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What is a bookmaker?

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The art of making a book is to 'balance' it so that a profit is made no matter what the outcome.

"What is Laying overround, Backing underround or Dutching?"

Bookmakers make money by offering odds that are different to the real probabilities in the underlying event. Traditionally all bookmakers offer prices that are overround. By overround we mean that they offer prices for punters to back which exceed the total probability in an event.

For example:-

If we were offering prices for the toss of a coin we know the probability of a head or tail is 50%. Excluding complex variations we know the probability of a head or tail being tossed is 100%. There are no other outcomes to this event.

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If we are a bookmaker and want to make money on this event we simply offer up 100% probability at a price higher than 100%. If we offered up a book of 105% we would simply lay heads or tails at 52.5%. This is the equivilant of laying heads and tails at 1.90 (Digital odds). Therefore the punter would back either event at 1.90 and we would guarantee a profit as long as both side of out bet was matched. If both sides of the bet was not matched we would end up paying out a liability on one side and not cover the bet on the other. However as long as our overround is big enough the good and bad days will average each other out over time and in the long term we would make money.

Example:-

Our bookmaker decides to accept betting on an event where there are only two outcomes. He decides to choose the the Oxford and Cambridge boat race.

The bookmaker might open his book by offering odds of 2-1 on Cambridge and 6-4 against Oxford. By a simple calculation (Two divided by three, the sum of the odds (2+1=3)) we can see that 2-1 on represents a probability of 66.67% and 6-4 against represents 40% (Four over ten).

The probabilities add up to 106.67% The excess of 6.67 over 100 percent is known as the over-round. In short he has sold odds of 106.67% but the outcome can only ever be 100%. There is a 100% chance that one horse or the other will win. (We are talking simplistically here). The bookmaker, if he can take bets in the proportion of the probabilities, say £66.67 on Cambridge and £40 on Oxford, will pay out £100 whichever wins on £106.67 taken, a percentage profit to him of 6.25%.

In practice, of course, the bookmaker will need to adjust his odds in accordance with supply and demand. More money for Oxford than the estimated probability indicates will cause him to shorten the odds against Oxford and lengthen those for Cambridge. The same principle works on the stock market when market makers buy and sell shares on their books at different bid and offer prices.

His final book might look like this :-

Cambridge Oxford
£50 @ 2-1 on £40 @ 6-4
£42 @ 4-6 on £32 @ 5-4
£50 @ 4-5 on £30 @ Evens

In this example, he began by seriously under-estimating the fancy for Oxford, and has been forced to reduce his odds from 6-4 to evens, at the same time offering better odds for Cambridge. Before adjusting his odds he stood to pay out £100 on Oxford, having taken only £90 in stakes. The odds offered on a horse race with many runners are calculated and adjusted in the same way. The over-round usually increases with the size of the field.

Bookmakers cannot win against Betting exchanges

A bookmaker's over round is only a theoretical over round as most of the money they receive is placed on favourites. If a heavy odds on (Less than 2.00 digital odds) favourite loses the bookmakers can rub there hands. However, if a favourite wins then the bookmakers are likely to be out of pocket. Over time we know the odds are created fairly accurately. Therefore if you are a bookmaker you will have periods where lots of favourites win and you will be out of pocket and other times when none win and you start planning the cruise to the Bahamas. Overtime though you will win.

However because of the lack of a balanced book and the likely hood of good and bad runs against your bank balance bookmakers need a wider over round. By doing this they ensure that if there is a bad run they will not go out of business. Because a lot of large bookmakers are listed companies with shareholders they are expected to report a steady earnings stream. If bookmakers changed there odds and reduced the over round to the sort of prices available on Betfair their profit margins would be killed. Also because they can not ensure a balanced book they could have a very bad run against them which could cost them a lot of money at best and at worst, if they didn't limit there exposure, there business. A lot of smaller bookmakers have gone this way.

Pari-mutuel or totalisator system

Look up the definition in a dictionary and the following description appears roughly along these lines - "A system of betting on races whereby the winners divide the total amount bet, after deducting management expenses, in proportion to the sums they have wagered individually."

This system cannot lose, since it operates on the same principle as a lottery, returning to winners a proportion of the total stakes. It is the system used to bet on a lot of horse races in most parts of the world. It was invented in Paris in 1865 by Pierre Oller. In France it is called the pari-mutuel, in English-speaking countries usually the tote, short for totalisator, the equipment used to register and indicate the bets and dividends. The football pools operates on this system.

The only hope for winning any sum of this money on this system is to guess that the betting has been very badly performed by the pool which leaves you margin to gain, even after the pool has subtracted its commission.

The operation of this works as such. Fundamentally all bettors submit their stakes to a pool. When the results are in the company that is running the pool takes a percentage from the pool for running expenses, profit and state taxes.

For Example:-

A British football pool works on a similar basis to the above, but there is a large government tax on the total pool and the pools company takes a further commission to cover expenses and profits of around 30-35%. The share-out for winners is only probably about 30% of the total pool. The odds on the football pools are not great. For a worse example of share out you can look at the national lottery.

It is not difficult to work out exact probabilities on soccer matches as you are able to make first hand judgment on the outcome of a variety of games, all judgments though are somewhat complex and still require an element of subjectivity. Using such information people have now and again been able to use to turn fantastic odds against in their favour by correctly reading distortions in the underlying market.

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