The Starting Price: Myths and Reality

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

During the course of advising the Starting Price Regulatory Commission (SPRC) over the last 10 years, I've come across many misunderstandings about the way the starting price (SP) operates. Following publication of the SPRC's latest report (here) (which was prompted by media comment following the 2015 Grand National), I thought I would write this note in an attempt to correct some misconceptions. This note sets out my personal views and is not written on behalf of the SPRC.

A brief history

The origin of the SP is shrouded in the mists of time but it is clear that The Racing Calendar was publishing starting prices in the early 18th century. However, it was the advent of the commercial telegraph which gave a new impetus to the SP in the 1870s. At that time, there were many more racecourses than today and bookmakers weren't in a position to quote prices on every horse in every race at every meeting. The exchange telegraph solved this problem by transmitting starting prices (being the odds generally available at the time the race started) to the off-course bookmaker who used these prices to settle bets. This meant that there was no longer the need for punter and bookmaker to negotiate prices before a bet was made [1].

Until the legalisation of off-course cash betting and the advent of betting shops in 1961, off-course credit bookmakers could only take bets at SP, with the compilation of a book and setting of odds being the preserve of the racecourse bookmaker. However, once betting shops really took off, it was important that off-course bookmakers had the ability to manage their liabilities and to ensure that the pattern of off-course betting was reflected in the starting price. As a result, off-course bookmakers started to place bets into the "ring" with the intention of ensuring that the SP represented a balanced book.

In 1994, a body called The Starting Price Liaison Committee (which subsequently became the SP Executive) was established to monitor the return of SPs from the ring. That body had 6 members: 2 from the Mirror Group (then owners of Sporting Life); 2 from the Press Association; and 2 from SIS. However, in May 2000 the SP Executive issued rules concerning the calculation of the SP and soon after there was concern that these new rules had resulted in an increase in the overround (explained below) to the detriment of punters. The SP Executive then commissioned a review by Arthur Andersen which led to the establishment of the SPRC as an independent regulator of the SP. (For more information about the SPRC and the algorithm for calculation of the SP see here).

Off-course money had a direct impact on the on-course market particularly because of Rule 4.2 of the National Joint Pitch Council (NJPC, which was the body then regulating racecourse bookmakers). This provided that on-course bookmakers could only hedge with other racecourse bookmakers; so, if a racecourse bookmaker took a big bet from an off-course firm, it could only lay off that liability with other bookmakers standing in the ring. As a result, the price of the horse being backed would be liable to be shortened by several bookmakers. However, in 2003 the Levy Board (which was responsible for the NJPC) abolished that rule which meant that racecourse bookmakers could then bet off-course and, in particular, bet with the newly arrived betting exchanges. Indeed, the advent of betting exchanges had a radical effect upon the bookmaking business generally.

Because, unlike the bookmaker, the betting exchange takes no risk but instead earns commission from the successful party to a bet, there is no necessity for the odds offered on an exchange to have a built-in margin. This new competitive form of betting not only put pressure on the odds offered by traditional bookmakers; it also meant that the racecourse bookmaker could back a horse on the exchanges and safely lay at a shorter price in the ring and would often no longer need to hedge bets placed from off-course. From that perspective, you could say that the on-course market became a lot stronger but, to the extent that this was true, that was far outweighed by the impact of the change in 2001 when betting duty moved from being based on turnover to gross win. Until that time, bets placed at the racecourse were tax free whereas punters had to pay tax on bets placed off-course. That was one of the big attractions for punters to go to place bets at the racecourse and it was eliminated overnight. Coupled with the availability of betting via smartphones, the last 10 years or so has seen a significant decline in the number of racecourse bookmakers so that at some midweek meetings there may be fewer than a handful of racecourse bookmakers present. This decline in numbers has understandably led to concerns about the racecourse tail wagging the off-course dog as far as the SP is concerned.

Whilst the decline in the number of racecourse bookmakers is a real concern, it is not as simple as saying that the SP system cannot function properly when there are only a small number of bookmakers present at the course as not only will they be the recipients of off-course money (which in turn will reflect the bets being placed off-course) but also, to the extent that the on-course bookmakers' prices are underpinned by the exchanges, the exchange prices themselves reflect the weight of money being staked by exchange customers (including by off-course bookmakers).

