Arbitrage betting or value betting?

This is not an article about HOW to do arbitrage betting (sure betting) or value betting. You can read more about what arbitrage betting and value betting is and how they are different in this article. If done right, both ways are betting methods that will quickly multiply your initial investment and these can be a carried out by someone with little or no experience with sports betting. For more information on arbitrage betting (arbing), I suggest an internet search, there are numerous good articles out there. For value betting, I recommend Trademate Sports’ free value betting lessons, which have a solid scientific approach. This article may guide you in case you want to start making money in sports betting, or if you’re already making money but consider changing your strategy from arbitrage to value. This article is about the pros and cons for each of the two strategies based on my personal experiences on the first two years of sport betting. All data presented in this article is real.

Although it sounds nice to multiply your investment, there is no such thing as guaranteed easy money (as far as I know). Being profitable at sports betting requires you to spend many hours with your computer/cell phone/tablet or at the local betting shop. If you already like spending time with video games and watching sports, this may even be appealing to you. There is another thing: due to limited liquidity in the betting markets, you can only invest up to a certain amount. Hence, if you are already a millionaire, it might be unrealistic to believe that your millions will multiply in a short time via sports betting.

ABOUT ME

Until August 2015, I had never before placed a sports bet, so I am no experienced bettor. I started with very small investments, in the hundreds – as things were starting to progress, I began to invest more, but I have never had more than EUR 5.000 invested. Today I have cashed out the initial investment plus another EUR 9.000 in profits. My overall profits have grown steadily, approaching EUR 22.000 and I even had months where I did not bet at all. This may seem like much money to some people, few money to others. It really does not matter, wealth is relative and up to a certain limit, one can choose any size of starting investment. I know that there are arbitrage bettors and value bettors who make much more money, people who have more money and more knowledge. In fact, there are sport bettors who make a living out of it. I am not of this kind and I still have my regular job, but sports betting has provided me with a solid second income and thanks to this, the balance of my family’s overall wealth has grown significantly and I have rewarded us with several extra vacations, instead of just being able to balance income with expenses without luxury.

I did arbitrage the first year, but then I transitioned to value last year. Today I am only value betting for numerous reasons. This does not mean that arbitrage is a worse strategy – in the end, the strategy of choice is probably whichever strategy is a good fit to your personality. Both strategies will give you a positive return in the long term. I will now go into reasons for choosing the right strategy.

THE DATA

First, let us have a look at my betting history, which will be the case study when evaluating both strategies. The overall profit chart provides us with an overview.

Overall Betting Stats

 

  • Turnover / 10: The turnover divided by 10 for illustration purposes.

  • Sum: The overall profit. Sum of Value, Arbitrage, Bonuses, Errors and Expenses.

  • Sum of soft books: If there had been no bets on sharp books, the sum curve would look like this.

  • Value bets: Profits from value betting.

  • Arbitrage bets: Profits from arbitrage betting.

  • Bonuses: Profits from bonuses.

  • Bank balance: The balance of how much that has been invested (negative) or cashed out (positive).

  • Errors: Balance of wins/losses due to wrong arbitrage bets, calculation errors and misplaced value bets.

  • Expenses: Cost of odds arbitrage and value services, transfer fees and commissions.

The overall sum (solid blue line) shows a steady growth of overall profits from sports betting. The three contributors to profit are Arbitrage betting (dotted purple), Value betting (solid purple) and Bonuses (solid green). Errors (dotted red line) and Expenses (solid red line) detract from the profit.

The sum of soft books (dotted blue line) is a hypothetical case to show the potential profit had I not been betting on the sharp books (more on this below).

I have been using 4 sharp books and 18 soft books for the betting. For arbitrage betting, there has been one sharp book and one soft book involved in almost every bet. For value betting, there has been only soft books. A more detailed presentation of this is located in the table below.

 

Distribution of bets at sharp and soft bookmakers

I am not naming which soft books I use, as I would not like it to be possible for any soft book to identify me as the author of this article. Generally, for the case of my betting, soft books are profitable and sharp books are unprofitable as expected. There is an exception with SBObet, generally considered as a sharp book, which has been profitable to me. Maybe this is due to variance, since I have not placed many bets there, only 159. Book5 is a soft book exception. This one has not been profitable even after thousands of bets, but very close to break-even. This soft book is probably not so soft after all, but it is a rather rare case among soft books.

ROI, TURNOVER AND STAKE SIZE

When looking at the overall profit (Sum) in the graphic presentation earlier, it seems that it has been quite steady, resembling a straight line, except from a dip and a rise this year. When looking at the columns for turnover however, it seems evident that there is more wagering during arbitrage, than with value betting. The following schematics confirms this.

