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Table 2: Betfair, Yarmouth Race 1, 18/9/02 - A Heavily Backed Winning Odds-On Favorite
|
Betfair
Matched
Trades |
Betfair
Avg. Odds (decimal) |
Betfair
Backers' Stakes |
Betfair
Layers' Liabilities |
Total
Escrowed Stakes or Real Turnover |
Max.
"Net Winnings" (if Winner) |
Maximum
Gross Wagering Margin |
Betfair
Commission @3.5% of Max. Net Winnings |
Margin
on .5 Matched Trades (70,741) |
Margin
on Total 'Turnover' (547,938) |
Camlet |
423,706 |
1.56 |
211,853 |
119,457 |
331,310 |
139,290 |
27.1% |
4,875 |
2.1% |
0.95% |
Frieda
= Kahlo |
26,450 |
4.93 |
13,225 |
51,963 |
65,188 |
270,424 |
52.6% |
9,465 |
4.1% |
1.84% |
Calligraphy |
7,050 |
10.70 |
3,525 |
34,184 |
37,709 |
262,345 |
51.0% |
9,182 |
4.0% |
1.79% |
Masaader |
4,692 |
18.64 |
2,346 |
41,378 |
43,724 |
270,718 |
52.7% |
9,475 |
4.1% |
1.84% |
Our
Lady |
1,474 |
49.13 |
737 |
35,471 |
36,208 |
266,420 |
51.8% |
9,325 |
4.0% |
1.81% |
Total/Expected
Value by P(n) |
463,372 |
100.98% |
231,686 |
282,454 |
514,140 |
186,573 |
36.3% |
6,530 |
2.8% |
1.27% |
We can see in Table 2 that in this case, the heavily backed favorite (in a small field) winning was the worst result for Betfair, although the alternate perspective, that any other result would have been spectacular, may be closer to the mark. This table does illustrate, though, that where all the trading is concentrated on one sub-event, the resulting real turnover, while still greater, is no longer a multiple of the matched-bets volume.
Table 3: Betfair, Sandown Race 1, 18/9/02 - A Real Roughie Won What Was Otherwise 'A Good Betting Race'
|
Betfair Matched
Trades |
Betfair Avg.
Odds (Decimal) |
Betfair Backers'
Stakes |
Betfair Layers'
Liabilities |
Total Escrowed
Stakes or Real Turnover |
Max. "Net
Winnings" (if Winner) |
Maximum Gross
Wagering Margin |
Betfair Commission
@3.5% of Max. Net Winnings |
Margin on
.5 Matched Trades (70,741) |
Margin on
Total 'Turnover' (547,938) |
Blue Knight |
19,588 |
5.58 |
9,794 |
44,826 |
54,620 |
105,773 |
19.3% |
3,702 |
5.2% |
0.68% |
Strathclyde |
21,048 |
6.21 |
10,524 |
54,831 |
65,355 |
115,048 |
21.0% |
4,027 |
5.7% |
0.73% |
Esatto |
50,805 |
5.56 |
25,403 |
115,754 |
141,157 |
161,093 |
29.4% |
5,638 |
8.0% |
1.03% |
Belia Chica |
18,936 |
8.77 |
9,468 |
73,570 |
83,038 |
134,843 |
24.6% |
4,720 |
6.7% |
0.86% |
Jayanjay |
12,669 |
8.92 |
6,335 |
50,197 |
56,531 |
114,603 |
20.9% |
4,011 |
5.7% |
0.73% |
Bryano de
Bergerac |
5,589 |
9.51 |
2,795 |
23,774 |
26,568 |
91,720 |
16.7% |
3,210 |
4.5% |
0.59% |
Matty Tun |
8,211 |
11.09 |
4,106 |
41,442 |
45,548 |
108,078 |
19.7% |
3,783 |
5.3% |
0.69% |
Three Days
in May |
2,113 |
25.07 |
1,057 |
25,432 |
26,488 |
95,116 |
17.4% |
3,329 |
4.7% |
0.61% |
Kelsey Rose |
1,565 |
33.27 |
783 |
25,253 |
26,035 |
95,211 |
17.4% |
3,332 |
4.7% |
0.61% |
White
Ledger |
958 |
47.18 |
479 |
22,118 |
22,597 |
92,380 |
16.9% |
3,233 |
4.6% |
0.59% |
Total/Expected
Value calc P(n) |
141,482 |
103.28% |
70,741 |
477,197 |
547,938 |
118,802 |
21.7% |
4,158 |
5.9% |
0.76% |
Table 3 demonstrates a pretty even betting race with no clear favorite, and despite the absolute roughie getting up, expected Margin was 21.7 percent (against an average of 20.3 percent) and expected commissions was £4,158 against an actual of £3,233. While margin on real turnover is lower (0.71 percent), this was compensated by the much higher multiple of matched-bets (3.8 x) or 7.75 times what would have been assessed as bookmakers' turnover.
These three examples show us that determining the average multiplier to make an assessment of real turnover is not easy, as it depends on both the number of runners and on the betting patterns for each race. However, it is reasonably estimated to be at least double the matched bets number.
Gross Profits Tax (GPT)
If Betfair (as it should be) is calculating its GPT liability as per the Finance Act 2002 amendment s5C BGDA 1981, in our first example the gross wagering margin* was £72,827 with a GPT liability of £10,924. But, if the favorite had won, its GWM would have been a loss (£96,510) or a carried forward GPT credit of £14,476. In our second example, the GWM was a loss (£99,624), and in our third example, the GWM was £48,144.
*GWM = sum total of all backers' stakes, liability on winner, returned stake on winner.
