Differences in odds systems

In today’s online betting industry there are two types of odds-systems used: the fixed odds system and the exchange odds system. These differ from the in the past most commonly used system:  the pari-mutuel betting. In this system the odds are calculated post the event by sharing the total number of bets among all the winning bets. Recently the exchange odds system, offered by the betting exchanges, is increasing in popularity, however the fixed odds system is still by far the most common system used in the betting industry (Jones, 2006). In the fixed-odds system the bookmakers is the one who establishes and offers the odds. Therefore, no betting can occur before the bookmaker has made his odds available. The bookmaker can change the odds before the event happens, however the bettors are locked in on their odds from the moment they place their bets (Ayton, 1997).

Bookmakers make a profit by accepting bets on a given market and adjusting odds to attract bets in the right proportion to secure a profit regardless of the outcome. This can be achieved by offerings odds that do not represent the actual statically probability of the event, the true odds, in a fair way. The deviation of the odds offered from the true odds is known as the bookmaker’s margin or the over-round (pinnaclesports.com). Furthermore, they make an additional return based on their exploitation of biases in the behaviour of their bettors (Smith et al., 2009). The over-round can be seen as the theoretical gross margin of the bookmaker, ignoring cost and assuming a balanced book. A balanced book means that the bookmaker makes a profit no matter the outcome. The bookmaker achieves this by increasing odds that are relatively under bet, making it more likely people will bet on this option, and decreasing odds that are relatively over bet, attempting to discourage further investment on this part of the bet (betfair.com). The over-round or margin can be best explained based on an example. When Ajax and Feyenoord play against each other the following imaginary fixed odds could be stated by the bookmaker: Ajax wins 1.833, draw 3.200 and Feyenoord wins 3.800. When the book is balanced for each outcome the following auxiliary percentages are calculated as follows:

Ajax wins                   100 / (1.833) = 54,56%

Draw                          100 / (3.200) = 31,25%

Feyenoord wins          100 / (3.800) = 26,32%

The over-roundness of the book is then the sum of the percentages minus 100, giving 54,56 + 31,25 + 26,32 – 100 = 12,13%. This means that in case the stakes on each outcome of the bet are as the auxiliary percentages indicate, the bookmaker will earn 12.13% of the total number of bets no matter the outcome. The return of the bookmaker is in this case 12.13/112.13 = 10,8% of the total stake. This is known as the handle (Kuypers, 2000). Nevertheless, it should be noted that bookmakers books are almost never balanced even though the bookmakers set their own odds, change the odds to stimulate more or less betting on a certain outcome and lay off bets with other bookmakers. Because of this the profit margin of the bookmaker is not guaranteed and bookmaker do make losses on some events (Ayton, 1997).

The betting exchanges offer a slightly different system: the exchange odds system. The exchange odds system can be found in the person-to-person market, where people can bet on a future outcome against others that are willing to offer that price. Note that in this system the odds are also fixed, meaning that once a bet is placed the odds of the placed bet can no longer change. The person who bets on the event to happen is known as the backer. The person who offers the price and the potential pay-out in case of a successful bet is the layer of the bet (Jones et al., 2006). In principle the layer of the bet takes over the job of the traditional bookmaker. The advantage of this kind of betting system is that the bookmaker is left out. Instead of earning money based on a margin, money is earned by the betting exchanges on commissions over the bets. These commission are often lower than the margin of the traditional online bookmaker (Smith et al., 2006), because the betting exchanges are able to offer better odds than the traditional online bookmakers. The odds are often higher when the volume of the betting exchanges increases, sometimes reaching points equally to no margin if compared to the traditional bookmaker.

The betting exchanges charge commission between 1 percent and 7 percent, based on the volume of the total number of bets the client does with the exchange and the type of event the bets are taken place on (Smith et al., 2009). Some of the betting exchanges ask for a commission over turnover (matchbook.com), others only over winning bets (betdaq.com, betfair.com).

Academic references:

Ayton, P. (1997). How to Be Incoherent and Seductive: Bookmakers' Odds and Support Theory. Organizational Behavior and Human Decision Processes, 72(1), 99-115.

Jones, P., Turner, D., Hillier, D., & Comfort, D. (2006). New business models and the regulatory state: A retail case study of betting exchanges. Innovative Marketing, 2(3), 112-119.

Kuypers, T. (2000). Information and efficiency: an empirical study of a fixed odds betting market. Applied Economics, 32(11), 1353-1363.

Smith, M. A., Paton, D., & Williams, L. V. (2006). Market Efficiency in Person‐to‐Person Betting. Economica, 73(292), 673-689.

Smith, M. A., Paton, D., & Williams, L. V. (2009). Do bookmakers possess superior skills to bettors in predicting outcomes?. Journal of Economic Behavior & Organization, 71(2), 539-549.

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