ROI at different types of betting

Obviously, there is a high ROI for betting involving getting your bonuses, but these are only initial and not expected to give you continuous profits. Value betting seems to give you much higher ROI than arbitrage betting. The reason is simple: when an arbitrage opportunity occurs, one part has usually not adjusted the odds according to market value. In almost every case, this is the soft book, so during arbing profits at the softs starts to increase while deficits at the sharps start building up. These deficits are the price to pay for having guaranteed profit in every bet. So betting on sharp books in arbing is a sort of insurance to avoid losing money in the short term. In the long term, this becomes very expensive. Today I am simply betting on the soft side of an arbitrage bet. This is my value bet. Had I had the confidence and knowledge to do this right from the beginning I would have had 50 % more profits today, as seen in the graphic presentation earlier (dotted blue line). However, in sports betting variance is huge, so it takes some time to realize that you are pumping money into the sharp books. Look at the Pinnacle balance for instance:

Pinnacle Results

Pinnacle Results

Relying on the data alone, I would still be in doubt after 1000 bets, whether Pinnacle is profitable when arbing. Ultimately, after a sample size of 1500 bets, I am convinced that Pinnacle is sharp, and I have the feeling that I have spent 5.000 EURO at Pinnacle for the sake of my own comfort, money that I wish that I had not spent. It would be great to be part of the elite that bets on Pinnacle and is profitable in the long term, since Pinnacle does not restrict winners. However, this is does not seem possible with regular value betting and definitely not with arbing.

In summary, arbing comes at a price. You need larger turnover and stakes to compensate for the price of the insurance. The soft books will eventually limit or exclude any person who is profitable in the long term. They may do it based on “inappropriate betting pattern”, “suspicion of arbitrage play” or anything else written in their terms and conditions. These are all just phrases with one common goal: to reduce your possibilities as a profitable bettor, so that you are no longer a threat to their business. I do not blame the soft books, in fact their behavior is quite rational. The betting industry is funded only by people losing while (hopefully) having a good time, so any consistent winners are counterproductive and must be stopped with any means before they grow too big.

From the perspective of the soft books, it makes no difference whether a player is arbing or value betting, both methods bet on favorable/wrong odds and this is unprofitable for the bookmaker. In case of limiting, value betting has an advantage. Larger turnover and larger stakes will get you limited faster. So value betting with smaller stakes, while achieving the same ROI will keep you longer in the game. Once limited, you can continue to value bet, with smaller stakes close to max limit. It is still cost effective, since arbing takes much more time to do. My average stake size for value betting is only a quarter compared to arbitrage for that particular reason, but profits are at least the same. On average, it would take me 2 minutes to do an arb, because I would need to calculate stakes and bet at 2-3 different places, and many confirmation steps. It takes me only 20-30 seconds to do a value bet, because it is one bet and just a short mental calculation of the stake. Value betting can be done anywhere, for instance via the cell phone when waiting for the bus, it is like playing a video game on the cell phone, which most people do anyways. This is not so easy with arbing. If you use a betting service such as Trademate Sports it is really easy to register the bets you placed and keep track of your betting history.

PSYCHOLOGY

The main reason why many people choose to do arbitrage is to avoid the unpleasant feeling of losing money. Arbitrage betting, or “surebetting”, gives you guaranteed profits on each bet regardless of the outcome. Well, this is not the same as completely risk-free, as surebets are quite sensitive to errors. Errors may occur when I accidentally place two bets on the same losing outcome without noticing, or when I cover one side of the bet, but the other bet has vanished in the meantime, when one bet is voided by the bookmaker, etc. Usually, arbing has larger stakes to compensate for the low ROI, so when something goes wrong it has a large impact. This happened to me 5 times in January 2016. Each time I was unlucky to lose money and each time I had the feeling that many hours of betting was lost. It took around 40-50 surebets, several days of work, to make up for one error. Still, for the experienced arbitrage bettor who makes fewer errors, the arbitrage strategy is quite risk-free.

In value betting, one has to accept, that although the overall tendency is upwards, there may be swings up and down, just like an index at the stock market. It is great when things go in your favor, you may get the feeling that you are on the road to become a millionaire next month. When things go bad you may get the opposite feeling, that this activity will eventually bankrupt you and you seriously start doubting whether there is something fundamentally wrong with your strategy. In both cases, emotions (rather than rationality) may have taken over. While emotion may be what motivates and drives people, it may be your enemy when you hit the winning streaks and losing streaks. You have applied a money management strategy, but still these unpleasant emotions may hit you, although you already knew that this is part of the game.

This is what happened to me when I first started betting. I had actually considered both strategies and I decided to value bet. Things were going great, but as soon as I got some downward swings after 50 bets in late August 2015, I felt uncomfortable and decided to begin my betting career doing arbitrage instead.

Early Strategy. Arbitrage betting vs Value betting Results.

This behavior was emotional, because I was abandoning a strategy I had already chosen, which had even given me two-digit ROIs, for a less profitable strategy, which I initially had decided not to do. I was definitely not losing at the time, but the motive was still to remove the uncomfortable feeling of losing a bet.

I later switched back to value betting. Since then, I have punched the pillow and slammed the door during some of my losing streaks, but when looking at the overall profit graph in the first chart (solid blue line) some losing streaks are hardly noticeable, they are very small dips in the overall picture. Some people are naturally adept in being rational, while I am not. The cure for me is exposure, which in return gives me robustness. I have also found out that a method that works for me is to glance at my profit graph every now and then. That is where I realize, that although I just lost wagers during the last four days corresponding to half a month of salary on my regular job, this is just part of the game and the tide will turn eventually. I could also stop following the games, just bet and forget - but on the other hand, I like sports and the games are quite exciting to watch, especially when you have bets on them.

