How Do Bookmakers Earn? How Big Is Their Edge?

Bookmakers accept bets on all outcomes of an event in order to generate a profit regardless of which outcome prevails.  If the odds offered by the Bookmaker are “fair” then they precisely reflect the real probability of an event occurring e.g. offering even money for Heads at the toss of a coin.

Note: offering fair odds has 0% edge for Bookmakers — so they use various techniques for adjusting them in their favour.

 

Coin Toss Example

To keep it simple let’s take the classic coin toss example and assume the Bookmaker has a perfectly balanced book with £100 stake on heads and £100 stake on tails (£200 total stake). This situation is ideal for the Bookmaker as they will always generate profit provided they offer odds less than 2.0 for both outcomes. If the Bookmaker offered 1.98 for both outcomes then one of the following two outcomes occurs (from the Bookmaker’s point of view):


Outcome 1: Heads Wins (50% real chance)
Heads: -£98 loss 
Tails: +£100 win 

Result = +£2 for the Bookmaker

Outcome 2: Tails Wins (50% real chance)
Heads: +£100 win for the bookie
Tails: -£98 loss for the bookie

Result = +£2 for the Bookmaker

No matter what result, the bookmaker is in profit. This is the simplest representation of Bookmaking, but it relies on balanced books to ensure that profit is absolutely guaranteed.

 

Implied Probability & Calculating the Overround

The implied probability for both outcomes in the above example is calculated by the following formula:

1 / (decimal odds) = 1 / 1.98 = 0.50505 = 50.51%

Using the implied odds we can calculate the overround, or “house edge”, by totalling the implied probabilities of all outcomes (in this case there’s 2 outcomes of “Heads” and “Tails”):

50.51% (for tails) + 50.51% (for heads) = 101.02%

Notice that for fair odds (where the Bookmaker offers 2.0 for both outcomes), the total of all outcomes is exactly 100.00%

Therefore 1.02% is the overround in our example. That is, for every 100 units paid out to punters, the Bookmaker expects to take 101.02 or 1.02% profit.

In our example we know the real fixed, fair probability of a heads occurring is 50%. With Horse Racing, or indeed any other sport, calculating the chance of winning is much more difficult and Bookies don’t always get it right. Indeed this can play into the hands of the Bettor as the sometimes the odds offered are above the fair odds for some selections.

 

Balancing Books

If the stakes are unbalanced then Bookmakers can adjust their odds in order to make the least popular outcome more attractive. Think about it: if you own a shop and you want to sell more of something you lower your price, offering better value to the customer. It’s no different in betting — if you want more volume on a horse you raise the value on that selection by giving better odds.

Let’s go back to the coin toss and suppose that there was £200 total stake on heads and only £100 on tails. To the Bookmaker this poses a risk that heads wins and the payout isn’t covered by their profits on the (losing) tails bets. Lowering the odds for tails and raising the odds for heads, despite the fact they both have a 50% real chance of winning, can help to create more volume on the tails outcome. And if you consider this scenario as a Bettor it’s a great opportunity to place a bet on tails as you know that it’s got an equal probability of winning to heads.

The same concept applies in a Horse Racing context. Imagine that a top-rated tipster with a large audience recommends a horse to win the race and suddenly the Bookmaker receives an influx of volume on that outcome. This creates an imbalance in the books, heavily weighted on one horse. It makes sense for the Bookmaker to raise the odds of other horses in the race and lower the odds on the tipped horse.

Bookmakers can also reduce volume on one horse by limiting bet sizes. For example, you might request £100 on a horse but will only get away maximum of £50. This approach somewhat undermines the role of the Bookmaker, and it can upset regular punters that have come to expect an outlet for their large stakes. Generally Bookies try to avoid limiting bet requests but on some occasions (with an extremely high volume) they reduce their exposure — often because the influx represents genuine knowledge or expertise on the race. In rare cases the heavily backed horse is reported and pulled out of the race due to suspicious betting patterns.

 

The Role of Exchanges

Betting exchanges like Betfair changed the landscape for Bookmaker. Traditional Bookmaking methods, such as predicting the odds in-house, are less common– and unnecessary.

The crucial difference between Bookmakers and the Exchange is that whilst Bookmakers set the odds at their discretion and then sell them to Bettors, the Exchanges provide a service for users to trade odds with one another. Exchanges make their money through charging commission on winnings and not through an overround.

But you’ll note that Bookmakers and Exchanges are generally synchronised in their price movements. Why is this?

