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The Vicious Cycle of Raising Takeout

Written by trackmasterplus on August 30, 2010 – 9:00 am -

Recently, discussions regarding takeout rates have been on the rise again since there is an amendment in California that would enable the possibility of raising the takeout rate on certain bets involving more than one horse. Here are some simplified examples of how raising the takeout rate could potentially be very detrimental to the amount of money returned to the government, the tracks and the horsemen. These examples pertain to the Pick 3, one of the wagers that would have the increase in taxation applied to it.

First, let’s take a look at some data from a typical day at the races using Del Mar’s card from Saturday, August 21st, 2010. The following relates to the Pick 3 sequences for races 3 through 10: the pool size, the off-odds plus one for the winner of each leg (the plus one is the original bet), the payoff with the current takeout of 20.68%, the adjusted payoff with the proposed takeout increase of an additional 3% (23.68%), and the $1 Parlay payoff (if one dollar was placed to win on the winner of Leg A and the subsequent winnings placed upon Leg B, and those winnings placed on the winner of Leg C).

Sequence	Pool	Leg A	Leg B	Leg C	Pick 3	Adjust 3	Parlay
Races 1-3	$133,765	2.2	2.7	2.5	$23.80	$22.90	$14.85
Races 2-4	$61,516	2.7	2.5	2.8	$41.70	$40.10	$18.90
Races 3-5	$80,010	2.5	2.8	4.2	$49.60	$47.70	$29.40
Races 4-6	$102,977	2.8	4.2	2.0	$36.70	$35.30	$23.52
Races 5-7	$98,153	4.2	2.0	7.6	$97.40	$93.70	$63.84
Races 6-8	$116,142	2.0	7.6	2.5	$61.10	$58.70	$38.00
Races 7-9	$82,356	7.6	2.5	2.4	$75.40	$72.50	$45.60
Races 8-10	$215,303	2.5	2.4	5.0	$33.20	$31.90	$30.00

To calculate the parlay payoff, the odds plus is multiplied for each leg to get the parlay payoff. For example, the one dollar parlay payoff for the first Pick 3 was calculated as follows: the odds on the first race (Leg A) winner was 1.2 to 1 ($2 payoff of $4.40), thus if one dollar were wagered, $2.20 would be the resulting payoff. This amount is then multiplied by the odds plus one of the next leg winner (2.2 times 2.7), this amount is now 5.94. Now we need to multiply 5.94 times 2.5 to come up with the resulting one dollar parlay amount of $14.85. As you can see, all of the Pick 3 payouts on this day paid more than the parlay. For the day, the average Pick 3 payouts were 1.6 times higher than the equivalent parlay on the same series of races. This happens more often than not, and is one of the advantages a bettor can exploit to make money at the races.

Let’s say we have a skilled, hypothetical handicapper who picks the winner of a race 31% of the time at an average payoff of $5.94. With these results, if he were betting to win every race, he would have a Return On Investment (ROI) of -8%. These results aren’t too shabby when compared to the takeout rate of 15.4% on win bets. Still, he doesn’t really have any incentive to wager from a strictly profitability standpoint since he has a negative ROI. But, this handicapper knows that if he plays the Pick 3, he can make a profit because the takeout of 20.68% is spread across three races rather than just collected in one race. With this in mind, he is able to generate a profit on his wagering without changing anything regarding his selection method. All other things equal, Pick 3 payouts are about 1.35 times better than the payout of a parlay for the same series of races when the takeout on the Pick 3 is five points higher than on a win wager. I won’t distract you with the detailed math, but these results allow him to generate an ROI of positive 5.4% rather than an ROI of negative 8%, even though his win percentage on the Pick 3 is only 2.98% (.31 times .31 times .31). But, if the takeout rate is raised to 23.68% his profits disappear.

The math shows on his Pick 3 wagers, if the takeout is raised one percentage point, his return on investment drops about two percentage points. Since the takeout rate in our example is raised by three percentage points, our handicapper’s ROI will drop six percentage points (to zero). This could cause him to cease wagering (for profit) altogether.