WHAT’S NEXT?

As goes for any other profitable bettor, every soft book will eventually give me ridiculously low limits or exclude me, so I am continuously considering the step of the evolution as a sports bettor. Luckily, some soft books are quite winner friendly and do not shut you down immediately and new companies emerge all the time, so value betting on soft books may continue for some time.

The logical next step will be value betting on Asian bookmakers. These bookmakers have much sharper odds, but do not have a reputation of systematically excluding winners. To my knowledge, there are little to none arbitrage opportunities here, but there are still value bets to be found. The Trademate Sports Pro product find value bets by comparing the Asian odds to the true probability of an outcome. Obviously, with sharper odds, ROI is lower, but a larger bankroll and larger stakes compensate for this.

FINAL REMARKS

When it comes to profitability, value betting is superior to arbitrage betting, since there is no “insurance fee” to the sharp books. If there was no such thing as limits, arbitrage betting could be more profitable, since stake sizes can be larger than with value betting, when there is no such thing as variance to compensate for. However, stake sizes are not scalable towards infinity, limits exist and they will happen to any successful sports bettor, so this makes arbitrage harder to do in a limited environment.

As both strategies are profitable, one then has to consider whether the reduced profits and much accounting on arbitrage is worth it, in order to avoid the unpleasant and inevitable losing streaks. This would be up to each individual to evaluate and experience. The choice of strategy will probably have to do with the sports bettor’s personality.

Written by a guest contributor who calls himself Vida in the Trademate Slack. If you have any questions, you can ask him there.  

How Bookmaker's Profile Winning Players and Thoughts on Tipsters

Former Oddscompiler: Matthew Trenhaile

Former Oddscompiler: Matthew Trenhaile

This post originally appeared at www.daily25.com and has been reposted here with the permission of Steve from the Daily25 blog. It is written by Matthew Trenhaile who has worked as an odds compiler for many years and is now out on his own taking on the bookies. You can follow Matthew on twitter @CrazedAlchemist and he also has his own blog. Over to Matthew.

 

Player Profiling

In this article I am going to look at the subject of profiling. I am not going to discuss it from a business sense perspective or from a moral one but simply to look at it from the perspective of analysing the process and how it has changed over time. I will tackle the subject of account restrictions and closures in my fourth and final article once I have looked at all the relevant elements of the problem.  I will also look at in this article the subject of tipsters and how they influence bookmaker trading decisions and their risk management. Bookmakers will often find themselves profiling tipsters to an extent rather than individual clients.

Profiling in the olds days

Bookmakers have always profiled bettors and do not let anyone tell you otherwise. At the racetrack bookmakers could turn you away, offer you different place terms, offer you an amount that they felt comfortable with or lay off your bets at other on course bookmakers if they didn’t fancy the liability on their books. Of course different racetracks and regions will impose different rules on the behaviour of on course bookmakers but they could still of course offer you less attractive odds in the hope of getting you to move on. Knowing who the smart punters were was as vital then as it is now. They also had to become familiar with those who placed bets for the smart punters because of course using another person to place your bets is nothing new. It is possible that historically it was easier to place a smart bet of decent size because of the attitude of at least some bookmakers as to how to handle that sort of bet at the track. They could use that information to not only shape their own book at the cost of the liability of the accepted bet but also over hedge the bet with another bookmaker on course before they got wind of the smart money and could slash their odds. In that way it made sense to try and get the smart money in manageable size early on rather than get picked off further down the line when you could only hedge at a price much shorter than you laid yourself. At some point this mind-set dissolved in western bookmakers barring a very select few while still remaining prevalent in the Asian bookmakers. If anything as the betting volumes around the world have risen the appetite for early smart money in Asia has only grown as the race to be smartest fastest has become ever more important to them. So what did everyone else do?

Profiling with The Rise of Online Betting

The western bookmakers found that with the rise of online betting there was even more money to be made but also that as with all industries where there is a gold rush the space became crowded very quickly. The online betting boom went stratospheric with the rise of online poker and soon everyone was making so much money that it was possible to make money sharp betting or bonus bagging or arbitrage betting for quite some time before anyone even noticed and limited or closed the account. Sadly when the market settled and then was crushed by the collapse of the US poker market it became just a bit harder for betting firms to make money. The cost of acquiring new customers rose, as there were so many operators competing for the clients and all of them desperate to fill holes created by lost poker revenues. Don’t get me wrong there were still account closures and restrictions due to some basic profiling before this point but nothing like there is now. Profiling at this point was largely driven by the odds compilers who would be able to see all the bets they laid thanks to improvements in technology and also in real time. I can’t speak for other odds compilers in the industry but at times the relationship between compiler and punter would get personal and the compiler would push for an account to be closed or at least restricted. This actually worked the other way as well if the client was sharp and bet once the market had settled and in moderate size on a decent market. As a compiler you even at times became fond of these gentle nudges from clients who seemed to be smart yet playing “honest” with you. For the online industry the rise of arbitrage trading and bonus exploitation as they saw it was becoming epidemic and running a successful bookmaker became about how many you turned away as much as how many you got through the door.