As GPT is paid based on the sum of all wins and losses from each event over a month, the GWM will logically fall to the overall retention rate (calculated from the traditional bookmaker's perspective), which is likely to be very low (and off a low base as would be calculated on half-matched bets (backers' stakes).
To consider the effect of this, we should look at the expected values based on probability (which, given the over-round has been eradicated, should be a reasonably accurate assessment).
In our first example, as we saw above, HMCE had a great win with Betfair's GPT liability exceeding commissions by almost £6,000, while Betfair's expected GWM was only £2,249; GPT was £337 (or 5.2 percent of £6,530 expected commissions).
In the second example, HMCE had a loss--a real soul destroying near £100,000--although Betfair's expected GWM was only £3,285; the GPT was £493 (or 9.4 percent of £5,235 expected commissions).
In the third example, while HMCE had a good win with GWM of £48,144 and a GPT of £7,222 (or a loss for Betfair of over £4,000), Betfair's expected GWM was only £2,248; the GPT was £337 (or 8.11 percent of £4,158 expected commissions).
The actual GWM over these three (randomly selected) events was £21,347 with a liability of £3,202, whereas the real revenue (commissions) was £13,210, so the effective GPT rate would have been 24 percent. But if all three favorites had won, we would have had a GWM loss of £266,550 to carry forward. Looking at the expected values, the total GWM was £7,702 for a GPT of £1,167 against commissions of £15,923, or 7.4 percent--about half of what it should be paying (ignoring the avoidance of Betfair's
punters)
Therefore, in calculating GPT liabilities, the coin-toss shell trick works in the betting exchange's favor... Again!
It is likely that any exchange's long-run GWM could be below 2 percent of bookmakers' turnover or the half-matched-bets. It would certainly be unlikely to reach the dizzy heights achieved by Betfair, 4 percent to 6 percent of its race-by-race margin on 0.5 matched-bets--so let's be generous and say its half. Then Betfair's maximum GPT liability is probably less than 7.5 percent of its gross revenue (commissions), as our simple three-race example above demonstrates.
Of course, under the alternative two-bet approach advanced in Bet Unfair!, total received commissions would be counted as stakes received without any payouts, so the GPT liability could be locked in at 15 percent of commission revenue.
Where's that pea? Maybe the BHB knows where it is. At least it opted for receiving the data royalty on the exchanges' commissions. Just luck?
It's only an educated guess, but my estimate of Betfair's monthly GPT payment (on racing alone) is approximately £325,000. But, perhaps it should be at 15 percent of commissions (which are estimated at £4.3 million) viz. £650,000. Either way, its a lot of money--up $2 million of my Aussie dollars (per month)--and probably more than enough for the HMCE not to contemplate auditing its operations. It was generating nothing in betting duty last year! But, it would appear that HMCE has robbed itself by assuming that a betting exchange would be profitable from a traditional bookmaker's perspective.
Betting Levy
Under the previous (40th) levy scheme 1.2 percent of turnover was levied on Internet wagering transactions. Betfair's matched bets on racing has been put at £45-£50 million pounds per week. However, we have seen above that rather than halving this number to determine turnover, we should, in fact, be doubling it (at least). On that back-of-the-envelope basis, Betfair's levy payment should be more than £62 million pounds per annum, but the levy is being paid at 10 percent of 1 percent (of true turnover), so only about £5.2 million will be payable. (The alternate calculation of 10 percent of 4 percent of half-matched bets gives the identical number, £5.2 million.)
Wait a minute! Both the BHB's and HBLB's forecasts for the 41st levy is only £110 million (including from bookmakers in Ireland). Obviously the £62 million per annum (from Betfair's turnover alone) is a ludicrous proposition. ... But is it?
What I am trying to highlight is that betting exchanges are operating under a different set of rules. So, while the bookmaker levy payments have gone up, they have gone up with both their turnover and revenue. (That is, the bookmakers have maintained their margin.)
Betfair is doing, on an escrowed funds basis, a very, very big turnover for a very fine margin. Its £50 million week (matched bets) multiplied by 2 (to get an assessment of total escrowed funds) multiplied by 52 (weeks) gives a real turnover estimate of £5.2 billion per annum. Now, to put that in context, according to HMCE, total stakes for the GBD (off-course bookmakers gross betting duty) in 2000-01 was £7.221 billion per annum (down from £7.295 in 99/00). By these numbers, Betfair alone is turning over 72 percent of 2000/01 off-course bookmaker turnover.
The point is, under the old levy rules (1.2 percent of turnover), they would have to pay £62 million per annum. Bookmakers are still paying this fee; in fact, on 10 percent of GWM of about 13.5, they are paying 1.35 percent of turnover.
Exchanges are happy to hide behind the half-matched bets because doing so does two things: It quarters their (estimated) real turnover (making them a less perceived threat to the bookmakers) and inflates their revenue (estimate £52 million) to betting turnover ratio to 4% as against 1% (making them seem 'closer to the real thing').
There is such a huge disparity between these numbers (£62 million v. £5.2 million) that something has to. I would argue that it may have been wrong for the BHB to abandon a turnover based fee for the use of its intellectual property. In the interest of a level playing field, it would appear more equitable to levy a cost-- as it was in the past--on punters' turnover.
The reasoning behind this is simple: It's ultimately the punter who pays for the intellectual property used to bet. Licensed wagering operators are simply a convenient collector of those fees (as is any retailer for VAT/GST). In the interest of keeping a level playing field (assuming the activities of betting exchanges in respect to horse racing go on unchanged), the only logical (equitable) method of charging is on true turnover--what the punter actually stakes.
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The views expressed in this editorial do not necessarily reflect the views of Interactive Gaming News or the views of the Australian Bookmakers' Association, which has not examined the U.K. issues in any detail.