To illustrate this point with actual numbers we can use our Del Mar data to illustrate the effect. Let’s say someone had a very lucky day and hit all eight of the Pick 3 wagers offered on the day and invested a total of $200 to do it. With the current takeout rate, the bettor would have received $418.90 which gives results of an ROI of 109% versus the return with the increased takeout rate of $402.80 and an ROI of 101%. In this example, the result is a hit of 8% in profits. As I said earlier, the underlying math would indicate a loss of about 6% on average across all tracks and all Pick 3s. The point is, a significant swing in ROI would likely result in such players looking for other ways to “invest” their money.

Our handicapper decides that enough is enough. He thinks the takeout rate should be lower, instead it is raised. He thinks that all-weather tracks are safer for horses and more fair to all styles of runners, but Santa Anita is reverting back to dirt. He is intrigued by certain aspects of peer-to-peer wagering, but that is being discounted by the racing industry as well. He decides to quit betting after 20 years of playing virtually every weekend at the track and via his ADW account throughout the week.

Given the very real scenario of our handicapper, and the general economic principle that when demand is down an increase in price is probably going to be detrimental to business in the long run, let’s take a look at how the proposed takeout increase in California is likely to play out. These figures are based on my personal, but I believe “educated” opinion. The data is again taken from our day at Del Mar. It includes: the projection which is the estimated change in handle from our current Del Mar day, the takeout rate, the size of the Pick 3 handle for the day, and the estimated total return to the government, tracks, horsemen, etc.

Projection	Takeout	Pool	Return
No Change	20.68%	$890,222	$184,098
17% Down	23.68%	$738,884	$174,968
33% Up	15.00%	$1,183,995	$177,599
50% Up	15.00%	$1,335,333	$200,300

The No Change row shows what happened this year for our Del Mar day. Let’s be optimistic and assume overall handle will stay flat going forward. The next row is a conservative estimate of what I think will happen if the proposed increase of 3% is implemented. Los Alamitos recently raised takeout and a decrease of 27% in handle has been the result, when overall handle declined about 10%. So the “net” effect was a 17% decline. As you can see, less money will be returned to purses, etc. I actually think the drop will be even greater. The next row is my conservative estimate of the effect if the takeout rate for the Pick 3 was lowered to 15% instead of increased as proposed. The 33% rate is taken from the recent increase in handle on the California lottery when they reduced the takeout rate on scratcher tickets about five percentage points. Since the Pick 3 customer is more focused on ROI than the typical lottery customer I think an increase in handle of 50% is actually a fairly conservative projection. In my opinion, this is a much likelier way to increase purses rather than the proposed increase in takeout rate.

Raising prices when demand is down is not a good strategy for long term growth. Increasing the takeout percentage is not going to increase purses in the long run. Whether a bettor is highly conscience of his Return On Investment or not, he starts to notice when he is coming home from the track with less and less money, until he finally quits going. The horse racing industry needs to find ways to increase handle in order to prosper. If we don’t do that the future looks bleak. Owners, trainers and others in the racing industry need to focus on coming up with ways to increase handle, rather than trying to only increase purse levels. Increased purses with decreased handle will be a losing proposition in the long run. Increasing the takeout rate will just add to the ever declining wagering handle statistics and the downward cycle will continue.

Craig Walker
TrackMaster Senior Product Development Specialist

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Posted in General Industry, Harness Racing, Thoroughbred Racing

Peer To Peer Betting: Is It Good for Horse Racing?

Written by trackmasterplus on August 16, 2010 – 9:00 am -

At the beginning of July, New Jersey’s General Assembly took the first steps in approving a peer to peer betting exchange model that has had success overseas generating wagering handle for horse racing and other sports. By limiting the wagering to citizens living within its state borders, the betting model should be able to stay clear of any federal regulations barring wagering across state lines. If New Jersey doesn’t continue to move down this path, it still seems that it is just a matter of time until some other enterprising state decides to make the move.

A betting exchange is basically a system where a person on one side is willing to offer a bet at a certain price and a person on the other side is willing to take that price (or vice versa). This peer to peer system has the possibility of opening up a new type of wagering market, where bettors try to lock in an edge on their wagers. This would introduce a new kind of bettor, the technical trader trying to gain a small edge by exploiting marginal advantages. This type of market can be created because of the lower takeout that is implemented in the betting exchange system when compared to the traditional takeout rates of parimutuel markets. These new types of investors will many times be people that are currently not involved in betting on horse racing at this time, but will become involved because of the motivation provided to make a profit via the betting exchange.

