Bookmaker

A bookmaker makes a market. It quotes a price on every outcome, accepts money on any of them, and aims to profit from the structure of those prices rather than from being right.

The book, and why it is called that

The term comes from the physical book in which bets were recorded. “Making a book” means quoting prices on every outcome of an event.

The key property of a bookmaker’s book is that the implied probabilities sum to more than 100%. A coin toss priced fairly would be 2.00 and 2.00. Implied 50% each, totalling 100%. A bookmaker prices it 1.91 and 1.91, implying 52.4% each and totalling 104.8%.

That 4.8% excess is the overround, and it is the source of the profit. If equal money lands on both sides, the bookmaker pays out £95.50 for every £100 taken regardless of the result.

Balancing versus taking a position

The textbook model has the bookmaker adjusting prices to attract money to the lighter side until the book is balanced and the outcome is irrelevant.

In practice, modern operators frequently take a position. They will let liability build on one side if they believe the price is right, because their models are good enough to make that profitable over time. This raises variance considerably, a major favourite winning a big race can cost the industry heavily, but increases long-run margin.

Prices therefore move for two different reasons: to rebalance the book, and because the bookmaker’s own estimate has changed. A steam move is usually the first; a slow drift is often the second.

Bookmaker versus exchange

A betting exchange is not a bookmaker. It matches bettors against each other and charges commission on net winnings, taking no position on the outcome.

The practical differences are significant. Exchange prices are generally better because there is no overround, only commission. You can lay as well as back, betting on something not to happen. And exchanges have no incentive to restrict winning accounts, since they profit from volume regardless of who wins, whereas traditional bookmakers routinely limit bettors who beat them.