Alternative Views on Rebates

[MVMcKee]

Not certain if anyone else finds this kind of thing interesting, but there is currently quite a bit of squabble regarding the whole rebate shop paradigm.
This is a posting from the PA board (previously cut and pasted from the Del Mar board). I found it to be a good read, but was especially amused by the section in which the author uses a couple of analogies to poker and commodoties trading. I am guessing at least a few of you will find them humorous also.
I posted a reply to this which I also pasted as a second message in this thread. A friend of mine read it, agreed, but said I was wasting my time in trying to elucidate these things to racing officials. I felt he wasn't giving them enough credit. He replied "They're smart enough to understand what you wrote, but you are understimating the power of denial."

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I’ve spent the past couple of days peeking into various chat/bulletin rooms gauging the buzz regarding computer bettors. This board contains the greatest number of fans trying to understand the issue. I’ve enjoyed reading the posts.

Two nights ago I received an email from a poster on this board (scorequick). He asked me to offer some thoughts on the issue.

As most of you know, Oaklawn removed rebate/computer wagering shops from its pools during the 2004 season. The motivation for the decision was to ensure fairness for the racing fans, especially those supporting the game in the nation’s grandstands and OTB’s. It was the right thing to do.

Last week, the NTRA released the results of a study which examined the effects of rebate/computer players. Oaklawn participated in the NTRA study by providing its 2003 and 2004 wagering data. The study analyzed the dynamics of Oaklawn’s wagering pools with the rebate/computer shops participating in 2003. Those dynamics were contrasted with the behavior of Oaklawn’s pools after the rebate/computer shops were removed in 2004.

The conclusion, which is included in the final report, is that Oaklawn’s effective takeout rate for its remaining simulcast sites went down 1.64% after removal of the rebate/computer shops.

As a result, some $3 million that would have been siphoned out of the pools by the rebate/computer shops went instead to stateside racing fans holding winning tickets.

Also…the late odds drop phenomenon disappeared at Oaklawn when the rebate/computer shops were removed.

HOW DO THE COMPUTER/REBATE SHOPS OPERATE

Some basic knowledge of the industry’s economic model is required.

When Oaklawn sends its signal to California, the fans in California are betting into Oaklawn’s pools, not separate pools (you already knew that).

Oaklawn’s WPS (win place show) takeout is 17%. So, California wagering sites offering the Oaklawn signal take 17% of the handle off the top. The other 83% is returned to winning wagers wherever they occur in the Oaklawn network.

From this 17% California must pay Oaklawn for its signal...let’s say the fee is 3% of handle.

Now California has 14% left (17% - 3%). Forgetting state and workmen’s comp obligations for the sake of simplicity, this 14% is split (7% & 7%) between the California wagering site and California’s horsemen (purses).

The 3% paid to Oaklawn is split between Oaklawn and the Oaklawn horsemen, building Oaklawn’s purses.

As you can see…the horsemen benefit on both sides of the equation, sending and receiving. They should, owning and training thoroughbreds is an expensive business. Solid purses will bring good owners to the game. If we don’t have thoroughbreds we don’t have a sport.

THE REBATE SHOP

Most rebate/computer shops are secondary pari-mutuel organizations (SPMO’s). The NTRA study defines SPMO’s as follows:

Does not conduct live racing;

Provides rebates to bettors, up to 10% or more;

Is based primarily on telephone account wagering with a limited customer base with some customers using personal computers in their handicapping and wagering activity and being afforded special pari-mutuel access or service;

Owners and/or operators are not clearly defined;

Is out-of-country, an Indian gaming facility, or is not in the geographical mainstream of U.S. racing locations;

Has little or no U.S. regulatory oversight;

Has significant level of business contrasted by no visible marketing or advertising;

Has consistent and often substantial money settlements due from host track; and

Tax withholding policies and practices in relation to U.S. regulations are unverified.

These SPMO’s have a tremendous advantage over U.S. sites. They have no obligation to local purses.

Let’s revisit the economic model. Here’s what happens to the same 17% takeout at an SPMO:

3% to Oaklawn (fee)
4% to the SPMO
10% rebate to the player (no purse obligation frees up this cash)

U.S. horsemen and track management were foolish to allow this model to evolve. I’ll agree with Steven Crist on that point.

