Ever wonder how a bookmaker ‘makes’ his ‘book’? When you visit a racing field and look at the rows of betting fields, how do you get the different prices? Surely the figures are not simply taken out of nowhere, because it is not often that you hear the sad story of a poor bookmaker!

Typically, prices for a given race are set around 4pm the day before the race. Every major bookmaker will have a team of five odds compilers, one working on each run on the card. These odds are then sent to the trading team and the rails bookmakers in the respective fields. Once a market gets on the right track, individual bookmakers will keep an eye on what others do as the market develops. Each one will compete 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 is certainly not an easy task!

When pricing any event, the first thing a bookmaker will need to consider is the amount of profit that will be generated on their prices. If you want a 20% margin, you will need to rate the race at 120% of the natural odds. Calculating the profit margin becomes even more difficult in the UK because it is one of the most overcrowded betting markets in the world and consequently very competitive. Margins too high and you will not be competitive, but reduce your margins too much and you will make less profit.

Playing the percentages

Here’s a little game you can try to help you understand how prices compare to a horse’s chances of winning a race. You will need a deck 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 riders at the starting positions of our ‘race’. Now, shuffle the remaining cards. Next, deal twelve cards from the top of the deck, on one side of the table. These cards will represent the 12 furlong markers on our “race track.”

In my example, the 12 ‘furlong’ cards comprised 4 clubs, 3 hearts, 2 diamonds, and 3 spades.

Begin the race by turning over the first card from the top of the deck. A ‘horse’ will advance one stadium each time you reveal a card of the corresponding suit. So if the top card is a suit, move the Club horse out of the stables and advance one stadium. Repeat until one horse reaches the twelfth and final stadium – you have a winner!

So how should we have priced each of these 4 horses before the race? Well, you have to consider these figures first: With 4 Ace cards and 12 more cards already dealt from an original deck of 52, there are 36 cards left in the deck. Diamonds is the favorite with 10 cards remaining in the deck, followed by Spades and Hearts with 9 cards each, and finally the Out Clubs with 8 cards.

The calculations are something like this for Diamonds: 10 cards in a pack of 36 remaining cards, so 10 divided by 36, multiplied by 120 (%) markup, 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, multiplied by 120 (%) markup, 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, multiplied by 120 (%) of profit margin, equals 26.7 (%) which in fractional terms means probabilities from 11/4

Adding up the percentages, you can see that the total is 33% plus 30% plus 30% plus 26% equals 119%, giving you your ‘overall’ profit margin of 19%.

Since 67% of all races are won by the favorite, a bookmaker might well lower the price of the favorite and then add some value to the other horses, to balance its book.

Obviously this was a simplified example, with only four horses in the race, but hopefully it highlights some of the reasoning behind pricing a race.