Risk Management Departments

It actually came as quite a surprise to some bookmakers just how many of their clients were making money or exploiting their bonus offers once they began to actually analyse the figures. It soon became clear that odds compilers either did not have the time (or could not be trusted) to do all the profiling so risk management departments sprouted up everywhere. These are teams of people who are incentivised to root out non-profitable accounts and as always with this kind of motivation there are going to be those who are overzealous. The UK risk managers had the ultimate tool at their disposal in that they had a true market price to hand in the form of Betfair and they quickly decided that odds compilers could not beat Betfair on every market all the time so clients who bet on odds bigger than the Betfair price were by definition sharp bettors. This progressed further to the assumption that odds compilers could not beat Betfair ever on any market. The obsession with arbitrage in the UK betting industry surrounded backing at the bookmaker and at the same time laying on the exchanges rather than say the placing of three separate bets at three different bookmakers to guarantee a return although the latter was still a concern. Odds compilers disliked arbitrage traders and sometimes tolerate sharp bettors because while they work hard to calculate the outcomes of events (unless it makes more sense to simply copy Asia or Betfair) all the arbitrage trader need do is wait for an alert and place the relevant bets. The intellectual competition has been removed in their eyes (sadly odds compilers are being kicked out of the industry as fast as the shrewd punters). Successful long term arbitrage traders will tell you it is actually both mentally and physically taxing but that is for another article. Arbitrage trading did an awful lot to educate the risk management community about how markets work and also made them realise the horrible Pandora’s box that had been opened by odds comparison sites. It also made them realise that copying an established set of market odds was both efficient and reduced arbitrage and some types of sharp betting.

Identifying arbers

So now we have a situation where you have a team of people constantly crunching data and the remit has come down from above that any client that does not pay for the exorbitant marketing, affiliate (also being abused) and advertising costs and also create a profit for the company is no longer to appear on the books at all. At this point it has been established that beating widespread arbitrage across all markets without moving prices is near impossible so trading arbitrage prices gets an account marked. Of course if you aren’t going to move your prices with the rest of the market there is every chance that when you are best price any outcome it will be an arbitrage opportunity with someone somewhere and you will end up best price even unintentionally if you do not move your prices even when you have not struck a bet. They have rejected the concept of losing money on one client to help make more money on other clients or rather they have rejected the concept of making a book. The truth is without the Pinnacle model in place it is very hard to make a balanced book, as there are simply so many bookmakers to bet with. Often an arbitrage opening and possibly a tipster selection are the only bets struck on a market. Lopsided books are an unavoidable reality for most bookmakers as square money tends to all bet one way and it bets in a different time frame to sharp money and can at times bet the same way as sharp money just at a worse price nearer to the start of the event. These latter bets are better bets to take but they still make for a one sided book however, if you have to always cheer on a particular outcome then better make sure it is one that the very worst bettors have not bet on.

What do they look for when profiling?

Well not all risk teams are the same but here are the things that will most likely be looked at:

  • Does the account make money? Sounds ridiculous to highlight this but it is the one thing that you can’t hide no matter whose account you use to place the bet.

  • Is the account price sensitive and did the account place a bet via a price sensitive medium such as a price comparison site? Sharp bettors are price sensitive.

  • Was the bet placed well in advance of the start of the event? Anything prior to the day of the event in particular can raise questions.

  • Is the price an arbitrage price at the time of the bet? Pretty easy this one.

  • Did the price shorten significantly after the bet was placed and before the start of the event? The closing price is more accurate than the opening price after all.

  • Did the client place only one bet rather than a variety of bets? Contentious this one but bookmakers like to see you place multiple bets on the same match as if you need as much action as possible.

  • Do you withdraw your money? Never let money out the door.

  • Do you use an E-Wallet when other more direct methods are possible? People who need to move money fast are sharp or arbitrage traders. Or possibly money launderers, which can get your account flagged just as fast whether you are one or not.

  • Do you use the online casino? If not then why not.

  • Do you bet on niche markets that are not directly highlighted by the marketing team?

  • Do you bet in large size? Betting is supposed to be a small stakes social exercise isn’t it?

  • Do you bet on mobile platforms? If yes then that is good news. If not how come your IP keeps changing when you login? Are you using a dongle or a VPN to confuse our kindly risk team?

  • Are you a woman? They do not conventionally bet on sports unless they have followed an arbitrage e-book or are a bowler account or at least that is the common assumption.

  • Are you betting in a size not commonly associated with your demographic? Research of professions and financial standing is becoming more commonplace now. Originally they just wanted to find the rich lawyers, accountants, doctors who are worth offering client entertainment to but now if you find a student betting £1,000 pound a game that is note worthy as well.

  • IESnare? Just Google it I guess. There are probably other cookie trackers that are not as well publicised.

  • Bet at the same time as several other punters, excluding just before an event starts. Was it arbitrage? Was it a tipster?

  • Try never to bet on a fixed match or one that is perceived as possibly fixed intentionally or unintentionally.

  • Do not work in the betting or tipster industry, be connected with the betting or tipping industry, friends on Facebook with people in betting or follow people on Twitter from the betting or tipping industry.