The betting exchange also opens up another new market of “during race” betting. There is currently no other way of making bets while the race is running (please keep your jokes and sarcastic remarks to yourself), so this is a brand new market which shouldn’t be any threat to take away betting from current wagering. “During race” betting also gives a bettor trying to hedge his bets another avenue to pursue his goal of locking in a profit.

The linchpin for all of this to work properly is that the betting exchange needs to do a thorough job of tracking and policing wagering activity. If something doesn’t seem “above board,” safeguards must be in place that allow a quick and efficient resolution to any problems. A proper betting exchange knows that wagering integrity is a key to their success and this will be a priority for any system that is put in place.

One of the arguments that is heard against the betting exchange model is that less will be returned to the tracks and horsemen because of the much lower takeout rate. I believe this is not really a justifiable argument for many reasons. The betting exchanges are based upon win betting and currently the win pools typically make up less than 20% of handle. A majority of current horse players that make bets to win will still do so just as they do now. They will not want to get involved with the intricacies of peer to peer wagering. As stated above, much of the handle on the betting exchange will be “new money,” from people with an interest in technical trading that currently don’t follow racing, and wagering from veterans that want to take part in the “during race” betting. Also, some of the newcomers could add directly into the parimutuel pools to take advantage of discrepancies between odds in the exchange and the parimutuel odds, or they could become involved in pools other than the win pool as well. All of this adds up to virtually no downside regarding the current pools and a chance at a significant upside from the betting exchange monies.

As an aside, raising takeout is definitely not a good long term strategy for the racing industry. If California racing decides to implement the rumored increase in takeout, it is sure to have a detrimental effect on wagering handle. Implementing ideas that lower the cost of the wager to the bettor, such as a peer to peer betting exchange, is one of the ways to increase wagering handle. Raising takeout is sure to have the opposite effect. The proposed increase is effectively taking away ten percent of a horse player’s current returns. Let’s hope this rumored proposal never comes to fruition. If it does, I believe whatever percentage of decrease in handle California racing would have had next year will at least double due to the takeout rate hike.

Craig Walker
TrackMaster Senior Product Development Specialist

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Posted in General Industry, Harness Racing, Thoroughbred Racing

Back To The Track

Written by trackmasterplus on August 11, 2010 – 11:00 am -

When was the last time you made a trip out to your local harness racing track? Whether it’s been only a week, or upwards of a year, or maybe even a decade…this coming weekend needs to be marked on your calendar. The United States Trotting Association, with the cooperation of its member racetracks, has designated the weekend of Aug. 14-15 as the time to go “Back to the Track.” Those who go to the harness races then will find a variety of special promotions and events to make their visit fun.

Back to the Track is a weekend to celebrate harness racing in all its forms: as a sport enjoyed by fans, as a challenging game played by handicappers and as a livelihood earned by the hard-workers on the backstretch. On Friday and Saturday (Aug 14 and 15), you’re invited to put down the remote, log off your computer, or finish the chores early and come back to the track to enjoy a day of harness racing. This national promotion is designed to get new fans to sample the excitement found only at the harness races, as well as welcome back those who may not have attended the races for some time.

With on-track attendance on the decline in recent years, the goal is to simply remind everyone that going to the harness races remains an exciting form of entertainment. Each of the harness racetracks that will be offering live racing this weekend will make fans feel welcome by offering special incentives and attractions. This includes the introduction of some brand new wagers.

A $50,000 guaranteed pool national pick-4 wager based on races at four different harness tracks will be part of the weekend event. The guarantee ensures that the pool will be deep enough for big and small bettors alike to dive into. Picking four consecutive winners in races from four different tracks in less than an hour is sure to bring some excitement back to the races. The pick-4 will be a $1 minimum bet and feature races from Meadowlands Racetrack, Yonkers Raceway, Balmoral Park and Northfield Park.

Also on Back to The Track Night, Monticello Raceway and Tioga Downs have joined forces to offer the betting public a series of wagers which is being dubbed “Dueling Doubles.” The bet will be a daily double with the first leg from Monticello Raceway and the other from Tioga Downs. In an effort to create extra excitement, four dueling doubles are being offered. They will encompass the first, third, fifth and seventh races from both racetracks.

To celebrate this great event and to help out fans tackle the new wagers, TrackMaster is providing free past performance programs and expert selection reports for all tracks racing this weekend. Click here to access all the free stuff on our special Back To The Track website.