Your teachers weren’t lying; there are actually a few interesting uses for maths. Gambling (as opposed to the form study side of things) is all maths. Which means if you are to be a successful gambler, one of the most important things you can get your head around are the market percentages.

#### Market percentages in fixed-odds markets

Fixed-odds markets look quite straightforward, but do you totally understand what the prices mean? Let’s make sure.

A fixed-odds price is just an expression of the perceived likelihood, or probability, of that selection winning. The bookmaker will set his opening market based on the percentage chance that he thinks each selection has of winning. If there’s a dominant horse running against a very weak field, for example, he may conclude it has a 90% chance of winning the race, even though there may be 15 horses running.

It’s the same whether it’s a sporting match between two teams, or a large race or tournament with dozens of entrants. There’s a probability of each winning, which can be expressed with a percentage.

##### Toss of a coin

We’ll start with the simplest example possible: a coin toss. There’s a 50% chance of the result being heads, and 50% chance of it being tails.

To convert the percentage into decimal odds, you just divide it into 1.

1 / 50% = \$2.00

So your price for both heads and tails is \$2.00 each. And that’s the price you get paid out. Imagine you and a mate make a \$10 bet on the outcome of a coin toss: heads you win, tails he does.

You both put in your \$10, and the winner gets paid \$20 – odds of \$2.00. Simple.

##### Two-way markets

The calculation is the same for other two-outcome markets where the odds aren’t even. For example, a match between a very good team which the bookie thinks has an 80% chance of winning, and a poorer team which he rates a 20% chance.

Team A: 1 / 80% = \$1.25

Team B: 1 / 20% = \$5.00

##### Larger markets

For markets with a larger number of outcomes – such as a tournament or a horse race, it’s no different again. Each outcome simply gets a percentage weighting. All that matters is that the total adds up to 100% – because there’s a 100% chance that any one of the selections will win.

##### The bookie’s cut

So how does the bookie make money? He takes a cut, and he does that by increasing the market percentages.

Let’s go back to our coin toss example. Let’s say you and your mate have the same bet, but this time you employ a bookmaker to take and hold the money until the coin is tossed.

Unfortunately for us punters, a bookie won’t do that job for free!

What the bookie does is increase the percentage on each selection, to include an amount for himself in the market.

Where the raw market had both the heads and tails at 50% each – \$2.00 – the bookie may increase this to say, 54% each.

1 / 54% = \$1.85.

That’s the odds for either a head or a tail. You and your mate put in your \$10 each, but now the winner only gets paid out at \$18.50. The bookie takes the \$1.50 difference for himself: that’s his cut..

The total market percentage is now 108%: 54% + 54%. If the bookie wishes to take a bigger cut, he may increase the market percentage more. You’ll notice that each time the market percentage increases, odds decrease, meaning the winning punters get less and the bookie gets more.

Let’s look at a hypothetical horse race for a more involved example. It’s a much bigger market, but the principles are exactly the same. Here, the bookie has set the market at 119.5%.

 Horse Probability Odds 1. So You Think 21% \$4.80 2. Winx 34% \$3.00 3. Octagonal 22% \$4.60 4. Might And Power 2% \$50.00 5. Northerly 7% \$14.00 6. Makybe Diva 21% \$4.80 7. Sunline 11% \$9.00 8. Better Loosen Up 1.5% \$67.00 119.5%

Do our bookies have high market percentages?

There’s a lot of variables that go into the market percentages that a bookie offers.

But bookies need to make enough margin to cover their expenses as thus run at a profit. The higher their expenses, the higher the market percentage needs to be to cover them.

Whenever bookies’ expenses are a topic of conversation, talk turns to illegal wagering.

Basically, it refers to people betting with bookmakers that aren’t licensed to operate in Australia.

They’re not taxed in Australia, and they don’t have to abide by Australian laws, nor cooperate with our racing or sports authorities when it comes to integrity issues.

The question is often asked: why would somebody bet with one of these illegal bookies?

The answer? Well there are a few reasons. But generally, it’s price-related.