I am sure there are other factors but suffice to say if you manage to avoid all the above listed things then maybe your account will avoid being restricted or closed. If ever you find yourself having one bet or even no bets and being restricted or closed just ask yourself whether you can rule out every single one of the above possibilities or being linked with an account that has exhibited some of the above behaviour.

Tipsters

Finally there is the subject of tipsters, which is of course a subject close to the hearts of readers of this blog. For the most part bookmakers are not concerned about tipsters from the sharp betting perspective (hard to believe I know but there are exceptions). Bookmakers will have seen so many lemmings following unsuccessful tipsters off cliffs that they do not instinctively inspire fear. Again Steve has frequently highlighted in his blog that following a given tipster is no guaranteed path to riches. Tipsters do create one-sided books though which can be frustrating, particularly in small illiquid markets. They also can cause bets that overlap with all of the behaviours listed above.  Tipsters generally try to tip at best price and well in advance of the event start. Tipsters can often cause prices to collapse and if some subscribers smash in to the exchanges they can make those who are hitting the books look like arbitrage traders. The price collapse can also trigger those who bet dropping prices to push the market even lower and it leaves the bookmakers with one terrible result and no easy way to get out of it if they have been foolish enough to not move the price fast enough. So for this reason compilers like to keep tabs on the popular tipsters of the moment. I personally used to regularly sign up for short periods or free trials to all sorts of services just to see if I could see what angle the tipster was working and whether it was something I felt I generally overlooked. Compilers in general will always respect tipsters who appear to be compiling their own prices more before tipping a selection. Good compilers were never afraid to learn from a tipster or site that had genuine merit. Compilers will be quick to dismiss tipsters without verified results, no clear strategy and inflated ROIs beyond what they deem likely. In other words we were trying to do exactly what the punters are doing more diligently nowadays and in both cases to see who to take seriously. Always of particular interest were any betting related websites, which had useful statistics or model calculations on them although many of those were swiftly dismissed as behind what we had already.

Hedging Bets: A strategy for reducing your risk when trading sports?

Key takeaways

  • Hedging sports bets can enable you to reduce your risk, but it will also reduce your potential ROI. Therefore it is a tradeoff between risk and reward that you as a trader have to make.

  • Be aware of potential pitfalls such as bookmakers voiding your bets as they can leave you exposed with high risk and no upside.

“A hedge is an investment to reduce the risk of adverse price movements in an asset.” - Investopedia

Russian Premier League: Ural vs Rostov

Russian Premier League: Ural vs Rostov

An Example of Hedging a Sports bet in a Russian Premier League Game

As a sports trader you can reduce your risk by hedging a trade you have placed. For instance on November 30th, 2016, Ural played Rostov in the Russian Premier League. The opening odds for the game offered by Pinnacle is included in the table below. Rostov both being higher placed in the League and being a team that beat Bayern Munich at 15 in odds in the Champions League the week before was the favorite to win the game.

Soft bookmakers typically place their odds lower than the odds offered by the sharp bookmakers such as Pinnacle, because they have a lower payout rate. 2,5 hours before kick-off, November 30th, the Norwegian bookmaker Norsk Tipping (NT) offered the game at 2.95 for a Ural win. However at this point in time the odds at Pinnacle had dropped to 2.17 (removing their 2,5% vig, the true odds would be 2.26) resulting in a 30.5 % edge [ ((2.95 / 2.26) -1) *100% ]. Next, Norsk Tipping most likely noticing a large amount of money placed on a Ural win adjusted their odds to 2.6 resulting in the odds below.

However, this was still a 15% edge versus Pinnacle. I placed the bet at 2.6 on NT with a stake of 850 NOK or approximately 100 USD. If Ural wins I would get a return of 260 USD and a profit of 160 USD (Stake returned - Initial stake). After I had placed my initial bet, I kept monitoring the odds at Pinnacle, which kept dropping. With such a large edge I now had the opportunity to hedge my bet to completely eliminate any potential losses if Ural failed to win, while making a smaller profit if they win. This was achieved by placing a bet on Rostov to win on the Asian Handicap line of +0.5 at Pinnacle at 1.96 in odds about 20 minutes after taking my initial position. Meaning that if the match ended in a draw, Rostov would have a 0.5 goal handicap, the result being a Rostov win. By hedging on Pinnacle I would have a return on investment of 11,7% given a Ural win [ 1 / (1/2.6 + 1/1.96) ]. While breaking even on any other outcome (a draw or a Rostov win), so basically I was freerolling the game without any risk of potential losses. An important point to note is that hedging differs from arbitrage, because the bets take place at different points in time. This enabled me to get a much higher ROI while taking positions on both sides than what I would have achieved through arbitrage at the time I placed my initial bet. 

Odds for hedging my bet

Odds for hedging my bet

Expected profits after hedging my bet

Expected profits after hedging my bet

New Information in the form of Lineup Changes Made the Odds Drop

The odds at Pinnacle kept on dropping all the way until kick-off as new information became known to the market. Most likely due to Rostov resting several key players, the pictures below compare the lineup Rostov fielded vs Bayern on the left and Ural on the right.

