For example, you see a widget for sale on eBay priced at £1. In your local pub you meet someone looking for a widget and they say they are willing to pay £2 for it. You tell that person that you can get them the widget and will need the money up-front. The person pays you £2, you immediately go to the eBay website, on your mobile phone and buy the widget. Once the widget is delivered to you, you can pass it on to the person in the pub. You have locked in an immediate profit of £1, risk free.
In sports trading, as in finance, there are many forms of arbitrage. The sports trading equivalent of the widget example above would be simultaneously backing an event at a high price and laying it at a low price. But how?
The Backer's Book
There are many places where you can place a bet on the Internet. There are the peer-to-peer exchanges such as Betfair, BetDAQ, WBX and Smarkets, spread betting firms such as Sporting Index and bookmakers such as Ladbrokes, William Hill to name but few. With online bookies you are only ever allowed to bet (back) so you are limited to arbitrage where the bookie's back price is high enough to allow you to lay it on an exchange at a lower price or back all other eventualities elsewhere to create a backer's book. A backer's book is a bet on all outcomes such that the sum of the reciprocals of all the back odds are less than 1.0
On the exchanges you have the ability to back or lay and look for price mismatches between exchanges, spread indices and bookies. Of course, the spreads will need some manipulation to make them comparable with the prices on the exchanges and the bookies but that is for another article. During the early days of betting exchanges pure arbitrage was common but not so now due to a large number of odds comparison websites which have arbitraged out the price mismatches.. You must also factor in commission when backing/laying on an exchange. If you are on 5% commission then you must make enough profit to pay for the commission and the loss from the opposing bet.
Bonus Arbitrage
Exchanges and bookmakers are desperate for you to chose them to the exclusion of all others and so they create special offers in the form of bonuses, rebates and free bets. Such offers give you more leeway when it comes to pure arbitrage in that you can don't have to create a perfect backer's book to make a profit. The bonus, rebate or free bet will compensate you enough to create a profit.
The only problem with bonus arbitrage is that it is short-lived. When you have used up all the free offers then you have to return to using standard trading methods. Also, some bookmakers don't like being used on one leg of an arb and they will refuse to pay you if they think you have using them for bonus arbitrage.
Bonus arbitrage is also known as Matched Betting, usually so that it can be marketed by get rich quick scammers.
Bonus Arbitrage
Exchanges and bookmakers are desperate for you to chose them to the exclusion of all others and so they create special offers in the form of bonuses, rebates and free bets. Such offers give you more leeway when it comes to pure arbitrage in that you can don't have to create a perfect backer's book to make a profit. The bonus, rebate or free bet will compensate you enough to create a profit.
The only problem with bonus arbitrage is that it is short-lived. When you have used up all the free offers then you have to return to using standard trading methods. Also, some bookmakers don't like being used on one leg of an arb and they will refuse to pay you if they think you have using them for bonus arbitrage.
Bonus arbitrage is also known as Matched Betting, usually so that it can be marketed by get rich quick scammers.
Statistical Arbitrage (Value Betting)
Statistical arbitrage is common in financial markets and can be utilised
in sports markets too. A database of previous event prices is created
to determine fair prices to judge when future prices are mismatched.
This is analogous to value betting in sports. You may believe the
favourite is too short in price. You could lay the favourite and back
one or two other contenders that will have to shorten if the favourite
lengthens.
In the past, when people only had the option of betting, this would have been called value betting. In value betting a bettor has decided that a price is too high and takes it. When the market corrects the price downward then a backer's book is apparent and all the other bets can be backed. This was common when ante-post markets were created for the bigger horse races, many weeks before the actual race.
In the past, when people only had the option of betting, this would have been called value betting. In value betting a bettor has decided that a price is too high and takes it. When the market corrects the price downward then a backer's book is apparent and all the other bets can be backed. This was common when ante-post markets were created for the bigger horse races, many weeks before the actual race.
Cross Market Arbitrage
In this form of arbitrage you are looking for price mismatches between different markets that are co-related. In football there is the final score and over/under 1.5 goals markets. Under 1.5 goals is 1-0, 0-1 or 0-0 and above 1.5 goals is any other result. You may get situations where differences between the two markets permit you to lock in a profit.
