I, Robot: The Future of Horse Race Wagering?

For nearly as long as computers have existed, professional gamblers of all kinds have used them to seek an edge.

As far back as the early 1980s, computer betting outfits operated in the shadows, trying to outsmart the sports books in Las Vegas. In the mid-80's, Australian Alan Woods and his partners began tinkering with a software program that took reams of data on previous horse races and crunched the numbers to find overlays. Once polished, the system made Woods and his computer team more than $150 million betting on races in Hong Kong.

In 1989, a 21-year-old computer geek spent the summer in his statistics professor's garage programming algorithms that could predict stock prices moments into the future. It was the birth of high-frequency trading (HFT), the process of buying and selling massive amounts of stock in fractions of a second. By 2010, HFT accounted for more than 60% of stock market volume in the U.S.

Slowly but surely, the development of such complex computer models made its way into North American racing's pari-mutuel pools. The first computer teams appeared in the late '90s, most of them basing offshore to avoid regulatory red tape in racing's complicated state-by-state oversight structure.

That fact alone made them appear shadowy and mysterious to racetracks, regulators and the public. Offshore was most associated with illegal bookmaking, and these new shops were also secretive – gamblers who think they have an edge usually are. From a distance, they must have seemed like your father's bookie. In reality, though, they were a new breed of horseplayer – more Wall Street Journal than Daily Racing Form, more business than sports, more whale than shark. Investors and scientists came together to build computer laboratories that would take a whole new approach to playing the ponies.

Initially, track management knew very little about these gamblers who created algorithms to identify betting opportunities and cover far more wagering combinations than a human ever could. But over time, as the number of Computer Robotic Wagering (CRW) teams grew, and they began forming inside the U.S., tracks not only gained a much better understanding of CRW, many of them embraced it.

“It's math. It's just like stock market arbitrage,” said Chris Scherf, executive vice president of the Thoroughbred Racing Associations, a member organization of tracks in the U.S. and Canada. “They write programs, and the programs wager accordingly.”

 

No 'I' in Team
Starting a Computer Robotic Wagering team isn't for everyone. It takes money, time, and manpower.

”It's not just one guy. To do this, you have to go out there and get your own math whiz, get an MIT grad to write a program that you then feed tons of race data into and develop your own forecasting model,” said Scherf. “Then you've got to test that over a period of a year and refine it and refine it. I've always heard it's going to cost you at least a million dollars to set up.”

Dana Parham, one of the pioneers of computer-assisted wagering, told the International Simulcast Conference in 2010 that it cost him $6 million to run his business with 30 employees.

Clearly, the computers don't do all the work, but they handle a majority of it. Racing and Gaming Services, a group based on the island of St. Kitts with a U.S. pari-mutuel hub, has about 90 customers who invest in the team's wagering strategies. Last year, RGS said 60% of its betting was done robotically.

“The point of the computer is to come up with a true or fair market value for each horse,” said Scherf. “If I run this race a thousand times, and this horse will win 500 times, then he should be even money. If he's 4-5, he's not a bet. If he's 6-5, he's a bet, the computer says. They do that for every horse in the race.”

In an interview with Standardbred Canada, Parham explained the key advantage of computer-driven wagering. It's not just about speed; the computer takes a long-range, statistical view that defies human handicappers.

“Bettors are people who make quick decisions, like 'the inside posts are doing exceptionally well tonight, let me give that extra credence.' The computer formulas don't vary with emotion from race to race. That's the good part of computer racing. The computer isn't all that smart, and it doesn't get that off course, either,” Parham said. “That's where I think the average gambler gets in trouble. Everything is kind of the same except bettors overemphasize good results because we have short-term memories. The computer doesn't.”

 

Giving Back
Because CRW is costly, and computer teams wager such high volumes, they universally believe they should be compensated by racetracks. Many tracks have obliged by giving high-volume shops what amounts to a rebate. Since these wagering services operate as their own Advance Deposit Wagering outfits (ADWs), the discount comes in the form of a lower “host fee” for taking the track's signal.

Earlier this year, the Meadowlands harness track struck an agreement with a computer wagering team that promised to dramatically increase its betting volume (to the tune of $300,000 a night) if the price was right. Darin Zoccali, director of racing operations, said management asked “every question imaginable” of the players but was satisfied it was an up-and-up deal and a good one for the track. Horsemen went along with it, banking on a spinoff effect that would attract other bettors seeking big pools.

“Handle drives more handle,” Zoccali said. “If these guys are betting more, maybe it drives more interest elsewhere. They started out being responsible for about 45% of the initial handle increase in January. That number is now down to 18%, so they're betting the same amount of money they were when the meet started but there's more money coming in from other sources.”

The amount of money now coming into U.S. pools from high-volume, computer-driven shops is estimated to be about $2 billion a year, roughly 15-20 percent of total handle.

That's no drop in the bucket. One racetrack executive who allows computer teams in his pools likened the wagering volume to “crack cocaine.” It's highly addictive.