Big players from U.S. grandstands moved their handle to these sites. They set up accounts and wagered by phone. Tracks were unable to match the rebate offer because of the obligation to place half of the takeout into purses (where I think it belongs).

The NFL supports player salaries by selling broadcast rights to television for billions. Racing, with no such luxury, funds the sport by committing a piece of the wagering dollar to purses.

The off-shore rebate shops circumvent the purse obligation, jeopardizing the sport’s foundation.

THE COMPUTER PLAYER

SPMO’s offer select players direct wagering connectivity to the tote system. In the aftermath of the pick-6 scandal, that fact alone is ominous.

Direct access to the wagering network enables the computer player to electronically scan and analyze wagers placed by all other players. Just prior to the start of a race, the “linked” computers comb pools seeking underplayed wagering combinations relative to the merits of the horses. The program pays special attention to exacta combinations; it can look at all of them in a b l i n k.

When the program robotically pulls the trigger, a complex array of wagers, mostly exotics, is spread over the underplayed combinations. Essentially claiming all overlay value the pools for that race had to offer. They are taking the cream off the top.

Getting this electronic “last look” enables the computer program a consistent win of 97-cents on each dollar wagered. That’s a steady loss of three cents on the dollar.

However, add the ten cent rebate and it’s a seven cent winner on the dollar. Consistently!

That’s how it works. It’s a sure thing. If they wager $100 million in a month they will make $7 million. There’s no risk. NO RISK! That’s why I call it siphoning, not wagering.

The effective takeout for these computers is 3%, not 17%. That means the effective takeout on everyone else playing in the pools is greater than 17%.

The NTRA study spells this out very clearly. U.S. players are guaranteed to lose faster when participating in pools accessed by rebate/computer shops.

These robotic wagering computers scan every race…at every track…every day. You’re always competing with them, unless you are wagering on Oaklawn or Tampa Bay Downs.

Many racing jurisdictions worldwide have banned computer robotic wagering. Australia is one of them. With no place left to go, all computer bettors are trying to plug into U.S. pools. The result will be more strain on purses and even smaller payouts for the U.S. grandstand player.

IS IT UNFAIR

Some say these are just smart handicappers with no real advantage. Others see it as progress. “Don’t stand in the way of technology” a friend of mine in the racing business argued the other day.

Consider these analogies:

If you sit for a game of poker in a casino you’ll soon discover that the house does not care which player wins the pot. The house gets a cut of every pot, regardless of winner

Pari-mutuel wagering is much the same. A cut is deducted from the pools and the balance is returned to winning tickets. The tracks care nothing about who wins the pools.

Imagine yourself at one of these poker tables. There are six of you playing when a seventh player arrives. The new player pulls a laptop computer from a bag and sets it up on the table. The laptop has a sophisticated lens that scans the cards on the table as well as the amount of chips in the pot. Everyone at the table laughs at the geek and his computer. Play continues.

The laughing soon stops as the computer player consistently wins pots. With more chips in front of him the computer player begins betting more aggressively…winning even bigger pots.

Exasperated, the players complain to the dealer that the computer player has an unfair advantage. The dealer scoffs…saying that the computer player is creating bigger pots, a portion of which goes to the house.

Now…what would you do? Would you stick around and lose, or would you get up and leave?

The critical difference between the poker table analogy and the pari-mutuel network is at the poker table you can see the computer player. In the pari-mutuel pools you can’t. He’s hidden.

Is that fair?

One more analogy…

A small set of investment traders quietly obtain computer access to the pipeline of trades. They view these trades just before they transact on the major exchanges.

With this unique access, the investors are able to see how all other investors are about to trade. Placing their trades based on this privileged knowledge, the investors consistently beat the market.

Is this fair? Would the SEC shut this down? Would people go to jail?

The rebate/computer wagering model is bad for racing and fundamentally unfair to 99% of the fans.

That’s why we cut ‘em off at Oaklawn.

Bobby Geiger

[MVMcKee]

There are a whole lot of additional facts being ignored in the Oaklawn official’s posting. In the NTRA findings it is stated that there is a "1-2%" increase in the effective takeout, because of the presence of a successful large denomination bettor who is getting a 96% or better ROI. The math here is very simple, and correct. If an individual, or some other entity is getting a 96% ROI, and their wagers comprise 8.25% of all monies wagered, they would effectively raise the takeout (15% for example) for all other monies wagered by 1% (to 16%).
The NTRA stopped the calculations here, and stated that this "effective takeout" increase affected the "average player" and "reduced churn", implying that all players are affected both negatively and equally by the presence of this whale with amazing pool triage' capabilities.
The reality is that the presence of the whale's money in the pools most negatively impacts those players whose methods most closely mimic those of the whale, and whose winning selections most often intersect with those of the whale.

