How To Price Up A Horse Race Just Like A Bookmaker:
Ever wondered how a bookmaker ‘makes’ his ‘book’? When you visit a race course and look along the rows of bookmaker pitches, just how do they come up with the different prices? Surely the figures are not just plucked out of thin air, because it's not often you hear the sob story about a poor bookmaker!
Normally the prices for any given race are settled around 4pm the day before a race. Every major bookmaker will have a team of five or so odds-compilers, one working on each race on the card. These odds are then delivered to the trading team, and the rails bookmakers at the respective courses. Once a market opens on track, the individual bookmakers will keep an eye on what the others are doing as the market unfolds. Each will be competing against the others, trying to attract business by offering the best prices. At the same time they need to balance their books and make a profit. It’s certainly no easy task!
When pricing up any event, the first thing a bookmaker will need to consider is the amount of profit to build into his prices. If he wishes to make a 20% margin he will need to price the race at 120% of the natural odds. Calculating the profit margin is made all the more difficult in the UK because it is one of the most over-populated betting markets in the world, and consequently very competitive. Margins too high and you will be noncompetitive, but cut your margins too much and you will make less profit.
Playing The Percentages
Here is a little game you can try, to help you understand how prices compare to the chances of a horse winning a race. You will need a pack of cards.
First, place the four Ace cards face up in front of you on a table. If you can imagine, these will represent the four runners in the starting stalls of our ‘race’. Now, shuffle the remaining cards. Next, deal twelve cards off the top of the deck, down one side of the table. These cards will represent the 12 furlong markers on our ‘race-course’.
In my example, the 12 ‘furlong’ cards comprised 4 clubs, 3 hearts, 2 diamonds, and 3 spades.
Start the race by turning over the first card off the top of the deck. A 'horse' will move forward one furlong each time you reveal a card of the corresponding suit. So, if the first card is a club, move the Club horse out of the stalls and forward one furlong. Repeat until a horse reaches the twelfth and final furlong - you have a winner!!
So, how should we have priced up each of these 4 horses before the race? Well, first you need to consider these figures: with 4 Ace cards, and 12 further cards already dealt from an original pack of 52, there are 36 cards left in the pack. Diamonds is the favorite with 10 cards left in the pack, followed by Spades and Hearts with 9 cards each, and finally the outsider Clubs with 8 cards.
Calculations go something like this for Diamonds: 10 cards in a pack of 36 remaining cards, so 10 divided by 36, times 120(%) profit margin, equals 33.3(%) which in fractional terms means odds of 2/1
For Spades and Hearts: 9 cards in a pack of 36 remaining cards, so 9 divided by 36, times 120(%) profit margin, equals 30.0(%) which in fractional terms means odds of between 9/4 and 5/2
Finally, the calculation for Clubs: 8 cards in a pack of 36 remaining cards, so 8 divided by 36, times 120(%) profit margin, equals 26.7(%) which in fractional terms means odds of 11/4
Adding up the percentages you can see the total is 33% plus 30% plus 30% plus 26% equals 119% which gives you your 'over-round' profit margin of 19%
Given that 67% of all races are won by the favorite, a bookmaker might well shorten the price of the favorite, and then add some value to the other horses, to balance his book.
This was obviously a simplified example, with only four horses in the race, but hopefully it highlights some of the reasoning behind pricing up a race.