typically it is between 14% and 25%. Whatever that rate, say 15% as an example, it is guaranteed on every event because of the way the tote works.

It is believed that a traditional fixed odds betting system will attract new money to that type of betting even if it operates on the same events that the tote already operates on. This is because of the inherent attractiveness of fixed odds betting. However, it will also attract money from the tote. What this means is that, in effect, any money that transfers over from the tote pool to the fixed odds pool produces a loss equivalent to the difference between the commission rate for the variable price pari-mutuel tote and the rate of return for the fixed odds system (for example, 15 - 5% = 10%). As a result, there needs to be an increase in turnover just to make up the difference. This problem is referred to as transference.

It can be shown mathematically that even if, for example, the rate of return on the fixed odds system is as high as 10%, the commission rate for the tote is as low as 15%, and the rate of transfer from the tote is only 50%, there would need to be an increase in turnover of 20% just to break even. The problem is highly sensitive to the rate of return of the fixed odds system and the commission rate of the pari-mutuel variable tote system. Therefore, of course, the problem would be even worse if the rate of return on the fixed odds system is lower (e.g. 2 - 4%), and/or the commission rate on the tote is higher (e.g. 18 - 25%) as it is in places like the United States.

While a lower commission rate will itself result in greater turnover, recent results of just such a reduction in commission in Australia as well as various data from elsewhere seem to indicate that the end result is economically counterproductive below a commission rate of about 10 - 15%. [top]

Attempted Solutions Only Highlight the Problems

The inherent attractiveness of set price betting is emphasised by the repeated attempts to introduce it in some form or another. These attempts have been made over about 30 years or more in various countries.

More recently there have been other attempts that seem to go to great lengths to avoid traditional problems and to avoid competing with the existing tote system. Such attempts include fixed odds sports betting and limited fixed odds betting on racing.

However, because these attempts can be very limited in the service that they provide, they only serve to highlight the problems that traditional fixed odds betting systems face. They also show what a very stark contrast there is between those systems and the Set Price Totalizator (SPT) and further highlight the considerable advantages of the SPT. [top]

Fixed Odds Sports Betting

It would appear that some groups, especially some TABs, have thought in the past that fixed odds sports betting would be a big money spinner for them. It would also seem that some of them had hoped to gain experience in sports betting and then transfer that expertise to racing. However, such plans face considerable problems.

Disadvantages of sports betting operations include:

The rate of return is typically about as low as that for traditional bookmaking. For example, the rate of profit is about 4% in Nevada, which is home to some of the biggest sports betting operators in the world.
Some installations claim a higher rate of return but they appear to require significant supervision and restrictions in their operations in order to achieve those results. It is arguable as to whether they would produce more profit overall if there was a lower rate of profit but on higher turnover.
And it is important to realise that the quoted profit is the gross rate of profit i.e. before any expenses such as for market makers, supervisors etc.

	The rate of return from such a facility is likely to diminish as it grows, and as sports betting grows in general, because more expert punters will be attracted to it and they will take profit from the operator of the facility. At the moment, most of the truly professional punters concentrate on racing.
	Similarly, as sports betting grows and more money is able to be made by betting on it, the problem of corruption will increase. Corruption also erodes the margins of the operator. Recent corruption in the game of cricket demonstrates the potential depth of the problem.
	Sports betting is already a very competitive business with many well established operators. And the competition on the major sporting events is from a worldwide market place. Niches for local sports exist but the turnover and profit from those sources will, of necessity, be limited. [top]

Problems in extending fixed odds betting from sports to racing include:

