Explaining arbitrage

Arbitrage is a strange-sounding noun describing a betting system that ‘guarantees’ a small profit on certain wagers. It is time-consuming and rarely gives big returns, but it does work, though not without exceptions.

arbitrage

Shortening the odds

Arbitrage takes advantage of the subtle variation in odds offered by bookies on the same events – in our case football matches. By seeking out the best prices on wins, losses and draws and betting specific amounts on all three with several bookies, bettors can be sure of a return.

This outcome arises because the punter can reduce the bookies’ ‘overround’ (or profit) on the book to less than zero per cent, giving them a loss. For the punter the book becomes ‘overbroke’, creating a betting opportunity called an arbitrage, or a sure bet.

Consider the following example:

Take a look at the hypothetical odds offered by three made-up bookmakers in the list below. Although this example is not real, the variation in odds is not unusual. By betting on a win, a loss and draw using the best odds from the three bookmakers a punter can guarantee their money back.

Bookmaker Home win    Draw    Away win

Bookie 1             1.90            3.15       4.23

Bookie 2            2.3               3 .1         2.85

Bookie 3            1.85             3.5         3.75

By selecting a home victory with the second bookie, a draw with bookmaker three and an away win with number one, the collective book is ‘overbroke’ by 4.31 per cent. An outlay of £100, strategically placed, would return a profit of £4.31. See the table below for confirmation:

Bookmaker    Home win    Draw    Away win

Best odds                   2.3             3.5               4.23

Stake                        £43.48       £28.57      £23.64

Profit with win    £56.52    £71.43       £76.36

Lost stakes           -£52.21     -£67.12      -£72.05

Overall profit       £4.31          £4.31            £4.31

Bookies are – quite rightly – careful to price their books with the market so that arbitrages are fairly rare, taken as a proportion of the total number of bets happening at any one time.

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However, such is the volume of sporting events around the world that arbitrages crop up quite frequently. But hold on; these happy anomalies in the betting system are not risk-free and, like any other form of betting, have their flaws.

As we mentioned, one is that punters have to stake a lot to get back a little. This is more than just a minor annoyance as many bookies put a limit on the size of the bet they will accept from any one bettor.

Imagine in the previous example you wanted a big return so divided up a ten thousand pounds between the three eventualities. Imagine then that the third bookie wouldn’t accept your bet because it was too large.

In this case you will have staked a large amount of money while leaving the door open for a substantial loss. Even if you can place all the bets and manage to win, charges associated with depositing and withdrawing money could erase the small profit you make anyway.

Bookies also have different policies when it comes to match postponements; some carry over your bet while others return it and reopen the books. This scenario could easily wipe your arbitrage and hand you a loss.

Finding arbitrages in the first place presents an ‘opportunity cost’ to punters whose time is often more profitably spent researching betting markets and betting longer odds. Why win a small amount when you can win more betting on Chelsea to beat Accrington Stanley in the FA Cup?

The last argument against arbitrages (and perhaps the most important) is that they take the fun out of betting, which is why a lot of people do it in the first place. Put simply, where’s the thrill if you know you’re going to win?

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