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The use of Arbitrage in sports markets: Are they bets you can’t lose?

January 24th, 2012 | by Martin |

In business economics, finance and sports, arbitrage is the method of taking advantage of a cost difference between two or more markets: striking a combination of matching bets which  capitalize upon the imbalance, the profit being the gap relating to the market prices.

When employed by academics, an arbitrage is a transaction that involves no bad cashflow at any probabilistic or temporal state including a positive cashflow in one or more state; simply, it is the chance of a risk-free profit at zero cost. Essentially free money from deals where no risk existed.
In banking markets this is known as ‘Arbitrage’. In sports markets it is called Matched Betting.

In principle and in academic use, an arbitrage is risk-free; in common use, for example statistical arbitrage, it could mean anticipated profit, though losses may manifest, and in practice, there are always risks in arbitrage, some minor (which include fluctuation of prices decreasing income), some major (including devaluation of a currency or derivative).

In academic use, an arbitrage involves taking advantage of differences in price of a single asset or identical cash-flows; in common use, it might be utilized to refer to differences between very similar assets (relative value or convergence trades), as in merger arbitrage.

Individuals who engage in arbitrage are known as arbitrageurs for example a bank or brokerage firm. The word is especially given to trading in financial instruments, for instance bonds, futures, derivatives, goods and currencies.

Sports arbitrage has also recently become possible due to the availability of web-based bookmakers offering up widely diverging odds on sports establishing situations where it is possible to place bets that cannot lose.

And even though this involves bookmakers it is far from gambling as there isn’t any risk to the initial stake which can’t be lost.

Arbitrage just isn’t simply the act of purchasing a product in one market and selling it in another for a higher price at some later time. The trades must transpire simultaneously to stop exposure to market risk, or perhaps the risk that prices may change in one market before both deals are completed.

In simple terms, this can be generally only possible with securities and financial products that may be traded electronically, and even then, when each leg of this trade is executed the prices sold in the market might have moved.

Missing one of the legs of the trade (and subsequently needing to trade it soon after at a worse price) is called ‘execution risk’ or more specifically ‘leg risk’.

“True” arbitrage mandates that there be no market risk included.