 

Lineup comparison for Rostov in this game vs their last game

Lineup comparison for Rostov in this game vs their last game

When the match started Ural had become the favorite and Rostov the underdog. Pinnacle offered the following odds:

Closing odds at Pinnacle

Closing odds at Pinnacle

The vig-free closing odds offered by Pinnacle at a Ural win would be 1.76 [ 1.71 / 0.973 ]. (You can read more about why the closing line is a good approximation of the true odds of a game here). The closing edge versus my initial trade at 2.6 would have been a 47,7% edge [ ((2.6 / 1.76) -1) * 100%) ]. It is also worth to note that I would have had better odds on my hedge trade if I had placed it closer to kick-off.

The Pros and Cons of Hedging a Sports Trade

The game ended with Ural winning 1-0, giving me a profit of $60. However, if I had simply stuck with my initial trade of a Ural win at 2.6 in odds without hedging I would have made a profit of $160. This highlights the pros and cons of hedging sports. The advantage of hedging was that I managed to eliminate my risk on the game. However, the disadvantage was that I reduced my potential ROI.

Btw, the winning goal was incredible! (27 seconds into the video)

Now, because of Norsk Tipping’s specific rules, the Ural - Rostov game was not offered as a single, meaning that I had to match it with another game to form an accumulator. I ended up combining it with another team scoring 2 goals or less in another game at 1.01 in odds. They ended up scoring 2 goals, so it was a close call, that ended with the trade being good. However this also meant that in reality my hedge trade was not completely risk free. If the 1.01 game had not gone in, I would have ended up losing the $100 I placed through Pinnacle. Also, bookmakers often reserve the right to void bets where the odds is wrongly set. This could potentially have left me with a huge -EV trade. So if you are going to hedge your trades, make sure you are familiar with your bookmakers rules and practices. 

Lessons Learned from Hedging a sports bet

What did I learn from this experience? One can only make decisions with the information one has available at that point in time. I could not know whether the market would continue dropping in odds on a Ural win after I placed my initial trade or whether it would swing the other way. Therefore I made the decision to hedge my trade and freeroll the game for a guaranteed profit if Ural ended up winning. In hindsight, I would have made the same decision if the trade had been a single on NT. However if I come across trades in the future where there are hedging opportunities, but the game is not offered as a single I would rather run the risk with the potential upside of a larger return on investment

Key takeaway

To sum it up hedging a sports bet can enable you to reduce your risk, but it will also reduce your potential ROI. Therefore it is a tradeoff between risk and reward that you as a trader have to make. In addition, you should be aware of potential pitfalls such as bookmakers voiding your bets as they can leave you exposed.

By

Marius Meling Norheim

Exploiting arbitrage opportunities: From trading stocks to sports.

"Arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies"

- Investopedia

How high-frequency trading firms exploit arbitrage opportunities in the stock market

With today’s technology, the pricing of stocks is updated within a few milliseconds of real-time. This is way faster than a human is able to perform calculations, which makes it difficult to find arbitrage opportunities in financial markets. As a result, firms who are performing day trading are now using computers to perform algorithmic electronic trading at a speed that is impossible for humans to match. The way this works is that you give the computer a set of instructions, which will trigger it to buy or sell stocks. These instructions can be related to price, timing, volume or a mathematical model. For instance, you write an algorithm that tells the computer to buy 1000 Tesla stocks whenever the price goes above $200 and sell if the stock price increases by 10% above the purchase price.  For more reading on arbitrage and algorithmic trading, check out the links. 

The non-fiction book “Flash Boys” by Michael Lewis, tells the story of how high-frequency trading (HFT) firms used a super fast fiber optic cable that connected the financial markets of New York with Chicago to perform arbitrage trading. This $300m cable reduced the journey time for data from 17 to 13 milliseconds. An advantage, which enabled the HFT firms to obtain better prices on their trades compared to their competitors.

To illustrate how this works in practice let’s imagine that a hedge fund wants to buy a 100 000 shares of Tesla stock. This purchase will be spread out on multiple stock exchanges to ensure that they get the best possible price on their purchase. As a result 60 000 shares are purchased on Nasdaq for $200 per share, but once someone buys stocks in a company, the price will increase. Thus there are only a limited amount of shares are available for $200. Once the purchase has been made the stock price of Tesla increases to $202 on Nasdaq. Therefore the hedge fund will look at buying the remaining 40 000 shares at a better price on a different stock exchange. At the London Stock Exchange (LSE) Tesla is still trading at $201 because the price has not been updated yet. What happens is that the HFT firm will notice that someone has purchased a large amount of Tesla shares on Nasdaq and therefore they will leverage their faster cable connection to purchase Tesla shares at the London Stock Exchange before the price increases to $202. So let’s say the HFT firm manages to buy Tesla shares at $201 per share at LSE. They then sell the stocks to the hedge fund for $201.99 and pocket a 99 cent profit per share. All of these events take place within a couple of milliseconds and are enabled by the firms using complex computer algorithms to perform their trading. In reality, the pricing difference is more likely down to 1 cent or less, rather than the 99 cents used in this example. However, if the HFT firm is able to perform thousands of trades like this during a day, then the profits will add up to huge sums in the end. According to the article at Harvard Politics, the HFT market produced profits of $5 billion in 2009, but declined to 1.25 billion in 2014. Also, HFT trading accounted for 73% of the total daily market volume on U.S. exchanges in 2014. A possible explanation for this decline can be found in the macroeconomics principle of perfect competition, which states that the existence of economic profits within an industry will attract new firms to the industry. The increased competition will result in diminishing returns for the firms and in the long run the industry will reach the state of perfect competition, an equilibrium where the industry profits equal zero. A second possible explanation is that the stock exchanges have improved their own connections, which reduced the relative edge that the faster connection provided the HFT firms.

