What is arbitrage? Betting on all possible outcomes to ensure a profit regardless of the eventual result
Traditional bookmakers set their markets with a built-in margin so they guarantee themselves a small profit, no matter what the outcome. Arbitrage turns the tables on them with the shrewd arbitrageur taking advantage of pricing discrepancies in the market to claim these small profit margins for himself.
For example, in the Australian Open tennis final, it was common to find a bookmaker offering Novak Djokovic at 1.2 (83.3% winning chance) and Andy Murray at 4.7 (21.3% winning chance). Added together, the probabilities come to 104.6%, giving the bookmaker a guaranteed profit margin of 4.6%.
If he can identify two separate places offering odds that add up to less than 100% on the same event, then he has found himself an arbitrage opportunity. And an arbitrage opportunity is the Holy Grail: free money.
What an Arb looks like
Let’s say you shop around and find these best prices available:
- Bookmaker X: Andy Murray @ 4.9 = 20.4% winning chance
- Betting Exchange: Novak Djokovic @ 1.3 = 76.9% winning chance
Here’s the crucial bit: the percentages combine to 97.3%. By betting £20.40 on a Murray victory at Bookmaker X and £76.90 on a Djokovic victory at Bookmaker Y, the arber guarantees a £2.70 profit for himself. Or, in other words, he returns £100 for every £97.30 that he wagers.
The profits might be small, but they are surefire bankroll builders. The bigger his bankroll becomes, the more it can be leveraged to make money. And, because arbing is a completely legitimate and legal way to ensure a profit, he is free to take advantage of as many arbitrage opportunities as he can find. Which makes finding them priority number one.
Here’s the catch: locating arbs at traditional bookmakers is no easy feat. It is not in the interests of bookies to offer wildly differing odds. After all, there is no incentive for them to encourage arbitrage – arbers eat into their profits. This is why bookmakers’ odds tend to be rather uniform across the board. So, while arbitrage is possible using a traditional bookmaker, it can make more sense to arb at a betting exchange.
An exchange has a different business model than a traditional bookmaker. Rather than building in a profit margin to every possible outcome, an exchange makes its money by taking a small commission from every trade. Betting exchanges aren’t incentivised by keeping a balanced book. They merely provide the platform to let the users do their trading.
The exchange as a company has no say on the odds. Exchange users set their own odds – and they can have very different views. There is no standardised ‘Djokovic @ 1.2′ price. Various users might offer Djokovic at anything from 1.09, all the way up to 1.3 or higher. Plus, crucially, they are happy for you to take both sides of a bet, unlike the traditional bookmaker.
Arbing at an exchange
It’s quite possible to bet both sides of a bet on a betting exchange if you pay attention to the price moves in the run up to a match. An attentive arber may manage to lay Djokovic at 1.1, and back him at 1.3, for example. Win or lose, the arber locks in a profit. With a wider range of prices on offer, arbitrage opportunities are plentiful and profitable at an exchange.
Accessibility is another consideration. Those who attempt to arb at only a handful of traditional bookmakers have to wait a long time between arb opportunities – meaning that the small profits don’t add up very quickly. Arbitrage is all about volume and with most successful arbs returning from 1-5%, the only way to win big is to win small a lot of times.
Successful arbitrage requires patience, discipline, and the ability to act fast when the opportunities arise. Exchanges make this task a whole lot easier. You cannot become rich overnight through arbing. However, if you are the sort of person who takes a methodical approach to their betting, then the long-term rewards are plentiful.
Arbitrage in three steps:
- Identify the best price available for each outcome (you can find tennis betting back and lay odds at Matchbook)
- Turn the decimal odds into percentages (use the percentage option at Matchbook to see these quickly), and add them together
- If they add up to less than 100%, then you’ve got yourself a profitable arb!