All about Back/Lay Betting Arbitrage
Within financial circles, the term “arbitrage” is used to describe a deal in which buying and selling securities or foreign exchange in different markets takes advantage of price discrepancies to make a profit. For example, if an ounce of gold can be purchased on a cheap market for £940 and at the very time sold for £960 on a dear market, a profit of £20. What is difficult, of course, is discovering such gaps and then being fast enough to take advantage of them.
When it comes to sports betting, suppose one bettor is willing to bet £50 on Arsenal at 3/5 odds, while another will back Tottenham, their opponent, with £40 at evens. In this case, a potential profit can be made by taking both wagers. It will not matter which side wins. Anyone who holds both of these bets will collect £90 and pay out £80. That’s a potential return of £10.
Finding the willing bettors is the hard part, of course. Traditionally, that has been the bookmaker’s role. In order to attract more money to one side of a wager or the other, the bookmaker will adjust the odds being offered. If the bookmaker is successful in “balancing the action,” with as much wagered on one side as the other. That’s because a small commission, the “juice,” is built into every payout.
Of special interest to bettors, however, are the price discrepancies that appear as betting shops lower or raise odds to balance the action. This is exactly where the opportunity for betting arbitrage appears.
In general, bettors are only allowed by bookmakers to “back” a selection, which means taking odds on its success. They do not often afford the opportunity to “lay odds” on a selection, giving odds on its failure. However, at a betting exchange like Betfair, bettors are permitted to do both, back and lay bets. As a result, when price discrepancies are found, a sharp bettor can get on both sides of a wager for a potential profit.
Horse racing, in particular, provides an opening for betting arbitrage. Ante post wagering causes odds to shift frequently right up until post time. An arbitrageur may notice one betting shop lagging behind the others in lowering the odds on a particular horse from 10/1 to 8/1. In this case, the horse can be backed at 10/1 with £100 at the shop while at the same time laying odds at a betting exchange on that horse at 9/1, taking £110 in wagers on what looks like a great deal compared to 8/1 odds available elsewhere.
With these wagers in place, the horse winning will pay 10 x £100 = £1,000 at the shop and lose 9 x £110 = £990 on the exchange for a potential profit of £10. Should the horse lose, £100 will be lost at the shop, but £110 will be gained at the exchange for a potential profit of £10. In either case, the arbitrageur is assured of a profit.
Several cautions must be noted. Anyone practicing betting arbitrage must be very careful to lay odds that are likely to attract bettors. The amount backed must be fully covered by the amount laid, otherwise a dilemma similar to the bookmaker’s occurs and it balancing the action by adjusting odds will become necessary. This can easily lead to a less favourable position.
Another caution is related to commissions. Whenever lay bets are successful on a betting exchange, a fee on the order of 5% will apply. This commission has to be figured into the equation when laying the odds, just as the juice taken by the betting shops also needs to be accounted for.
Large price differences are uncommon when practicing back/lay betting arbitrage. More typically, the gaps are so small that significant amounts must be wagered in order to gain a profit worthy of the time invested.