According to Investopedia’s definition, arbitrage opportunities exist as a result of market inefficiencies, which allow investors to exploit price differences. Therefore it is not limited to just investments in stocks, but really any market where such opportunities exist. As a result the HFT firms also trade other types of securities such as bonds, futures and foreign exchange contracts. The rest of this article will focus on price inefficiencies within sports markets.

Arbitrage opportunities in sports markets

Within the world of sports betting there exists bookmakers where you bet against the house and betting exchanges where you bet against other people. The latter can be compared to a regular stock exchange, the main difference being that the traders buy and sell bets on the outcome of events such as a football game rather than stocks. What makes the sports market interesting from a trading perspective is that it is more inefficient than the financial markets, which in turn creates arbitrage opportunities. At the free site oddsportal.com, one can compare the odds of a game provided by different bookmakers and betting exchanges, which enables you to see the inefficiencies that exist within the sports market with your own eyes. I’ve included a screenshot of the odds from different bookmakers on the Liverpool – Manchester United game that was played on 17.10.2016.

Odds comparison

Odds comparison

The odds of a game’s outcome reflect what the bookmaker believes to be the probability of that outcome. The probability of an outcome equals the inverse of the odds, in addition one has to adjust for the bookmaker's payout rate, which is the amount of money that they pay back to their customers. For instance Mybet has a 90% payout rate, which means that they take a 10% cut of the money that is placed on this game. Next let’s compare the odds provided by two different bookies.

Sharp vs Soft Bookie Odds and Probability

Sharp vs Soft Bookie Odds and Probability

What we can see here is that the two bookies differ greatly in what they believe will be the outcome of the game. Now this leaves us with the question of which bookmaker is right and are either of them able to accurately predict the game’s outcome? The earlier screenshot above shows that Mybet’s odds for a home win is 2.40, while the closest bookmaker is at 2.27. This large deviation from the rest of the market indicates that Mybet is the bookmaker who underestimates the probability of a Liverpool win. The consequence of Mybet having mispriced the probability of a Liverpool win, by placing their odds at a higher level than the rest of the market, is that it creates an arbitrage opportunity. More specifically it makes it possible to put money on the outcome of a draw and an away win at two other bookmakers with a guaranteed ROI of 2.62% as can be seen in the screenshot below.

Arbitrage Bet / Surebet

Arbitrage Bet / Surebet

This is what is referred to as a surebet. The advantage of surebets is that in theory you are guaranteed a profit without any risk. Surebets are also called arbitrage bets and have been covered in even more detail in this article. While this article covers some practical experiences of using arbitrage betting from Vida, a guest contributor at the Trademate blog

However, the majority of surebets will occur at the soft bookmakers (will be defined later), which can lead to several practical disadvantages:

  1. Soft bookmakers limit sports traders who are able to win consistently.

  2. You need to find high enough odds on all of the outcomes for it to add up to a surebet.

  3. If the odds deviate too much from the rest of the market, bookmakers are able to void bets placed on that game. Imagine the following scenario: you are following the recommendation in the screenshot above, by placing money on a home win at Mybet, a draw at Vulkan bet, but when you are trying to place a money on an away win at Leonbet, you are limited to place a maximum of $1. You are now unable to complete the surebet, which results in a huge negative expected value on the bet. (If you are unfamiliar with the statistical concept of expected value (EV), read this short article) Now whether you are investing in stocks or sports the most important principle is to avoid loosing money, because if you loose 50% of your capital ($10 000 → $5000), you will need to increase it by 100%, just to return to the starting point ($5000 → $10 000).

  4. You will need to distribute your capital and thus tie up your capital across a very wide range of bookmakers to take advantage of the surebet opportunities.

Difference in estimated probability between soft and sharp bookmaker

Difference in estimated probability between soft and sharp bookmaker

Because of the disadvantages with arbitrage trades (surebets) listed above, a better strategy is to place a high volume of +EV trades. An example of a value trade would be to place money on a home win to Liverpool, which has a +6.06% EV. Over a large sample size placing +EV trades should be a profitable strategy in theory. This is based on the assumption that the Asian Bookmaker's odds accurately reflect the true probability of a game’s outcome, which is covered in this article. 