“If the computer wagering handle disappeared tomorrow, the industry would be shell-shocked,” said Scherf.

But would the CRW teams, with their sophisticated software and capability to bet at lightning speed, win without concessions from the tracks?

It's debatable.

Rob Terry, vice president of Racing and Gaming Services, told horsemen at a conference last year that the company lost 6% in 2011 not factoring in the track discounts.

One track executive said the CRW team playing its pools is in the neighborhood of break-even for 2013.

At the Meadowlands, Zoccali said because computer-driven betting is mostly about covering a high percentage of combinations, the margins are small.

“They're looking to come out ahead, essentially with the rebate,” Zoccali said. “They're not looking to make a ton of money. It's very interesting when you talk with the guys, they're not in it to show 30% profit or anything like that. It's about getting the program to run efficiently and effectively.”

But what effect does robotic wagering have on other players? And on the pools?

 

“Flesh and Blood”
Not every track is comfortable allowing CRW teams into their pools. Oaklawn Park has shunned computer-assisted bettors for years, arguing that they win often enough to discourage other gamblers.

Tampa Bay Downs doesn't say an outright “no” to CRW players, but the track deters them by offering unappealing “discounts.”

“For the most part, when we do that calculation to come up with the price, most of the computer betting outfits decline to accept that price,” said General Manager Peter Berube. “So we effectively keep them out of the pools by pricing our product beyond what they think is reasonable.”

Berube said one or two groups are betting into Tampa's pools, but they are paying a relative premium to do so. He believes the computer gamblers distort pools by betting so many combinations, and they drive away other bettors who represent the daily churn.

“Very rarely will you see odds changes at Tampa Bay Downs because those type of wagers are not coming in at the last second,” said Berube.

But is Tampa Bay Downs missing out on a nice chunk of handle?

“Oh, absolutely,” he said. “But it's a slippery slope. You go down that road, and then all of the sudden, you get hooked on this handle, and you see the effect that it has on your pools, but you've already gone down that road, and it's hard to kick that handle out. So I'd rather not go down that road at this point and time.

“Effectively what happens when you have these high-volume outfits and they win more than the norm, you're effectively raising your takeout on the rest of the players in your pools. And that's just not good business.”

The Swedish tote company, ATG, doesn't think it's good business either. In May, ATG banned computer “bot” wagering altogether.

“We want people of flesh and blood to bet on horses, not robots,” said ATG's CEO Hasse Skarplöth. “I do wish to emphasize that these account holders have not done anything wrong, violated any laws nor breached any rules, but they have, nonetheless, used a method that, in the long run, puts a great number of regular players at a considerable disadvantage, and consequently, is having a detrimental effect on the entire horse racing economy.”

Before making its decision, ATG spent a year investigating robotic wagering and learned to detect such wagers because of the number of bets placed, the high stakes involved, the high number of horses included in each wager and because the bots did “not bet on horses but instead bet according to how other players bet on horses.”

 

Who's Watching?
In North America, the Thoroughbred Racing Protective Bureau, an arm of the racetrack organization, TRA, keeps a close eye on all ADWs, including those that specialize in or welcome robotic wagering.

The TRPB is led by former FBI agent, Frank Fabian.

”Beginning in 2005, TRPB initiated a very robust due diligence program at the request of the TRA membership, which looked into the ownership, business operations, regulatory environment, and the technical capabilities of ADWs that were wagering into our members' pari-mutuel pools,” said Fabian.

Essentially a vigorous background check, the TRPB process was prompted in part by the Uvari indictment of 2005, which involved charges of money laundering, tax fraud and race-fixing against a group with some connection to offshore “micro-ADWs.” Fabian said tracks wanted to know more about all of the entities betting into their pools. Since then, almost all ADWs, both offshore and U.S.-based, have voluntarily agreed to the due diligence program.

“Ninety-nine percent of them have gone through this process and some of them twice,” Fabian said, noting that the ADW services that do robotic wagering have been forthcoming.

“Most of these folks are very proud of what they do,” he said. “They're very sophisticated operations, and there's certainly nothing improper about what they do. The industry may have a view on robotic play, as to whether that's good or bad for bettors, but those are things that TRPB does not comment on. We're here to ensure the integrity of the pools… and that we have a good understanding of everyone that's wagering into our pools.”

Even though Tampa Bay Downs currently keeps the computer wagering outfits at a distance, GM Peter Berube said the TRPB process instills high confidence that there's nothing shadowy about them.

“Any of the entities that are in our pools have gone through the TRPB due diligence process, which thoroughly vets out the principals behind the operation, criminal background checks, etc, so you really know who you're doing business with. In the past, that wasn't the case,” said Berube.

 

Pool Tricks?
On May 21, 2012, a filly named Eye Look the Part was heavily favored to win a seven-horse maiden race at Thistledown Racetrack. As post time approached, she was the overwhelming favorite at 1-5, but as the final odds appeared shortly after the race went off, Eye Look the Part was the longest shot in the field at 5-1.

