Sports Arbitrage Trading (1) - An Introduction

Arbitrage, also known as pairs trading, has been widely available in the securities market for many years. When the act of arbitrage is defined or described in its pure form it means buying any form of security In one market and selling it instantaneously on another, with the prior knowledge that the value of the security is higher for that instant on the seller market.

With electronic trading this kind of arbitraging has become possible in the last few years. The instances of margins being sufficiently high to justify such a transaction are few and far between, and the trader has to move very fast to take advantage of the opportunity. If they hesitate too long, the profit may well move into a break even situation before their eyes, and in an even worse scenario, make move into price discrepancy, where losses sometimes considerable, can be incurred. In theory, immediate risk-free profit can be earned but the dealer has to be very much in the right place at the right time to make it happen.

It is for this reason the most popular form of arbitrage over the last few years has become trading in foreign exchanges, widely known as Forex. This has become the most classic form of pairs trading, where dealers and even members of the public choose a pair of currencies and try to decide which one will rise in value against the other. Dealing takes place only in the five major global currencies, which means that dealings in the market are less volatile and be easily regulated. Forex trading is by far and away the largest global market, with trillions of dollars being traded every day.

However the serious profits being earned on line are for those who can afford to take a long term view. However there are no shortages of dealers who know the ropes and are prepared to invest huge chunks of money on a currency fluctuation, usually with a very large percentage being underwritten by the banks. If their hunch is right, these savvy dealers can earn some very hefty profits on just a few minutes of trading. However if the pendulum swings the wrong way, if even for a micro second, and the bank’s capital looks like it is about to be exposed to risk, then they will immediately call in their loan, and the trader will have lost their capital. It might even be only 2% of the total sum of money invested in the trade, but 2% of a huge amount of money is still a lot of money.

That is why most people who deal in Forex prefer the long term view without to much bank exposure. They can make enough profit on their money over three months, and in most cases are satisfied.

Another area where the internet has changed many people’s lives is in online gaming. Similar but not quite the same. The internet gaming revolution began towards the end of the last millennium in a fairly primitive form. However as computer technology has improved and interest has increased worldwide, online gaming has a become probably the largest growth industry running into many trillions of dollars every year and growing,

Online casino operators have not been slow to realize the immense profit potential that exists in wagering online. No longer hampered by the rules and regulations that plagued the land based casino industry, they have invested fairly large sums of money in building and maintaining state of the web sites, where players can gamble on whatever takes their fancy.

While the online casino operators attempt to paint a picture that wagering online is fun, in certain formats it can be very addictive. While the mathematical odds at an online casino are considerably more in favor to the player than that of the land casino, the fact that players can play every day from their own home means that the odds very rapidly erode in favor of the house, and losses begin to incur that grow and grow. Statistics show that this rule applies to slot games and the most vulnerable sector of the population are single, divorced or widowed women in their fifties upwards. The ability to fund accounts through credit cards has been largely curtailed by the US government , but in Europe the ability to gamble large amounts of money on line goes largely unchecked.

Favorable publicity for online gaming has been earned by the large number of online and televised poker tournaments that seem to go on all year round. Online casino operators like poker because it adds a taste of excitement, and is regarded as game of skill. The only income that online casinos earn from Poker is entry fees from tournament players as well as a percentage of the ante. I.e. the sum of money that each player puts in before the hand is dealt.

It may be profitable and great for public relations; however it is nowhere near as profitable for them as slot games, and the little old lady from Pasadena who is more than half way towards losing her home.

An entirely different kettle of fish in the world of online gaming is sports betting. All the pluses and all the minuses in online gaming apply for the operators of sports betting sites., They have the same 24/7 potential client base, where sports events of every type are going on around the clock somewhere in the World. The downside for the sports betting site operator is that unlike the online casino where they have total control over each bet, and to a lesser extent with poker where the casino operators at least have some guaranteed income from entrance fees and antes, the online sports betting sites have absolutely no form of guaranteed income, and can only hope that their clients will lose more bets than they win. Which they invariably did. At least till now.

What those operators of online sports betting sites failed to take into account when they set up their sites is that the revolution in instantaneous transfer of information electronically would expose a major Achilles' heel in the industry that could, and inevitably would, be used against them. Today there are many hundreds of online sports betting websites, all of them legitimately competing against each other for the many billions of dollars to be wagered on sports online.

So crowded is online sports betting and so fast-paced, that the odds-setters involved have a more difficult task than expected. A disadvantage to the global reach of the online sportsbook is that the odd setters, may not have access to local information such as a certain key player’s loss of form, ground conditions, weight problems, stomach problems, financial problems or even that someone stayed out too late the night before. That can mean a big difference to setting the odds on an event, especially if a rival bookmaker has access to this inside information and fixed a completely different set of odds.

Up until recently, this phenomenon would happen maybe sixty or seventy times a month. These were usually opening odds, and when the online bookmaker compared the odds being offered by their competitors and realized that the odds that they were offering were completely off track, would adjust them accordingly with no damage being done.

Until a bright City trader, Rajeev Shah, with considerable experience in arbitraged trading came to the realization that that online sports betting web sites were highly susceptible to having their odds "paired" if one bookmaker had set their odds too high on the result of a sporting event, any sporting event, any time in the World.

Shah, author of the industry reference guide: Sports Arbitrage - How To Place Riskless Bets & Create Tax-Free Investments, came to the conclusion that if he created a situation where he could compare different sets of odds amongst the thousands of possibilities that appeared every hour, he was almost certain of picking out a few every month, although he couldn’t be sure exactly how many of these potential guaranteed profit earning situations would show up during a set time period, if at all. His early efforts showed that these "pairing" situations showed up fairly regularly, with most of them lasting for several minutes - more than enough time for an efficient trader to place his bets - before bookmakers reduced their odds to match that of their competitors.

His early simulations convinced him that it was possible to earn profits through sports betting arbitrage and that they could be considerable. The obvious drawbacks were the necessity to be on constant watch to catch one of these "pairing situations" which would come and go in a matter of minutes. Realizing that the best way that consistent profits could be earned would be with a software program that would alleviate the necessity to be on constant look out for favorable pairings whenever they occurred, Shah created the aptly named software ArbAlarm.

With this comes the reality of sports arbitrage trading as a regular and guaranteed risk free and tax free money maker. Who loses? The online sportsbooks which set the wrong odds and failed to adjusts them on time. Who gains? Everyone who discovers the possibilities of sports arbitrage trading.