Arbitrage is a term used to describe the purchase of a product which is then immediately sold to make a profit. Arbitrage betting or more commonly arbs, is the practise of backing all possible outcomes of an event to guarantee a win.
Now you know its possible to create an opportunity that you guarantee profit, you may be asking why isn’t everyone doing it. Well we will walk through one example and possibly see why.
In this example we will take a theoretical boxing match; Muhammed Ali vs Mike Tyson. Ali has been priced by Bookie A at 1.5 and by Bookie B at 2.0. Tyson has been offered at 2.5 and 1.73 respectively. This has created an arb opportunity as the sum of Bookie A’s Tyson probability (2.5 = 40%) and Bookie B’s Ali probability (2.0 = 50%) are less than 100%.
So if we were to place 100 units on Tyson at Bookie A;
Return if Tyson Wins = 100 * 2.5 = 250
We need to figure out how much to put on Ali at Bookie B to guarantee an equal win whatever the result. Fortunately, this is quite an easy equation.
Stake on 2nd Bet = (Odds of first bet / Odds of second bet) * first stake
In this case;
Stake on 2nd Bet = (2.5/2) * 100 = 125
So this means that our return on the Ali bet with Bookie B would return;
Return if Ali Wins = 125 * 2 = 250
Now we have staked a total of 225 units. Now we just show that the profit of these bets are the same;
Profit if Tyson wins = Return – Total stake = 250 – 225 = 25
Profit if Ali wins = Return – Total stake = 250 – 225 = 25
So in this process we have guaranteed ourselves a 25 unit profit, which you may have noticed is 10% of the total stake. 10% is the amount that is missing from the original two implied probabilities.
Arb opportunities of this magnitude are quite rare but even so, we can see that it takes quite a lot of investment to get our relatively small return. Not only would you have to find these very differing odds but you would have to act very quickly before one of the bookmakers identified the arb themselves and closed it.
Now arbing is a completely legal form of gambling and bookmakers will not void any bets unless there was a clear or obvious error in publishing. This doesn’t mean that bookies will allow you to arb away, in fact it is quite the opposite. Most bookmakers look to restrict customers who arb as quickly as possible as due to the betting style it means that they could have an infinite bankroll and will likely be betting on odds that are wrong. In the long term the bookmakers cannot win. This infinite bank roll and the need for large investment means that customers who are arbing will often have the same pattern and are quite easily identifiable though and accounts dont last long. This is almost universally true for retail bookmakers but books like Pinnacle will use arbs to make their books more efficient and actually welcome arbers.
So not only is arbing counter productive to your betting shelf life, its disadvantageous from a bankroll point of view. Lets assume both Bookie A and Bookie B were off with their odds and the true odds of Tyson to win were 1.91. We made 10% from our arb but if we had backed only Tyson with Bookie A, we would have got a nearly 12.5% value bet and in the long term we would have made more money than the arber. The element of risk is what makes the second bet less appealing for most people but there are risks for arbing as well.
The main of advantage of arbing is clearly the guaranteed profit. The downside is that it takes a large stake to return relatively small amounts in return, the prices can move in between making the first and second bet leaving you with a possible loss and that bookmakers will notice your behaviour and close your account. Some of these potential pitfalls can be negated somewhat by the use of the betting exchanges (although remember to add in your commission) and the use of automated arbitrage software tools that can place bets almost simultaneously.