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What is arbitrage betting?

Arbitrage betting or arbing is a trading method used on betting exchanges that guarantees a profit by taking advantage of price disparities between and within markets. This article explains what arbitrage betting is, how to identify arbs and how to make an arbitrage bet.

Arbitrage betting explained

Arbitrage is a trading technique which benefits from price differentials between two markets to guarantee a profit regardless of the outcome.

Arbitrage is common practice for traders on the stock exchange; a trader guarantees a profit by buying stock at a particular price on one exchange and selling the same stock for a higher price on another.

This principle is similar for sports betting, as the makeup of betting exchange - learn how a betting exchange differs to a bookmaker - is very similar to that of a stock exchange.

Traditionally, sports arbitrage was done secretively by placing bets at multiple bookmakers on the high street. However, betting exchanges and online betting have transformed arbitrage betting and made this taxing work unnecessary.   

Arbitrage sports betting is essentially where you place bets on all outcomes for an event at odds that guarantee a profit, whatever the eventual result will be - rather than gambling which carries higher risks, sports arbitrage betting is more of a low-risk, medium-yield investment strategy.

Market efficiency and arbitrage opportunities

Understanding the concept of market efficiency is key to understanding arbitrage betting. All betting markets are reliant on information to set a price, the accuracy of this information and who has access to it, and how quickly determines its efficiency.

If everyone has access to 100% accurate information, then the market would be efficient. Vice versa, if no-one had information, or were informed by poor data, then the market would be inefficient.

No market is 100% efficient - otherwise there would be no arbitrage opportunities - as traders and oddsmakers acquire and react to information differently and within differing time frames. The dispersion between information quality, the speed to which it’s available, and how it’s interpreted all contribute to market movements. Arbitrage opportunities arise from this market inefficiency.

Arbitrage calculator

This arbitrage calculator automatically calculates how much you should stake on each outcome on a market you want to make an arbitrage bet on.

 

Using the Smarkets arbitrage calculator is simple. Just follow the below instructions:

  • Input the total stake you want to risk.
  • Input the odds for outcome 1 and the commission if on a betting exchange (if you are arbing between bookmakers set the commission value to 0).
  • Repeat for the other outcomes you would like to arb (add new outcome if you require more than 4 outcomes on a market).
  • The arb calculator will then automatically inform you how much you need to stake on each outcome and your profit.

How to make an arbitrage bet

There are two types of arbitrage bets to take advantage of on betting exchanges:

  • Odds arbitrage
  • Bonus arbitrage (also known as matched betting)

Let’s show you how to identify both arbitrage opportunities with simple explanations:

Odds arbitrage

A fair market is priced with an implied probability adding up to 100%. Traditional bookmakers build a margin into their odds which helps balance the book by pricing the market over a 100% - understand how betting margins impact your return.

Arbitrage effectively reverses this, allowing you to exploit price discrepancies across bookmakers and a betting exchange like Smarkets so the implied probability of the odds on offer is below 100% - in the favour of the bettor.

The simplest form of arbitrage is where the exchange lay odds - learn how to lay a bet here - are lower than the back odds offered by the bookmaker - benefiting from the back high, lay low trading philosophy. The idea is to cover all eventualities across the bookmaker and exchange to lock in a profit.

Let’s say in a darts match between James Wade and Phil Taylor you look at the odds on a bookmaker and the Smarkets betting exchange. The odds to back both players on the bookmaker are listed below:

  Wade to win Taylor to win Market margin
Odds 2.4 (41.67%) 1.55 (64.52%) 106%

Now you see you can lay Wade with odds of 2.1 - betting that he won't win - on the Smarkets exchange. This is the perfect example of an arbitrage opportunity as the implied probability for the combined bets is 89.29%.

  Wade to win at bookmaker Wade not to win at Smarkets Combined market margin
Odds 2.4 (41.67%) 2.1 (47.62%)  89.29%

Calculate your lay stake for arbitrage bets on a betting exchange

Say you want to stake £100 on Wade to win on the bookmaker with odds of 2.4. To calculate your lay stake on the Smarkets exchange you simply use the following calculation:

(back price x back stake) / (current lay odds - exchange commission)

For our example that's: (2.4 * 100) / (2.1 - 0.02) = £115.38

You would then make a £115.38 lay bet on Wade to win at odds of 2.1 on the betting exchange.

