World Cup Arbitrage

I have caught a piece of World Cup Fever, and although Australia may not have the easiest route forward (understatement of the year) the tournament has been lively and enjoyable so far.

I have been following the betting markets, mainly as I view it as the most accurate predictor of how the world cup will unfold. Having said that, there have been many upsets already, such as the Dutch thumping of Spain and Costa Rica's amazing defeat of Uruguay. I have been monitoring the markets closely as I am interested in developing betting systems in the near future.

I know many people believe that gambling is a sinkhole of money, but I believe that is only true in the traditional sense of taking a punt. With arbitrage based methods, profit is guaranteed if the execution is successful. With predictive models, expected profit can be calculated through extensive backtesting.

Now my arbitrage example: Who will be the winner of Group H in the world cup - Belgium, Russia, South Korea or Algeria?

Sportsbet will payout $26 on Algeria. However on Betfair, you can Lay Algeria at $21. To Lay a bet means to act as a bookmaker, i.e. betting against an event to happen. Let's do the calculations to work out how much to put down:

Let x = amount backing Algeria at sportsbet
Let y = amount against Algeria at Betfair
Let R = Return (we want it to be the same, win or lose)

Algeria wins:
R = 26x - 21y

Algeria Loses:
R = 0.95y - x (as Betfair takes a max of 5% comission on wins)

Therefore:
x = 0.95y - R
R = 26(0.95y - R) - 21y
27R = 3.7y
R = 3.7y / 27

Therefore, if you lay $200 on Algeria (near market depth at time of writing, used for simplicity sake), you should bet $162.59 on Algeria at Sportsbet, resulting in a profit of $27.40 no matter the result. That seems like a decent return.

Well that would be jumping to conclusions too quickly. The above is all true, that if you place the bets as described above you are guaranteed to make $27.40. What it doesn't reveal is the liability you need to be prepared to cover if Algeria wins.

Total capital to make the above bets is $162.59 in the Sportsbet account, and $200 x 21 = $4362.59. Therefore return is now (27.40 / 4362.59) * 100 = 0.62%. Annualised, given that the last game is on the 27th of June, 12 days away, the annualised return is 0.62 * (365/12) = 30.4%. Better, but still not worth it given such a low absolute return for the effort and risk (i.e. successful exeuction of orders) required.

While this particular arbitrage opportunity is not what it seems, I feel that there are good opportunities in the market in other arenas. While bots tend to dominate in arbitrage, I think there are still some novel approaches that could yield fruit.

I may try building some arbitrage tools later on, however the high bankroll required and risk in making the executions make it less appealling to me. I feel that predictive modelling has the potential to yield better results.