Computer Assisted Wagering: Different Worlds, Different Fixes

Calling extreme odds changes the “Achilles heel of pari-mutuel wagering,” Michael Fitzsimons, the Hong Kong Jockey Club's executive director of racing products, recently sold the audience at the Asian Racing Conference on a plan to standardize global access to the World Pool by sophisticated computer teams.

“For the first time, we are proposing this year to work on the World Pool professional hubs, where we come together with operators to agree to the rules and through our smart contracts technology, we will enforce these rules no matter where the professional enters the pool,” Fitzsimons said, noting how the technologies these teams employ have shortened the gap by 45% in the difference between bet placement and odds update.

“We won't rest until we have this down to mere seconds,” he added.

The primary culprit for these late odds changes are Computer Assisted Wagering (CAW) players. These are well-resourced teams of eggheads given a major edge over regular gamblers thanks to their use of sophisticated and lightning fast computer technologies, along with attractive rates and rebates not available to the average punter.

Fitzsimons's idea is indeed novel–one easier to conceptualize than to realize. For one, it would require the right technologies being in place, Fitzsimons told the TDN in a series of written responses. However, “we believe that a centralized approach can create more efficient outcomes, more incentive to commingle and create a more sustainable environment for all involved,” he added.

It is perhaps one of the most sweeping proposals publicly floated for managing CAW play. Less invasive ones are already in effect. Think restrictions to pools before the off, and penalties for win-margins above a certain threshold.

But if there's a common gripe among critics of how it's handled in the U.S., it's that measures here largely fail to adequately restrict these teams of players from the pools that are often most attractive to them–in other words, the high-takeout bets.

“The issue is allowing them to have an advantage,” said Jerry Brown, professional gambler and president of Thoro-Graph Inc., publisher of data used by professional horseplayers and horsemen. He has called the rapid growth of CAW play an “existential crisis” for the game.

“Right now, they're being given too much of an advantage,” said Brown. “That advantage is taking money away short term from the regular players–it's a pari-mutuel game–and long-term, it's taking away from the stakeholders in the industry.”

The HKJC is a wagering goliath–during the 2023-2024 fiscal year, the equivalent of $17.3 billion was wagered on its horse racing–and offers an interesting case study in how a leading horse racing jurisdiction manages CAW play.

The HKJC's approach cuts through the obfuscatory fuzz denoting many end of meet reports, headlined with broad handle numbers–that handle is much less a useful barometer of fiscal health than the revenues generated.

“Our approach is much more about maximizing income than maximizing turnover which unfortunately seems to still be the measurement of success in many jurisdictions,” Fitzsimons wrote, using the Hong Kong equivalent of “handle.”

According to Fitzsimons, as the HKJC has incrementally increased the rates it charges its CAW customers, overall turnover might have declined among these players, but its revenues have increased.

“In the 2023/24 season, the income earned from professionals grew YoY [year-over-year] by 10% more than the turnover, indicating we are hitting the inelastic part of the demand curve and creating a healthy ecosystem. In actual terms last season, turnover from professionals actually dropped by around 8%, but income increased by 2%,” wrote Fitzsimons.

When “rates” are mentioned, what is meant are “host fees.” This is a charge wagering outlets pay to track operators for the contractual right to import a simulcast signal. A wagering outlet could be another racetrack, an ADW platform (like FanDuel), or a CAW platform (like Elite Turf Club).

Experts say that CAW host fees for the premium tracks in the U.S. typically vary between 6% and 8%. This is important to know for the horsemen and women plying their trades–in California, for example, this fee is split roughly 50/50 between purses and the track.

What kind of rates does the HKJC charge? Fitzsimons declined to mention specifics, bar one example.

“The harder the pool to win–or put another way, the greater the number of possible permutations of a particular bet type–the greater the advantage the professionals have. And as such, we charge more in those circumstances,” Fitzsimons wrote.

“For instance the Triple Trio, we charge a 19% host track fee on a 25% takeout for the CAWs to play,” he added. “This allows for a moderation of turnover as any rebate is likely zero or maybe 2 or 3% at the most, plus the ability to earn decent income from this segment which can be reinvested in various ways back into the industry and wagering ecosystem.”

(Note: A general rule of thumb is that rebate = takeout minus host fee. In short, as wagering operators compete aggressively on price to attract these deep-pocketed players, rebates increase and pools can grow sicker)

Which brings the conversation around to late odds fluctuations.

Some venues have sought to manage this by cutting off the CAW teams' access to certain pools before post. The New York Racing Association (NYRA) requires CAW players to place win bets on its races no later than two minutes to post (more on this in a bit).

The HKJC cuts off its CAW customers from the pools around 15 seconds before post time. When asked why it's not more restrictive, Fitzsimons explained that time is related to “transaction processing times,” and the overall liquidity of their pools.

“Given the size of our pools and the relationship with the professionals, this is the most efficient time for us. But in different jurisdictions with different pool sizes this will vary. We are currently working hard on modernizing our technology to ensure the time from bet placement to odds update is as short as possible,” Fitzsimons added.

There is a rough threshold when the percentage share from CAW play on overall handle becomes so large that it begins, essentially, to cannibalize the pools.

Thoroughbred Owners of California (TOC) executive director, Bill Nader, places that tipping point around the 25% marker. In recent years at some California tracks, CAW players have constituted a larger margin than that in certain pools. In other U.S. jurisdictions, the situation is even more lop-sided.

At the National Horsemen's Benevolent and Protective Association (HBPA) conference at Prairie Meadows in July, Dave Basler, executive director of the Ohio HBPA, said that CAW players make up “close to” 40% of the overall handle in the state.