Nowadays Bookmakers tend to follow the Exchange by offering odds sufficiently below the current Lay value. They’re happy to base their odds around those offered on the Exchange — which reaffirms my belief that the Exchange odds (and thereby public opinion) is efficient enough to rely on, and an accurate representation of a real-life probability. Therefore Bookies following the exchange using a simple “price tracking“ technique are consistently setting profitable odds.

Price tracking the Exchange does have some issues though — most notably arbitrage opportunities. It’s not easy to be totally synchronised in a volatile market and the Lay odds often fall below the Bookmaker odds, enabling the Bettor to make a risk-free trade. This opportunity usually doesn’t last too long as the Bookies are fast in changing their odds to below the Exchange, thereby closing the opportunity.


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Smarter Betting At Bookmakers

Knowing how to calculate the overround using decimal odds is a useful first step because it allows you to concentrate on the betting markets with the lowest overround. These are the markets that – in theory at least – give you the fairest deal. Focusing on those and avoiding markets with excessive overrounds should make it easier for you to make a long term profit from sports betting.

Mentality also goes a long way to reducing the Bookmaker’s edge in sports betting. Focus on getting a good price and forget about “picking winners”. You could pick a loser at 40/1 odds, but if the fair odds are 25/1 this was a good bet to make. Equally if you accept odds way below the fair odds then regardless of whether you win or lose you’ve still made a bad bet.

You have to accept that you can’t always win. Sometimes this can be extremely frustrating. If you’re finding that the swings in your results are too big to handle then starting reducing the variance by keeping to lower odds. Naturally you’ll win much more frequently and it might be a little less stressful, too.

It’s my personal view that the UK is guilty of losing price value through the reluctance to switch from fractional to decimals odds. I don’t use Fractions myself as I cannot instantly see if one price is larger than another. If i’m quoted 7/4 or 9/5, it’s not instantly clear what’s higher or what the exact difference is between them, like it is with decimals. Fractional odds make it easier for the Bookmaker to round the odds down unfavourably, and for the Bettor to make a miscalculation. Bookies allow you to change the odds format, so everyone should be using decimal odds to ensure accuracy. Decimals are simple: the higher the value, the better the odds are.

As a final note: remember that Bookmakers don’t know the outcome of an event before it happens, nor do they always get it right. Those are myths. Bookmakers are merely just experts in offering odds at lower-than-fair-value odds. That’s their job, and effectively their “fee” for the service they provide. In essence, it’s the reverse of this that you want to be doing as a player i.e finding odds that are above fair. Above fair odds are what we refer to as “value bets” and this is the crux of successful betting for gamblers of all sports.

To find value bets at Bookmakers, I can recommend Trademate Sports. I’ve been monitoring my progress in using their software, and the results are superb.


Other Smart Betting Approaches at the Bookmaker

Many bettors profit from risk-free techniques which put the edge in their favour:

  • Matched Betting. The process of earning money from betting bonuses & free bets. I’ve written a detailed beginners guide right here. It’s not too difficult to follow and it points you towards excellent value services which guide you to earning up to £1,500 /month.
  • Arbitrage Betting. Following on from Matched Betting, ‘Arbitrage’ opportunities between sports betting companies enable punters to profit from differences in their odds. Again this is completely risk free, and you can read more information on my post: Does Arbitrage Betting Work? Is It Worth The Effort?

 


Further Reading:

How To Choose The Right Bookmaker

Why Use Bookmakers Instead Of The Betting Exchange?

List Of Best Odds Guaranteed Bookmakers

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ed pierce
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ed pierce

I didn’t realize just how much work the bookmakers have for themselves! I always thought they made a lot more than what they do as long as they are balanced and fair. But it looks like they have to really put in the effort. Do you think the bookmakers place their own bets as well, or is it better for them not to bet at all?

Toby
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To be honest it’s not too much effort, as they tend to get their prices right by tracking the odds set by the public on Betfair. This process is usually automated – and if it wasn’t then they would indeed have an extremely tough time managing the huge number of markets offered today!

As for Bookies placing their own bets – apparently they sometimes hedge out of their risk using Betfair. I guess they can use exchanges to re-balance their books. I don’t think any of them would want to admit they do that though…

Barbara M. Smith
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Barbara M. Smith

Do Bookies also track Pinnacle?

Toby
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I think so, yes. Generally Pinnacle, the Exchanges and Bookmakers are pretty synchronised. Often it’s Pinnacle that moves first – sometimes the exchange.