There are a number of bits of reality that the NTRA has (I am hoping by design and not by oversight) chosen to exclude from its findings:

1) The whale will lose more wagers than it wins. Therefore, more payoffs will increase than decrease. For example, take a case in which a highly successful, large denomination bettor has a 30% "hit rate" on his win bets. This player’s large bet does lower his odds, but it also increases the odds on all other betting interests. So in this example, 7 out of every 10 races has a higher win payout than it would were the whale (and the money he wagered into the pool) not present.

2) The "average" player (referenced in the NTRA/Oaklawn messages) will actually benefit from the presence of the whale's money.
This is plain simple logic:
By definition, the "average" player, meaning the majority of players (or more precisely the majority of the money in the pools) will not have bet the overlaid horse that the whale seeks and will eventually negatively impact the odds on. Therefore, the majority of win payouts that the "average" player cashes will actually be larger. (If using a strict (albeit unrealistic) definition of "average" dollar/player, ALL win payouts cashed would be higher.)

3) The degree to which other winning (by winning I mean an ROI above the mutual take) players will be positively/negatively impacted is wholly dependant on how often their winning selections are the same as the whales.
If my selections mirror the whales selections exactly, and the whale (as in a previous post) wagers enough to reduce his ROI from .96 to .91 (while maximizing his total return after rebate), then my ROI, whether I have been wagering $5 a race or $5000 a race will also drop from .96 to .91.
If I have a "pre-whale" ROI of .96, and the whale wagers on 2 out of every 3 of my winners, then my ROI will be negatively impacted to a lesser degree, as the increase in the payout on one horse will be negatively offset by the reduction on the other 2.
If my methods and selections as a winning player differ markedly from those of the whale, then I may actually see an increase in my ROI due to the whale's presence.
The bottom-line is that a winning player’s selections are by definition more likely than an average player's selections to intersect with those of the whale, or for that matter other winning players.

It really does surprise me that both the NTRA and Oaklawn Park could come to the conclusion that rebate shops and the presence of whales (I am not talking about the possible technological privileges they may be extended) is a negative. I really feel that this is a case in which these organizations wanted to see a statistical/quantitative validation of a hypothesis they formulated, and when they saw an initial indication of the answer they wanted, they hesitated to take the next logical step and truly investigate the "who is impacted" part of the equation.

[hurrikane]

I"m not so sure I agree with your logic there Mv but my take is the origiinal poster was making a differnet point.

The offshores paying 3% for a signal are left with a lot of money to spread around where as the track has to pay half of that leftover money to the horseman. Seems to me the solution is to charge the offshores extra money for the horsemen if they want to play into the pool. Problem solved.

Also, if, as this guy says, most of the money goes to exotics why is that affecting the win pools? Seems the exotics would be the place to do this since it is not so blatantly obvious. But if that is the case the win payouts would not be affected and would have no effect positive or negative on the win player.

I"m not so sure why the NTRA babies these guys. They have the pools to play into. These guys are not going to cater to the whales without these pools. They can't cover them. So, charge them to play into the pool. I"m not sure what they are afraid of...losing the 3%?

[MVMcKee]

I only used the win pool as an example because it made the explanation of the math much simpler. The same logic would apply to the exotic pools, albeit the explanation would be a bit more circuitous.

Oaklawn (in this case) charges and receives the exact same fee from an offshore site as it does from another racetrack. So, to Oaklawn, or any other track that SENDS a signal, the percentage of revenue is the same. So you hit the nail on the head when you answered the question “What are they afraid of?”, yes they are afraid of losing the 3%, because that is 100% of the revenue they receive for sending their signal to any outlet.

