A trading evolution; from football into horse racing

The arms race between global football trading syndicates creates genius teams and technology which can be applied to many other sports, but horse racing can be one of the most lucrative, and most challenging.

Categories: Football, Horse Racing, Liquidity, Statistical models, Technology, The basics

I have worked as a recruiter, agent, broker and publisher within sports trading for approximately six years. During this time, I have worked with large and small syndicates across Europe, Asia and North America and met a diverse variety of individuals and groups.

Approximately 70% of my work has been within football trading, 10% a mix of other sports such as golf and tennis, but the most interesting part, around 20% of my work, is within global horse racing.

In football, the trading volumes in Europe and Asia are now so enormous and so established; it is difficult for any market analyst to accurately estimate its size. This is primarily due to the ‘underground’ or ‘black’ markets across Asia (not to mention the other continents that bet unfathomable numbers on football through a similar system), of which the majority is conducted on a credit, rather than on a cash basis. This means that the true volumes and frequencies of betting transactions are impossible to accurately quantify. What is for sure is the diverse and significant opportunities for quantitative, algorithmic and technological sports traders, of any size.

There are four or five ‘top-tier’ football trading syndicates in the UK. These groups have become highly profitable by one of two methods; either they have perfected the art of pure or statistical arbitrage between the books and exchanges (credit and cash) in Europe and Asia, or they are able to generate ‘true value’ pricing and beat the market over the long term. These pioneering syndicates and market leaders have profited handsomely from their teams of the best and brightest technological and statistical employees, combined with the fastest and most advanced technology, core data and earliest team news. Of these four or five groups, only one has been a ‘recent’ entrant to the market. Two proprietors have even purchased progressive professional football clubs in England and turned their hand to success there.

Not only are there increasing numbers of ‘smart’ players and groups entering the markets for football, there exists an ongoing ‘arms’ between these largest syndicates and this has two effects. The first is to increasingly shave margins in the market as the price on every market in every match in every league around the world, becomes closer and closer to its ‘true’ price. This means that value becomes harder and harder to derive and profit margins, long term at least, are driven south. There are now economies of scale in football that did not exist even five years ago. This leads the largest syndicates to seek out new sports where market inefficiency gives the opportunity of higher margins.

Global horse racing markets seem to offer such an opportunity, and not only are the largest syndicates beginning to invest time and finance into exploring these, so too are the ‘second tier’ of trading groups, eager to establish trading strategies in a new market, with the perception of less competition and higher margins. However, whereas the barriers to entry for football trading are minimal (just open a betting account with an exchange), much greater barriers exist in the world of pari-mutuel (tote) horse racing. Here, I am not talking about UK and Irish horse racing, which internationally is commonly looked down upon with pity due to the bookmakers’ stranglehold on the sport and the painfully size of the purses and tote. Rather, I am talking about the real opportunities which exist within markets such as Hong Kong, the United States and Australia.

Within football, the access to market for quantitative or technological traders and syndicates is relatively straightforward, especially within Europe. Whilst the entry-level trader will begin trading with one of the exchanges such as Betfair and Betdaq, successful groups will quickly look for trading platforms with slimmer spreads, less commission, better prices and more liquidity. There are a number of groups which can introduce such players into the Asian credit markets’ bookmakers and exchanges. With horse racing, establishing trading is much more demanding.

To begin with, one must look at the market for access to pari-mutuel betting (outside of the UK). Betting within jurisdictions such as the US, Australia, Hong Kong, France, Sweden, Japan, Korea and Singapore, is strictly controlled, and the racing industry in these countries retain control over the legality of betting on these races (we shall not discuss the black markets in this particular article, but they are becoming increasingly problematic for these industries). Betting through a licensed tote is the only way to bet on many races. To get access to an international tote provider is not difficult, however the fundamental structure of tote betting; i.e. the large takeout, is the greatest barrier.

A tote works by ‘pooling’ all of the bets on that particular race, taking out a percentage (anywhere up to 20%; the takeout) and the remainder is paid out to the winner(s), with the return calculated according to the proportion of the pool backing that horse. It also offers ‘exotic’ markets such as exactas and trifectas. Of course the main obstacle to such a system from the point of view of the trader, is that it becomes very difficult to beat the market by 20% (i.e. to beat the takeout) and generate consistent profits. This is where rebates come in.

The takeout from the pool/tote, effectively pays for the racing industry. The purse/prize money that these racing jurisdictions offer is the lifeblood to horse breeders, owners, trainers and jockeys. There must also be payments made to those put on the show; the racetracks. As long as the market is healthy and there are people betting on horses, the industry is sustainable. But what attracts players to bet on horses are big winnings i.e. big pools; and for big pools, the industry needs big players providing liquidity into their markets. Here is the enticing part for to advanced football syndicates and what attracts so many groups of all shapes and sizes, to try and crack racing modelling.

In order to maximise the liquidity on every race, the racing industry in each of the jurisdictions will offer a rebate to any player or syndicate that plays upwards of around $10m per annum (more information on rebates can be found here). The more volume a syndicate plays, the bigger the rebate. So, herein lies the barrier to entry; how to bet upwards of $10m per annum without losing a lot of money, even after the rebate. The answer lies within the frameworks which currently exist in the football modelling world; data, stats and computing.

Rather like the data for football, a huge wealth of data sets exists for horse racing and some of the commercially available data providers offer literally thousands of variables for each race, horse, jockey and trainer, going back a decade… a dream scenario for any statistician. However, due to the existence of around two dozen ‘top-tier’ horse racing trading groups globally, the market pricing is already relatively efficient, and the data market has moved on from just what’s available on the market. Similar to football syndicates relying on data differentials from their competitors, such as team news and post match quantitative analysis, racing syndicates continue to build out their data teams with watchers providing unique proprietary data to be fed into the algorithms. In parimutuel markets, inside knowledge from trainers, owners, jockeys etc. has comparatively little impact due to the much bigger size of the purses; everyone is trying their best in every race (in top-level thoroughbred racing anyway, which is where the biggest margins and profits are made by the syndicates).

To successfully model pari-mutuel horse racing, as opposed to modelling football, the syndicate must of course bear in mind the minimum trading volumes required to qualify for the rebate. This means that ‘finding value’ is a lot more challenging as the group must model value for a very large proportion of the races. Trading frequencies are every high.

Comparing football and racing syndicates may be similar to comparing equities and FX trading syndicates in the financial markets; although the fundamental strategies may not be too dissimilar, it is a significant challenge to migrate the core expertise in one market into another. It is common knowledge that several of the largest football trading syndicates have attempted to enter the pari-mutuel racing markets (with varying degrees of success), and vice versa. However, it is a testament to how different these markets are, that no groups have successfully mastered both.

The opportunities within racing modelling are very attractive for groups with the required expertise, capital and most importantly; patience, and the margins eclipse those found even in the most lucrative of football markets. The barriers to entry, and indeed success, are daunting and many bright, well funded groups have been left bruised and poorer for trying. However, by selecting the right partners and engaging with knowledgeable experts in the field, the odds of success can be greatly improved.