Closing line: The most important metric in sports trading

As part of any form of investing it is important to have a benchmark that you can compare your performance against. Otherwise, you do not know whether the results you are getting are because you have made smart decisions or luck. Professional poker players use analysis software to track their hand history, enabling them to review whether they make decisions with a positive expected value. E.g. calling hands where they have pot odds. For stock investors, a suitable benchmark is how you perform against the S&P 500, an index fund consisting of the 500 US companies with the highest market cap (Stock price x volume of shares). For sports traders, the benchmark is the odds at the time the match kicks-off, what is known as the closing line


How do bookmakers decide on their odds?

Typically an odds line will be placed by a bookmaker after they have performed a statistical analysis, which takes all the information they have available into consideration for instance, the team’s lineup, injuries and historical performance. Once the initial odds line has been set it will be adjusted based on market movements, meaning how much money is put on the different outcomes. The efficient market hypothesis used in financial markets states that it is impossible to beat the market because the existing asset prices always incorporate and reflect all relevant information. So if an asset is underpriced in the stock market, it will lead to investors buying the stock until it returns to its intrinsic value or in other words a fair price. The same applies to the sports market, if a bookmaker underpriced the odds of a particular outcome, let’s say a home win to Liverpool vs Manchester United, then smart sports traders will put money on this outcome until it is priced at a fair value. So for instance, if someone places a $1 million on Liverpool to win, the odds will shift. If another person believes that the odds is now mispriced and that there is value on the other side, they might place $1 million on Manchester United to win and the odds will shift again and thus eliminating the inefficiency. The more money that is put on the outcome of a game, the more likely it is that the all of the inefficiencies have been eliminated. Thus the odds at the time the match kicks off, the vig-free (bookmaker’s margin removed) closing line, will reflect all of the information that is in the market.


Are bookmakers able to accurately predict the outcome of a game?

Now which bookmakers are the best at accurately predicting the outcome of a game? First, let’s define the bookmakers and exchanges into two main categories: 1) soft bookmakers, who have low limits on how much money can be placed on games.  2) Sharp bookmakers, who have high limits on games. The majority of the sharp bookmakers will have higher payout rates (Soft: 85-95% vs Sharp: 95-98%). What typically happens at the soft bookmakers is that they limit winning players in order to protect their profit margins. The sharp bookmakers however, choose the opposite strategy, they want to have smart traders at their site because it makes their odds more accurate. The sharp bookmakers have much higher limits on the amount of money that can be placed on a game. This basically allows them to have more information incorporated into their odds, which makes the bookmaker able to more accurately predict the real world outcome of the game.  


How efficient is the sports market?

Through looking at the correlation between the expected probability of a game’s outcome and the actual outcome it is possible to determine how accurate a bookmaker's odds are. From a sample size of 397,935 football games offered by Pinnacle Sports, a sharp bookmaker, there existed a high correlation (r-squared = 0.997) between the closing lines and the observed probabilities. In other words, Pinnacle’s odds accurately predicted the real world outcome 99.7% of the time. Meaning that that their odds are very efficient. In their business models, bookmakers make a tradeoff between their margin and the total turnover of bets that are placed through their service. Because Pinnacle is so confident in their odds being correct it enables their business model to rely on a high volume of money being placed on their games and them to have a low margin, approx. 2 % and a 98% payout rate to their customers.

The majority of the soft bookmakers are European, while the sharp bookmakers operate in the Asian market. Because of the higher amount of money that is placed on games in the Asian market, it has higher liquidity. This attracts professional sports traders with large bankrolls, which increases the level of competition. The consequence being an efficient market because smart sports traders exploit any inefficiencies that occur. Now it is easier to finds arbitrage opportunities in the European market however, the limits on how much money you can place on the game effectively puts a cap on potential earnings. Because the Asian market is more efficient, the best sports traders are only able to beat the market with a couple of  +EV%. They counter-balance the lower edge by placing a high volume of trades at high sums.  Because the soft bookmakers limit winning players, sports traders will eventually have to move into the Asian market.  


The goal for sports traders is to beat the vig-free closing line of the sharpest bookmakers

No one is able to accurately predict the outcome of every sporting event. However, this does not imply that it is impossible to become a profitable sports trader nor that those who are profitable are merely lucky. The goal when trading sports is not to win every bet you place, but to make decisions that have a positive expected value (+EV). E.g placing trades that have a larger chance of winning than implied by the odds. Over a small sample size of trades anything can happen or in other words variance will have a large impact on your results,. However, over a large volume of trades the variance will even out and only sports traders who are able to consistently beat the vig-free closing lines at the sharp bookmakers will be profitable. In the sports market, the sharp bookmakers’ closing lines are considered to be the expected value. Meaning that If you traded at a higher odds than the closing line you have made a +EV trade, while if the odds you traded at is lower than the closing line you have a -EV trade. Now obviously at the time you decide on whether to place a trade or not, you do not know what the closing line will be. However there are multiple factors that impact the movement of the odds and thus the closing line, such as the time before kick-off, the bookmakers payout rate and the liquidity in the market, which will be discussed next.


Time before kick-off

The odds are a reflection of the information possessed by the market. Thus the longer before kick-off you place a trade, the more information might appear that can affect the odds one way or the other. Therefore trades that are placed closer to kick-off will most likely experience less fluctuations.


Payout rate and liquidity - The difference between edges (+EV trades) at soft vs sharp bookmakers

The main difference between the soft and the sharp bookmakers is their payout rate and liquidity. An edge occurs in the market, when there are differences in the odds offered by the various bookmakers. The majority of the soft bookmakers have a lower payout rate than the sharps. So for instance the odds at Manchester United winning at home vs Arsenal this weekend is 2.50 at Ladbrokes and 2.68 at Pinnacle. Their respective payout rates are at the time of writing, 92,6% and 98%.