My primary point in posting this relates to the sections titled “The Computer Player” and “It is Unfair” in the Oaklawn official’s diatribe. While I certainly don’t advocate the “direct tote access” mentioned here, in the Computer Player section he represents the large player’s venture as being “risk free”, I don’t believe that I need to explain the utter ridiculousness of that characterization. In the It is Unfair section, he uses analogies to a poker game where the user of a PC can not only see the chips, but the other players cards, and to the stock market. Both of these comparisons are gross misrepresentations of what is occurring. In the poker comparison it is implied that the bettor can not only see the flow of money in the pools, but can follow the race up to the top of the stretch (the turn of the last card) before making his final wagering decision. The stock market analogy is even more ludicrous, inasmuch as if you are accessing and analyzing the flow of money within the market, you are in essence viewing the determinant of the end result. No such cause and effect relationship exists between the flow of money in the mutual pools and the order of finish in a race.

Had the article not used so much rhetoric and caricature I would have given it more credence, but as it is, it just seems like another political press release. The large player could be portrayed accurately, acknowledging the fact that this individual would be a winning player even without the rebate, but that he would be obligated to bet less in order to maintain his positive ROI. Instead the whale is being represented as the manifestation of much of what ails racing today.

If we were being truthful, the issue may more accurately be portrayed like this:

We run 60,000 races a year in the U.S., will pay upwards of $4 million dollars for a yearling and need to keep in place a purse structure that will support this overhead (as opposed to adjusting our expenditures to match our income flow).
We compete directly with casinos, but price our product nearly 8 times higher than our competition. In a free market economy, the natural proper action would be to lower our pricing model to a competitive level. Unfortunately we have spent the last 15 years trying to block competition through legislative means, have not taken appropriate action, and now find ourselves painted in a corner, operating in “paycheck to paycheck” mode in which we no longer have the luxury of lowering our established takeout rates (either directly or through rebates) and then waiting a year to realize the benefits of such an action.

Hmm, maybe I shouldn’t have referred to Oaklawn Guy's posting as a diatribe, I’m sounding kind of bitter myself.

[qhrick]

DSF editor Steven Crist wrote a recent column that echoes my thoughts precisely. I don't tend to agree with much of what he writes but I would consider thie column right on the whole notion that this should be a level playing field is laughable IMHO. Life isn't that way. A paste of his column follows
-qhrick

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By STEVEN CRIST
NEW YORK - A National Thoroughbred Racing Association task force has spent the last eight months studying why national betting handle is increasing while revenues for purses and track operations are declining. While much of the information in the final version of its 110-page report released Friday is interesting and overdue, the report unfortunately settles on the wrong culprits.

The fault, according to the most publicized part of the report, lies not with the racing industry but with some of its best customers, who have figured out how to reduce the game's ridiculously high takeout through mechanisms such as informed handicapping, rebates, and high-tech program betting. The report argues that these customers are hurting the industry by placing their bets with outlets that return less money to the industry, and that by playing at a lower rate of takeout, these customers are effectively raising takeout on less-informed players and discouraging them from participating.

Some of the remedies proposed border on the absurd, illustrating what a dangerously misguided area of focus this issue could become. For example, the report approvingly discusses an outrageous proposal under which lottery-like bets would be added to an exacta pool after betting had closed in order to make payouts unpredictable and specifically to reduce payoffs on those combinations most heavily bet in the final minute of wagering. Why not just throw a blanket over the odds board or bar people from using past performances?

This idea that a cabal of wildly successful bettors is taking bread from the mouths of horsemen and tracks is nonsense. First of all, these so-called successful bettors are not even winning. The rebate shops and program bettors are getting back 90 to 98 percent of their handle, not 120 percent, and while this mathematically reduces the overall return rate of the rest of the public, this is the nature of parimutuel betting, not an alarming new development. The game always has and always will feature three distinct classes of bettors: the vast majority, which loses more than the blended takeout rate, currently a punitive 20 percent; a small number of hard workers who will lose somewhere between 0 and 20 percent; and a tiny, tiny number of people who actually show a profit.

What rebates have done is allow some people in the second group to stay in action while hovering around a break-even point or eking out a modest profit. An 8 percent rebate turns a 4 percent loser into a 4 percent winner. The rebate does not come from the other bettors; it comes from the betting outlet's extremely high margin. This is not the bettors' fault but the industry's, for allowing its fees for signals and pool access to run as low as 2 or 3 percent of handle when they should be two or three times higher.

There are a few areas in which the most sophisticated bettors may have been given too much leeway. No one should be receiving odds feeds not available to the general public, and a few tracks have solved the late odds-change problem by enforcing a sensible cutoff of outside wagers at zero minutes to post.

