08/27/2009 11:00PM

Computer betting may be 10% of national handle

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SARATOGA SPRINGS, N.Y. - Sophisticated computer programs that often send huge, payoff-changing wagers only seconds before the close of betting are now accounting for approximately 10 percent of the national wagering handle, according to estimates provided by racing officials who monitor the activity of the programs.

An estimated $1.5 billion in computer-generated wagers - a number that is disputed by some racing officials - is being bet by six or seven teams of mathematicians and programmers that benefit from some of the most lucrative rebates in the industry. The teams bet through either Elite Turf Club or Racing and Gaming Services, both based in the Caribbean.

Although computer programs have been sending bets into U.S. parimutuel pools for at least eight years, the programs have only recently come to provide as much as 10 percent of the national betting handle, according to the officials. Since several large racing operations, including the New York Racing Association, prohibit the programs from betting into their pools, the computer teams almost certainly account for far more than 10 percent of the handle on some races at certain tracks.

As a result, the programs remain the driving force behind many late odds changes because of the amount of money they send into the pools just before the close of betting. In addition, the methods by which the programs work remain a source of controversy for some players who contend that the teams exploit unfair advantages in the parimutuel system - such as the lucrative rebates that push the programs into profitable territory and the ability to instantaneously place thousands of wagers.

"Our position remains that they have unfair advantages," said Hal Handel, the chief operating officer of NYRA. "It's been documented. Just look at the negative settlements. Look at the effect they have on your players, the impact on payouts, churn. They are not good for New York racing, and they are not good for the fans of New York racing."

Officials who monitor the activity of the computer programs say that over the past year the teams may have scaled back their wagering from an estimated high of $2 billion because of a sizable decline in overall handle. Betting by the teams is limited by the amount of money in the pools according to the law of diminishing returns, a principle that applies to any big bettor in parimutuel wagering.

The rise of computer program wagering mirrors the trend on Wall Street, where sophisticated arbitrage programs have sought to profit from slight differences in prices of stocks and commodities for more than a decade, oftentimes by hedging against an array of outcomes. Some racing bettors have expressed shock that the computer programs could be accounting for as much as 10 percent of the national handle, which was $14.3 billion last year. (Handle is expected to decline to approximately $13 billion this year.)

An official who works closely with a computer wagering team contended this week that the $1.5 billion estimate was too high, although the official also said that the teams would bet at least $1 billion this year, or 8 percent of the national handle.

Chris Scherf, the executive vice president of the Thoroughbred Racing Associations, said that the $1.5 billion estimate is based on the association's analysis of parimutuel records. The TRA, through the Thoroughbred Racing Protective Bureau, regularly analyzes parimutuel reports for discrepancies and suspicious betting patterns. Although the number is not precise, Scherf said, the TRA is fairly confident that the $1.5 billion figure for this year is accurate.

"Whatever the number, they are a large fraction of what is wagered in the pools," Scherf said. "It's at least 10 percent."

The programs work by running thousands of permutations of a race outcome based on values assigned to horses' past-performance data. The permutations provide the basis for the program to calculate probabilities for orders of finish. After conducting a last-second analysis of the amount of money in the parimutuel pools, the programs send wagers into the bet-processing system to ideally cover any specific bet or combination where the parimutuel odds are overlaid compared with the program's evaluation.

Racing officials, including supporters of the programs, agree that the computers are unprofitable without rebates that can go as high as 15 percent of handle on certain bets - a circumstance that suggests that rebates tilt playing fields in a betting system that, theoretically and by definition, is supposed to treat all players equally. Although the question of whether rebates are appropriate in parimutuel betting appears to have been settled, there is still some controversy regarding the computer programs' ability to peer into the bet-processing system and make bets at a speed and volume that a human cannot match.

A similar debate is occurring on Wall Street, where regulators are trying to decide whether to place tighter restrictions on computer trading programs that buy and sell large volumes of securities in the blink of an eye. The speed at which the computers operate allows the programs to insert themselves between buyers and sellers in established transactions and generate an enormous amount of cash income for the program operators.

Although both the Wall Street and racing computer programs perform tasks that humans cannot perform, supporters of racing computer programs tend to dismiss the comparison to Wall Street, contending that the racing robots exploit inefficiencies in the market, rather than creating them.

"The question for racing is this," said Dick Powell, a spokesman for RGS, the offshore rebate shop that has computer bettors as customers. "Do you want racing to be the Nasdaq of 2009, or the New York Stock Exchange of 1953?"