How bookmakers make money: an inside look in the trading room

Every bettor is looking for ways to beat the bookie. To become a consistently profitable bettor though, a deep understanding of odds calculation is only half of the story; the other half is knowing how bookmakers operate. In this article we lift the lid on the methods that keep both bookmakers and professional bettors profitable.

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Making a book, in betting parlance, refers to laying bets on the outcomes of an event. The term originates from the practice of recording bets in a hard-bound ledger, giving the English language the term bookmaker.

Bookmakers have been around for thousands of years in one form or another. The role of bookmakers is similar to that of a stockbroker. They accept money from multiple people on various outcomes and after the event is finished they pay out the winners. In return for this service, they get a fee (known as the margin) and their goal is to make a profit.

The mathematics of bookmaking

Online betting companies employ a team of people, usually referred to as traders or odds compilers. Their job is to set the odds based on a mixture of statistical probabilities and public opinion with the aim to closely represent the chance of every outcome, plus the margin.

Accounting for all the variables in any event is not an easy job. For every match the traders have to account for the form of the squad, injuries of key players, the referee, influence of the crowd etc. By considering all the variables, they first calculate the real chance of an occurrence and then price in the margin.

Below are the Pinnacle Sports’ odds for the match Leicester City vs. Norwich City on Saturday, 27th February.

Odds Implied Probability
Leicester City 1.531 65.32%
Draw 6.810 14.68%
Norwich 4.540 22.03%

If you add up the probabilities, you will notice that you get 102.3%, meaning that the bookmaker has a profit margin of 2.3%, assuming balanced action on all sides.

A match can be priced anywhere between 101% and 120% depending on the market and the betting activity. Premier League matches for example are typically priced up to around 104% according to Oddsportal.com

All strategic long-term bettors seek to maximize their returns by obtaining the highest odds possible. The higher the margins of a bookmaker, the poorer their odds offering is, as margins can affect your long-term profitability. Here’s a short video on how to calculate the betting margin.

It is extremely important that you know the margins the bookmaker you bet with is offering. If they offer popular markets like the Premier League at greater than 104%, you are better off shopping around for a bookmaker with lower margin. For less popular leagues, markets of 110% or more are the norm.

Understanding odds fluctuation

Unlike the bettors, who try to predict the outcome of a match in order to make money, traders don’t gamble. Their priority is to ensure that they get bets on the outcomes of all outcomes proportionally (commonly known as “balance the book”), so that they make a profit regardless of which outcome prevails.

Once the odds are published, the traders closely monitor the flow of the stakes and how they are distributed among the different outcomes. If the bets are placed according to the traders’ calculations, then the odds will remain stable. If, on the other hand, a disproportionally large amount of money is placed on one side of a bet, the odds will be recalculated.

Let’s take the Leicester City vs. Norwich City match from above and assume that 100 bettors placed their $1 worth bets as follows:

Odds Bets distribution
Leicester City 1.531 75%
Draw 6.810 10%
Norwich City 4.540 15%

If Leicester wins, the bookmaker will collect $100, but will have to pay out $75*1.531 = $114.825. In this case, the software used by the traders will start to indicate a loss and the odds will be readjusted.

These adjustments are continuous and performed by all bookmakers in an attempt to keep their books balanced. It is the fluctuation of odds that allows for arbitrage betting, also referred to as “sure bets”.

Consistent profit making

An arbitrage bet utilizes odds from across different bookmakers by placing bets on each of the option resulting in the aggregate margin in the bettor’s favour, hence producing a proportionate profit.

Pinnacle Sports are widely regarded to offer margins as low as 1.5% for soccer and baseball and apply a low margin policy to all markets posted, with any of the widely available arbitrage softwares often highlightening Pinnacle Sports on one side of an arbitrage.

Now that you know how bookmakers make money, you are one step ahead from the average bettor. For a detailed analysis of how to apply arbitrage in practice, here’s a detailed article on The basics of an arbitrage betting strategy. A must read for anyone who aspires to become a professional sports bettor.

Source: pinnacle.com