How Do Bookmakers Make Money
A bookmaker is a commercial enterprise that accepts bets on sporting events and novelty markets such as Politics and TV Specials at agreed odds. The range of betting events depends on the country in which the bookmaker is located. Odds compliers set the odds with a built in profit margin for the operator. The objective is to take a range of bets at different odds to guarantee a profit regardless of the outcome of the event. The profit margin is the cost of supplying such a service.
Bookmakers aim to take bets across the range of outcomes that reflect the odds. A betting market is fluid in that the odds makers adjust the odds in line with the weight of money on each option. Bookmakers spread the risk by laying off bets when the liability is beyond the accepted level of exposure. They don’t look to make money from the bets but on the balance of stakes and payout. Bookmaking is legal in regulated countries like the United Kingdom.
Types Of Bookmaker
The bookmaking landscape changed from the end of the last century. In the UK, bookmaking activities were traditionally conducted over the telephone, at racecourses or with cash in licensed betting offices. The internet has transformed the bookmaking industry but the customer, or bettor, can choose from a number of ways to place a bet. There are now three types of bookmaker and most of the business takes place online:
A fixed odds bookmaker issues a range of prices (the odds) in fractions to create a betting market. For example, the ‘bookie’ offers odds on the three outcomes of a football match, most commonly after 90 minutes. The three options are Home Win, Draw and Away Win. The odds have a built in profit margin or house edge. There is a simple calculation to determine the bookmaker’s probability from each option:
+100/(A + B/B)%
So, for odds of 2/1 the calculation is +100/(2+1/1) = 33.00%
Here is a typical match result market for a football match:
Home Team 11/10 +100/(11+10/10 47.62%
Draw: 9/4 +100/(9+4/4) 30.77%
Away Team 5/2 +100/(5+2/2) 28.57%
This book is said to be over round because the components total more than 100%. The bookmaker has set the odds with a theoretical profit margin of 6.96%. The art of bookmaking is to take bets on each option that reflect the probability and generate the profit.
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The growth of spread betting coincided with mass use of the world wide web on the internet. Spread betting companies grew from traders betting on currencies and financials in the City of London. The bookmaker issues a spread and the bettor or trader bets on the outcome being higher or lower than the spread. Spreads are expressed in two numbers and traders buy at the higher number and sell buy at the lower number.
For example, the spread on the number of goals in a football match could be 3.1-3.3. A bettor who thinks there will be more than 3.3 goals, buys at 3.3 while a bettor who thinks there will be less than 3.1, sells at 3.1. The spread betting bookmaker makes money from the difference in the stake and payout. Markets fluctuate based on the balance between buy and sell stakes.
Exchange betting first appeared in the betting industry at the start of the century. Betfair was one of the first operators and that bookmaker now dominates the industry. Betting exchanges provide the infrastructure for peer-to-peer betting. They bring together backers who want to bet on something to happen and layers who want to bet on something not to happen. Bets are matched at a mutually beneficial price, partially matched or not matched at all. Exchange odds are expressed in decimals.
Exchange bookmakers issue a back price and lay price for all outcomes in an event. The back price is always lower than the lay price. Here is a typical market for the match winner after 90 minutes in football:
Home Team Back Price 2.26 Lay Price 2.32
Draw: Back Price 3.35 Lay Price 3.40
Away Team Back Price 3.65 Lay Price 3.8
Exchange bookmakers don’t make money from the outcome of bets but by charging a commission on winning bets. The business model guarantees a profit regardless of the outcome.
Types Of Bet
There are three types of bet across the range of bookmakers. The way each type of bookmaker makes money is different but all the betting markets fall in the following categories:
Bookmakers publish betting for a sporting event a few days before the event takes place. The odds can fluctuate based on team teams and injuries. Developments have an impact on the weight of money for each outcome and bookmakers change the odds accordingly.
The development of the internet has led to a growth in in-play betting. Trading takes place during the action and the odds fluctuate in line with the progress of play and the score. In-play betting is suspended after a significant event such as a goal in a football match.
Bettors can place wagers on the outright winner of future sporting events in ante-post betting. For example, bookmakers introduce ante-post betting on the major championship races at the Cheltenham Festival months in advance of race day. The odds fluctuate in line with betting activity.
The core betting sport in UK bookmakers is horse racing. Internet betting saw the growth of more sports-orientated bookmakers. Football is by far the most popular online betting sport and most bets are placed on matches in the English Premier League. Tennis is the second biggest sport for online betting. More tennis bets are placed on in-play markets than before matches begin. UK-facing bookmakers feature a wide range of cricket, rugby and golf markets. Operators who serve the mainland Europe market focus on sports such as handball, volleyball and basketball. The popularity of sports for betting is consistent across the three types of operation. Bookmakers make money in various ways but the markets and sports are the same.