Betfair allows for three types of bets in horse racing; win, place and forecast bets. In the last minutes of betting prices are moving very quickly and one market may lag another. For example, a favourite lengthens quickly on the win market but is lagging in the place market. A lay on the place market could be backed once the place market begins to move after the win market.
Cross Exchange Arbitrage
Occasionally prices mismatches will occur between Betfair, BetDAQ and online bookmakers. Although rare and fleeting, they do occur. However, it may not be worth the effort. Certainly, it is common for bookmakers to close the accounts of arbitrageurs that consistently take money from them. It would be wise to use bookmakers to hedge against a no-hoper layed on an exchange. The quantity of losers on your bookmaker account may convince them to keep you as a client.
There are many companies that offer to help you find cross exchange arbs. For a fee you will be given access to the company's website that lists all the arbs. But wait, think about it, if there are manypeople accessing the website then it is a matter of the first person to see the arb that profits from it and everyone else loses their access fee. Also, if such arbs were profitable then the arb alert companies would use their software to clean up fo themselves and obviously they are not doing so.
Conclusion
There are many opportunities for arbitrage. More even than the examples given here. Opportunities come and go and the full-time sports trader must be constantly looking for new angles to take advantage of. So when someone says, "Arbs are a waste of time in sports trading." Think again, there are many ways to utilise arbitrage in sports betting.
Further Reading
Programming for Betfair is a guide to creating applications for direct access to
Betfair's exchange and will therefore be useful to those wishing to
implement an algorithmic trading set up using the other books listed
here.
The book covers arbitrage with the author stating that all sports betting is either pure or statistical arbitrage in nature.
No previous programming experience is necessary to build the applications in the book. After completing the programming exercises the reader will have a powerful tool for gathering prices for database creation, strategy building and algorithmic trade placement. Beginner programmers and experienced programmers have informed me that the book is easy to understand and that it has assisted them in creating algorithmic trading platforms.
Amazon - Programming for Betfair: A Guide to Creating Sports Trading Applications with API-NG
Programming for Betfair is a guide to creating applications for direct access to
Betfair's exchange and will therefore be useful to those wishing to
implement an algorithmic trading set up using the other books listed
here.The book covers arbitrage with the author stating that all sports betting is either pure or statistical arbitrage in nature.
No previous programming experience is necessary to build the applications in the book. After completing the programming exercises the reader will have a powerful tool for gathering prices for database creation, strategy building and algorithmic trade placement. Beginner programmers and experienced programmers have informed me that the book is easy to understand and that it has assisted them in creating algorithmic trading platforms.
Amazon - Programming for Betfair: A Guide to Creating Sports Trading Applications with API-NG
Efficiency of Racetrack Betting Markets is a very popular collection of articles on betting market efficiency. The book is edited by William Ziemba a noted expert on market efficiency and arbitrage in sports and financial markets. Topics include the psychology of betting, utility, optimal bet sizing (including Kelly Criterion), place arbitrage, favourite/longshot bias, market efficiency and handicapping, exotic wagering and efficiency comparisons between pari-mutuel and bookmaker markets.Amazon - Efficiency Of Racetrack Betting Markets
Handbook of Sports and Lottery Markets, also edited by William Ziemba, is another anthology of academic work and is similar to Efficiency of Racetrack Betting Markets (including a few papers from that book). Additional studies include; modelling distance preference and pace in horse races, American football and basketball market efficiency, a study of doseage and predictability in horse racing, the role of tipsters, prediction markets, association football and lotteries. Amazon - Handbook of Sports and Lottery Markets
Information Efficiency in Financial and Betting Markets is edited by Leighton Vaughan Williams who is very much the British equivalent of William Ziemba. Articles include; the concept of market efficiency, quarbs (quasi-arbitrage between markets, favourite/longshot bias, exotic bets, longshot bias in tennis and some association football market efficiency.Amazon - Information Efficiency in Financial and Betting Markets
Sports Arbitrage - citations - academic papers on sports arbitrage
