How does SportsBook make $$?

Photos taken at Las Vegas.

Above picture shows people are looking at the casino SportsBook big screens with live odds.


It seems a lot of people misunderstand how SportsBook make money. So I’ll try to explain this below. In additional, I will talk about the SportsBook in China.

Misperception

The most common misperception about sports betting is that people think they are betting against the SportsBook maker. For instance, if you win $$, the SportsBook must lose $$. Therefore, SportsBook is your opponent. Their thinking is the same as playing i.e. Blackjack in casino, where the opponent is the casino.

This is NOT true. SportsBook is NOT your opponent. What is true is that if you win money on your sports bet, the SportsBook lose that money. To understand this, try to imagine if you are running a SportsBook, how do you make money?

SportsBook as a Service

SportsBook make money by charging a spread on the betting quote. What does this mean?

For example, for a basketball game, let’s say the probability of the total score greater than 218.5 is 50%, total score less than 218.5 is 50%. The SportsBook will quote Over/Under 218.5 as -110 / -110.

If you are not familiar with this quotation format. What this means is that if you bet $100 on either Over or Under and win, you would win roughly $90 bucks. Thus, you are not going to win $100, the $10 difference is the SportsBook fee.

What do I mean $10 is the SportsBook fee?

What SportsBook try to do is to balance the bets, aka ideally they want the same amount of money betting on both Over and Under. In this scenario, image a total of $100 betting on Over, as well as Under. The SportsBook will collect $200, who ever wins, it will refund the $100 bet plus the $90 winning. Therefore, $10 is the leftover which is the profit for the SportsBook.

As you can see, the SportsBook is GUARANTEED for make this $10 profit no matter the result of the sports event. Essentially, the SportsBook is providing a service, a platform, a market for people to play; and charging a service fee.

You might ask why sometimes there is quote like -120 / -120, aka the SportsBook charges $20 service fee for $100 bet. This the same reason “illiquidity” in finance, measure by how wide the spread is. In this sports betting quote, this means there is not much betting money on this sports event at the given quote. Thus, the SportsBook has to charge a higher fee to account for it.

SportsBook Risk

Another question you might ask next is : then SportsBook is a great business, the profit is locked.

Well, this is partly true, not completely though. Why? SportsBook usually can balance both side of the betting quote. What can really hurt SportBook is parlay. Parlay deserves another a whole new discussion at another time. It’s quite interesting, and I can certainly talk quite a bit regarding parlay strategy.

SportsBook in China

First of all, SportsBook in China are illegal venue running underground since gambling is illegal in mainland China.

If you ever have a chance to look at China SportsBook quotes, the quotes are a LOT more attractive than any other SportsBook. For example, it’s rare to see +10000 quote in any sports event for the U.S. and Europe SportsBook.  However, you often see kind of quote in SportsBook in China.

What does +10000 quote imply? Since +10000 means if you bet $100 and win, you would win $10,000. Therefore, this implies the output of this event is highly unlikely.

Then why U.S. and Europe SportsBook don’t offer this quote even if it’s unlikely event?

Well, in finance, this has a name “tail risk”. Or people may understand it as “black swan”. In this scenario, most likely there won’t be the other side to the +10000 bets, meaning the SportsBook will be the one taking the risk. If this rare event happens, the SportsBook will be the one to lose, and likely loss a lot.

Therefore, it doesn’t make sense for SportsBook to take this unnecessary risk. If you work in the risk management field, you would definitely know how important managing the tail risk.

So you might wonder why SportsBook in China offer this kind of quote?

That’s because SportsBook in China has huge credit risk. Imagine you bet $10,000 on +10000 and win, then you should entitle to $1,000,000 payout. However, most likely you won’t get the money. That’s because the SportsBook won’t pay you, and there is nothing you can do about it.

First, you cannot sue an illegal entity. Second, the SportsBook can shut it down in a matter of hours and suddenly disappear. Immediately after a short time, the people behind the same SportsBook can open up the same SportsBook with a different user interface and continue their SportsBook business as usual.

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