ARB103: Why do arbs occur?
Arbs are simply a favourable difference in odds offered by different bookmakers. Arbs occur when one bookmaker’s odds are out of alignment with the odds offered by other bookmakers. There are a few reasons why one bookmakers odds can differ from the rest of the market, as described below.
The main source of arbs
In order to understand why most arbitrage opportunities occur you have to appreciate how bookmakers make money. In general, bookmakers always try to balance their book (i.e. they want to collect equivalent bet amounts on both teams in a sports event) so that they make profit regardless of who wins the match.
So what does a bookmaker do when a punter places a huge bet with them on one team in a sporting match? The bookmaker’s book is no longer balanced and they need to attract more bets from punters on the other team, otherwise they stand to lose money. This is done by increasing the odds offered – making bets on the other team more lucrative to punters.
By increasing the odds on one team, that bookmaker potentially creates an arb in the market (against the other bookmakers who are still offering the original unchanged odds).
If you think that this doesn’t happen because bookmakers are too big, think again. There are many professional bettors who work together in syndicates, placing large bets in unison in order to create significant odds movements. The syndicates then bet on the opposing team (now at high odds) to make a profit. The big swings in odds can create arbs.
A less frequent source of arbs
There are hundreds of sports bookmakers around the world, each specialising in particular sports and locations. However, this doesn’t stop them offering bets on sports/leagues/teams outside their area of expertise. As a result, arbs can occur due to a simple difference in opinion between bookmakers as to which team is the favourite.
This is a less frequent source of arbs because all bookmakers watch and follow each other’s odds so that as soon as the ‘knowledgeable’ bookmaker changes odds (due to injuries, inside information etc.) then the others follow suit. The delay between odds changes (arising because soft bookmakers have manual traders setting their odds) can cause arbs to occur.
A very rare source of arbs
Let’s not forget that soft bookmakers have archaic systems with human traders setting odds manually, and humans make mistakes. Typos, transpositional errors, poor anticipation of betting flow, and misreading probabilities are all causes for setting inaccurate odds. This source of arbs is rare because processes are in place at bookmakers to catch these mistakes.