Blaming the customers and promoting ignorance and random payouts, however, is not the way for the racing industry to improve its economics. Instead of trying to thwart its cleverest and highest-volume customers, racing should be overhauling its own pricing structure to make the game more attractive for players and more profitable for itself. The way to do that is through a combination of lower takeout for bettors and higher simulcast fees to retailers.

Racing failed to anticipate the growth of simulcasting into the driving force in the game. It considered simulcast fees found money and set absurdly low rates to importers. Then it failed to offer anything to compete with those retailers in the way of rebates, rewards and convenience. Why is anyone surprised that handle has migrated? And now, rather than addressing the problems that caused the current situation, racing wants to blame the customers who have taken advantage of it.

Racing wants to have it both ways: continuing to sell its product at a suicidal discount to competitors, while simultaneously complaining it is losing business to them - and then it says the customers are the problem for making a logical choice.

The task force was created in response to the release of statistics last January showing that handle had risen 0.8 percent in 2003 while purses had declined 1.7 percent. Industry leaders demanded an explanation for these numbers, but as the report clearly shows, this phenomenon has been going on for at least 15 years, mirroring the ongoing migration of ontrack handle to offtrack retailers. Until the industry fixes its pricing structure, nothing will change. Blaming and combatting the customers only obscures this underlying issue, while sending the unappealing message that only uninformed chronic losers are welcome to play this game.

[Victor]

The "customer" is always right and he (she) will LEAVE before accepting the blame and being penalized for quote "destroying" the industry. What a joke.

[Mall]

I agree with Mv's logic re the straight pools, & recall that when this all started with the mystery man from N. Dakota, for the reason suggested by Mv, I was trying to figure out where he was going to concentrate his action so I could bet against him. In my estimation, things have changed dramatically since then.

In addition to the proliferation of rebate operations, bet consolidators, & batch wagering, it appears that most have abandoned straight wagers, I'm guessing because of visibilty & possible political issues, both of which might jeopardize what they're doing in the exotic pools. The bottom line is that wps is the only place one can get anything close to a level playing field at any track which allows direct access & batch wagering.

The tracks which do allow direct access & batch wagering don't publicize those facts, but the very few times they have been pressed on the issue, they have claimed that the same information & betting systems the rebate shops are using are available to anyone who has an internet connection, citing, I am told, ATRpro as an example. As clever as that program is, & putting aside where this leaves those who support racing the most by actually attending races, it's clear to me that this is not the case.

In fact, I am convinced that in addition to rebates, the other main reason RGS, the undisputed whale among rebate shops, has expanded exponentially is that they offer both direct access & the kind of massive computing power necessary to implement batch wagering systems based on last second analysis & betting into exotic pools. That's one of the reasons I thought it was such a sporting gesture for CD to outsource the handling of its daily settlements to RGS, thereby allowing RGS to also make a buck on the computer capacity which its players are not using to fleece those willing to bet into exotic pools at tracks which allow direct access & batch wagering.

[Victor]

Gee, all of a sudden, Oaklawn wants to "protect" the player's interests. They're concerned about fair play. :rolleyes:

It's called competition and I hate to break it to you racing industry, it's out there.

[DK's Magician]

1)The inability of the tracks to price their product effectively has been the most persistent problem in this industry since I have been around.

2)It is a joke that if I bet $5000 and another guy bets $5 we pay the same % fee. The track does not work any harder or utilize any more resources.

3)In any capitalistic endeavor he who uses the most resources whether they be cash or man power should reap the highest returns. Tracks such as OP changing rules midstream after some have invested tremendous amounts creating LEGAL technology to beat them is extremely bad business.

4)Let them shut off every rebate shop on earth-they have ZERO power over the exchanges, who will ultimately hand them their collective asses.

5)The self aggrandizing folks' that consider themselves representative of the racing inudstry, talk a good game, of course they are also leading patrons of rebate shops and exchanges. I do not know one single person involved on the trainer/ownership side that does not employ these means to bet.

And of course the coup de gras, OP itself, anyone wonder how it is that jackass managed to procure an insurance policy against the Smarty bonus last minute? Right an insurance agent set it up.:D


Please excuse the profanity-as a loyal patron of this industry for around 30yrs now, I only see a persistent stream of ineptitude, they collectively possess the foresight of a 9yo.