 

WHY INVESTING IN SPORTS OVER STOCKS MAKES SENSE FOR PRIVATE INVESTORS


A rational investor will attempt to maximize returns while minimizing risks. This implies that they will invest in the markets or financial instruments where the potential return / risk ratio is the highest. Investors in financial markets can broadly be divided into two categories: Long-term oriented investors who rely on fundamental analysis and short-term oriented investors who follow a trend or technical analysis. The former are often referred to as value investors, which means that they try to identify assets that are underpriced by the market. They also require the asset to be significantly underpriced, which provides a margin of safety, before they purchase a given asset. What I view as the main disadvantage for the value investors is that, because they are oriented towards the long-term, which can be anytime between 3-10+ years, it means that they will tie up their capital in investments for a long time before potentially reaching a positive return on investment. In the meantime, you do not know whether your hypothesis that the asset is underpriced holds true.

The opposite of strategy would be day trading, taking advantage of short-term price discrepancies in the market. Day traders apply different methods such as looking at chart patterns or technical indicators in order to predict future market movements. Now the main disadvantage with being a day-trader is that computers are superior to humans in performing statistical analysis and for discovering patterns in large datasets. Thus gaining an edge in the market when you are competing against HFT firms is very difficult. The gap in access to information held by hedge funds compared private investors have increased dramatically in the last decades. Today hedge funds can rely on real-time satellite images of the parking lots of JC Penney to predict their quarterly returns, while private investors rely on historical financial statements. The result being that it is very difficult for private investors to compete against the professional hedge funds, especially if they rely on technical analysis. This is because, if there does exist price inefficiencies in the stock market it will be exploited by the HFT firms way faster than any private investor is capable of, returning the market to an efficient state. Thus in practice, the day trader performing technical analysis is competing against HFT firms, with access to less information and using inferior methods.

To manage risk the principle of portfolio diversification is followed by both groups of investors. The short-term investor will typically mitigate risk, by making a high volume of smaller trades with low risk and low returns that add up and provide a positive ROI. In comparison, value investors will make a lower volume of investments, but with a higher potential ROI on each of them. Similar to the day trader a sports trader will perform a high volume of smaller investments on the sports market. With any strategy, it is important to set up a feedback loop that provides you with data on how your strategy is performing. Within sports trading, the natural benchmark is to measure whether the odds you are putting money on is able to consistently beat the closing lines of the sharp bookmakers. If so, you will have a positive expected value, which in theory should lead to profits over a large sample size of sports trades.

Poker players will be familiar with the difference between the short and the long term. In the short term is possible for anyone to win, regardless of skill. Because luck or randomness has a large impact on the outcome. While in the long run, the random variance will even out and the players who have an edge will be the ones making a profit. The same holds true for people who trade in both the stock and the sports markets. Anyone can make a profit in the short term, but in the long term only traders who make decisions with a positive expected value will be profitable.

How price differences occur in the sports market

The reason that computers running algorithms are used to trade in the financial markets is because in these markets prices are updated so fast that it almost impossible for humans to exploit. In the stock market the difference in price that you will be able to obtain when purchasing Tesla stock at Nasdaq versus LSE is close to identical since the updates happen within milliseconds across exchanges in different markets. While in the sports markets the same asset, the outcome in the game between Liverpool and Manchester United is priced differently at different bookmakers or exchanges. In addition, these inefficiencies are not necessarily corrected in real-time. For instance, in the game between Chelsea vs Manchester City on February 21st, 2016 it took the bookmaker Norsk Tipping almost 30 minutes to adjust their odds compared to the Asian market, as seen in the image below. You can read more about how value occurs in the sports market by clicking the link in the previous sentence. 

How value occurs in sports betting markets

How value occurs in sports betting markets

Now compare this to the stock market, where the price would have been adjusted within milliseconds. These market inefficiencies create arbitrage opportunities that can be exploited by smart sports traders.

Being a sports trader

For professional sports traders, the majority of work is put in during the weekends because this is when the majority of games are played. In a given weekend you can potentially run through your bankroll multiple times by placing a high volume of sports trades. Trades are typically placed within a couple of hours before the game starts to reduce the variance that may occur between the opening to closing lines of the bookmakers. Thus the capital of the investor is tied up in the investment for a shorter period of time. The result being that you can grow your fund much faster, than for long-term investments in the stock market.

For example, if your bankroll consists of $10 000 and you place sports trades with an average of + 3% EV per trade. +EV being the trades where you get a higher odds than the closing lines of the sharpest bookmakers. Now let’s assume that you place your trades with a flat structure* of $100 per bet and that over the weekend you place 100 bets. Then your expected profit would be: 100 (trades) x $100 * 1,03 (EV)  - $10 000 = $300. Now obviously, whether you endure winning or losing streaks will have an impact on your actual profits . If we assume that there is no variance in the 100 trades we placed or in other words that we are neither lucky nor unlucky, our actual profits would be equal to our expected profits of $300. In reality, the variance will only even out if you are able to place a high amount of +EV trades

*Your bet sizing is an important topic when trading in the sports market. You can read more about bet sizing in this article

Conclusion

To sum it up there are 3 main advantages of trading in the sports market compared to the stock market:

  1. Market inefficiencies enable arbitrage opportunities.

  2. Shorter investment cycles provide a higher potential for profit growth and reduced capital tied up in investments.

  3. Faster feedback loop on strategy performance.

Written by: Marius Meling Norheim

Disclosure: Neither I, nor Tradematesports have any affiliation or receive any form of compensation what so ever from any of the bookmakers, websites or companies mentioned in this article.

 

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