Rebates for quantitative traders in parimutuel horse racing markets

Brooke Greville explores how parimutuel and tote pools in horse racing offer robotic and quantitative players the opportunity to reap exceptional rewards…. but huge rebates are the crucial ingredient.

Categories: Execution & Getting On, Funding, Horse Racing, Liquidity, Professional, Statistical models, Tools

Horse racing is said to be ‘The Sport of Kings’.

It may have been at one time, but today, it’s a much broader sport, attracting billions of dollars globally in wagering and trading. For savvy quantitative and algorithmic groups, racing provides an outstanding opportunity to derive significant profit.

In jurisdictions where general sports betting is restricted by law, horse racing is often the only sport on which betting is legal. In the vast majority of markets globally where quality horse races are run, bookmaking is illegal and pari-mutuel – or ‘tote-based’– betting is the only legal form of betting. The United States, Hong Kong, Australia, Singapore, Japan and France are considered to be the largest pari-mutuel markets, whereas in UK and Irish racing traditional bookmakers constitute the predominant form of betting.

Pari-mutuel/tote models combine similar bet types within a race into individual pools from which a ‘Takeout’ is deducted.  Takeout represents ‘gross revenue’ to racing’s stakeholders, and can range from 6% to 25%,depending on the bet type.  Once deducted, the balance of the pool is paid to winning players, based on a proportional division of the net pool among those holding winning tickets.  In simplest terms – and at the risk of stating the obvious, the lower the odds, the more money bet on that particular outcome, and thus the lower the return.

Representing gross revenue to stakeholder, Takeout funds track and tote operations, and purses or prize money paid to horse owners, trainers, and jockeys, as well as governmental assessments, taxes, charitable causes, and a host of other beneficiaries, compelled and voluntary.

So what is the outstanding opportunity pari-mutuel betting offers the savvy player?  It’s called “a rebate.”

A rebate?  Really?  That’s it?

Though the concept of a rebate is quite simple, from the player’s point of view, it’s a misnomer. It is in reality a question of pricing.  Nonetheless, the application of what has become known as ‘the rebate’ can be quite lucrative to those receiving them. It is important to keep in mind that ‘rebates’ vary dramatically from another important pari-mutuel concept – lower takeout – and work to the advantage of the players receiving them much more significantly.

Why do rebates exist, and how do they differ in size for different players?

First off, rebates exist to encourage new and additional play.  They are typically offered to high volume players, which for example in the U.S. generally includes those wagering $5 million or more per year.  In the context of professional players worldwide, that is a relatively modest threshold that can provide significant returns, particularly given the concept of ‘churn’.

The most successful of these groups operate within nearly all of the global racing jurisdictions, and not surprisingly negotiate and receive the best rebates/rates available.

Unlike bookmakers who offer odds on an event with an average of 2-8% advantage to the book, by analogy the pari-mutuel Takeout… ‘the vig’ so to speak…may be seen by some as constituting a 12-15% ‘disadvantage’ to the player. Whilst the difference between the two is substantial, the rebate alters that difference dramatically. When combined with the fact that pari-mutuel pools are not generally limited by the operator in terms of bet size or pay-out, a rebate within a substantial pari-mutuel can lead to significant advantages and returns for such players.  Moreover, the ability to hedge one’s bets – though in a fashion different from that which may occur on an exchange – further improves a player’s return.

Despite their comparatively higher Takeouts, in jurisdictions where racing is the only form of legalised betting, players remain eager bet into pari-mutuel pools, particularly where pool depth, or ‘liquidity’ is significant. Most players will not only bet on a horse to win, but they will bet that horse in a variety of wagers; e.g.,to come within the top two (place) or three (show), or in more complicated bets such as exactas (picking the first and second in the correct order), trifectas (first third in the correct order) and superfectas (first to fourth in the correct order).  These latter bets are commonly referred to as ‘exotics,’ and generally offer players substantially significant returns and winnings if correctly selected.

As in any sports betting industry, liquidity attracts liquidity, and this is also true in horse racing.  Typically, the larger the pool size, the greater the volume of betting. It is in these pools where those receiving rebates generally concentrate their play. Not surprisingly, that concentration of play benefits both industry stakeholders and the co-called “rebaters” alike, by attracting increasing attention and play from other, less “incentivized” players.  This cause and effect has lead more tracks to offer rebaters a chance to play in their pools, with several tracks – and tote operators/ADWs – creating staff positions focused on the identification and recruitment of such players.

Make no mistake, it’s not easy to profitably trade millions of dollars every year on horse racing.  It requires skill and expertise, so simply qualifying for the rebate ensures virtually nothing to the player. With that reality noted, there is a small but growing minority comprised of professional handicappers and syndicates, referred to as ‘robotic’ or data players, which includes quantitative and algorithmic groups, most often a combination of the two, that are achieving enviable success. It is this latter combination of the two where the relevance to the Sports Trading Network readership comes into play.

Horse racing is a sport where a huge volume of data is produced for each and every race, jockey, trainer, racecourse, surface type, track configuration, equipment, medication, and of course the horse itself. These data sets are all commercially available, albeit at a not insignificant sum. Though it is theoretically possible to ‘scrape’ some of that data from online sources, despite the high cost of data, it remains relatively more costly to scrape. Moreover, several of these top-level groups have created unique proprietary data sets by employing teams of skilled observers to observe the horses and races on which such data sets/statistics are produced. It is both these data sets and pool dynamics that are statistically analysed and manipulated to form their profitable trading strategies.

It is this system of rebates that offers quantitative and algorithmic players numerous opportunities to realize significant profits. Several teams of such players have demonstrated for nearly a decade their abilities to create models that ‘beat the public’ and to trade profitably over the long term, while wagering large volumes over and over into the pools. The most successful of these groups operate within nearly all of the global racing jurisdictions, and not surprisingly negotiate and receive the best rebates/rates available.

About Brooke G

Since studying International Economics, Brooke has worked for the past twelve years within recruitment and executive search headhunting in several sectors including sports betting. Brooke has a deep interest in quantitative approaches to generating profit from sports trading and he has built an extensive network of quantitative and statistical sports traders, hedge funds, agents and sports and affiliate groups within North America, Europe and Asia.

He is the publisher of Sports Trading Network which seeks to connect the members of this network with each other.
One Thought on Rebates for quantitative traders in parimutuel horse racing markets
    6 Nov 2013

    A very interesting article. Im surprised you have no comments about it.I have heard about this in the past and often been interested in finding out more about it but to no avail.
    Its a subject i find fascinating and would certainly be interested in more information.

    Glad i found your website,i look forward to reading through it in the coming days.

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