Illegal, offshore bookies aren’t subject to anywhere near the costs that legitimate Australian-licensed bookmakers are. Therefore, they have fatter margins to play with and can offer lower market percentages – and thus higher dividends – to punters.

Thankfully for us, in August 2018 Australia’s biggest bookmaker, Sportsbet, revealed a little about their operating margins in their results update and investor briefings.

It was designed to give viewers an idea of the impact of new point-of-consumption taxes. You can view it here if you like.

##### Turnover

Racing bodies love to talk about turnover – that’s the total amount wagered on their racing. But how do the numbers look for a bookie, and what’s the impact of a new tax?

Let’s go with a simple example: you have a \$100 bet on a race. How much of that does the bookie actually pocket?

##### Revenue

Revenue is the proportion of your \$100 that the bookie keeps (in total, across all winning and losing punters).

Obviously that varies a lot depending on punters winning and losing. But we know the overall figures. The Queensland Government (with cooperation from the other states and territories) collect and publish the Australian Gambling Statistics each year.

The last published data showed bookies turn over around \$7.9 billion annually on racing, of which punters lost about \$850 million. Call it 11% in round numbers.

So of your \$100 bet, the bookie keeps – on average – \$11. That’s their revenue.

##### GST

Like all other businesses, the federal government takes a cut of revenue in GST. So the net revenue after GST is actually \$10. 10% of that, or \$1, goes to the federal government in GST.

##### Product Fees

In Australia, racing bodies (and sporting bodies) collect product fees from bookies who take bets on their events. The fees vary based on the state, the code and the type of meeting, such as whether whether it includes high-profile Group races.

Sportsbet put that figure overall at 15% of net revenue, so we’ll say \$1.50 of the \$10.

##### Point-of-Consumption Tax

The new taxes. What the state governments are doing is charging a further percentage on net revenue. Because most of the big bookies are based in the Northern Territory, the state governments say they get no tax. And they want some of the pie.

The POC tax rates vary. South Australia, Western Australia and Queensland have gone with 15% of revenue. New South Wales went with a lower 10%, while Victoria went lowest with 8%.

Sportsbet says that, blended all together, they’ll pay a total rate across all states of around 13% of net revenue. So that’s \$1.30.

##### Other Costs

With what’s left, the bookies pay for all the other costs of doing business. Their staff, offices, admin costs, those endless advertisements… everything else that you need to run a business. Sportsbet’s figures put that at 40% of net revenue.

##### Company Tax

After all that is deducted, the bookie has their gross profit. From that, of course, they pay company tax to the federal government, which is 30% of profits in Australia. Sportsbet (and all other companies) have ways to reduce that which are completely legal, so they will ultimately pay less than that. But it gives us an idea.

##### The Wash Up

Assuming all else is equal (which it may well not be), we can get an idea of how much it costs an illegal bookie to operate in comparison. We have absolutely no idea what their other costs of business are, of course.

But given they don’t have enormous marketing budgets and CBD offices full of staff on Australian wages, we can assume they’re far less. We’ve plugged in half the amount of the licensed bookie… purely for illustration (as we said, we don’t know).

 Licensed Australian bookmaker Illegal bookmaker Turnover \$100.00 \$100.00 Revenue (lost by punters) 11% of turnover \$11.00 \$11.00 GST 10% of net revenue \$1.00 – Net revenue \$10.00 \$11.00 Product fees 15% of net revenue \$1.50 – Point of consumption tax 13% of net revenue \$1.30 – Gross margin \$7.20 \$11.00 Other costs 40% of net revenue \$4.00 \$2.00 Gross profit \$3.20 \$9.00 Company tax 30% of gross profit \$0.96 – Net profit \$2.24 \$9.00

All figures are examples for illustration only

The kicker, of course, is illegal bookies pay no GST, product fees, POC tax or company tax. It starts to give you an idea of how much Australian bookmakers are taxed, and why illegal bookies can afford to pay so much more back to punters in better dividends.

That’s the point. Though these costs are “taxes on bookmakers”, they’re really taxes on punters – because the bookies pay for them with higher market percentages and lower dividends.

For those with the means to reach illegal bookies and deal with them, you can see why the lower market percentages makes it attractive.

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