We explain how bookmakers set odds, how bookmakers guarantee they win, and (importantly) how you can exploit this processes to make money.
When people think about how bookmakers set odds, they usually picture teams of experts trawling over historical data and crunching numbers. This actually isn’t too far off, but it ignores the most important factor- the odds set by their competitors. We’ll discuss the process of how price-setting bookmakers set their odds, how these odds filter through to other bookmakers, and most importantly how you can take advantage of this process.
Stage 1: Pricing Up
When your average punter places a bet, they usually do so within 48 hours of the event starting. This makes sense for most people, as by that time most of the important information about that event (such as player injuries) will have been released and they avoid tying down their money for longer than necessary. A person that only bets a short time out from an event would be used to having a choice of which bookmaker to place their bet with, and may have missed an important fact about bookmaking- that specific bookmakers around the world will inevitably be the first to set odds or ‘price up’ on certain markets.
Bookmakers that are amongst the first to release odds are called ‘price-setting’ bookmakers. It should be noted that a particular market may actually have more than one price-setting bookmaker, so it isn’t strictly true that only the very first bookmaker to set odds is a price setter. Instead price-setting bookmakers can be thought of as bookmakers that set odds based only on internal pricing mechanisms, rather than using competitor’s odds as a basis.
Price-setting bookmakers are usually larger, well established bookmakers, with high turnover and more resources at their disposal. Decisions about which sports a bookmaker will act as the price-setter for reflect upon the expertise of their staff, accuracy of their pricing models, and the richness of their historical data. As such, a bookmaker that acts as a price setter on one market or sport may not be the first to release odds on another.
Price-setting bookmakers will use a combination of three factors when determining how to set odds:
1. How customers will bet:
Bookmakers will try to predict how their customers will bet based on historical trends, social media, and other indicators of public sentiment. They will usually try to set odds aren’t too far out of line with their expected distribution of betting, and in doing so ensure they will profit no matter the outcome of the event.
2. Underlying probability:
Bookmakers employ experts who use historical outcomes and predictive models to approximate the underlying probability of the event. If bookmakers believe that how their customers will bet doesn’t align with the underlying probability of an event (i.e. that the punters are wrong) they may ‘take on’ the market and set odds in an attempt to profit from this bias. The odds they set in this instance would be a combination of how they predict their customers to bet and what they believe the underlying probability to be.
3. Betting exchanges:
Betting exchanges (such as Betfair) will often allow betting on markets before any bookmakers release their odds. As long as the market has significant action (i.e. matched bets) they can provide an early indicator of how a bookmaker’s customers will bet. If a price-setting bookmaker does decide it wants to ignore betting markets and set odds that differ from the betting exchange they will often simultaneously release odds and place a large matched bet on the betting exchange to profiteer from the mismatched odds. It often surprises people to learn that some of the highest volume betters on exchanges are actually betting companies themselves
But no matter how careful a price-setting bookmaker is when setting initial odds, not being able to use competitor’s odds as a reference means they can still get a market significantly wrong. Ultimately, if their customers’ opinions differ greatly from the odds they set there will be an influx of bets on one side of the market. If this happens they are presented with three options: they can adjust their odds to attract punters to the other side of the market, they can ‘take on the market’ and leave themselves exposed, or they can maintain their odds and offset their open position by placing counter bets on a betting exchange.
How this can be exploited:
Learn who the price-setting bookmakers are, and when they release odds. If you get in quick you can capitalise on any miscalculation of odds before they adjust to reflect the market’s opinion.
Whilst price-setting bookmakers may get any market wrong, it is important to remember that they are definitely most susceptible to mispricing on:
- Less popular sports without strong market sentiment indicators
- Exotic bets that have little action and may not be offered on exchanges
Stage 2: Following Suit
Once price-setting bookmakers have set the market, and made any corrections in response to the initial flurry of bets, other bookmakers called ‘price-following’ bookmakers, will follow suit. The odds they set must align with the price-setting bookmakers to a reasonable degree as if they are significantly different they will risk receiving an influx of bets on one side of the market from punters seeking to arbitrage (by placing counter bets with both bookmakers).
That said, by no means do price-following bookmakers exactly match the odds of the price-setting bookmaker. Most instead use the odds set by their competitors and overlay them with their own pricing mechanisms. The consequence of having a stable market to use as a guide (plus their additional analysis) usually means that the initial odds set by price-following bookmakers are even more closely aligned with the market than price-setting bookmakers.
Below is a simplified example of how odds might be set by a price-setting bookmaker, corrected to match market reaction, only for price-following bookmakers to follow suit and release closely aligned odds.
- Initial odds released with the Sharks starting as favourites over the Dragons.
- During the first 6 hours of the market betting the vast majority of money has gone on the Dragons and the price-setting bookmaker adjust odds dramatically to make them favourites.
- During the next 6 hours 70% of the money is put on the Dragons, and again the odds adjust, this time to make them even shorter favourites.
- During the next 6 hours 55% of the money is put on the Dragons. Given the new odds of $2.15/$1.76 this is an ideal spread for the bookmaker, as they will profit the same amount of money regardless of who wins (55% of $1.76 = 45% of $2.15). No adjustment is made.
- Now that odds have stabilised, the price-following bookmakers release their odds. They offer better odds on both outcomes to attract customers, and the price-setting bookmakers follow suit. It is now a competitive buyer’s (or in this case punter’s) market.
Unfortunately, all of this means that by the time a price-following bookmaker sets odds you have lost your chance of taking advantage of a mispricing. The flipside of this is that a by the time a price-following bookmaker releases odds, so have many of their competitors, and in to attract punters, price-following bookmakers need to set competitive odds.
Now whilst you may not be able to catch a price-following bookmaker with odds that differ greatly from market perception, that doesn’t necessarily mean you won’t find value. The market itself is made up of punters that are subject to all sorts of biases. Hence, bookmakers, with expert price-setters and unbiased statistical modelling, often are actually better predictors of probability than the market. As such waiting for odds to adjust may not actually be a bad thing, as it means you are no longer facing high bookmaker’s margins and betting against price setting experts, but competitive odds and betting against other punters who have taken control of the market.
How this can be exploited:
If a price-setting bookmaker has priced odds that match how their customers bet, then they are unlikely to adjust. In this instance you should wait for price-following bookmakers to open betting so that you can bet in a stable and competitive ‘buyers’ market and shop around for better odds.
The decision to bet as soon as the first betting market opens really depends on whether you think the bookmakers have misjudged how the betting public will bet or not. If they are wide of the mark, and you think other punters will agree you should bet right away. If they have set odds you think are in line with how the market will bet but you want to back the outcome anyway, it’s best to wait until more bookmakers have released odds and go with whomever has the best offer or odds.