How To Make A Book & The Theory Of Bookmaking
It is a generally accepted view that the biggest exchange - Betfair - is a perfect market, with the most popular events usually forming ’books’ that rarely rise above a 101% overround.
In fact the whole concept is geared towards providing backers with the advantage, as most of the marketing you read emphasises. So does anyone actually consistently make a book on the exchanges in the traditional way a bookmaker does? There are some key differences in approach, so lets take a look at the theory first.
Bookmakers use a formula to work out the size of the overround for each book, e.g. in horse racing the bookie will assign a 2% overround per runner for the first 10 runners, 1% per subsequent runner, plus 5% for the book. So, in a 12-runner horse race we would expect the overround to add up to 27% (127% book). The size of the overround per runner also varies from sport to sport. For example, in football most bookmakers bet to 111-112% for match odds markets.
A bookie has complete control over the odds he offers, but initially he doesn’t know the volume of bets that will be made at those prices. What he is basically trying to do is adjust the odds he offers in order to take bets in the right proportions to take in enough stakes across the board so that the amount he pays out is less than the stakes he takes in from the losing selections. If he achieves that goal then he will not be concerned which horse wins.
On the exchanges whereas you could not claim to control in which direction the odds move, you do have control over the volume of bets you take. You could try placing your offer of odds across the boards in the right proportions to guarantee a profit, but all of those bets have to be matched for you to win. You immediately lose control of the process.
My approach is to set up a book on an event when I see the market is trading at or above 98% on the lay side. What I’m trying to do is get the entire field covered right at the beginning, so that the stakes are all in proportion. Of course, as soon as I accept bets on the lay side at or around 98% I’m guaranteeing a loss that is spread equally across the field. Once the entire field is matched, my next objective is to get the book over 100% to ensure I will be in profit. With the prices continually changing since I committed to my bets, I will approach my objective in one of two ways to improve and then balance the book. If one price has reduced significantly since I took a bet on it, then I will lay it again at that price and instantly try and back it at slightly higher odds and stakes designed to balance the book. If that works, the book will now be balanced and typically be around 101% or above. With green numbers across the board I’ll move onto the next event. This is very similar to the standard zig-zag method of trading, as by backing the selection I’m locking in the profit from the margins.
So why not just trade? By laying the field I’m not restricted to the price movements of just one selection, and more often than not one or more of the selections will reduce significantly in price, before drifting back out again.
If I can’t back to balance the book or the prices move very slowly across the board I will try and take bets across the board by offering prices and stakes in proportion to the original loss making book I created.
With the help of a spreadsheet (and/or the software available on the exchanges) it usually takes a combination of taking and making bets to balance the book, but it should always be possible to get the overround above 100%. I have always managed it (bear in mind just getting the book over 100% doesn’t guarantee a profit!). You need time to complete a book effectively, and although it helps the price movements if you’re taking bets after the ‘big money’ comes in on an event - in the case of horse racing usually ten minutes before the off - it can be a mad scramble to balance the book before the event starts. And the law of sod is quite clear - if you’re over-exposed on an outcome then that outcome will happen! So, if you’re taking bets close to the off, always close your position. Do not be tempted to redeem the position in-running - it’s too much of a gamble.
An alternative to initially establishing a loss-making book is to gradually build up a book by offering the odds on each selection at stakes that you feel will ensure your book will be above 100%. To judge that you need to record all the odds available on the lay side when your first bet is taken. After that, just try and take bets when the odds for a selection dip below the level you recorded.
Once your book is comfortably above 100% in theory you should be able to balance the book so that you earn the same profit on each outcome. In reality it is very difficult calculating how much you must back or lay selections to reach a balance. By experimenting with a spreadsheet (or the betting exchange software) you will probably reach a reasonable compromise with the book being exposed on some horses, and in profit with others.
Obviously each book is different, but if you are exposed to a horse in a book over 100%, you will find that your payouts in relative terms should be less than had you simply laid that selection. For example, you might earn £5 if 7 out of 8 selections win, but if the outsider wins, which was trading at odds of 25, you might have to pay out £15. Of course normally if you’d just laid the outsider at 25 to gain £5, you would have to risk £120 to do it.
Overround - if the book percentage adds up to over 100% it is said to be overround. The figure over 100% is the bookmaker’s profit. To calculate the overround you need to add up the percentage chance of each event based on the offered odds. In the table on page 14 you would add up column E to find out the overround.
Overbroke - if a book adds up to a figure less than 100% then the punter could back all outcomes at proportionate stakes to guarantee a profit.