09/16/2004 12:00AM

Report: Computer bets hurt players


LEXINGTON, Ky. - The practice of allowing a small number of sophisticated bettors to make hundreds of wagers just seconds before the start of a race has thrown parimutuel betting in the United States out of balance and has effectively increased the takeout for all other players, according to a report commissioned by the National Thoroughbred Racing Association.

The report, which was to be issued Friday, was prepared by a New York-based consulting firm, National Economic Research Associates, as part of an examination of handle and purse trends. The report recommends that the racing industry consider new restrictions on wagering by so-called "program players," a term used to describe sophisticated handicappers who use special computer systems to calculate and place bets. The report also recommends the adoption of a new bet-processing network that could quickly and accurately reflect the vast sums of money that come into parimutuel pools just before a race starts to address what it calls an imbalance in the parimutuel market.

The imbalance, the report suggests, comes about because some sophisticated players can extract data from the tote system and then place bets almost instantaneously. However, the report said, the same technology "cannot then redistribute the updated parimutuel information on a real-time basis." The report also said that the "current imbalance in effective takeout rates" for players would result in declines in handle by those players betting against the highest takeout.

The report was written by Louis Guth, a senior vice president, and Thomas Joscelyn, senior analyst, and is part of a wide-ranging study by a task force set up by the NTRA early this year, after data indicated that handle in 2003 increased by 1 percent over 2002 but purses declined by 1.7 percent. Portions of the study have been publicly discussed, most notably at the Aug. 15 Jockey Club Round Table Conference on Racing in Saratoga Springs, N.Y.

The recommendation that the industry upgrade its bet-processing network echoed a recommendation made by a task force set up after the 2002 Breeders' Cup pick six scandal, in which a worker at the bet-processing company Autotote manipulated a wager on the pick six while exploiting security loopholes in the network. Although a collection of industry groups pledged to work on developing a new network, progress has been slow, according to the new report.

"While recognizing the progress made to date, the task force notes that industry fragmentation, competing business models, and allocation of scarce resources have inhibited the pace of the overall tote upgrades," the report said.

Generally, the report attributes the decline in industry revenues to the past decade's rapid migration of bettors from racetracks to remote wagering locations, which generally return less revenue to the racing industry. As a result, the percentage of handle that goes to purses declined from 7.3 percent of wagering in 1995 to 6.2 percent in 2003, the report said.

The report breaks new ground in the detailed analysis conducted by NERA, which used confidential handle data from up to 15 racetracks and examined the impact of several tracks' decisions this year to curtail wagering on their signals by rebate shops. Those analyses indicate that the higher win rates by players at rebate shops are having a negative impact on the rest of the wagering public.

The report said that of the six rebate shops for which it had data for 2003, bettors at the shops were getting back 98.6 percent of their wagers at the best-performing shop and 90.7 percent at the worst-performing shop. In 2002, one shop had a return of 106 percent, the report said. A pool of players should normally receive about 80 percent of its wagers back in winnings, equal to the takeout.

The report said that many bettors at rebate shops were taking advantage of an inefficiency in the parimutuel betting market that did not allow all bettors to know with a sufficient degree of certainty what the ultimate odds on a horse or bet combination would be. The report said the ability of program players to exploit this inefficiency "is very closely analogous to so-called market-timing issues with trading in certain mutual funds that have been the subject of investigation and litigation as of late."

"Informed program players are not unambiguously good for parimutuel wagering as long as the totalizator system that processes their wagers . . . does not, or cannot, post odds changes quickly enough for other players to respond to, thereby increasing those players' effective takeout rate," the report said.

In an analysis of a decision by Woodbine to cut off two unidentified rebate shops this year, the report said the effective takeout rate for non-rebate players betting on Woodbine's races dropped from 22 percent in 2003, when the rebate shops were betting on the signal, to 20.8 percent in 2004. At the same time, even though Woodbine's handle declined 5.1 percent after the sites were shut off, revenues to the track increased by 1.6 percent.

Greg Avioli, the chief operating officer of the NTRA, said that the analysis of Woodbine and other tracks underscores a new dynamic in the racing industry.

"It's not necessarily true anymore that if handle is up, net income is up," Avioli said. "The racing industry has to realize that, just like the recording industry, the Internet has completely changed the business. More and more, revenue growth is going to come from the interstate handle side of things, and each track is going to have to figure out how to react to that."