Calculate your profit if you win at the bookmaker

Profit = (back odds – 1) * back stake – (lay odds -1) * lay stake

So for our example, that would be: Profit = (2.4 - 1) * 100 - (2.1 -1) * 115.38 = £13.08

Calculate profit if the lay bet wins at the exchange:

Next, you calculate your profit if your lay bet with the exchange is successful:

Profit = (lay stake * (1 - commission)) - bookmaker stake

So for our example that would be: Profit = (115.38* (1-0.02)) -100 = £13.07

Overall arbitrage profit

The table below shows all outcomes and your profit for your arbitrage bet - this includes the 2% commission charged on the exchange if your bet won.

Outcome

Bookmaker

Smarkets exchange

Profit/loss

Wade wins

+£140

-£126.90

+£13.08

Wade loses

-£100

+£113.07 (includes 2% commission)

+£13.07

So if you placed this arbitrage bet, you would guarantee a profit between £13.07 or £13.08 irrespective of the result.

Bonus arbitrage

Bonus arbitrage, also known as matched betting, allows bettors to take advantage of the many bonuses, free bets and incentives on offer with bookmakers by using Smarkets betting exchange to make a low-risk profit.

Implementing a matched betting or bonus arbitrage strategy is simply placing a bet with the bookmaker who offered the incentive, and then lay the same outcome on the Smarkets betting exchange - read more in our step-by-step guide to matched betting.

This allows you to cover all potential outcomes, eliminating your risk, and lock in a profit.

Arbitrage and betting exchanges

Identifying arbitrage opportunities isn’t easy because it’s not in the best interests of bookmakers to offer differing odds. Therefore they constantly update their odds by monitoring their competitors to ensure they are in-line. They also don’t want arbitrage bettors using their site, as they are profitable players.

Albeit still possible for arbitrage opportunities to exist between bookmakers, it’s easier to use a betting exchange.

The model of a betting exchange is significantly different to that of a bookmaker. Instead of balancing their books in a way which increases their chances of making money irrespective of the result, a betting exchange makes money charging a small commission - 2% on net market profits only with Smarkets.

Unlike a bookmaker, the exchange doesn’t set the odds. Instead, it facilitates a platform for trading. Therefore exchange users set the odds - which can vary greatly.

Betting exchanges like Smarkets welcome arbitrage bettors, and because the platform allows you to trade like a stock exchange - back and lay - it naturally produces arbitrage opportunities known as 'trading a market'.

When trading on the betting exchange you can either hedge your backed bets, by laying a bet on the same outcome, or vice versa, by laying and then backing a selection. Both strategies allow you to:

  • Guarantee profit whatever the outcome of an event
  • Reduce your risk and potential losses

Risks associated with arbitrage betting

Arbitrage opportunities occur regularly due to the volatile nature of betting markets. The basic logic of arbitrage is fairly simple, but there are a number of risks to consider:

Bankroll

Arbitrage betting can require a large bankroll in both bookmaker accounts and on the betting exchange - to cover your liability requirements.

Liquidity

Lack of liquidity - how much money there is in that particular market, which determines how much you can stake - can also be a problem for arbitrage bettors, especially in less popular events. If there isn’t sufficient liquidity, you will not be able to complete your arb, and could potentially lose money.

Speed

As mentioned, bookmakers constantly monitor competitors to ensure they are not out of line. The consequence of this is the opportunity to arb is not available for long. To take advantage of these price disparities between bookmakers and traders, trades must be completed quickly before the market corrects itself. An arbitrage system can help but doesn’t guarantee you will be able to cover all eventualities quickly enough.

Small returns

The maths behind arbitrage is unquestionable, but the profits are generally small. While you can make bigger profits, more often an arb will return around 2-5% of your original stake.

Limitations

Bookmakers don’t want arbitrage bettors, so as a result, they will close or limit your stakes if they identify you as one. Fortunately, the Smarkets betting exchange welcomes arbitrage bettors.

Apply this to betting

Arbitrage betting has both risks and rewards and despite bringing in small margin returns it does produce a risk-free profit if executed correctly, which is why most professional traders apply these techniques.

Now you understand what arbitrage betting is, learn how to calculate arbitrage betting for three-way markets or between two bookmakers, and then take advantage of the best odds online - with Smarkets’s industry-low 2% commission.

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