She proceeded to win the race like a 1-5 favorite – by 16 1/2 lengths – but she paid $12.80 to win. So what happened?

Thousands of dollars, bet legally through parimutuel accounts, came in at the last minute on all of the other horses in the field. Racing officials theorized that someone was trying to drive up the price on Eye Look the Part and then collect at non-pari-mutuel offshore sites that paid off at track odds. Officials were also suspicious of an $8,359 win bet and $968 show bet placed through an ADW well before the race went off. Because of the unusual amounts, officials believed robotic wagering was behind the wagers.

But after an investigation, that part turned out not to be true. Robotic betting was not involved in the incident.

Still, because of well-publicized, unusual occurrences such as the one at Thistledown, the perception exists that CRW teams are somehow manipulating pools by intentionally influencing the odds or by “past-posting” – getting their wagers in at lightning speed after the gates open.

Frank Fabian of the Thoroughbred Racing Protective Bureau says unequivocally that neither is true. Past-posting has occurred due to human or mechanical errors, and Fabian admits the fact that the final cycle of betting often doesn't appear on the tote until after the race goes off creates the impression that something is not right.

“It gives this perception that there may have been wagers coming into the pool after the start of the race or some sort of manipulation going on, and that is not the case,” said Fabian. “I don't have a concern with respect to pool manipulation in U.S. wagering. I have no concern with respect to that.”

The reason for Fabian's confidence is that since 2006, the TRPB has been analyzing wagering data at all of its member tracks on a near real-time basis. Analysts develop historical betting patterns and scour daily for “atypical variances” in odds fluctuations, cashing, and pari-mutuel prices. All ADWs taking a track's signal, including robotic wagering teams, have their own code, which allows the TRPB to pinpoint any issues.

“Let us say there's some irregularity,” said Fabian. “We can identify the location, the ADW; we can take it right down to the account with the ADW.”

Fabian said since CRW teams are only permitted into the pools by the tracks themselves, those players have no incentive to raise red flags.

“I can assure you that the ADWs today are not going to risk their relationship with the industry, with the tracks with whom they have simulcast agreements and are allowed to enter their pools,” he said. “None of the ADWs that come into TRA pools want to have account holders who are doing something nefarious. They value the fact that they have relationships with TRA and non-TRA racetrack associations.”

The Meadowlands' Darin Zoccali agrees. When the track signed a simulcast deal with a computer betting group earlier this year, the contract included an “out clause” if any problems arose.

“If we saw anything that concerned us with any possibly negative impact on our other customers or our pools, we can get out of the contract within 72 hours, no ifs ands or buts,” Zoccali said. “We can just tell these guys it's not working out for us anymore – we're out.”

But Zoccali said the track has seen no issues with astronomically high wagers, odds manipulation, or out-of-whack payouts.

“We couldn't be happier with it the way that it's gone. We've had no issues at all.”

 

The Future of Race Betting?
So, will there come a day when “flesh and blood” bettors are replaced entirely by bots wagering at warp speed against each other?

It seems highly unlikely.

For one thing, there are about a dozen high-volume, robotic wagering entities currently betting into North American pools, but not only are the start-up costs a barrier to growth of the sector, the TRA's Chris Scherf believes there's probably a point of saturation, too.

“I don't know how many computer teams this could absorb because they would squeeze the profit out of the odds if they were all going against each other,” he said.

There is evidence elsewhere that computer arbitrage reaches a tipping point. Australian pioneer Alan Woods had phenomenal success for years but went on a lengthy losing streak once other computer teams got in on the action in Hong Kong.

On Wall Street, the cracks are already appearing in high-frequency trading. From 2008 to 2011, as much as two-thirds of all stock trades in the U.S. were attributed to HFT companies. This year, it's down to about half, and both overall profits and profits per trade are down significantly. Some HFT firms have gone out of the business. The market is less volatile, and that has cut into HFT's edge, but so has competition.

Still, sophisticated computer-modeled gambling isn't going anywhere. In Las Vegas, both bettors and sports books are still ramping up their statistically-driven technology. North American racing can choose to continue on that path or reverse course, but the consensus seems clear.

“At this point, do you really want to scare these guys away just because you're not sure how their computer program works even though everything has checked out? I don't think you want to go down that road,” said the Meadowlands' Zoccali.

The computer teams clearly do well enough to survive – some of them like RGS and Elite Turf Club have been around for years. Many tracks and horsemen have decided, however reluctantly, that the handle is too good to pass up. Overall wagering has seen a steady decline, however, and it's fair to wonder whether high-volume shops have affected the odds enough over time to scare away other customers.

But Zoccali and Scherf both say they've seen little to no pushback from day-to-day gamblers.

“They say, let those guys in. We want them in,” said Scherf. “One thing they do is create pools, and they're not always right. Computers aren't always right.”

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