02/24/2011 6:04PM

Single-pool wagering opens up new bet types, but many find it too complex


The parimutuel system has undergone several changes in the 84 years since it was adopted at U.S. racetracks, allowing new bet types, accepting wagers from far-flung locations and in different currencies, and calculating prices when takeout rates have differed between jurisdictions. But the basic math has remained the same: Minus the takeout, winning bettors in one bet-type pool get all the money from the losing bettors in the same pool.

Are bettors ready for that system to change?

A Wall Street company hopes so. Longitude, a subsidiary of the options-trading company International Securities Exchange Holdings Inc., lobbied successfully for the passage of a bill in New Jersey last year that legalized a new parimutuel system called single-pool wagering. The new system tweaks the way money is distributed from the pools. In the system, it’s possible – in fact, it’s probable – that a portion of the money bet by players of one bet type will be distributed instead to players of another bet type. In other words, money bet on exactas could be distributed to win bettors, or vice versa.

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So far, New Jersey is the only state that has passed legislation legalizing single-pool wagering, and the state’s racing commission would need to adopt regulations governing the practice before a track could adopt the system. That will probably take 12 months or more, according to state racing officials.

In the meantime, the system’s developers probably have some explaining to do. Although Longitude officials have met with a number of industry representatives to build support for the product – the Jockey Club sent a letter to New Jersey legislators in support of the bill – many racing officials remain confused by the system’s mechanics while others are skeptical that it represents an improvement.

“It seems to be a different way of computing,” said one regulator who was briefed by Longitude and asked not to be named because of the risk of antagonizing his relationship with the company. The regulator went on to say he did not think Longitude really altered the system and did not see why it was necessary.

Longitude officials contend that single-pool wagering will provide a multitude of benefits, including the ability to display real-time odds and an increase in pool liquidity, a term that supporters of the system use to describe the ability of a bettor to place a wager of any size without dramatically changing the odds. That ability would presumably enable bettors to make larger and larger bets. It would also give incentives to racetracks to offer new bet types that can’t be justified under the present system because they do not draw enough wagers, supporters say.

Under the system, most wagers – whether exacta, place, superfecta, etc. – would be combined in a single pool. Using patented mathematical techniques that were developed to analyze the prices of commodities and derivatives on exchanges, the pool’s calculator would analyze the amount of money on a specific finish-order outcome to determine payouts. In practical terms, if a horse is being played more heavily in exacta bets to finish first relative to the money bet on the horse to win, the win price for the horse would be lower than in a standard mutuel pool to reflect the positions taken by the exacta players.
Dennis Dowd, a former executive with the New Jersey Sports and Exposition Authority who is a consultant for Longitude, said the company envisions new bet types under the single-pool wagering system, including wagers that would allow bettors to select a horse to finish exactly second or third, or allow bettors to play two horses to finish in the first three or four places.

Those bets are possible under the current system by creating a new bet type with its own pool. But tracks have had limited success in offering new bet types in part because the segregated pools frequently don’t attract enough wagers to prevent a large bet from dramatically affecting the odds. Since the single-pool system would treat any bet as a wager on a specific outcome among a matrix of possibilities for the final running order – for example, all exacta bets with a specific horse finishing second would influence the odds on a bet on a single horse to finish second, since both are betting, in part or wholly, on the same outcome – bettors would have more confidence in making a large wager.

“That’s the real big advantage,” Dowd said. “Players can make any size bet they want, and with the real-time access to odds, you can see exactly how the bet influences all the prices.”

The system would allow bettors to place wagers that are akin to Wall Street plays, such as limit orders. For example, a bettor could place a $100 win wager on a horse, but the bet would be accepted only if the horse’s odds remained above a certain price, say, 5-1, at the time betting closed. Bettors could even designate portions of a large bet to go into the pool at different prices.

That capability sounds a lot like giving a player the ability to cancel a wager – currently an unofficial no-no because of the way canceled bets can be used to manipulate pools. But Dowd said no bettors would be able to manipulate prices because the system would continually calculate the effect on odds using the money that is outside the pool before determining whether that bet is accepted.

“It’s not a cancel,” he said. “The money is set aside. It’s exactly like a limit order on Wall Street.”

If all this sounds enormously complicated, that’s because it probably is, at least when considering the complexity of the algorithm that underlies the calculation of single-pool prices. But the apparent complexity might also be related to the reluctance of many racing officials and horseplayers to wrap their heads around the new system after so many years of using a relatively simple two-step calculation to determine payouts in the segregated pools.

Alex Dadoyan, the assistant vice president of racing development and distribution at Monmouth Park and the Meadowlands in New Jersey, has used a model of the system provided by Longitude to enter fictional bets on a race, and he said he has been “amazed” to watch wagers on one bet type affect the price of other bet types. He also said that discrepancies between the prices that would be expected in the current parimutuel system and the payouts under the single-pool system were minor, except in unusual situations.
“If you take your typical bettor, the person who walks up to the window and makes a bet, and then cashes that winning bet, I’m not even sure they would notice that the system was calculating the prices in a new way,” Dadoyan said.

Dadoyan pointed out that the current parimutuel system has its own share of oddities, such as trifectas that pay less than exactas, or win prices that are lower than place prices. According to Dowd, under the new system, some of those oddities would disappear: trifectas would always pay more than exactas, for example. That’s because of the nature of the algorithm, which by definition cannot determine that it is more likely to select three horses in the correct order than two horses in the correct order.

But after 84 years of learning how to recognize these inversions, many sophisticated horseplayers might be resistant to change, especially when many players have devised methods to spot inefficiencies in the segregated pools. Then there are the logistical hurdles of integrating the system into the bet-processing network and writing and adopting appropriate regulations.

Longitude has not yet determined how it will be compensated for developing and maintaining the system, Dowd said. Presumably, the company would take a share of each bet made through the system, a cost that would be borne by financially strapped racetracks or passed along to gamblers through takeout hikes.
And then there are the racing officials who remain skeptical, many of whom privately admit to confusion over the system’s inner workings.

Said another racing official, who asked not to be identified, “We’ve got enough stuff to worry about right now without making it all more complicated.”