What is more, it was last year's Grand National which prompted the latest SPRC report, the biggest betting race of the year with around 200 bookmakers present on the course at Aintree. What the media comment focused on was the Grand National overround of 164% and this leads me on to some of the issues where there is a lack of understanding.

What is the overround?

Put simply, the overround is the total amount a punter would have to stake on a race so that whichever horse wins he will receive back 100 units (including his stake). So, if at the returned SPs you have to stake £110 to get back £100, the overround is 110%. The 10% reflects but does not equate to the bookmaker's gross margin. It does not equate to the bookmaker's gross margin because punters do not place precisely calculated stakes on every horse in a race; most bets in fact tend to be placed on the favourite and second favourite. A related measure is the overround per runner which is simply the overround divided by the number of runners in the race.

Betfair have their own so-called SP which has often been used by critics to compare unfavourably with the official SP. For example, the official SP of Shutthefrontdoor, last year's Grand National favourite was 6/1 whereas its Betfair SP was 27/1 and this was used by many commentators to justify the contention that the SP mechanism was flawed. However, this is to compare apples with pears. First, Betfair do not publish how their SP is calculated but it is clearly a very different mechanism. Second, the gross margin or overround implicit in Betfair's prices will tend to zero ) so that the greater the number of runners, the greater the likely disparity between the official and Betfair SPs. Third, the demographic of the typical Betfair customer is very different to that of the typical once a year Grand National punter who will not be searching for value or arbitrage opportunities but will instead be attracted by the romance of AP McCoy riding the winner of his last Grand National.

Off-course bookmakers are manipulating the starting price by placing bets into the ring

This is one of the more fundamental misunderstandings that I have come across where some commentators seem to think that the practice of off-course bookmakers betting with racecourse bookmakers is inherently designed to disadvantage the punter. As I've explained above, that is how the SP mechanism is supposed to work in order that the SP is properly reflective of the weight of money staked off-course. In any event, the off-course bookmakers' ability to influence the racecourse market and the SP is much less than used to be the case before the advent of betting exchanges and the abolition of NJPC rule 4.2.

Higher overrounds mean the punter is getting ripped off

Again, the assumption on the part of some commentators seems to be that the fact that the overround for one race is greater than another means that the punter is being exploited.

In reality, the trend in the UK betting market has been in favour of punters over the last few years as is demonstrated by the average overround represented by the SP having declined from 1.9%% in 2001 to 1.7% last year. This is a reflection of the intensely competitive UK market.

In any event, the bookmaker (as opposed to the exchange), manages its book and sets and changes its prices with a view to making a profit – that's their business. Unlike the exchange, they are not there to provide a platform for punters to place bets with each other. Who is to say what is the right level of margin or overround at which bookmakers should be operating? There is no right level: this is a market and the operation of the market – supply and demand – determines the prices. The fact that the overround may differ between races and the racecourse punter might get a worse price than if he had stayed at home, used an odds comparison site and took advantage of special offers online is no different from someone choosing to buy food at M&S when they could go to Lidl or buy online from Waitrose.

Not only is the punter being offered better odds but his choice is incomparably greater than in previous years. I remember when I first started betting, the only choice available (other than ante post on big races) was to bet at SP or to take a price in a betting shop in the 10 minutes or so before the race. Today the punter can take "early" prices in the afternoon of the day before the race, can bet with the exchanges, can bet "in-running" and is offered all sorts of promotions such as "guaranteed best odds"; indeed, I'm surprised that SP is still responsible for such a significant proportion of bets. In the words of John McCririck, "the punter has never had it so good".

In my view, the Grand National prices last year were indeed a reflection of the operation of the market that day and if racecourse bookmakers set their odds in order to make a profit on what ought to be their most profitable day of the year, I don't really see a cause for concern. Where, however, I think the market may not be operating properly is where you have a handful of bookmakers on a cold evening meeting at Wolverhampton with a small number of spectators in attendance. These are the kinds of meetings where the SP may be out of kilter but the answer can't be to impose a ceiling on overrounds as some have suggested but instead to find ways of incentivising more bookmakers to stand at the course.

[1] For the history of the SP and bookmaking generally, I am indebted to "The Art of Legging" by C Sidney.