Predicting the Starting Price is NOT Possible (for us mortals)

Before the creation of betting exchanges, whereby you can lay as well as back a horse, gamblers were limited to placing bets with a bookmaker. These bets were win bets with no possibility of laying off to take a profit, prior to or during the race. The only way to turn a profit would be to find a "value bet", a bet whose price is greater than the true price for that horse.

To find a value bet professionals create their own forecast (or tissue) prices. This forecast is what professionals believe will be the price of each horse just as the race starts. As we know from efficient market hypothesis, the starting price (SP) represents the true probability for a horse to win. If at anytime before the race starts, the price of a horse to win is greater than the forecast price then a bet will be placed. The reason being that SP will be the true probability of the horse winning and any price taken above that would be a value bet.

The problem with this system is that between creating a forecast price and the race starting, new information can enter the market thus altering the crowd's perception of the race's outcome and the probability of a horse winning. Any attempt at forecasting starting prices does not take into account new information and will therefore not predict SP. New information, entering the market, changes the eventual SP and so any forecast will be incorrect.

So how do the professional bettors make money? Simply, they have prior access to the new information entering the market. Insider dealing exists in sport, just as much (if not more) as in financial markets. You may have heard the term "connections" being used in horse racing. Connections are links between various people associated with a particular horse. A professional may have contacts within a training yard and will have access to information that only owners and trainers have access to. This information can be factored into the professional's "forecast".

For example, an owner might hold a horse back for a few races to create the impression that it is not so good. In that way a future race will provide odds big enough for a "betting coup", whereby the professional can profit from the mis-priced winning horse. Professional horse racing bettors are insider traders and are not to be confused with professional gamblers. Although a person may be both, a professional gambler is not necessarily a professional bettor in the horse racing world.

Patrick Veitch is an excellent example of an insider trader/professional horse racing bettor. He owns horses so he can directly influence a market. He tells other trainers how to race their horses (thus gaining inside information). Patrick often gets involved in betting coups whereby horses are mis-ridden to throw the bookies before a large bet is distributed (via his many bet runners) in a future, favourable race. It's no wonder Patrick's profit margins are so big. Betting your own horse to win (at favourable odds) is always more profitable than the prize money received from owning a horse. Odds manipulation is the way to do it. Is all of this legal? Not in the financial world but then the 'Sport of Kings' abides to a different set of rules.

7 comments:

  1. Interesting article.

    How are odds manipulated?

    Jeff

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    1. I thought you would have read the whole site by now.

      Answer - Volume or earlier betting on other horses to bring their prices down and lengthen others. Alternatively you can false run a horse to make its odds longer in the next race. Plenty of insider dealing.

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  2. No, I haven't, interesting as the blog is. :)

    Do you think manipulation is possible to spot in individual markets?

    Thanks

    Jeff

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  3. It would be hard to know the intention of each bettor.

    Besides an insider or syndicate splits their bet up amongst many agents.

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  4. Does the SP really reflect the 'true probability of a horse to win the race'? Isn't it the volume of money wagered on each horse, which only reflects the opinion of the bettors, not some platonic ideal of the true price? Otherwise favourites would win far more often than they do..

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    1. There have been many studies which have shown SP having a relationship to winning chance. Namely, that horses going off at evens tend to win approximately 50% of races and so on through the ranks of odds. I have a few articles showing this to be so on my site under Market Efficiency.

      There were some studies that showed a favourite/long shot bias. i.e. that the odds on short-priced favourites were slightly longer than they should have been and rank outsiders with odds that were too short. That was a pre-exchange anomaly due to people chasing losses and betting on outsiders to recoup losses. Such a bias does not seem to appear on the exchanges.

      Volume is a very poor indicator of price. I have done a statistical analysis on Betfair prices (unpublished) that shows prices based on each horse's fraction of the total volume showing no correlation to SP or winning chance.

      Volume and price are not related. If you have access to the API it is a simple programming task to demonstrate this. You can also scrape the data off Betfair's website just at the off.

      I hope that answers your query and sorry if I sound abrupt as I have to give a seminar and need to write it up.

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  5. Excellent blog. I am sick and tired of all those fools on the internet (mostly forums on sites which are selling a program) speaking out about how great scalping is, i am just a pessimistic guy, Eugene Fama is an idiot and so on.

    Everybody want to believe it so bad and it just have to work then..

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