Rivalled only perhaps by darts’ players, few do mental arithmetic as well as your average punter.
He might have struggled with mathematics at school, but ask him the return from $20 at $2.75 and he’s worked out what to do with the $55 before the cooperative horse has slowed to a gallop.
And yet, ask the same punter how much the bookmaker will make from the same race, and he won’t know what you’re talking about. After all, the bookmaker lost, didn’t they?
If you are new to betting, or you are the punter described above and you want to become more profitable, understanding how bookmakers decide on the odds they offer punters is crucial to your success.
The Over-Round or Market Percentage
Bookmakers obsess about something called the over-round, because it’s the thing that guarantees, in the long run, that they will make a profit.
The best way to explain how it works is to think about a two-horse race.
Horse A is the favourite at $1.50. To the average punter, these odds only mean that, if they were to put a winning bet of $10 on the horse, they would make $5 profit. To a bookmaker, though, the $1.50 represents the percentage chance of that horse winning. This is calculated by dividing 1 by $1.50, before multiplying it by 100. In this case, 66.6%.
Horse B is the second favourite at 3.0. Using the same method as above, we can work out the percentage at being 33.3%.
The example above is what is sometimes called a fair or perfect book, because adding the two percentages up totals 100%. Or, in betting-speak, the over-round is 100%
In this example, if we assume that the percentage chance is accurate, and punters back each horse proportionate to its chance of winning, although individual punters will win, neither punters as a whole, nor the bookmaker, will win or lose money.
Bookmakers like to make money. So what they do is offer slightly worse odds than the percentage chance says they should. So in our example, the odds become $1.43 and $2.7. The table below shows what this does to the percentage figure:
Whenever the over-round is more than 100% (and bookies always make sure it is), the bookmaker knows they will make a profit, as long as punters back each horse in proportion to its chance of winning – meaning, in the example above, that 66.6% of the money is bet on Horse A, with 33.3% bet on Horse B.
Balancing the Book
Punters don’t behave exactly as probability suggests they should though, and more of them than expected might back Horse A. In this scenario, the bookmakers will offer lower odds on Horse A and lengthen the odds on Horse B.
Crucially, when changing the odds, the bookmaker will still make sure that a healthy over-round is retained, as this is their mathematical guarantee of profitability – their edge. With the new odds, though, more punters will start backing Horse B, and the bookmaker will balance his book.
If you’ve never stopped to think about it, this is why they’re called book-makers.
Bookmakers and Australian racing
In the 13-runner 2015 AJ Moir Stakes, won by Buffering, the bookmaker over-round on starting prices averaged approximately 116%. In terms of bookmakers, that is pretty generous, but then the AJ Moir Stakes is a popular betting race, and bookmakers have to compete against their rivals to attract the punter through their doors.
In most races, the over-round sees that bookie’s mathematical profit margin at anywhere between 1-2% per horse, with less popular racing sometimes seeing higher margins still. AJ Moir Stakes will be at the lower end of that profit margin figure, lower grade races at the higher end.
How Betfair is different
Betfair does not make the book. Punters – backers and layers – offer their own odds on the horses they think will win or lose. As they have opinions on individual horses, rather than the race as a whole, they offer more generous odds than bookies. And if they don’t, someone will jump ahead of them and offer a better price.
As there are lots of punters betting, it creates what economists call a perfect market, which in turn means that the vast majority of races on Betfair operate a near-perfect 100% over-round, meaning better odds for backers, as they are not having to pay the margin added by traditional bookies.
There is a catch, though, as Betfair charges a small commission of between 5 and 8% on winnings, depending on the sporting code.
However, because that commission is charged on such a low over-round, and it is only charged on winnings, profits returned to punters are often better on Betfair.
Take Buffering in the 2015 AJ Moir Stakes. Profit on a $10 bet at the bookmakers average starting price of $7.50 was $65. Profit at the Betfair Starting Price of $8.45 was $70 even after taking away 6% in commission payments. That means that in this case, punters would have won over 7% more with Betfair.
It’s important to note that not every horse will be a better price on Betfair, but because of the way the Betfair market is created – with no one building in their own guaranteed profit margin – the vast majority of them will be.