Because Pinnacle have a higher payout rate and allow larger bets to be placed on the outcome of this game than Ladbrokes, more money is placed on the game through Pinnacle. The result being that Pinnacle has more liquidity. More liquidity means more information, which means that odds at Pinnacle is a better reflection of the true odds (the true probability of the game’s outcome). Now let’s imagine the scenario where news gets out 1 hour before kick-off that Alexis Sanchez, Arsenal’s best player is injured. The sharp traders know that this decreases the likelihood of Arsenal winning the game, so they will place a large bet of $1 000 000 on a Manchester United win, the result being that the odds of United winning at Pinnacle drops to 2.30. If we look at the vig-free odds (removing Pinnacle’s margin of 2%), the odds is 2.346 (2.30 * 1.02). The odds at Ladbrokes remains at 2.50, meaning that there now exists an edge in the market of 6.56% [ ((2.50 / 2.346)-1)*100 ]. The market movement from 2.68 to 2.30 is a fluctuation of 16.5%. For Pinnacle odds to swing the other way and eliminate the edge, it is going to take new information. This information must then convince bettors to place hundreds of thousands of dollars on a draw or away win to change the odds. Now there is only 1 hour before kick-off so we can assume that the probability of this occurring is rather low. This implies that what is an edge 1 hour before kick-off is also likely to remain an edge at the time of kick-off. Or in other words if we had placed that trade 1 hour before kick-off at 2.50, it is likely that we would have beat the closing line of the sharp bookmaker, thus it is a +EV trade.

In general the odds at the soft bookmakers is way lower than the sharp bookmakers, because their payout rate is lower. Thus for an edge to occur at the soft bookmakers, the market must drop by approximately 10% (because of the soft vig). The probability that the market will swing back to its original position is then fairly low. Whereas a 2-3% drop between the sharp bookmakers will create an edge, it then takes a lot less new information for the market to move out of your favor as opposed to the 10-13% drop at the soft bookmakers. The point being that if an edge occurs at a soft bookmaker, it is much more likely to remain an edge versus the closing line when the game starts, than an edge that occurs between sharp bookmakers.


Which bookmaker is the sharpest?

The bookmaker with the consistent highest liquidity in a particular market is considered to be the sharpest within that market. This is because more liquidity attracts sharper traders. Sharper trades possess information. Once they place a trade the market reflects the information possessed by this trader. Close to kick-off in a high liquidity market all of the sharp traders will have placed their trades and thus the market reflects the sum of the information possessed by the individual traders. The closing line represents what the market believes to be the true odds and thus probability for the different game outcomes.

Pinnacle usually has the highest liquidity and is therefore most often the sharpest of the bookmakers. Thus when edges occur between the sharp bookmakers it is usually because a sharp trader is placing a lot of money on a line at Pinnacle. This causes the odds to drop by 2-3 % and a 1% edge to occur versus the rest of the market. When this happens other traders will compete to capture the same liquidity on the other sharp bookmakers before someone else does.

When an edge occurs in the asian market, the sharp traders will keep betting the line until the value is on the other side, hence equilibrium is usually not the lowest-most point on the graph. Thus if you are able to place your trades at the peak edge it is very likely that the line will stabilize slightly lower than the odds you placed at. By placing trades on edges, you are placing your money on what is the right side of the market. Therefore it is more likely than not that the market will move in your favor.

Trademate is a valuable tool for sports traders, because it allows you to monitor market movements. Sometimes “false deviations” will occur at the sharp bookmakers, meaning that the line is pushed back to its original position, by someone taking a large position on the other side of the market. The result would then be that what was a +EV trade at the time you placed it, becomes a -EV trade 2 minutes later. As more money is placed on a game, meaning that the liquidity increases, it requires more money to shift the odds. Thus placing trades closer to kick-off means increases the likelihood of your trade being a +EV trade at the time the line closes.


Low liquidity vs high liquidity sport markets

In general, bookmakers only allow smaller stakes to be placed on lower leagues and smaller sports. Thus these leagues have lower liquidity than the major leagues such as PL, CL, NBA, NFL and MLB. As a sports trader this is important to know, because if there is a 5% edge on both a Premier League game and a game in English League 2, it is going to take a lot less money to shift the odds in the L2 game and thus turning your +EV trade into a -EV trade. Now, this could swing both ways, so your +EV trade could be even higher. The point is that the only thing that is guaranteed is that the lower liquidity markets are much more volatile than high liquidity markets. Therefore they can be considered to be riskier. In an example where you place both trades close to kick-off (<1 hour) then most likely both of the trades will end up as +EV trades versus the closing line. However, let us assume that you place both trades 4 hours before the game. Then it is much more likely that the L2 game is going to swing out of your favor than the PL game. Thus as a sports trader, you have to weigh up whether placing that trade at that edge is worth the risk.


Key takeaways

  • As a sports trader your goal is to place trades that beat the vig-free closing line of the sharpest bookmakers. Over a high volume of trades, only traders who are able to consistently beat the closing line will be profitable.
  • The closing line in high liquidity markets reflects the true odds, because it incorporates all of the information that exists in the market.
  • At the soft bookmakers it is likely that more often than not edges that occur pre-game are likely to remain +EV trades versus the closing line, because in order for the edge to occur in the first place the market needs to move a lot. This decreases the possibility of it swinging the other way and out of your favor.
  • Placing trades close to kick-off reduces the likelihood that the edge will change dramatically.
  • Lower liquidity markets are much more volatile and thus riskier than high liquidity markets.