The Future of Hedging

16 December 2005

The influence of betting exchanges on British horse racing could bring about a change to the model of race betting that has existed in the United Kingdom for several decades.

Britain's on-course bookmakers have traditionally shortened prices by laying horses to lose in the on-course the ring, thereby limiting their potential losses. In recent years, however, many of them have opted to accomplish this through online betting exchanges. The result has been the reinvestment of a significant amount of money into betting exchanges--money that used to go through the on-course market--and ultimately an on-course market that is no longer affected by bookmakers' hedging activities. It has, therefore, become difficult for off-course bookmakers to influence prices; even though they can hedge their bets with the on-course books, the on-course books can simply back horses at longer prices on betting exchanges.

Off-course bookmakers in Britain have consequently been using a somewhat inaccurate market in forming their prices, so last month some of the industry's biggest off-course firms announced that they too have begun using betting exchanges to hedge their bets.

William Hill on Nov. 4 became the first off-course bookmaker to confirm that it is hedging its bets with Ireland-based betting exchange Betdaq and not with the racecourse bookies.

"Racecourse bookmakers have been allowed to hedge directly into betting exchanges since September 2003, and many traditional bookmakers have been replaced by, or have developed into, operators who, in effect, act as mere commission agents for the exchanges," William Hill CEO David Harding explained to the Racing Post. "They reinvest hedging money directly into the exchanges, leaving the course market unaffected. As a consequence, the racecourse market has become increasingly unrepresentative of what is happening off-course."

Harding added, "Rather than trouble course bookmakers with our hedging money, we'll save them the bother by using the exchanges directly."

The next day Britain's largest independent bookmaker, Betfred, also announced that it would begin hedging its bets with betting exchanges, primarily Betdaq.

"The margins on course are getting thinner, and we're struggling to make an impact with out hedging," Betfred Managing Director John Haddock stated.

Haddock also noted that if the company's chairman and founder, Fred Done, wished to continue hedging with the on-course books as well as with the betting exchanges, then he would do so.

"Fred's his own man," Haddock told the Racing Post, "but we're growing at the rate of about 10 shops every three weeks, and as we get bigger, hedging becomes a major part of our business. We have to go where the market is."

Coral Eurobet, meanwhile, announced at the end of November that it would begin using the world's largest betting exchange, U.K.-based Betfair, to hedge some of its bets.

"We will be hedging into the exchanges on a trial basis to see if it improves our performance," explained Coral's managing director, Wilf Walsh. "We have been driven to experiment by the ineffectiveness of our money going into the ring, which has been a problem. . . . We're also using the on-course market, in a dual approach, but that's open to so many vagaries nowadays. Anything can happen in the traditional market in the ring, but our traders are now in complete control. On outsiders, for instance, they certainly have an immediate impact on prices when they use the exchange."

British bookmaking company Ladbrokes has not announced whether it will shift to hedging its bets with betting exchanges, but trading director Mike O'Kane says the company will "closely monitor the situation."

Many believe that the shift could cause a destabilizing of the racecourse betting market. Aside from the on-course bookmakers losing a large chunk of business to the betting exchanges, they also have reason to fear the trend could mean the demise of the current system whereby the on-course bookmakers determine the starting price (often abbreviated SP) that is used to establish the price used by off-course betting shop, Internet and telephone operators.

In early November, after William Hill revealed its plan to hedge with Betdaq, on-course bookmaker Dan Hague of Towcester stated, "This could be the tip of the iceberg and I fear the worst for the on-course game. The days are gone when the big firms could influence the market, and you can't really blame them for withdrawing from involvement in the ring. There might be a lot of bums on racecourse seats, but the days of course punters putting on lumpy bets are almost a thing of the past. At the same time, our expenses and overheads are on the increase."

The on-course bookmakers at Folkestone on Nov. 14 made a concerted effort to keep all of the betting money within their betting ring by not hedging any bets with the betting exchanges in an attempt to demonstrate that an on-course market can still exist without betting exchanges. The effect on margins was reportedly not as large as some had hoped, but the volume of money within the betting ring was noticeably higher.

Some alternate models upon which a new starting price system could be based involve a cooperative effort by the major off-course bookmakers. Another idea that has gained much exposure in the press is the suggestion that the betting exchanges might be able to offer a suitable model.

Stephen Burn, Betfair's head of media, told the Telegraph last week, "Betting exchanges are purest model available which give an accurate representation of a horse's chance according to the market. They can be used not only for racing, but any other sports product."

Burn said Betfair's SPs would provide accountability, transparency and liquidity.

"It will require a leap of faith to start trusting an organization, which the bookmakers used to regard as taking the food out of their mouths," he said, "but I think they realize we are here to stay."

Bradley Vallerius

Articles by Bradley P. Vallerius, JD manages For the Bettor Good, a comprehensive resource for information related to Internet gaming policy in the U.S. federal and state governments. For the Bettor Good provides official government documents, jurisdiction updates, policy analysis, and many other helpful research materials. Bradley has been researching and writing about the business and law of internet gaming since 2003. His work has covered all aspects of the industry, including technology, finance, advertising, taxation, poker, betting exchanges, and laws and regulations around the world.

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