business

Racetrack Arbitrage in Hong Kong

Here's how clever bookies exploit the spread between odds offered by online gambling sites and those at the track

By Bruce Einhorn

Having been based in Hong Kong for BusinessWeek since 1996, I've had to get up to speed on a whole range of issues about which I knew next to nothing. There was Thailand's current-account balance, the pluses and minuses of cable modem vs. digital subscriber line, and the merits of Intel's lawsuit against Via over chip-set technology.

Rarely, though, have I felt so behind the curve on a story than when I researched my most recent article, about the travails of the Hong Kong Jockey Club as it tries to keep Internet gambling services off its turf (see BW Magazine, 12/17/01, "Jockeying for a Piece of the Action").

So I turned to Andrew, a 40-something Westerner who has lived in Hong Kong the past four years. Andrew won't give his last name, and you'll soon see why. He used to work for a bank, but he has long since given that up to spend his time betting on the ponies -- which is completely legal in Hong Kong -- and working as a bookie -- which is not.

BAD START.

  People like Andrew are very much in the news in Hong Kong these days. The Jockey Club, which operates the only two racetracks in city, has seen its revenues drop dramatically since the Asian financial crisis rocked the local economy in 1997. The take for the racing season that ended last June was $10.5 billion -- compared to $12 billion in 1997. And the new season has gotten off to a bad start, with receipts down 5% from last year. The Jockey Club blames the most recent fall on the arrival of Internet gambling sites like Britain's William Hill Organization and Australia's Centre Racing (see BW Online, 7/13/01, "The Jockey Club's Race against Cyber-Betting").

Here's how Andrew -- and many of the other illegal bookmakers causing the Club so many headaches -- makes his living. "The main attraction [of the Internet services] is that they offer fixed odds," he explains. "I know exactly how much my return will be." Like most racetrack operators worldwide, the Jockey Club adjusts its odds based on demand: As more people believe a horse will win, the odds for that horse fall.

And the odds keep changing until the race begins. Only then does a gambler know what the final odds are. So if you place a bet on a horse with odds of 5:1, but then others decide you're right and do the same, by the time the race begins your odds may have become a far less lucrative 4:1 or worse. But if you had placed your bet with an online gambling service, your odds would have been fixed at 5:1.

RISKY BUSINESS.

  For Andrew, that gap creates an arbitrage opportunity. He'll bet one day in advance of the race on a horse that has fixed odds of 5:1 in the expectation that on race day it will fetch 4:1 at the Jockey Club. He'll then offer friends odds of 4.5:1. "I actually make a small profit out of it," he says. "I've got a half-point for myself. So, if I bet $10,000 with Centre Racing and my horse wins, I'm going to get $50,000 profit. If I sell that bet at 4.5:1, if the horse wins I will pay out $45,000, and I make $5,000 risk-free."

Well, not entirely. There are some risks -- going to jail, for one. But what about if his horse loses? "I finish even," he says. That's because he's out his $10,000 to the online betting service -- but he has made $10,000 from his local customers.

Before the advent of Internet betting, the risks were much higher. Until recently, Andrew placed his fixed-odds bets with local bookies connected to Hong Kong's feared triads, the local Mafia. Using reputable online bookmakers is better, because with the mob, "there is some doubt over whether you will get paid," he says without any trace of irony.

GOING TO WORTHY CAUSES.

  In Hong Kong, horse racing is big business. The tiny region is the world's third-largest betting market, behind only Japan and the U.S. Since the city has very little in the way of a professional sports scene, news of horse racing dominates the local newspapers' sports pages during the nine-month season. The Jockey Club, which enjoys a government-mandated monopoly on horserace betting, is the city's biggest taxpayer, accounting for 10% of total revenues.

Its annual tax payments go a long way toward ensuring Hong Kong can maintain the low personal and corporate income taxes that have made it a hub for multinationals in the region. Since 1.5% of the club's receipts go to charity, schools, hospitals, and a host of other worthy causes are funded by the city's gambling fix. When you factor in legal and illegal gambling, each man, woman, and child in Hong Kong wagered about $3,000 last year, by some estimates.

Except, that is, for me. During my five-plus years in Hong Kong, I've never felt the urge to go on a weekend or a Wednesday night to the Jockey Club's original turf track, an oasis of green amidst the depressing low-rises, flyovers, and cemeteries of the Happy Valley neighborhood of Hong Kong Island. Nor have I felt the need to go to the newer facility out in the New Territories, halfway up the peninsula on the way to the Chinese border.

"STILL BIG MONEY."

  I've been to the racetrack once in my life. Back when I was a college student, I went with a few friends to the Meadowlands in New Jersey and bet on a few races. I lost each time -- and quickly decided that I had better ways to spend my money.

Even without me, though, business is good, according to Andrew. His revenue for one season of Hong Kong racing is about $4.7 million. Small wonder the city is called "the Olympics of horse racing." Hong Kong may be in recession, and the Jockey Club may be plagued by plunging revenues, but none of that bothers Andrew. "The racing is still good," he says. "There is still big money. There is still big interest."

Given the amounts of money at stake, the Jockey Club and the Hong Kong government have their work cut out for them.

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BW Online

Edited by Beth Belton

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