Statistical Arbitrage vs Matched Betting

by | Dec 24

8 min read

Hey guys, Joonas here, the founder of Edge Alerter. I’m going to go through the key differences between statistical arbitrage bets as opposed to matched betting.

I’ve received a lot of questions from members, especially new ones, asking about how we’re similar and how we’re different. This article will clear up how we are different and secondly, to mathematically prove how the long-term expectancy is significantly higher from a sports arbitrage betting perspective as opposed to the matched betting approach.

For those not familiar, my background is in Quantitative Finance. I’ve been a professional Derivatives Trader for many years. I worked at Bet365 for five years as an in-play trader and I’ve been betting successfully for many years. The purpose of this analysis match is that matched betting is extremely popular globally. If you Google it, the internet lights up, there are an estimated 1,000,000 people globally doing matched betting. For those not familiar, it’ll be interesting for you to learn how both work and then I’m going to give proof of how the matched betting approach is mathematically suboptimal especially in comparison to a statistical arbitrage betting approach.

What is matched betting?

Essentially you could break it down and call it the pure arbitrage betting of promotions. But what does that mean exactly? It’s when you’re locking in a guaranteed profit. The matched bettor will do that through promotions. For example, they’ll back a team or player or horse with a bookie promo code and may get an early payout, or maybe it’s a second and third promo insurance within the racing and then they’ll typically lay it on Betfair. They are trying to lock in, guaranteed by themselves, between 5% to 10% profit on turnover. Essentially locking in profit and there’s a hedging component to it typically through Betfair (but you can do that through other bookies as well).

What is statistical arbitrage betting?

It’s all about focusing on purely expected value of horse racing betting or sports betting with assistance from an arbitrage betting formula. We don’t need to pay away hedging costs or insurance fees and we don’t need to pay Betfair a commission. It’s all about long term expectancy through arbitrage betting formulas. You might naturally ask the question about risk because you’re not hedging on Betfair or through other bookies. There can be higher variants, however you can manage your risk through correct stake sizing. Those are the two key definitions.

Let’s look at a few examples to explain this in more detail.

Example one:

Let’s imagine Betfair is liquid. By liquid I mean that the spread is tight, there’s a good amount of that liquidity in the book in terms of how much size there is to back and lay as well. I will use $10 stakes for the purpose of this example. Imagine a horse is $3 to back with the bookies and $3 to lay on Betfair. It’s relatively rare to get that because the bookies are quick to move but let’s just assume for the purpose of this example that’s the case.

The matched betting approach:

There would typically be a promotion on this race. They would back the horse with the bookie and having $10 on that, if the horse wins, you’re going to win $20 profit. Then you’re going to lay the horse on Betfair for $10 at $3. You’re paying Betfair some commission if you win. If the horse doesn’t win, you’re going to win $9.50 instead of the full $10. What is your net position after that? If the horse wins your PNL is zero. If the horse loses you’re just losing $0.50 and obviously the hope with this approach is that it runs second or third. From an expectancy perspective let’s just assume that there is no promotion to keep the math a bit simpler. The expectancy here is negative 33 cents and the way you work out expectancy is by multiplying all the outcomes that can happen with the PNL that is attributed to each one. In percentage format it is a negative 3.3% expectancy.

The statistical arbitrage betting approach:
We still take the $3 value with the bookie but we’re not bothering with laying at all. The net position is we either win $20 or we lose $10. There is more variance here as explained but there are two parts to professional betting and trading:

  1. Quantifiable long term positive expectancy
  2. Diligent stake sizing.

Expectancy:

Expectancy is critical to betting. Ask yourself, what’s the expectancy here and then multiply them out so it’s exactly 0. Instead of losing 3.3% where the expectancy is zero and obviously they’ve both got the same amount of promotional value in the second and third run. It’s 3.3% profit on turnover inferior but this is a liquid bet, so let’s take a second example.

This is an illiquid Betfair market and as I mentioned above, backing with threes is rare. You’ll more likely be backing at $3 and laying between $3.30 or $3.50. Let’s  use $3.50 in this example. I won’t walk through each line item but basically if you’re backing at $3 and laying at $3.50 the expectancy is negative $2.00. Off the base of a $10 stake, that’s negative 20%, so you’re giving up a lot or you’re donating a lot because you want to hedge and manage your risk. The startup approach here again, it’s zero, so it’s 20% profit on turnover different. That’s extremely significant.

To summarize the math in these two examples, in example one, the liquid Betfair market, the matched betting approach has a 3.33% lower expected profit on turnover and in the illiquid Betfair example, it has a 20% lower expected profit on turnover. That is extremely significant.

The only other thing I would add to that is there’s a critical difference between profit on turnover and return on investment. Whilst the 30% versus the 10% might not sound that significant, but because there’s this power of compounding, after 10 bets your return on the investment, if your POT is 30%, it’s going to be over 1000% whereas if you compound 10% over 10 bets you’re winning at 159% return on investment. There’s a huge difference.

In summary

These examples should give you some ideas and insight into the expectancy and how the hedging costs are significant. Over the long run those examples were negative 3.33% and negative 20% in comparison to the statistical sports arbitrage betting approach. On average a matched bettor is probably about 10 to 15% profit on turnover inferior, so there is a cost to expected profit.

One of the most common justifications for using the matched betting approach is to manage variants and that’s fair enough, you know intuitively, you’re backing it over here and laying it over there. You are capturing a spread, if you like, but there are essentially insurance costs that you shouldn’t be paying. Through diligent stake sizing you can manage your variance with the statistical arbitrage approach.

Conflicts

Interestingly a lot of these matched betting services are affiliated with Betfair. Further to that, Betfair actually has the same parent company as SportsBet. There’s a lot of these matched betting services where they’re kind of in bed with the bookies effectively. They’re trying to get punters in there backing and laying in Betfair and chopping themselves up by paying these exorbitant insurance costs.

Be careful with top price finders, simply because the bookies use them too. If all you’re doing is using top price finders through matched betting services to try and turn over bonuses for example, then the bookies can find you quickly. There are also funding requirements to consider. Betfair requires you to have the full amount of the potential liability down, so it is more expensive from a cost of capital perspective as well.

Final thoughts

Now that you understand the difference between matched betting and statistical arbitrage betting, you might be interested in a statistical arbitrage betting perspective, but how do you find a good system to follow? There are a lot of systems out there. Most of them don’t work. Most of them unfortunately are quite scammy at best.

At Edge Alerter we’ve built up a reputation and a real strong track record of having a system that works and supplies horse racing tips, cricket betting tips, football betting tips and a variety of other online sports betting tips in Australiaand around the globe.

Do the analysis for yourself and have a good look at the system that are our there.

If you’d like to try us out, you can sign up for a Free 7-day trial that gives you access to our entire system for a whole week. You will also have access to our 7-Day Betting Course.

If you’ve have any questions you can message me on Telegram, email us or chat with us live on our website.

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