	The markets for races are significantly more complex than for sports betting and there are a greater number of chances involved. This results in lower market accuracy and greater difficulty in balancing the book.
	The system would encounter the more skilled punters who concentrate on the established area of racing; many of these punters are truly professional and are expert at "getting the money on".
	The risk of corruption would seem to typically increase with the size of the market, and markets for racing are much bigger. A higher level of corruption would further erode margins.
	Significantly greater overheads would result from extra costs such as employing market makers and supervisors to monitor incoming bets. Greater overheads means lower net profit.
	The number of races run is voluminous and the pools are often small. Such a situation would require significant expenses for market makers and supervisors if betting was to be on a wide range of events. On the other hand the SPT could operate on most markets without supervision.
	Such a process would take an extended period of time because a bank of expertise and data would need to be obtained. On the other hand, the SPT could be introduced in a very short time frame.
	As a result of these factors, such a system would inevitably produce a significantly lesser rate of return than the current pari-mutuel tote and the SPT because of lower profitability and higher costs. Therefore, a significant increase in turnover, probably well in excess of 20%, would be needed just to break even.
	Expanding the system to cater for anything other than win betting would be difficult. Win betting accounts for perhaps only 20 - 30% of turnover on racing. On the other hand, the SPT is applicable to place betting and multiples as well. [top]

Limited Fixed Odds Betting on Racing

The attraction of fixed odds betting is so strong that there have been recent proposals to operate a service in the areas least affected by problems. Because these systems are restricted to certain areas of the market, obviously they must be limited in various ways. Such proposals include restricting the system in its time of operation and on the types of races on which it functions.

One example of such a restriction includes operating only on major races where the pools are large, and there is a greater chance of “balancing the book” and recording profitability closer to that of the tote. Another example is to only offer betting well before the main betting period, such as by allowing betting only until the night before the event or stopping it even earlier. Another restriction that can be used is to offer no refund or substitution for another runner if the runner on which a bet is made is balloted out or is scratched. Such an arrangement improves profitability for the operator.

Yet despite the restrictions, these systems seem to attract a significant amount of business, which underlines once again the attraction punters have to knowing what price they are to receive. If punters willingly make set price bets under such restricted conditions, how much more would they be willing to bet under normal conditions?!

Disadvantages of these restricted proposals include:

They clearly do not satisfy punter demand because they are obviously limited to a very small number of large pools, a small range of times such as well before the main betting period, and limited by other unfavourable conditions.

They provide set prices precisely where they are needed the least, namely on larger pools where the prices are more stable. The pools where set prices are more advantageous and where it is believed that betting will be stimulated the most are the smaller and medium pools where prices are less stable.
Furthermore, the smaller and medium pools are the ones where regular punters most frequently bet. Larger pools would tend to not only have more stable prices but also involve more recreational punters who would be less concerned about the price they receive.

	The proposals would often be restricted to win betting which only accounts for about 20 - 30% of turnover; even further restrictions would be likely if place betting was provided. Betting on a range of multiples would be considerably more difficult still.
	Unless the conditions remain extremely restrictive, they still have the problem of transference.
	If fixed odds betting operations were ever to be outside the very restricted areas mentioned, the amounts bet by punters would need to be significantly restricted so as to ensure adequate profitability.
	The level of profit would be restricted by extra costs such as those for market makers, betting supervisors and operators. [top]

SA TAB Model

In 1989 the South Australian TAB (an OTB) proposed to introduce a “fixed odds betting system”. This proposal aroused a great deal of interest and controversy in locations such as Australia (South Australia in particular) and the United States. It was a typical bookmaker-type system in a number of ways and consequently had similar types of weaknesses.

International Totalisator Systems Inc. purchased the marketing rights in the United States, subject to a trial of the system. An investigation into the system commissioned by the South Australian government resulted in a report which unanimously considered it viable and the legislation enabling its introduction was passed in the Lower House of the State Parliament.

However the local bookmakers, who offer fixed odds betting and stood to be badly affected by the introduction of such a system, managed to expose weaknesses in it and doubts about its profitability, and they lobbied against it. In the face of this criticism, the controlling body failed to support it and the legislation did not pass the Upper House of Parliament. [top]

Other Set Price Systems

For the sake of completeness, it needs to be mentioned that there have been other proposals that bear some superficial similarity to the SPT, although none of these particular proposals have ever been implemented.

One of the strengths of the SPT is that it is able to draw on a flexible pool of variable price bets. Even so, care must be taken with the mathematics and with a number of practical aspects; otherwise problems could arise.

None of the systems that bear some superficial similarity to the SPT have had the same combination of elements - a single pool for both variable price and set price bets and the mathematical and practical treatment of those bets that the SPT uses. As a result, some of those proposals have tended to be unstable, and some were dependent on a fortuitous combination of bets to even appear to work. [top]