Because of differing takeout rates, the percentage of overall turnover CAW players make up in individual pools differs depending on the bet type. In Hong Kong's Quinella, for example, they make up about 15% of the pools. Across the board, it averages out at around 13%.

According to Fitzsimons, these numbers represent what he considers a “good balance” between CAW and mass market play.

“Professionals make the prices of the pools more accurate which is good for everyone, but at the same time we need to protect the local customer and maintain a healthy ecosystem, so 'healthy' will vary depending on the size of the underlying pool and the bet type,” Fitzsimons wrote.

“When we operated the World Pool on the Cox Plate last year, the final dividend for Romantic Warrior was $2.80, but had it been a local pool only without the participation of international syndicates via commingling there is little doubt that he would have been $1.70 or $1.80 at the most,” Fitzsimons added.

OTHER JURISDICTIONS

France's Pari Mutuel Urbain (PMU) is reportedly Europe's leading betting operator and the “third largest player in horse racing pari-mutuel betting.”

In a July Q&A with Jour du Galop, Emmanuelle Malecaze-Doublet, PMU general director, explained that major international bettors (given the acronym GPIs) would soon be barred from playing on the Quinte+, a flagship super high-five-style bet in France, with consolation pay-offs.

As of the beginning of August, that bet had a 37.85% takeout rate. The change went into effect on Aug. 1 this year.

The reason, said Malecaze-Doublet, was that allowing the powerful international players into this pool was ultimately siphoning profits out of French punters' pockets.

“An example: during the last Prix d'Amerique, the [winning] punters … won around €640,000; tomorrow, with the eviction of the GPIs, these same punters will get €1.2 million. Another example: a punter won €1 million in the Quinte+ in the spring; without the GPIs, this same punter would have won €2 million. All the payout ranks will be positively impacted, with an accentuated effect on the big wins,” said Malecaze-Doublet in the Q&A.

According to background sources consulted for this story, the PMU also requires large international players whose win-rates are over 100% to forfeit their winnings back to the PMU. This essentially makes their profit margins incumbent upon the rebates they receive through the betting platforms.

Closer to home, NYRA is widely regarded as having among the most aggressive approaches among U.S. operators to curbing CAW play. It bars CAW play in the Pick 6, Late Pick 5, and Cross Country Pick 5 pools.

The TDN has detailed what The Stronach Group (TSG) and Del Mar have done in California in recent years.

Los Alamitos racecourse introduced an interesting new measure involving projected odds. Starting with the third race, projected odds–based on will-pays in pick 3s–are shown on simulcast screens roughly 20 minutes before post time, then after horses parade onto the track.

“Look, no one is necessarily doing a great job here,” said Marshall Gramm, economics professor and professional gambler, about the U.S.

“The U.S. market is really ripe for CAWs almost more so than any other market, maybe with the exception of Hong Kong. But with Hong Kong, it doesn't matter so much because the pools are so big,” he added.

The primary problem is that the measures introduced in the U.S. by and large fail to adequately restrict CAW play from the bets with the biggest takeout. Why these pools?

The equation is simple, though seemingly paradoxical: The bigger the takeout, the larger the rebate for the CAW player, the higher the profits for the player and their teams.

“The pools that are priced the worst–the Superfecta, the Trifecta–those are pools that are dominated by the teams,” said Gramm. “The gap in the price between the casual player and the teams are the largest in the pools where the teams are just destroying the casual player. Right? The more complicated the bet, the more efficient their teams are.”

NYRA has a 24% takeout rate on the Superfecta. Some tracks are even higher. “And that's where the teams destroy players. And teams are often getting 17% rebate on top of that,” he added.

If tracks lowered their takeout without lowering the host fee–or maybe even by increasing the host fee–that would effectively lower the rebate for the teams, said Gramm. In short, casual players would see more of their monies returned, leading them to churn more.

“And if they churn more, they like it. They invest more. Handle should theoretically go up. And [CAW] teams would love this, right? Everyone could win under this scenario,” said Gramm.

In the short term, tracks might lose some of the revenues garnered on-track, he admitted. “But for many of them, that's not much to begin with anyway,” said Gramm.

Furthermore, the takeout rate should be relatively flat across the board, said Gramm. “There's no reason we should have a tiered takeout. There's no reason it shouldn't 18% or 16% across the board. The gaps between the haves and have nots is too large,” he said.

Such a move would require “a leap of faith” for the racetracks, admitted Gramm. Smaller racetracks are unlikely to lead the charge. If they lower their takeout rates, the big ADWs owned by Churchill Downs and The Stronach Group (TSG) would likely reduce their host fees in response, said Gramm.

“Twin Spires doesn't want to lose their large margins on their customers,” Gramm said.

That's why it would take a powerful independent track–a Del Mar or a Keeneland–to take the plunge, said Gramm. “I think they could have their cake and eat it, too,” he said.

“They can make the announcement to their customers. The only place they might be losing money is in on-track and their California customer,” he said. “But if handle went up, teams would bet more. I think it would be a win, win, win for everyone.”

Brown narrows his suggested fixes into two main camps. The first would be to drastically reduce the generous rebates CAW teams receive. The second would be to restrict their access to their pools in a more wholesale manner.

“You have to shut them out electronically with three or four minutes to post–if they want to continue playing, they can do so, just not electronically,” adding that this needs to be deployed across all pools, not just the win pool.

“It needs to go much further than that,” said Brown, about the steps NYRA and other operators have taken so far. “It should be all pools. Anytime you give these guys electronic access at the last second, you're giving them an advantage the horseplayers can't match.”